Taxation Reviewer UP Sigma Rho

TAXATION PRE-BAR REVIEWER 2004
TABLE OF CONTENTS
GENERAL PRINCIPLES OF TAXATION 2 34
INCOME TAXATION 35 - 110
TRANSFER TAXES 111 132
ESTATE TAX 111 125
DONORS TAX 125 132
TAX REMEDIES 133 164
LOCAL TAXATION 165 180
TARIFF AND CSTOMS CODE 181 1!"
This reviewer is a compilation of reviewers and memory aids on
Taxation, and is a product of the collective eforts of Mike Atanante, JR
Moreno, JJ Jaminola and Atty. Rene Callanta Jr.
The authors do not uarantee the accuracy of the contents of this
compilation. !e would appreciate if you take time to inform us of any error
mistake or inaccuracy which you may uncover, as well as any comment or
suestion.
Sigma Rho ( ) reviewers
Sigma Rho Fraternity , College of Law , University of the Philippines
1
GENERAL PRINCIPLES OF TAXATION
FNDAMENTAL PRINCIPLES IN TAXATION
Taxation
Taxation is the inherent power of the soverein, exercised throuh the leislature, to
impose "urdens upon su"#ects and o"#ects within its #urisdiction for the purpose of
raisin revenues to carry out the leitimate o"#ects of overnment.
$t is also de%ned as the act of levyin a tax, i.e. the process or means "y which the
soverein, throuh its law&makin "ody, raises income to defray the necessary
expenses of overnment. $t is a method of apportionin the cost of overnment
amon those who, in some measure, are privileed to en#oy its "ene%ts and must
therefore "ear its "urdens.
$t is a mode of raisin revenue for pu"lic purposes, 'Cooley(
Taxes
Taxes are the enforced proportional contri"utions from persons and property levied "y
the law&makin "ody of the )tate "y virtue of its sovereinty for the support of the
overnment and all pu"lic needs, 'Cooley(
They are not ar"itrary exactions "ut contri"utions levied "y authority of law, and "y
some rule of proportion which is intended to ensure uniformity of contri"ution and a
#ust apportionment of the "urdens of overnment.
Thus*
a. Taxes are enforced contri"utions
Taxes are o"liations created "y law. 'Vera v. Fernandez, L-31364,
March,30, 1!(. Taxes are never founded on contract or areement, and are not
dependent for their validity upon the individual consent of the person taxed.
". Taxes are proportional in character, since taxes are "ased on one+s a"ility to pay.
c. Taxes are levied "y authority of law.
The power to impose taxes is a leislative power, it cannot "e imposed "y the
executive department nor "y the courts.
d. Taxes are for the support of the overnment and all its pu"lic needs.
ESSENTIAL ELEMENTS OF A TAX
-. $t is an enforced contri"ution.
.. $t is enerally paya"le in money.
/. $t is proportionate in character.
0. $t is levied on persons, property, or the exercise of a riht or privilee 12xcise tax3.
4. $t is levied "y the )tate which has #urisdiction over the su"#ect or o"#ect of
taxation.
5. $t is levied "y the law&makin "ody of the )tate.
6. $t is levied for pu"lic purpose or purposes.
PRPOSES OF TAXATION
-. Revenue of fscal: The primary purpose of taxation on the part of the overnment
is to provide funds or property with which to promote the eneral welfare and the
protection of its citi7ens and to ena"le it to %nance its multifarious activities.
.. Non-revenue or regulatory: Taxation may also "e employed for purposes of
reulation or control. e..*
a3 $mposition of tarifs on imported oods to protect local industries.
"3 The adoption of proressively hiher tax rates to reduce ine8ualities in wealth
and income.
c3 The increase or decrease of taxes to prevent in9ation or ward of depression.
2
"#L v. $d%, 164 &C'# 3(0
The leislative intent and purpose "ehind the law re8uirin owners of vehicles
to pay for their reistration is mainly to raise funds for the construction and
maintenance of hihways and, to a much lesser deree, pay for the operatin
expenses of the administerin aency. $t is possi"le for an exaction to "e "otha tax
and a reulation. :icense fees are chares, looked to as a source of revenues as well
as means of reulation. The fees may properly "e rearded as taxes even thouh they
also serve as an instrument of reulation. $f the purpose is primarily revenue, or if
revenue is at least one of the real and su"stantial purposes, then the exaction is
properly called a tax.
Tio v. Video)ra*, 1+1 &C'# (0,
;< -=>6 which created the ?ideoram Reulatory @oard also imposed a /AB
tax on the ross receipts paya"le to the local overnment. )C upheld the validity of
the law rulin that the tax imposed is not only a reulatory "ut also a revenue
measure prompted "y the reali7ations that earnins of videoram esta"lishments of
around ;5AA million annually have not "een su"#ect to tax, there"y deprivin the
overnment of an additional source of revenue. $t is a user tax imposed on retailers
for every video they make availa"le for pu"lic viewin. The /AB tax also served a
reulatory purpose* to answer the need for reulatin the video industry, particularly
the rampant %lm piracy, the 9arant violation of intellectual property rihts, and the
proliferation of pornoraphic video tapes.
Caltex v. Co**issioner, (0, &C'# !++
Taxation is no loner a measure merely to raise revenue to support the
existence of overnment. Taxes may "e levied with a reulatory purpose to provide
means for the reha"ilitation and sta"ili7ation of a threatened industry which is
afected with pu"lic interest as to "e within the police power of the )tate. The oil
industry is reatly im"ued with pu"lic interest as it vitally afects the eneral welfare.
SMPTAR# PRPOSE OF TAXATION
More popularly known as the non&revenue or reulatory purpose of taxation. !hile the
primary purpose of taxation is to raise revenue for the support of the overnment,
taxation is often employed as a devise for reulation "y means of which certain
efects or conditions envisioned "y the overnment may "e achieved.
Cor example, overnment may provide tax incentives to protect and promote new and
pioneer industries. The imposition of special duties, like dumpin duty, markin duty,
retaliatory duty, and countervailin duty, promote the non&revenue or sumptuary
purpose of taxation.
T$EOR# AND BASIS OF TAXATION
The power of taxation proceeds upon the theory that the existence of overnment is a
necessity, that it cannot continue without means to pay its expenses, and that for
these means, it has a riht to compel all its citi7ens property within its limits to
contri"ute.
The "asis of taxation is found in the reciprocal duties of protection and support
"etween the )tate and its inha"itants. $n return for his contri"ution, the taxpayer
received "ene%ts and protection from the overnment. This is the so called DBenefts
received principle.
Taxation has "een de%ned as the power "y which the soverein raises revenue to
defray the necessary expenses of overnment. $t is a way of apportionin the cost of
overnment amon those who in some measure are privileed to en#oy the "ene%ts
and must therefore "ear its "urden, '+1 #*. -%r. 34(.
The power of taxation is essential "ecause the overnment can neither exist nor
endure without taxation. DTaxes are the lifeblood of the government and their prompt
and certain availability is an imperious need, ./%ll v. 0nited &tates, (+ 0.&. (4!,
1+ #"T' 106, 10!31. The collection of taxes must "e made without any hindrance
if the state is to maintain its orderly existence.
Eovernment pro#ects and infrastructures are made possi"le throuh the availa"ility of
funds provided throuh taxation. The overnment+s a"ility to serve and protect the
3
people depends larely upon taxes. Taxes are what we pay for a civili7ed society,
.Co**issioner v. #l)%e, 1+, &C'# 1.
LIFEBLOOD DOCTRINCE
The life"lood theory constitutes the theory of taxation, which provides that the
existence of overnment is a necessity, that overnment cannot continue without
means to pay its expenses, and that for these means it has a riht to compel its
citi7ens and property within its limits to contri"ute.
$n Co**issioner v. #l)%e, the )upreme Court said that taxes are the life"lood of
the overnment and should "e collected without necessary hindrance. They are what
we pay for a civili7ed society. !ithout taxes, the overnment would "e paraly7ed for
lack of motive power to activate and operate it. The overnment, for its part, is
expected to respond in the form of tani"le and intani"le "ene%ts intended to
improve the lives of the people and enhance their moral and material values.
@y enforcin the tax lien, the @$R availed itself of the most expeditious way to collect
the tax. Taxes are the lifeblood of the governent and their propt and certain
availability is an iperious need, .C2' v. "ineda, (1 &C'# 10+1.
The overnment is not "ound "y the errors committed "y its aents. $n the
performance of its overnmental functions, the )tate cannot "e estopped "y the
nelect of its aents and oFcers. Taxes are the life"lood of the nation throuh which
the overnment aencies continue to operate and with which the state efects its
functions fro the welfare of its constituents. The errors of certain administrative
oFcers should never "e allowed to #eopardi7e the overnment+s %nancial position,
.C2' v. CT#, (34 &C'# 34,1.
The @$R is authori7ed to collect estate tax de%ciency throuh the summary remedy of
levyin upon the sale of real properties of a decision without the conition and
authority of the court sittin in pro"ate over the supposed will of the decedent,
"ecause the collection of the estate tax is executive in character. As such, the estate
tax is exempted from the application of the statute on non&claims, and this is #usti%ed
"y the necessity of overnment fundin, immortali7ed in the maxim DTaxes are the
lifeblood of the governent and should be ade in accordance !ith la!, as any
arbitrariness !ill negate the very reason for governent itself, .Marcos 22 v. C#, (!3
&C'# 4!1.
Taxes are the lifeblood of the governent and so should be collected !ithout
unnecessary hindrance. ;hilex+s claim that it had no o"liation to pay the excise tax
lia"ilities within the prescri"ed period since it still has pendin claims for ?AT input
creditGrefund with the @$R is untena"le, ."hilex Minin) Cor3oration v. C2', (4
&C'# 6,!1
2ll%strations o4 Li4e5lood theory
-. Collection of taxes cannot "e en#oined "y in#unction.
.. Taxes could not "e the su"#ect of compensation or set of.
/. A valid tax may result in the destruction of the taxpayer+s property.
0. Taxation is an unlimited and plenary power.
NECESSIT# T$EOR#
Taxation as stated in the case of "hil. 6%aranty Co., 2nc. v. Co**issioner .13
&C'# !!+1, is a power predicated upon necessity. "t is a necessary burden to
preserve the #tate$s sovereignty and a eans to give the citi%enry an ary to resist
aggression, a navy to defend its shores fro invasion, a corps of civil servants to
serve, public iproveents for the en&oyent of the citi%enry, and those !hich coe
!ithin the #tate$s territory and facilities and protection !hich a governent is
supposed to provide.
BENEFITS RECEIVED PRINCIPLE
This theory "ases the power of the )tate to demand and receive taxes on the
reciprocal duties of support and protection. The citi7en supports the )tate "y payin
4
the portion from his property that is demanded in order that he may, "y means
thereof, "e secured in the en#oyment of the "ene%ts of an orani7ed society. Thus, the
taxpayer cannot 'uestion the validity of the tax la! on the ground that payent of
such tax !ill render hi ipoverished, or lessen his fnancial or social standing,
because the obligation to pay taxes is involuntary and copulsory, in exchange for
the protection and benefts one receives fro the governent.
$n return for his contri"ution, the taxpayer receives the eneral advantaes and
protection which the overnment afords the taxpayer and his property. Hne is
compensation or consideration for the other, protection for support and support for
protection.
Iowever, it does not mean that only those who are a"le to and do pay taxes can
en#oy the privilees and protection iven to a citi7en "y the overnment.
$n fact, from the contri"ution received, the overnment renders no special or
commensurate "ene%t to any particular property or person. The only "ene%t to which
the taxpayer is entitled is that derived from the en#oyment of the privilee of livin in
an orani7ed society esta"lished and safeuarded "y the devotion of taxes to pu"lic
purpose. The overnment promises nothin to the person taxed "eyond what may "e
anticipated from an administration of the laws for the eneral ood, %Lorenzo v.
"osadas1.
Taxes are essential to the existence of the overnment. The o"liation to pay taxes
rests not upon the privilees en#oyed "y or the protection aforded to the citi7en "y
the overnment, "ut upon the necessity of money for the support of the )tate. Cor this
reason, no one is allowed to o"#ect to or resist payment of taxes solely "ecause no
personal "ene%t to him can "e pointed out as arisin from the tax, '(oren%o v.
)osadas*.
DOCTRINE OF S#MBIOTIC RELATIONS$IP
This doctrine is enunciated in C2' v. #l)%e, 2nc. .1+, &C'# 1, which states that
DTaxes are !hat !e pay for civili%ed society. +ithout taxes, the governent !ould be
paraly%ed for lac, of the otive po!er to activate and operate it. -ence, despite the
natural reluctance to surrender part of one$s hard-earned incoe to the taxing
authorities, every person !ho is able ust contribute his share in the burden of
running the governent. The governent for its part, is expected to respond in the
for of tangible and intangible benefts intended to iprove the lives of the people
and enhance their aterial and oral values.
7hat is the sco3e o4 the 3o8er to tax9
The power of taxation is the most a"solute of all powers of the overnment .&ison v.
#ncheta 130 &C'# 6+41. $t has the "roadest scope of all the powers of overnment
"ecause in the a"sence of limitations, it is considered as unliited, plenary, coprehensive
and supree.
Iowever, the power of taxation should "e exercised with caution to minimi7e in#ury to
the proprietary rihts of the taxpayer. $t must "e exercised fairly, e8ually, and uniformly, lest
the tax collector kill Dthe hen that lays the olden eJ .'oxas v. CT#, (3 &C'# (!61.
7hen is taxation considered as an i*3le*ent o4 3olice 3o8er9
$n 7alter L%tz v. -. #ntonio #raneta, , "hil 14,, the )C upheld the validity of the
tax law increasin the existin tax on the manufacture of suar. DThe protection and
promotion of the suar industry is a matter of pu"lic concern, the leislature may determine
within reasona"le "ounds what is necessary for its protection and expedient for its
promotion. $f o"#ective and methods alike are constitutionally valid, there is no reason why
the state may not levy taxes to raise funds for their prosecution and attainment. Taxation
may "e made the implement of the state+s police power.J
$n Tio v. Video)ra* 'e)%latory /oard, 1+1 &C'# (0,, the levy of a /AB tax
under ;<-=>6, was imposed primarily for answerin the need for reulatin the video
industry, particularly the rampant %lm piracy, the 9arant violation of intellectual property
rihts, and the proliferation of pornoraphic videotapes, and is therefore valid. !hile the
direct "ene%ciaries of the said decree is the movie industry, the citi7ens are held to "e its
indirect "ene%ciaries.
7hat is the conce3t o4 :scal ade;%acy9
5
That the sources of revenues must "e ade8uate to meet overnment expenditures,
.Chavez v. <n)3in, 1,6 &C'# 3311.
TAX DIFFERENTIATED FROM OT$ER TERMS
Tari= and >%ties
The term tarif and duties are used interchanea"ly in the Tarif and Customs Code
1;< Ko. -0503.
Customs duties or simply duties, are taxes imposed on oods exported from or
imported into a country. Customs duties are really taxes "ut the latter term is "roader
in scope.
Hn the other hand, tarif may used in any of the three senses*
-3 A "ook of rates drawn usually in alpha"etical order containin the names of
several kinds of merchandise with the correspondin duties to "e paid for
the same, or
.3 The duties paya"le on oods imported or exported, or
/3 The system or principle of imposin duties on the importation or
exportation of oods.
License or re)%latory 4ee and Tax
:icense fee is leal compensation or reward of an oFcer for speci%c services while a
tax is an enforced contri"ution from persons or property "y the law&makin "ody of
the )tate "y virtue of its sovereinty and for the support of the overnment and all
pu"lic needs.
:icense fee is imposed for reulation, while a tax is levied for revenue.
:icense fee involves the exercise of police power, while tax the exercise of power of
taxation.
Amount of license fees should "e limited to the necessary expenses of inspection and
reulation, while there is enerally no limit on the amount of the tax to "e imposed.
:icense fees are imposed only on the riht to exercise a privilee, while taxes are also
imposed on persons and property.
Cailure to pay a license fee makes the act or "usiness illeal, while failure to pay a tax
does not necessarily make the act or "usiness illeal.
$xa*3les o4 re)%latory tax
Motor vehicle reistration fee, )uar levy, Coconut levy, reulation of non&useful
occupations.
).( v. /du: This involves the imposition of motor vehicle reistration fees which the
)upreme Court ruled as taxes. Cees may "e rearded as taxes even thouh they also
serve as instruments of reulation "ecause taxation may "e made the implement of
the )tate+s ;olice ;ower. @ut, if the purpose is primarily revenue, or if revenue is, at
least one of the real and su"stantial purposes, then the exaction is properly called a
tax.
Criteria 4or deter*inin) license 4ees
-. $mposition must relate to an occupation or activity which involves the health,
morals, safety and development of the people and which needs reulation for the
protection and promotion of pu"lic interest.
.. $mposition must also "ear a reasona"le relation to the pro"a"le expenses of
reulation, takin into account the costs of direct reulation as well as the
incidental expenses.
2nstances 8hen license 4ee *ay exceed cost o4 re)%lation, control or
ad*inistration
6
-. !hen the collection or the license fee is authori7ed under "oth the power of
taxation and police power.
.. !hen the license fee is collected to reulate a non&useful occupation.
&3ecial #ssess*ent and Tax
-. A special assessment is an enforced proportional contri"ution from owners of
lands, especially or peculiarly "ene%ted "y pu"lic improvements.
.. A special assessment is levied on land.
/. A special assessment is not a personal lia"ility of the person assessed, it is limited
to the land.
0. A special assessment is "ased wholly on "ene%ts, not necessity.
4. A special assessment is exceptional "oth as to time and place, a tax has eneral
application.
'e3%5lic v. /acolod M%rcia, 1! &C'# 63(
A special assessment is a levy on property which derives some special "ene%t
from the improvements. $ts purpose is to %nance such improvement. $t is not a tax
measure intended to raise revenues for the overnment. The proceeds thereof may "e
devoted to the speci%c purpose for which the assessment was authori7ed, thus
accruin only to the owners thereof who, after all, pay the assessment.
&o*e r%les?
An exemption from taxation does not include exemption from a special
assessment.
The power to tax carries with it the power to levy a special assessment.
Toll and Tax
-. Toll is a sum of money for the use of somethin. $t is consideration which is paid
for the use of a road, "ride, or the like, of a pu"lic nature. Taxes, on the other
hand, are enforced proportional contri"utions form persons and property levied "y
the )tate "y virtue of its sovereinty for the support of the overnment and all
pu"lic needs.
.. Toll is a demand of proprietorship, while tax is a demand of sovereinty.
/. Toll is paid for the use of another+s property, tax is paid for the support of
overnment.
0. The amount paid as toll depends on the cost of construction or maintenance of the
pu"lic improvement used, while there is no limit on the amount of tax that can "e
collected as lon as it is not excessive, %nreasona5le, or con:scatory.
4. Toll may "e imposed "y the overnment or "y private individuals or entities, tax
may "e imposed only "y the overnment.
Tax and "enalty
-. ;enalty is any sanction imposed as a punishment for violation of law or for acts
deemed in#urious, taxes are enforced proportional contri"utions from persons and
property levied "y the )tate "y virtue of its sovereinty for the support of the
overnment and all pu"lic needs.
.. ;enalty is desined to reulate conduct, taxes are enerally intended to enerate
revenue.
/. ;enalty may "e imposed "y the overnment or "y private individuals or entities,
taxes only "y the overnment.
>e5t and Tax
7
-. A de"t is enerally "ased on contract, express or implied, while a tax is "ased on
laws.
.. A de"t is assina"le, while a tax enerally cannot "e assined.
/. A de"t may "e paid in kind, while a tax is enerally paid in money.
0. A de"t may "e the su"#ect of set&of or compensation, while a tax enerally
cannot.
4. A person cannot "e imprisoned for non&payment of tax, except poll tax.
5. A de"t is overned "y the ordinary periods of prescription, while a tax is overned
"y the special prescriptive periods provided for in the K$RC.
6. A de"t draws interest when it is so stipulated or where there is default, while a tax
does not draw interest except only when delin8uent.
SET-OFF OR COMPENSATION IN TAXATION
6eneral r%le* A tax delin8uency cannot "e extinuished "y leal compensation. This is
so "ecause the overnment and the person assessed with the tax are not mutually
creditors and de"tors. Keither is a tax o"liation an ordinary de"t. Moreover, the
collection of a tax cannot await the results of a lawsuit aainst the overnment. Cinally,
taxes are not in the nature of contracts "ut row out of the duty to, and are positive
acts of the overnment to the makin and enforcin of which the personal consent of
the taxpayer is not re8uired .Francia v. 2#C, 16( &C'# 6((1.
"hilex Minin) Cor3. v. C2', (4 &C'# 6,! .1,1
;hilex Minin Corp. wants to set&of its claims for ?AT input creditGrefund for the excise
taxes due from it. The )upreme Court disallowed such set&of or compensation.
Taxes cannot "e su"#ect to compensation for the simple reason that the overnment
and the taxpayer are not creditors and de"tors of each other. There is a material
distinction "etween a tax and a de"t. <e"ts are due to the overnment in its corporate
capacity, while taxes are due to the overnment in its soverein capacity.
$xce3tion? The )upreme Court allowed set&of in the case of 0oingo v. 1arlitos 23
#4R. 556* 2in re: clai for payent of unpaid services of a governent eployee vis-
7-vis the estate tax fro his estate*. The fact that the court havin #urisdiction of the
estate had found that the claim of the estate aainst the overnment has "een
appropriated for the purpose "y a correspondin law shows that "oth the claim of the
overnment for inheritance taxes and the claim of the intestate for services rendered
have already "ecame overdue and demanda"le as well as fully li8uidated.
Compensation therefore takes place "y operation of law
$n the case of 'e3%5lic v. $ricta, .1!3 &C'# 6(31, The )C allowed taxes due
from the taxpayer to "e considered paid throuh the delivery of certi%cates of
inde"tedness. $t held that* D"n e8ect, !hile &udgent shall be rendered in favour of the
Republic against #apaguita for unpaid taxes, &udgent ought at the sae tie issue
for #apaguita coanding payent to it by the Republic of the sae su
representing the face value of the certifcate of indebtedness assigned to it and for
recovery of !hich it had specifcally prayed in its counterclai.
@This can 5e constr%ed as an exe*3tion.
$n C2' v. $sso &tandard, .1!( &C'# 3641, the )C allowed the overpaid income
tax of -=4= to "e considered tax credit aainst the de%ciency income tax of -=5A. $t
held that DThe obligation to return the oney ista,enly paid arises fro the oent
the payent is ade, and not fro the tie that the payee adits the obligation to
reiburse. The obligation of the payee to reiburse an aount paid to hi results fro
the ista,e, not fro the payee$s confession of the ista,e or recognition of the
obligation to reiburse.J
'e;%isites o4 Co*3ensation in taxation A>o*in)o v. 6arlitosB
-. That the tax assessed and the claim aainst the overnment "e fully li8uidated.
.. That the tax assessed and the claim aainst the overnment is due and
demanda"le, and
8
/. That the overnment had already appropriated funds for the payment of the claim.
SRVE# OF P$ILIPPINE TAXES
A. $nternal Revenue taxes imposed under the K$RC
-. $ncome tax
.. Transfer taxes
a. 2state tax
". <onor+s tax
/. ;ercentae taxes
a. ?alue Added Tax
". Hther percentae taxes
0. 2xcise taxes
4. <ocumentary stamp tax
@. :ocalGMunicipal Taxes
C. Tarif and Customs duties
<. TaxesGTax incentives under special laws
CLASSIFICATION OF TAXES
#s to s%5Cect *atter or o5Cect
-. ;ersonal, poll or capitation tax
Tax of a %xed amount imposed on persons residin within a speci%ed territory,
whether citi7ens or not, without reard to their property or the occupation or
"usiness in which they may "e enaed. e.. Community tax.
.. ;roperty tax
Tax imposed on property, real or personal, in proportion to its value or in
accordance with some other reasona"le method of apportionment.
/. 2xcise tax
A chare imposed upon the performance of an act, the en#oyment of a privilee, or
the enaement in a occupation.
#s to 3%r3ose
-. EeneralGCiscalGRevenue tax
A eneralG%scalGrevenue tax is that imposed for the purpose of raisin pu"lic funds
for the service of the overnment.
.. )pecialGreulatory tax
A specialGreulatory tax is primarily imposed for the reulation of useful or non&
useful occupation or enterprises or for the reulation or protection of industries
im"ued with pu"lic interest, and secondarily for the purpose of raisin pu"lic
funds.
#s to 8ho 5ears the 5%rden
-. <irect tax
A direct tax is demanded from the person who also shoulders the "urden of the
tax. $t is a tax which the taxpayer is directly or primarily lia"le and which he or she
cannot shift to another.
9
.. $ndirect tax
An indirect tax is demanded from a person in the expectation and intension that
he or she shall indemnify himself or herself at the expense of another, fallin
%nally upon the ultimate purchaser or consumer. A tax which the taxpayer can
shift to another.
#s to sco3e o4 the tax
-. Kational tax
That tax imposed "y the national overnment.
.. :ocal tax
A local tax is imposed "y municipal corporations or local overnment units
1:EL+s3.
#s to the deter*ination i4 a*o%nt
-. )peci%c tax
A speci%c tax is a tax of %xed amount, imposed "y the head or num"er or "y some
other standard of weiht or measurement. $t re8uires no assessment other than
the listin or classi%cation of the o"#ects to "e taxed.
.. Ad valorem tax
As ad valorem tax is a tax of %xed proportion of the value of the property with
respect to which the tax is assessed. $t re8uires the intervention of assessors or
appraisers to estimate the value of such property "efore the amount due from
each taxpayer can "e determined.
#s to )rad%ation or rate
-. ;roportional tax
Tax "ased on a %xed percentae of the amount of the property receipts or other
"asis to "e taxed. e.. Real estate tax.
.. ;roressive or raduated tax
The tax rate of which increases as the tax "ase or "racket increases. e.. $ncome
tax
<iressive tax rate* proressive rate stops at a certain point. ;roression halts at a
particular stae.
MKot to "e confused with ;roressive system of taxation, wherein the num"er of
indirect taxes outnum"er the direct taxes.
/. Reressive tax
Tax the rate of which decreases as the tax "ase or "racket increases. There is no
such tax in the ;hilippines.
#s3ects o4 taxation
"rocesses incl%ded or e*5odied in the ter* DtaxationE
-. :evyin or imposition of the tax which is a leislative act.
.. Collection of the tax levied which is essentially administrative in character.
The %rst is taxation, strictly speakin, and the second may "e referred to as tax
administration. The two processes toether constitute the taxation system.
T#F &G&T$M&
Constit%tional Mandate
10
The rule of taxation shall "e uniform and e8uita"le. The Conress shall evolve a
proressive system of taxation. '#ec. 93, .rt. :", 4onstitution*
Tolentino v. #ecretary if ;inance. Reressivity is not a neative standard for courts to
enforce. !hat the Constitution re8uires the Conress to do is to Devolve a progressive
syste of taxation.J This is a directive to Conress, #ust like the directive iven to it,
to ive priority to the enactment of laws for the enhancement of human dinity. The
provisions are put in the Constitution as moral incentives to leislation, not as
#udicially enforcea"le rihts.
"ro)ressive syste* o4 taxation and re)ressive syste* o4 taxation
A proressive system of taxation means that tax laws shall place emphasis on direct
taxes rather than on indirect taxes, with a"ility to pay as the principal criterion.
A reressive system of taxation exists when there are more indirect taxes imposed
than direct taxes.
'e)ressive tax rates
Tax the rate of which decreases as the tax "ase or "racket increases. There are no
reressive taxes in the ;hilippine #urisdiction.
Reressive tax rates should "e diferentiated from a reressive system of taxation
which exists when there are more indirect taxes imposed than direct taxes.
T$REE BASIC PRINCIPLES OF A SOND TAX S#STEM
1. Fiscal ade;%acy
$t means that the sources of revenue should "e suFcient to meet the demands of
pu"lic expenditures& %Chavez v. <n)3in, 1,6 &C'# 3311.
(. $;%ality or theoretical C%stice
$t means that the tax "urden should "e proportionate to the taxpayer+s a"ility to
pay. This is the so&called Dability to pay principle.
3. #d*inistrative 4easi5ility
$t means that tax laws should "e capa"le of convenient, #ust and efective
administration.
NATRE AND LIMITATIONS OF T$E POWER OF TAXATION
Hat%re o4 characteristics o4 the &tateIs 3o8er to tax
-. The power of taxation is an incident of sovereinty as it is inherent in the the )tate,
"elonin as a matter of riht to every independent overnment. $t does need
constitutional conferment. Constitutional provisions do not ive rise to the power
to tax "ut merely impose limitations on what would otherwise "e an invinci"le
power. Ko attri"ute of sovereinty is more pervadin, and at no point does the
power of overnment afect more constantly and intimately all the relations of life
than throuh the exactions made under it, .Ch%rchill and Tait v. Conce3cion,
34 "hil 61.
.. The power to tax is inherent in the )tate, and the )tate is free to select the o"#ect of
taxation, such po!er being exclusively vested in the legislature, /<4/)T where
the Constitution provides otherwise, .#rt. V2, &ec, (, A(BJ #rt. F, &ec. +1.
#rt. V2, &ec. (,. 3ar. (.
The Conress may "y law authori7e the ;resident to %x within speci%ed limits,
and su"#ect to such limitations and restrictions as it may impose, tarif rates, import
and export 8uotas, tonnae and wharfae dues, and other duties or imposts within
the framework of the national development proram of the Eovernment.
#rt. F, &ec. +
11
2ach local overnment unit shall have the power to create its own sources of
revenues and to levy taxes, fees, and chares su"#ect to such uidelines and
limitations as the Conress may provide, consistent with the "asic policy of local
autonomy. )uch taxes, fees, and chares shall accrue exclusively to the local
overnments.
/. $t is su"#ect to Constit%tional and inherent li*itations, hence, it is not an
a"solute power that can "e exercised "y the leislature anyway it pleases.
POWER TO TAX' POLICE POWER' POWER OF EMINENT DOMAIN
TAXATION POLICE POWER EMINENT
DOMAIN
>$F2H2T2<H ;ower of the )tate
to demand
enforced
contri"utions for
pu"lic purposes.
;ower of the )tate
to enact such laws
in relation to
persons and
property as may
promote pu"lic
health, safety,
morals, and the
eneral welfare of
the pu"lic.
;ower of the )tate
to take private
property for pu"lic
use upon payin to
the owner a #ust
compensation to "e
ascertained
accordin to law.
#%thority
exercisin) the
3o8er
Hnly the
overnment or its
political
su"divisions.
Hnly the
overnment and its
political
su"divisions.
May "e ranted to
pu"lic service or
pu"lic utility
companies.
TAXATION POLICE POWER EMINENT
DOMAIN
"%r3ose 2nforced
contri"ution is
demanded for the
support of the
overnment.
Lse of property is
reulated for the
purpose of
promotin the
eneral welfare.
;roperty is taken
for pu"lic use.
"ersons a=ected Hperates upon a
community, a class
of individuals or
their property.
Hperates upon a
community, a class
of individuals or
their property.
Hperates on an
individual as the
owner of a
particular property.
$=ect Money contri"uted
in the concept of
taxes "ecomes part
of pu"lic funds.
Ko transfer of
ownership of the
property sei7ed, at
most there is
restraint on the
in#urious use of the
property. Restraint
on the exercise of a
riht.
There is transfer of
ownership or a
lesser riht 1e..
lease3, of the
property.
/ene:ts received ;resumed that the
taxpayer receives
the e8uivalent of
what he
contri"uted in the
form of protection
from the
overnment, and
the en#oyment of
livin in a civili7ed
society.
;ersons afected
receives no direct
"ene%t "ut only as
such as may arise
from the
maintenance of the
healthy economic
standard of society.
;erson afected
receives #ust
compensation for
the property taken
from him.
#*o%nt o4
i*3osition
Eenerally no limit
as to the amount of
tax to "e imposed.
Amount imposed
should not "e more
that that suFcient
to cover the cost of
the license and the
necessary
expenses of
reulation.
Ko amount
imposed, since it is
property which is
taken.
'elationshi3 to
the Constit%tion
)u"#ect to certain
Constitutional
limitations
Relatively free from
Constitutional
limitations and is
)u"#ect to certain
Constitutional
limitations 1e..
12
superior to the non&
impairment
provisions.
inferior to the non&
impairment of
contracts clause3.
"o8er to tax incl%des the 3o8er to destroy
Chief Justice Marshall declared that the power to tax includes the power to destroy.
Therefore, it should "e exercised with caution to minimi7e in#ury to the proprietary
rihts of the taxpayer. $t must "e exercised fairly, e8ually and uniformly, lest the tax
collector kills the Dhen that lays the olden eJ. An in order to maintain the eneral
pu"lic+s trust and con%dence in the overnment, this power must "e used #ustly and
not treacherously. 'Chief Justice Marshall in the case McC%lloch v. Maryland,
reiterated in 'oxas v. CT# (3 &C'# (!61.
$n the case "anhandle <il Co*3any v. Mississi3i, Justice Iolmes seeminly
contradicted the =arshallian view "y declarin that D the po!er to tax is not the
po!er to destroy !hile this court sits.
>o*ondonIs reconciliation o4 Marshall and Kol*es
The imposition of a valid tax measure could not "e #udicially restrained merely
"ecause it would pre#udice the taxpayer+s property.
An illeal tax could "e #udicially declared invalid and should not work to pre#udice a
taxpayer+s property.
Marshall+s view refers to a valid law, while Iolmes+ view refers to an invalid law.
"o8er to tax is excl%sively le)islative in nat%re
The power to tax is peculiarly and exclusively leislative and cannot "e exercised "y
the executive or #udicial "ranches of the overnment. Ience, only Conress can
impose taxes.
Matters 8ithin the co*3etence o4 the le)islat%re A&co3e o4 le)islative 3o8er to
taxB
-. The su"#ect to "e taxed.
.. The purpose 1o"#ect of taxation3 of the tax 1should always "e for a pu"lc purpose3.
/. The amount or rate of tax.
0. The manner, means, and aencies of collection of the tax.
>iscretion as to s%5Cect o4 taxation
The leislature has unlimited scope as to the persons, property or occupation to "e
taxed, where there are no constitutional restrictions, provided the property is within the
territorial #urisdiction of the taxin state, .Cooley1
C2' v. &antos, (!! &C'# 61! .1!1
The )upreme Court held that it is within the province of the leislature whether to tax
#ewelry or not. !ith the leislature, lies primarily the discretion to determine the
nature 1kind3, o"#ect 1purpose3, extent 1rate3, coverae 1su"#ects3, and situs 1place3, of
taxation.
$t is inherent in the power to tax that the )tate "e free to select the su"#ects of
taxation, and it has "een repeatedly held that Dine'ualities !hich result fro a
singling out of one particular class for taxation, or exeption, infringe no
4onstitutional liitation.
/enCa*in 6o*ez v. $nrico "alo*ar,. L-(364+, <ct. (, 16,, (+ &C'# ,(!1
;etitioner 8uestions the constitutionality of the statute, claimin that RA -5/4,
otherwise known as the Anti&T@ )tamp :aw, is violative of the e8ual protection clause
of the Constitution "ecause it constitutes mail users into a class for the purpose of the
13
tax while leavin untaxed the rest of the population and that even amon postal
patrons the statute discriminatorily rants exemptions.
$t is settled that the leislature has the inherent power to select the su"#ect of
taxation and to rant exemptions. The classi%cation of mail users is "ased on the
a"ility to pay, the en#oyment of a privilee and on administrative convenience. Tax
exemptions have never "een thouht of as raisin issues under the e8ual protection
clause.
&ilvestre "%nsalan v. The M%n. /oard o4 the City o4 Manila .+ "hil 461
;laintifs souht the annulment of Hrdinance Ko. //=> of the City of Manila which
imposes a municipal occupation tax on persons exercisin various professions in the
city and penali7es non&payment of the tax, enacted pursuant to )ec. -> of the Revised
Charter of the City of Manila, which empowers the Mun. @oard to impose a municipal
occupation tax, not to exceed ;4A per annum, on persons enaed in various
professions.
;laintifs complaint is that while the law has authori7ed the City of Manila to impose
the said tax, it has withheld that authority from other chartered cities, not to mention
municipalities.
The )C held, that it is not for the courts to #ude what particular cities or
municipalities should "e empowered to impose occupation taxes in addition to those
imposed "y the Kational Eovernment. That matter is peculiarly within the domain of
the political department and the courts would do well no to encroach upon it.
>iscretion as to 3%r3oses 4or 8hich taxes shall 5e levied
The sole ar"iter of the purposes for which taxes shall "e levied is the leislature,
provided the purposes are pu"lic. The courts may review the levy of the tax to determine
whether it is for a pu"lic purpose, "ut once that is determined, the courts can make no
other in8uiry as to the purpose of the tax, as it afects the power to impose it, .Cooley1
7alter L%tz v. #ntonio #raneta,. L-!,+, >ec. ((, 1++, , "hil 14,1
;laintif :ut7 assailed the constitutionality of )ecs. . and /, CA 456, which provided for
an increase of the existin tax on the manufacture of suar, allein such tax as
unconstitutional and void for not "ein levied for a pu"lic purpose "ut for the aid and
support of the suar industry exclusively.
The )C held, that as the protection and promotion of the suar industry is a matter of
pu"lic concern, the legislature ay deterine !ithin reasonable bounds !hat is
necessary for its protection and expedient for its prootion. -ere, the legislative
discretion ust be allo!ed full play, sub&ect only to the test of reasonableness> and it
is not contended that the means provided in )ec. 5 of CA 456, "ear no relation to the
o"#ective pursued or are oppressive in character. $f o"#ective and methods alike are
constitutionally valid, no reason is seen why the state may not levy taxes to raise
funds for their prosecution and attainment. Taxation may "e made the implement of
the )tate+s ;olice ;ower.
IN$ERENT LIMITATIONS
IN$ERENT LIMITATIONS
-. ;urpose must "e pu"lic in nature.
.. ;rohi"ition aainst deleation of the taxin power.
/. 2xemption of overnment entities, aencies, and instrumentalities.
0. $nternational comity.
4. :imitations of territorial #urisdiction
"%5lic 3%r3ose o4 taxation
This is one of the inherent limitations on the power to tax and is synonymous to
Dovernmental purpose.J A tax must always "e imposed for a pu"lic purpose,
otherwise, it will "e declared as invalid.
14
The term Dpu"lic purposeJ has no %xed connotation. The essential point is that the
purpose of the tax afects the inha"itants as a community and not merely as
inha"itants.
$t has "een said that the "est test of rihtful taxation is that the proceeds of the tax
must "e used*
-. Cor the support of the overnment.
.. Cor some of the reconi7ed o"#ects of the overnment, or
/. To promote the welfare of the community.
"%5lic vs. "rivate interest
$n "asc%al v. &ec. o4 "%5lic 7orLs 110 &C'# "hil 331, the )C held that the
appropriation for construction of feeder roads on land "elonin to a private person is not
valid, and donation to the overnment of the said land made over 4 months after the
approval and efectivity of the Act for the purpose of ivin sem"lance of leality to the
appropriation does not cure the "asic defect. $ncidental advantae to the pu"lic or to the
)tate, which results form the promotion of private enterprises, does not #ustify the use of
pu"lic funds.
$=ect o4 incidental 5ene:t to 3rivate interest
The purposes to "e accomplished "y taxation need not "e exclusively pu"lic.
Althouh, private individuals are directly "ene%ted, the tax would still "e valid
provided such "ene%t is only incidental.
The test is not as to who receives the money, "ut the character of the purpose for
which it is expended, not the immediate result of the expenditure, "ut rather the
ultimate results.
The appropriation of pu"lic money to construct a road on private land is not a pu"lic
purpose. %"asc%al v. &ecretary o4 "%5lic 7orLs. 110 "hil. 3311.
"o8er to tax cannot 5e dele)ated
The power of taxation, "ein purely leislative, cannot "e deleated "y the Conress.
This limitation arises from the doctrine of separation of powers amon the three
"ranches of overnment.
$xce3tion to the non-dele)ation r%le
-. <eleation to the ;resident.
.. <eleation to local overnment units
/. <eleation to administrative aencies
>ele)ation to the "resident
Conress may authori7e, "y law, the ;resident to %x, within speci%ed limits and
su"#ect to such limitations and restrictions as it may impose*
-. Tarif rates,
.. $mport and export 8uotas,
/. Tonnae and wharfae dues, and
0. other duties or imposts within the national development proram of the
overnment.
This authori7ation is em"odied in )ec. 0A- of the Tarif and Customs Code which is
also called the D?exible tari8 clauseJ
Flexi5le tari= cla%se
15
$n the interest of national economy, eneral welfare andGor national security, the
;resident, upon recommendation of the Kational 2conomic and <evelopment
Authority, is empowered*
-. To increase, reduce or remove existin protective rates of import duty,
provided that the increase should not "e hiher than -AAB ad valorem.
.. To esta"lish import 8uota or to "an imports of any commodity, and
/. To impose additional duty on all imports not exceedin -AB ad valorem.
>ele)ation to local )overn*ent %nits
The power of local overnment units to impose taxes and fees is always su"#ect to the
limitations which the Conress may provide, the former havin no inherent power to
tax. 'Basco v. ).14@R(.
Municipal corporations are mere creations of Conress which has the power to create
and a"olish municipal corporations. Conress therefore, has the power of control over
local overnment units. $f Conress can rant to a municipal corporation the power to
tax certain matters, it can also provide for exemptions or even to take "ack the power.
The power to tax is primarily vested in the Conress, however, in our #urisdiction, it
may "e exercised "y local leislative "odies, no loner merely "y virtue of a valid
deleation "ut pursuant to direct authority conferred "y )ection 4, Article N of the
-=>6 Constitution, su"#ect to uidelines and limitations which Conress may provide
which must "e consistent with the "asic policy of local autonomy, .MC2## v.
Marcos, (61 &C'# 66!1.
>ele)ation to ad*inistrative a)encies
!ith the rowin complexities of modern life, and the many technical %elds of
overnment functions, as in matters pertainin to tax exemptions, deleation of
leislative powers has "ecome the rule and non&deleation the exception. The
leislature may not have the competence, let alone the interest and the time, to
provide direct and eFcacious solutions to many pro"lems attendant upon present day
undertakins. The leislature could not "e expected to state all the detailed situations
wherein the tax exemption privilee would "e restored. The task may "e assined to
an administrative "ody like the Ciscal $ncentives Review @oard 1C$R@3. '=aceda v.
=acaraig, ABC #4R. DDA*.
Cor deleation to "e constitutionally valid, the law must "e complete in itself and must
set forth suFcient standards.
Certain aspects of the taxin process that are not really leislative in nature are
vested in administrative aencies. $n these cases, there really is no deleation, to wit*
-. ;ower to and value property,
.. ;ower to assess and collect taxes,
/. ;ower to perform details of computation, appraisal, or ad#ustment, amon
others.
'eason 4or exe*3tin) )overn*ental entities
Eovernment will "e taxin itself to raise money for itself,
$mmunity is necessary on order that the overnmental functions will not "e impeded.
"ro3erty o8ned 5y the &tate
Tax exemption of property owned "y the Repu"lic of the ;hilippines refers to property
owned "y the overnment and its aencies which do not have separate and distinct
personalities. DThe overnment does not part with its title "y reservin them, "ut simply
ives notice to the world that it desires them for a certain purpose.J As its title remains with
the Repu"lic, the reserved land is clearly covered "y tax exemption.
Iowever, the exemption does not extend to improvements on pu"lic land.
Conse8uently, the warehouse constructed on the reserved land "y K<C should properly "e
16
assessed real estate tax, as such improvement does not appear to "elon to the pu"lic,
.H>C v. Ce5% City, (1+ &C'# 3,(1.
7hich )overn*ental entities are exe*3t 4ro* tax9
-. Eovernment )ervice $nsurance )ystem 1E)$)3
2. Social Security System (SSS)
/. ;hilippine Iealth $nsurance Corporation 1;I$C, ;hilIealth3
0. ;hilippine Charity )weepstakes HFce 1;C)H3
4. ;hilippine Amusement and Eamin Corporation 1;AECHR3
2nternational co*ity
Corteous, friendly areement and interaction "etween )tates.
Lnder $nternational :aw, property of a forein )tate may not "e taxed "y another
)tate.
'easons 4or exe*3tion
)overein e8uality of )tates.
!hen one )tate enters the territory of another )tate, there is an implied
understandin that the former does not intend to denirate "y placin itself under the
#urisdiction of the other )tate.
$mmunity from suit of a )tate.
Li*itation o4 territorial C%risdiction
Tax laws cannot operate "eyond a state+s territorial limits.
;roperty outside one+s #urisdiction does not receive any protection from the )tate.
-%risdiction o4 the "hili33ine )overn*ent to i*3ose taxes
!here shares of stock left "y a non&resident alien decedent with a corporation in the
;hilippines, the )C held that the actual situs of the shares of stock is in the ;hilippines. The
owner, residin in California, had extended here her activities with respect to her intani"les
so as to avail herself of the protection and "ene%t of the ;hilippine laws. Accordinly the
;hilippine overnment had the #urisdiction to tax, .7ells Far)o /anL v. Collector, !0 "hil
(3+1.
CONSTITTIONAL LIMITATIONS
CONSTITTIONAL LIMITATIONS
-. <ue process of law,
.. 28ual protection of laws,
/. Rule of uniformity and e8uity in taxation,
0. ;rohi"ition aainst imprisonment for non&payment of poll tax,
4. ;rohi"ition aainst impairment of o"liations and contracts,
5. ;rohi"ition aainst infrinement of reliious freedom,
6. ;rohi"ition aainst appropriation of proceeds of taxation for the use, "ene%t, or
support of any church,
>. ;rohi"ition aainst taxation of reliious, charita"le, and educational entities,
17
=. ;rohi"ition aainst taxation of non&stock, non&pro%t educational institutions,
-A. Hthers
a3 Erant of tax exemption
"3 ?eto of appropriation, revenue, tarif "ills "y the ;resident
c3 Kon&impairment of the )C #urisdiction
d3 Revenue "ills shall oriinate exclusively from the Iouse of Representatives
e3 $nfrinement of press freedom
f3 Erant of franchise
DE PROCESS OF LAW
There must "e a valid law
Tax measure should not "e unconsciona"le and un#ust as to amount to con%scation of
property
Tax statute must not "e ar"itrary as to %nd no support in the Constitution
7hen does the 3o8er o4 taxation i*3in)e the d%e 3rocess cla%se9
The due process clause may "e invoked where a taxin statute is so ar"itrary that it
%nds no support in the Constitution, as where it can "e shown to amount to a con%scation of
property, .'eyes v. #l*anzor, 16 &C'# 3((1.
E(AL PROTECTION OF LAWS
All persons su"#ect to leislation shall "e treated alike under similar circumstances
and conditions "oth in privilee conferred and lia"ilities imposed.
The doctrine does not re8uire that persons or properties diferent in fact "e treated in
law as thouh they were the same. !hat it prohi"its is class leislation which
discriminates aainst some and favors others.
As lon as there are rational or reasona"le rounds for so doin, Conress may roup
persons or properties to "e taxed and it is suFcient if all mem"ers of the same class
are su"#ect to the same rate and the tax is administered impartially upon them.
2s classi:cation allo8ed9
The taxin power has the authority to make reasona"le and natural classi%cation for
purposes of taxation, "ut the overnment+s act must not "e prompted "y spirit of hostility, or
at the very least discrimination that %nds no support in reason. $t suFces then that the laws
operate e8ually and uniformly on all persons under similar circumstances or that all persons
must "e treated in the same manner, the conditions not "ein diferent "oth in privilees
conferred and lia"ilities imposed, .&ison v. #ncheta, 130 &C'# 6+41.
'e;%isites o4 a valid classi:cation
-. $t must "e "ased on su"stantial distinctions which make real diferences.
.. The classi%cation must "e ermane to the purpose of the law.
/. The classi%cation must not "e limited to existin conditions only "ut must also apply
to future conditions su"stantially identical to those of the present.
4. The classi%cation must apply e8ually to all mem"ers of the same class. 'Tiu v. 4., 6EA
#4R. 9D3 FABBBG*
Ti% v. C#,
The Constitutional riht to e8ual protection of the law is not violated "y an executive
order, issued pursuant to law, rantin tax and duty incentives only to "usinesses
within the Dsecured areaJ of the )u"ic )pecial 2conomic Oone and denyin them to
those who live within the Oone "ut outside such Dfenced in territory. The Constitution
does not re8uire a"solute e8uality amon residents. $t is enouh that all persons
under like circumstances or conditions are iven the same privilees and re8uired to
follow the same o"liations. $n short, a classi%cation "ased on valid and reasona"le
standards does not violate the e8ual protection clause.
18
!e %nd real and su"stantial distinctions "etween the circumstances o"tainin inside
and those outside the )u"ic Kaval @ase, there"y #ustifyin a valid and reasona"le
classi%cation.
<r*oc &%)ar Co*3any v. Treas%rer o4 <r*oc City, (( &C'# 603
$n the case of Hrmoc )uar Company v. The treasurer of Hrmoc City, the )C held the
ordinance unconstitutional for taxin only suar produced and exported "y the Hrmoc
)uar Co., $nc. The classi%cation to "e reasona"le should "e in terms applica"le to
future conditions as well. The taxin ordinance should not "e sinular and exclusive as
to exclude any su"stantially esta"lished suar central of the same class as plaintif,
from the coverae of the tax.
# la8 8ithdra8in) the exe*3tion )ranted to the 3ress 8as challen)ed as
discri*inatory 4or )ivin) 5roadcast *edia 4avored treat*ent.
The )C held that it is not discriminatory. $f the press is now re8uired to pay ?AT, it is
not "ecause it is "ein sinled out, "ut only "ecause of the removal of the exemption
previously ranted "y law. Curther, the press is taxed on its transactions involvin printin
and pu"lication, which are diferent from the transactions of "roadcast media, there is a
reasona"le "asis for the classi%cation, 2Tolentino v. #ec. of ;inance 96H #4R. C6E*
NIFORMIT# AND E(IT# IN TAXATION
)ec. .> c, Art. ?$ of the Constitution provides that Dthe rule of taxation shall be
unifor and e'uitableJ.
The concept of uniformity in taxation implies that all taxa"le articles or properties of
the same class shall "e taxed at the same rate. $t re8uires the uniform application and
operation, without discrimination, of the tax in every place where the su"#ect of the
tax is found. $t does not, however, re8uire a"solute identity or e8uality under all
circumstances, "ut su"#ect to reasona"le classi%cation.
The concept of e8uity in taxation re8uires that the apportionment of the tax "urden
"e, more or less, #ust in the liht of the taxpayer+s a"ility to shoulder the tax "urden
and, if warranted, on the "asis of the "ene%ts received from the overnment. $ts
cornerstone is the taxpayer+s a"ility to pay.
PRO$IBITION AGAINST IMPRISONMENT FOR NON-PA#MENT OF TAX
Ko person shall "e imposed for de"t or non&payment of poll tax. ')ec. .A, Art. $$$,
Constitution(
The non&imprisonment rule applies to non&payment of poll tax which is punisha"le
only "y a surchare, "ut not to other violations like falsi%cation of community tax
certi%cate and non&payment of other taxes.
"oll tax
;oll tax is a tax of %xed amount imposed on residents within a speci%c territory
reardless of citi7enship, "usiness or profession. e.. community tax
PRO$IBITION AGAINST IMPAIRMENT OF OBLIGATIONS AND CONTRACTS
Ko law impairin the o"liation of contracts shall "e passed. ')ec. -A, Art. $$$, -=>6
Constitution(
The o"liation of a contract is impaired when its terms or conditions are chaned "y
law or "y party without the consent of the other, there"y weakenin the position or
rihts of the latter.
An example of impairment "y law is when a later taxin statute revokes a tax
exemption "ased on a contract. @ut this only applies when the tax exemption has
"een ranted for a valid consideration.
19
A later statute may revoke exemption from taxation provided for in a franchise
"ecause the Constitution provides that a franchise is su"#ect to amendment,
alteration or repeal.
PRO$IBITION AGAINST INFRINGEMENT OF RELIGIOS FREEDOM
Ko law shall "e made respectin an esta"lishment of reliion, or prohi"itin the free
exercises thereof.
The free exercise and en#oyment of reliious profession and worship, without
discrimination or preference, shall forever "e allowed. Ko reliious test shall "e
re8uired for the exercise of civil or political rihts. ')ec. 4, Art. $$$, -=>6
Constitution(.
The payment of license fees for the distri"ution and sale of "i"les suppresses the
constitutional riht of free exercise of reliion. '.erican Bible #ociety v. =anila, AEA
)hil. 63C*.
PRO$IBITION AGAINST APPROPRIATION OF PROCEEDS OF TAXATION FOR T$E SE'
BENEFIT' OR SPPORT OF AN# C$RC$
&ection (, #rt. V2, 1,! Constit%tion
-. Ko money shall "e paid out of the Treasury except in pursuance of an appropriation
made "y law.
.. Ko pu"lic money or property shall "e appropriated, applied, paid, or employed directly
or indirectly, for the use, "ene%t, or support of any church, denomination, sectarian
institution or system of reliion, or of any priest, preacher, minister or other reliious
teacher, or dinitary as such except when such priest, preacher, minister or dinitary
is assined to the armed forces, or to any penal institution, or overnment orphanae
or leprosarium.
/. All money collected on any tax levied for a special purpose shall "e treated as a
special fund and paid out for such purpose only. $f the purpose for which a special
fund was created has "een ful%lled or a"andoned, the "alance, if any, shall "e
transferred to the eneral funds of the overnment.
PRO$IBITION AGAINST TAXATION OF REAL PROPERT# ACTALL#' DIRECTL#' AND
EXCLSIVEL# SED FOR RELIGIOS' C$ARITABLE' AND EDCATIONAL PRPOSE
Charita"le institutions, churches and parsonaes or convents appurtenant thereto,
mos8ues, non&pro%t cemeteries, and all lands, "uildins, and improvements, actually,
directly and exclusively used for reliious, charita"le, or educational purposes shall "e
exempt from taxation. ')ec. .>, Art. ?$, -=>6 Constitution(.
This is an exemption from real property tax only.
The exemption in favour of property used exclusively for charita"le or educational
purpose is not limited to property actually indispensa"le therefore, "ut extends to
facilities which are incidental to and reasona"ly necessary for the accomplishment of
said purpose. '.bra :alley 4ollege v. .'uino, AC9 #4R. AEC*.
To "e exempt from realty taxation, there must "e proof of actual, direct and exclusive
use of lands, "uildins and improvements for reliious or charita"le purposes,
2)rovince of .bra v. -ernando AED #4R. AE5*.
PRO$IBITION AGAINST TAXATION OF T$E REVENES AND ASSETS OF NON-STOC)'
NON-PROFIT EDCATIONAL INSTITTIONS
All revenues and assets of non&stock, non&pro%t educational institutions used actually,
directly, and exclusively for educational purposes shall "e exempt from taxes and
duties. Lpon the dissolution or cessation of the corporate existence of such
institutions, their assets shall "e disposed of in the manner provided "y law. ')ec. 0,
Art. N$?, -=>6 Constitution(
This exemption from corporate income tax is em"odied in )ec. /A of the K$RC which
includes a non&stock, non&pro%t educational institutions.
20
Kote however the last pararaph of )ec. /A, which states* DNot!ithstanding the
provisions in the preceding paragraphs, the incoe of !hatever ,ind and character of
the foregoing organi%ations for any of their property, real or personal, or fro any of
their activities conducted for proft, regardless of the disposition ade of such
incoe, shall be sub&ect to tax iposed under this 4ode.
>e3art*ent o4 Finance <rder 14+-,+
Kon&stock, non&pro%t educational institutions are exempt form taxes on all their
revenues and assets used actually, directly and exclusively for educational purposes.
Iowever, they shall "e su"#ect to internal revenue tax on income form trade, "usiness
or other activity, the conduct of which is not related to the exercise or performance "y
such educational institutions of its educational purposes or functions.
$nterest income shall "e exempt only when used directly and exclusively for
educational purposes. To su"stantiate this claim, the institution must su"mit annual
information return and duly audited %nancial statement. A certi%cation of actual
utili7ation and the @oard resolution or the proposed pro#ect to "e funded out of the
money deposited in "anks shall also "e su"mitted.
>e3art*ent o4 Finance <rder 13!-,!
An educational institution means a non&stock, non&pro%t corporation or association
duly reistered under ;hilippine law, and operated exclusively for educational
purposes, maintained and administered "y a private individual or roup oferin
formal education, and with an issued permit to operate "y the <2C).
Revenues derived from and assets used in the operation of cafeteriaGcanteens,
dormitories, and "ookstores are exempt from taxation provided they are owned and
operated "y the educational institution as ancillary activities and the same are located
within the school premises.
C2' v. C#, (, &C'# ,3 .1,1
The Poun Men+s Christian Association of the ;hilippines, $nc. 1PMCA3, was
esta"lished as a D!elfare, educational and charitable non-proft corporation. $t
conducts various prorams and activities that are "ene%cial to the pu"lic, especially
the youn people, pursuant to its reliious, educational and charita"le o"#ectives.
$n this case, the )C held that the income derived "y PMCA from leasin out a
portion of its premises to small shop owners, like restaurants and canteen operators,
and from parkin fees collected form non&mem"ers are taxa"le income.
Cirst, the constitutional tax exemptions ranted to non&stock, non&pro%t
educational institutions does not %nd application "ecause PMCA is not an educational
institution. The term Deducational institutions or D"nstitute of learning has ac8uired a
well known and technical meanin. Lnder the 2ducation Act of -=>., such term refers
to schools. The school system is synonymous with formal education, which Drefers to
the hierarchically structured chronologically graded learnings organi%ed and provided
by the foral school syste and for !hich certifcation is re'uired in order for the
learner to progress through the grades or ove to the higher levels. A perusal of the
articles of incorporation of the PMCA does not show that it esta"lished such a system.
)econd, even if it "e exempt under )ec. /A, of the K$RC as a non Q pro%t, non Q
stock educational corporation, the income from the rent of its premises and parkin
fees are not covered "y the exemption, accordin to the last pararaph of the same
section. )ec. /A, provides that income of whatever kind and character from any of its
properties, real or personal, or from any of its activities for pro%t are not exempt from
income tax.
Cinally, )ec. .>, Art. ?$ of the Constitution does not apply as it extends
exemption only form real and property taxes& not from income taxes.
TAXATION OF PROPRIETAR# EDCATIONAL INSTITTIONS
;roprietary educational institutions, includin those cooperatively owned, may
likewise "e entitled to such exemptions su"#ect to the limitations provided "y law
includin restrictions on dividends and provisions for investment, ')ec. 01/3, Art. N$?,
Constitution(.
21
Lnder )ec. .61@3 of the K$RC, proprietary educational institutions and hospitals which
are non&pro%t shall pay a tax of -AB on their taxa"le income except for passive
income which are su"#ect to diferent tax rates.
7hen is a 3ro3erty tax exe*3t 4or 5ein) D%sed excl%sively 4or ed%cational
3%r3osesE
The test of exemption is the use of the property for the purposes mentioned in the
Constitution. The exemption extends to facilities which are incidental to and reasona"ly
necessary for the accomplishment of the main purposes, such as, in the case of hospitals* a
school for trainin nurses, a nurses+ home, property used to provide housin facilities for
interns, resident doctors, superintendents, and other mem"ers of the hospital staf, 2-errera
v. I4 Board of .ssessent .ppeals, 6 #4R. A3C*.
$n .bra :alley 4ollege :. -on. .'uino AC9 #4R. AEC, The use of the second 9oor for
residential purposes of the <irector and his family was held to incidental to the purpose of
education, while the lease of the %rst 9oor to a corporation is not, and therefore considered
taxa"le.
OT$ER CONSTITTIONAL LIMITATIONS
1& GRANT OF EXEMPTION
Ko law rantin any tax exemption shall "e passed without the concurrence of
a ma#ority of all Mem"ers of Conress, ')ec. .>103, Art. ?$, Constitution(.
2& VETO OF APPROPRIATION' REVENE' OR TARIFF BILLS B# T$E PRESIDENT
The ;resident shall have the power to veto any particular item or items in an
appropriation, revenue, or tarif "ill, "ut the veto shall not afect the item or items
to which he does not o"#ect, ')ec. .61.3, Art. ?$, Constitution(.
An item in a "ill refers to particulars, details, the distinct and severa"le parts of
a "ill. $n "udetary leislation, an item is an invalid sum of money dedicated to a
stated purpose, 'Eon7ales v. Macarai -=- )CRA 04.(
3& NON-IMPAIRMENT OF T$E *RISDICTION OF T$E SC
Conress cannot take away from the )C the power iven to it "y the
Constitution as the %nal ar"iter of tax cases.
The )C shall have the followin powers*
Review, revise, reverse, modify, or aFrm on appeal or certiorari, as the law or
the Rules of Court may provide, %nal #udments and orders of lower courts in*
All cases involvin the leality of any tax, impost, assessment, or toll, or any
penalty imposed in relation thereto, ')ec. 41.3 1@3, Art. ?$$$, Constitution(.
4& REVENE BILLS S$ALL ORIGINATE EXCLSIVEL# FROM T$E $OSE OF
REPRESENTATIVES
All appropriation, revenue or tarif "ills, "ills authori7in an increase of the
pu"lic de"t, "ill of local application, and private "ills shall oriinate exclusively in
the Iouse of Representatives, "ut the )enate may propose or concur with
amendments, ')ec. .0, Art. ?$, Constitution(
The Constitution simply means that the initiative for the %lin of "ills must
come from the Iouse of Representatives, on the theory that, elected as they are
from the districts, the mem"ers of the Iouse can "e expected to "e more
sensitive to the local needs and pro"lems. $t is not the law Q @ut the revenue "ill Q
which is re8uired "y the Constitution to oriinate exclusively in the Iouse of
Representatives, "ecause a "ill oriinatin in the Iouse may undero such
extensive chanes in the )enate that the result may "e a rewritin of the whole,
and a distinct "ill may "e produced, 'Tolentino v. #ec. of ;inance*.
The Constitution does not also prohi"it the %lin in the )enate of a su"stitute
"ill in anticipation of its receipt of the "ill from the Iouse, as lon as action "y the
)enate is withheld until of a said "ill, 'Tolentino v. #ec. of ;inance*
5& INFRINGEMENT OF PRESS FREEDOM
22
This limitation does not mean that the press is exempt from taxation. Taxation
constitutes an infrinement of press freedom when it operates as a prior restraint
to the exercise of this constitutional riht. !hen the tax is imposed on the receipts
or the income of the press it is a valid exercise of the soverein preroative.
6& GRANT OF FRANC$ISE
Tax exemptions included in the rant of a franchise may "e revoked "y another
law as it is speci%cally provided in the Constitution that the rant of any
franchise is always su"#ect to amendment, alteration, or repeal "y the
Conress when the common ood so re8uires.
SITS OF TAXATION
SITS OF TAXATION
:iterally, situs of taxation means place of taxation. $t is the )tate or political unit which
has #urisdiction to impose a particular tax.
The determination of the situs of taxation depends on various factors includin the*
-. Kature of the tax,
.. )u"#ect matter thereof 1e.. persons, property, act or or activity3,
/. ;ossi"le protection and "ene%t that may accrue "oth to the overnment and
the taxpayer,
0. Residence or citi7enship of the taxpayer, and
4. )ource of income.
&it%s o4 taxation on 3ersons A3oll tax0
;oll tax may "e properly levied upon persons who are inha"itants or residents of the
)tate, whether or not they are citi7ens.
&it%s o4 tax on real 3ro3erty
)itus is where the property is located pursuant to the principle of lex rei sitae. This
applies whether or not the owner is a resident of the place where the property is
located.
This is so "ecause the taxin authority has control over the property which is of a
%xed and stationary character.
The place where the real property is located ives protection to the real property,
hence, the owner must support the overnment of that place.
LEX REI SITAE
This is a principle followed in %xin the situs of taxation of a property. This means that
the property is taxa"le in the )tate where it has its actual situs, speci%cally in the
place where it is located, even thouh the owner resides in another #urisdiction.
!ith respect to property taxes, real property is su"#ect to taxation in the )tate where
it is located and taxa"le only there. (ex rei sitae has also "een adopted for tani"le
personal property under Article -5 of the Civil Code. A diferent rule applies to
intani"le personal property, speci%cally, obilia se'uuntut persona.
&it%s o4 tan)i5le 3ersonal 3ro3erty
$t is taxa"le in the )tate where it has actual situs althouh the owner resides in
another #urisdiction.
As stated a"ove, lex rei sitae has also "een adopted for tani"le personal property
under Art. -5 of the Civil Code.
23
&it%s o4 taxation o4 intan)i5le 3ersonal 3ro3erty
G+,+-./ -0/+1 )itus is the domicile of the owner pursuant to the principle of obilia
se'uuntur persona. This rule is "ased on the fact that such property does not admit
of any actual location and that such property receives the protection and "ene%ts of
the law where they are located.
E23+4567,81
-. !hen it is inconsistent with the express provisions of the statute.
.. !hen the property has ac8uired a "usiness situs in another #urisdiction.
MOBILIA SE(NTR PERSONAM
This :atin maxim literally means that Dthe property follows the personJ. Thus, the
place where the owner is found is the situs of taxation under the rule that mova"les
follow the person. This is enerally where the owner resides.
$n taxation, this principle is applied to intani"le personal property the situs of which
is %xed "y the domicile of the owner. The reason is that this type of property rarely
admits of actual location.
Iowever, there are two exceptions to the rule. Hne is when it is inconsistent with the
express provisions of a statute. Two, when the interest of #ustice demand that it should
not "e applied, i.e. where the property has in fact a situs elsewhere.
7ells Far)o v. C2', !0 "hil 3(+
This case involves the collection of inheritance taxes on shares of stock issued
"y the @enuet Consolidated Minin Corporation and owned "y :illian 2ye. The shares
were already su"#ected to inheritance taxes in California and are now "ein taxed "y
;hilippine authorities.
Hriinally, the settled law in the Lnited )tates is that intani"les have only one
situs for the purpose of inheritance tax Q the domicile of the decedent at the time of
his death. @ut this rule has, of late, "een relaxed. The maxim obilia se'uuntur
persona, upon which this rule rests, has "een decried as a mere %ction of law havin
its oriin in considerations of eneral convenience and pu"lic policy and cannot "e
applied to limit or control the riht of the )tate to tax property within its #urisdiction. $t
must yield to esta"lish fact of leal ownership, actual presence and control elsewhere,
and cannot "e applied if to do so would result in inescapa"le and patient in#ustice.
The relaxation of the oriinal rule rests on either of two fundamental
considerations*
-. Lpon the reconition of the inherent power of each overnment to tax persons,
properties and rihts within its #urisdiction and en#oyin the protection of its
laws, or
.. Lpon the principle that as to intani"les, a sinle location in space is hardly
possi"le, considerin the multiple, distinct relationships which may "e entered
into with respect thereto.
The actual situs of the shares of stock is in the ;hilippines, the corporation
"ein domiciled therein. And "esides, the certi%cates of stock have remained in this
country up to the time when the deceased died in California, and they were in the
possession of the secretary of the @enuet Corporation. The secretary had the riht to
vote, collect dividends, amon others. Cor all practical purposes, the secretary had
leal title to the certi%cates of stock held in trust for 2ye. 2ye extended in the
;hilippines her activities re* her intani"le personal property so as to avail herself of
the protection and "ene%ts of the ;hilippines laws.
C2' v. >e Lara, 10( "hil ,13
The )upreme Court did not su"#ect to estate and inheritance taxes the shares
of stock issued "y ;hilippine corporations which were left "y a non&resident alien after
his death. Considerin that he is a resident of a forein country, his estate is entitled
to exemption from inheritance tax on the intani"le personal property found in the
;hilippines. This exemption is ranted to non&residents to reduce the "urdens of
multiple taxation, which otherwise would su"#ect a decedent+s intani"le personal
property to the inheritance tax "oth in his place of residence and domicile and the
place where those are found.
24
This is, therefore, an exception to the decision of the )upreme Court in 7ells
Far)o v. C2'. This has since "een incorporated in )ec. -A0 of the K$RC.
T$EORIES RE1 SITS OF INCOME TAXATION
1. >o*icilliary theory
The location where the income earner resides is the situs of taxation. This is
where he is iven protection, hence, he must support it.
(. Hationality theory
The country of citi7enship is the situs of taxation. This is so "ecause a citi7en is
iven protection "y his country no matter where he is found or no matter where he
earns his income.
3. &o%rce la8
The country which is the source of the income or where the activity that
produced the income is the situs of taxation.
SITS OF INCOME TAX IN T$E P$ILIPPINES
The situs is where the income is derived.
The source of an income is the property, activity or service that produced the income.
Cor the source of income to "e considered as comin from the ;hilippines, it is
suFcient that income is derived from an activity within the ;hilippines. $n /<#C+s
case, the sale of tickets in the ;hilippines is the activity that produces the income. The
tickets exchaned hands here and payments for fares were also made in the
;hilippines. The 9ow of wealth proceeded from and occurred in the ;hilippine territory,
en#oyin the protection accorded "y the ;hilippine overnment, in consideration of
such protection, the 9ow of wealth should share the "urden of supportin the
overnment.
The a"sence of 9iht operations to and from the ;hilippines is not determinative of
the source of income or the situs of income taxation. The test of taxa"ility is the
source of the income or the situs of income taxation. The test of taxa"ility is the
source of the income and the source is that activity which produced the income. 2ven
if the tickets sold covered the transport of passeners and caro to and from forein
cities, it cannot alter the fact that income from the sale of the tickets was derived
from the ;hilippines. The word DsourceJ conveys one essential idea, that of oriin, and
the oriin of the income is here in the ;hilippines, '4oissioner v. B@.4, A5B #4R.
6BH*.
)itus of tax on interest income is the residence of the "orrower who pays the interest,
irrespective of the place where the o"liation was contracted. $f the "orrower is a
resident of the ;hilippines, the interest payment paid "y him can have no other source
than within the ;hilippines.
M%lti3licity o4 s%its
Multiplicity of situs, or the taxation of the same income or intani"le su"#ects in
several taxin #urisdictions, arises from various factors*
-. The variance in the concept of domicile for tax purposes,
.. Multiple distinct relationships that may arise with respect to intani"le
personal property, or
/. The use to which the property may have "een devoted all of which may
receive the protection of the laws of #urisdictions other than the domicile of the
owner thereto.
The remedy to avoid or reduce the conse8uent "urden in case of multiplicity of situs is
either to*
-. ;rovide exemptions or allowance of deduction or tax credit for forein taxes, or
25
.. 2nter into tax treaties with other )tates.
DOBLE TAXATION
>o%5le taxation in the strict sense and do%5le taxation in the 5road sense
$n its strict sense, referred to as direct duplicate taxation, dou"le taxation means*
-. Taxin twice,
.. "y the same taxin authority,
/. within the same #urisdiction or taxin district,
0. for the same purpose,
4. in the same year or taxin period,
5. some of the property in the territory.
$n its "road sense, referred to as indirect dou"le taxation, dou"le taxation is taxation
other than direct duplicate taxation. $t extends to all cases in which there is a "urden
of two or more impositions.
Constit%tionality o4 do%5le taxation
Lnlike in the Lnited )tates Constitution, our Constitution does not prohi"it dou"le
taxation.
Iowever, while it is not for"idden, it is somethin not favored. )uch taxation should,
whenever possi"le, "e avoided and prevented.
$n addition, where there is direct dou"le taxation, there may "e a violation of the
constitutional precepts of e8ual protection and uniformity in taxation.
The arument aainst dou"le taxation may not "e invoked where one tax is imposed
"y the )tate and the other is imposed "y the city, it "ein widely reconi7ed that
there is nothin inherently o"noxious in the re8uirement that license fees or taxes "e
exacted with respect to the same occupation, callin, or activity "y "oth the )tate and
a political su"division thereof. And where the statute or ordinance in 8uestion, there is
no infrinement of the rule on e8uality, '4ity of Baguio v. 0e (eon, 9H #4R. B63 (.
Villan%eva v. City o4 2loilo, (6+ &C'# +3,
An ordinance imposin a municipal tax on tenement houses was challened "ecause
the owners already pay real estate taxes and also income taxes under the K$RC. The
)upreme Court held that there was no dou"le taxation. The same tax may "e imposed
"y the Kational Eovernment as well as the local overnment. There is nothin
inherently o"noxious in the exaction of license fees or taxes with respect to the same
occupation, callin, or activity "y "oth the )tate and a political su"division thereof.
Curther, a license tax may "e levied upon a "usiness or occupation althouh the land
used in connection therewith is su"#ect to property tax.
$n order to constitute dou"le taxation in the o"#ectiona"le or prohi"ited sense*
-. The same property must "e taxed twice, when it should "e taxed once.
.. @oth taxes must "e imposed on the same property or su"#ect matter.
/. $t should "e for the same purpose.
0. @y the same )tate, overnment, or taxin authority.
4. !ithin the same #urisdiction or taxin district.
5. <urin the same taxin period.
6. Hf the same kind or character of tax.
26
At any rate, there is no unconstitutional prohi"ition aainst dou"le taxation in the
;hilippines. $t is somethin not favored "ut is permissi"le, provided that some other
constitutional re8uirement is not there"y violated.
2nternational C%ridical do%5le taxation
Tax conventions such as the R;&L) tax treaty are drafted with a view towards the
elimination of international #uridical dou"le taxation, which is de%ned as the imposition of
compara"le taxes in two or more states on the same taxpayer in respect to the same su"#ect
matter and for identical periods.
Methods o4 eli*inatin) do%5le taxation
To eliminate dou"le taxation, a tax treaty resorts to several methods. Cirst, it sets out
the respective rihts to tax of the state of source or situs and of the state of residence with
reard to certain classes of income or capital. $n some cases, an exclusive riht to tax is
conferred on one of the contractin states, however, for other items of income or capital,
"oth states are iven the riht to tax, althouh the amount of tax that may "e imposed "y
the state of source is limited.
The second method for the elimination of dou"le taxation applies whenever the state
of source is iven a full or limited riht to tax toether with the state of residence. $n this
case, the treaties make it incum"ent upon the state of residence to allow relief on order to
avoid dou"le taxation.
There are t8o *ethods o4 relie4
-. $n the exemption method, the income or capital which is taxa"le at the state of source
or situs is exempted at the state of residence, althouh in some instances it may "e
taken into account in determinin the rate of tax applica"le to the taxpayer+s
remainin income or capital.
.. $n the credit method, althouh the income or capital which is taxed in the state of
source is still taxa"le in the state of residence, the tax paid in the former is credited
aainst the tax levied in the latter.
The "asic diference "etween the two methods is that in the exemption method, the
focus is on the income or capital, whereas the credit method focuses upon the tax.
MEANS OF AVOIDING OR MINIMI9ING T$E BRDEN OF TAXATION
S62 :.863 ;7-<8 7; <6,6<6=6,> 7- +83.4+ ;-7<5.2.567,
-. )hiftin
.. Capitali7ation
/. 2vasion
0. 2xemption
4. Transformation
5. Avoidance
N75+* !ith the exception of evasion, all are leal means of escape.
S$IFTING
)hiftin is the transfer of the "urden of a tax "y the oriinal payer or the one on whom
the tax was assessed or imposed to someone else.
$t should "e "orne in mind that what is transferred is not the payment of the tax "ut
the "urden of the tax.
Taxes that can 5e shi4ted
Hnly indirect taxes may "e shifted 1e.. ?AT3, direct taxes 1e.. $ncome tax3 cannot "e
shifted.
27
7ays od shi4tin) the tax 5%rden
-. Corward shiftin
!hen the "urden of the tax is transferred from a factor of production throuh
factors of distri"ution until it %nally settles on the ultimate purchase or consumer.
E2.<4/+1 Manufacturer or producer may shift tax assessed to wholesaler, who in turn
shifts it to retailer, who also shifts it to the %nal purchaser or consumer.
.. @ackward shiftin
!hen the "urden of the tax is transferred from the consumer or purchaser
throuh the factors of distri"ution to the factor of production.
E2.<4/+1 Consumer or purchaser may shift tax imposed on him to retailer "y
purchasin only after the price is reduced, and from the latter to the wholesaler, and
%nally to the manufacturer or producer.
/. Hnward shiftin
!hen the tax is shifted two or more times either forward or "ackward.
Thus, a transfer from the seller to the purchaser involves one shift, from the
producer to the wholesaler, then to retailer, we have two shifts, and if the tax is transferred
aain to the purchaser "y the retailer, we have three shifts in all.
2*3act and incidence o4 taxation
$mpact of taxation is the point on which a tax is oriinally imposed. $n so far as the law
is concerned, the taxpayer is the person who must pay the tax to the overnment. Ie
is also termed as the statutory taxpayer Q the one on whom the tax is formally
assessed. Ie is the su"#ect of taxation.
$ncidence of taxation is that point on which the tax "urden %nally rests or settles
down. $t takes place when shiftin has "een efected from the statutory taxpayer to
another.
&tat%tory tax3ayer
The statutory taxpayer is the person re8uired "y law to pay the tax or the one on
whom the tax us formally assessed. $n short, he or she is the su"#ect of the tax.
$n direct taxes, the statutory taxpayer is the one who shoulders the "urden of the tax
while in indirect taxes, the statutory taxpayer is the one who pays the tax to the
overnment "ut the "urden can "e passed to another person or entity.
'elationshi3 5et8een i*3act, shi4tin), and incidence o4 tax
The impact is the initial phenomenon, the shiftin is the intermediate process, and the
incidence is the result. Thus, the impact in a sales tax 1e.. ?AT3 is on the seller
1manufacturer3 who shifts the "urden to the customer who %nally "ears the incidence
of the tax.
$mpact is the imposition of the tax, shiftin is the transfer of the tax, while incidence
is the settin or comin to rest of the tax.
TAX EVASION
Tax evasion is the use "y the taxpayer of illeal or fraudulent means to defeat or
lessen the payment of a tax. $t is also known as Dtax dodin.J $t is punisha"le "y law.
Tax evasion is a term that connotes fraud throuh the use of pretense or for"idden
devices to lessen or defeat taxes, 'Jutivo v. 4T. A #4R. ACE(.
E2.<4/+1 <eli"erate failure to report a taxa"le income or property, deli"erately
reduction of income that has "een received.
$le*ents o4 tax evasion
Tax evasion connotes the interation of three factors*
28
-. The end to "e achieved. 2xample* the payment of less than that known
"y the taxpayer to "e leally due, or in payin no tax when such is due.
.. An accompanyin state of mind descri"ed as "ein Devil, in "ac faith,
wilful, or deli"erate and not accidental.J
/. A course of action 1or failure of action3 which is unlawful.
$vidence to 3rove evasion
)ince fraud is a state of mind, it need not "e proved "y direct evidence "ut may "e
proved from the circumstances of the case.
$n the case of 'e3%5lic v. 6onzales, 13 &C'# 633, the )upreme Court aFrmed the
assessment of a de%ciency tax aainst Eon7ales, a private concessionaire enaed in
the manufacture of furniture inside the Clark Air @ase, for underdeclaration of his
income. )C held that the failure of the taxpayer to declare for taxation purposes his
true and actual income derived from his "usiness for two consecutive years is an
indication of his fraudulent intent to cheat the overnment of taxes due to it.
2s an aMdavit exec%ted 5y reven%e oMcers a tax assess*ent9
An aFdavit executed "y revenue oFcers statin the tax lia"ilities of a taxpayer and
attached to a criminal complaint for tax evasion, is not an assessment that can "e
8uestioned "efore the CTA, 24"R v. ).#4@R, 6EB #4R. 5E9*
&tate the 3rinci3le laid do8n in the case o4 0H6#/ v. C0&2 ! &C'# ,!!
Remedies for the collection of de%cient taxes may "e "y either civil or criminal action. $n
case of failure to %le a return, the tax may "e assessed or a proceedin in court may "e
"eun without an assessment. An assessment is not necessary "efore a taxpayer may "e
prosecuted if there is prima facie showin of wilful and deli"erate attempt to %le a fraudulent
return with the intent to evade and defeat tax. A criminal complaint is instituted not to
demand payment, "ut to penali7e the taxpayer for violation of the Tax Code, 2Kngab v. 4usi*
TAX AVOIDANCE
Tax avoidance is the exploitation "y the taxpayer of leally permissi"le alternative tax
rates or methods of assessin taxa"le property or income in order to avoid or reduce
tax lia"ility. $t is politely called, Dtax minimi7ationJ and is not punisha"le "y law.
$n the case of >el3hers Traders Cor3. v. 2#C, 1+! &C'# 34, the )upreme Court
upheld the estate plannin scheme resorted to "y the ;acheco family in convertin
their property to shares of stock in a corporation which they themselves owned and
controlled. @y virtue of the deed of exchane, the ;acheco co&owners saved on
inheritance taxes. The )upreme Court said the records do not point to anythin wron
and o"#ectiona"le a"out this estate plannin scheme resorted to. The leal riht of
the taxpayer to decrease the amount of what otherwise could "e his taxes or
altoether avoid them "y means which the law permits cannot "e dou"ted.
TAX EXEMPTION
$t is the rant of immunity to particular persons or corporations of a particular class
from a tax which persons and corporations enerally within the same state or taxin
district are o"lied to pay. $t is an immunity or privilee, it is freedom from a %nancial
chare or "urden to which others are su"#ected.
2xemption is allowed only if there is a clear provision therefore.
$t is not necessarily discriminatory as lon as there is a reasona"le foundation or
rational "asis.
'ationale 4or )rantin) tax exe*3tions
$ts avowed purpose is some pu"lic "ene%t or interest which the lawmakin "ody
considers suFcient to ofset the monetary loss entailed in the rant of the exemption.
The theory "ehind the rant of tax exemptions is that such act will "ene%t the "ody of
the people. $t is not "ased on the idea of lessenin the "urden of the individual owners
of property.
29
6ro%nds 4or )rantin) tax exe*3tions
-. May "e "ased on contract. $n such a case, the pu"lic which is represented "y the
overnment is supposed to receive a full e8uivalent therefore, i.e. charter of a
corporation.
.. May "e "ased on some round of pu"lic policy, i.e., to encourae new industries or to
foster charita"le institutions. Iere, the overnment need not receive any
consideration in return for the tax exemption.
/. May "e "ased on rounds of reciprocity or to lessen the riors of international dou"le
or multiple taxation.
N75+1 28uity is not a round for tax exemption. 2xemption is allowed only if there is a
clear provision therefore.
Hat%re o4 tax exe*3tion
-. $t is a mere personal privilee of the rantee.
.. $t is enerally revoca"le "y the overnment unless the exemption is founded on a
contract which is protected from impairment.
/. $t implies a waiver on the part of the overnment of its riht to collect what otherwise
would "e due to it, and so is pre#udicial thereto.
0. $t is not necessarily discriminatory so lon as the exemption has a reasona"le
foundation or rational "asis.
Ninds o4 tax exe*3tion accordin) to *anner o4 creation
-. 2xpress or aFrmative exemption.
!hen certain persons, property or transactions are, "y express provision,
exempted from all or certain taxes, either entirely or in part.
.. $mplied exemption or exemption "y omission.
!hen a tax is levied on certain classes of persons, properties or transactions
without mentionin the other classes.
2very tax statute makes exemptions "ecause of omissions.
Ninds o4 tax exe*3tions accordin) to sco3e or extent
-. Total
!hen certain persons, property or transactions are exempted, expressly or
impliedly, from all taxes.
.. ;artial
!hen certain persons, property or transactions are exempted, expressly or
impliedly, from certain taxes, either entirely or in part.
>oes the 3rovision in a stat%te )rantin) exe*3tion 4ro* all taxes incl%de indirect
taxes9
Ko. As a eneral rule, indirect taxes are not included in the rant of such exemption
unless it is expressly stated.
Hat%re or 3o8er to )rant tax exe*3tions
-. Kational overnment
The power to rant tax exemptions is an attri"ute of sovereinty for the power
to prescri"e who or what persons or property shall "e taxed implies the power to
prescri"e who or what persons or property shall "e taxed implies the power to prescri"e
who or what persons or property shall not "e taxed.
.. :ocal overnments
30
Municipal corporations are clothed with no inherent power to tax or to rant
tax exemptions. @ut the moment the power to impose a particular tax is ranted, they
also have the power to rant exemptions therefrom unless for"idden "y some provision of
the Constitution or the law.
The leislature may deleate its power to rant tax exemptions to the same
extent that it may exercise the power to exempt.
/asco v. "#6C<' .16 &C'# +(1 O
The power to tax of municipal corporations must always yield to a leislative act of
Conress which is superior, havin "een passed "y the )tate itself. Municipal corporations
are mere creatures of Conress which has the power to create and a"olish municipal
corporations due to its eneral leislative powers. $f Conress can rant the power to tax,
it can also provide for exemptions or even take "ack the power.
Chavez v. "C66 .6' Ho. 130!16, >ec. 6, 1,1
$n a compromise areement "etween the ;hilippine Eovernment, represented "y the
;CEE, and the Marcos heirs, the ;CEE ranted tax exemptions to the assets which
will "e apportioned to the Marcos heirs. The )upreme Court ruled that the ;CEE has
a"solutely no power to rant tax exemptions, even under the cover of its authority to
compromise ill otten wealth cases. The rant of tax exemptions is the exclusive
preroative of Conress.
$n fact, the )upreme Court even stated that Conress itself cannot rant tax
exemptions in the case at "ar "ecause it will violate the e8ual protection clause of the
Constitution.
2nter3retation o4 la8s )rantin) tax exe*3tions
G+,+-./ -0/+
$n the construction of tax statutes, exemptions are not favored an are construed
strictissii &uris aainst the taxpayer. The fundamental theory is that all taxa"le
property should "ear its share in the cost and expense of the overnment.
Taxation is the rule and exemption.
Ie who claims exemption must "e a"le to #ustify his claim or riht thereto "y a rant
express in terms Ltoo plain to be ista,en and too categorical to be isinterpreted.
$f not expressly mentioned in the law, it must "e at least within its purview "y clear
leislative intent.
E23+4567,8
-. !hen the law itself expressly provides for a li"eral construction thereof.
.. $n cases of exemptions ranted to reliious, charita"le and educational
institutions or to the overnment or its aencies or to pu"lic property
"ecause the eneral rule is that they are exempted from tax.
&trict inter3retation does not a33ly to the )overn*ent and its a)encies
;etitioner cannot invoke the rule of strictissii &uris with respect to the interpretation
of statutes rantin tax exemptions to the K;C. The rule on strict interpretation does
not apply in the case of exemptions in favour of a political su"division or
instrumentality of the overnment, .Maceda v. Macarai)1.
>avao 6%l4 v. Co**issioner, .(3 &C'# !6A1,B1
A tax cannot "e imposed unless it is supported "y the clear and express lanuae of a
statute, on the other hand, once the tax is un8uestiona"ly imposed, Da claim of
exemption from tax payments must "e clearly shown and "ased on lanuae in the
law too plain to "e mistaken.J )ince the partial refund authori7ed under )ec. 4, RA
-0/4, is in the nature of a tax exemption, it must "e construed strictissii &uris
aainst the rantee. Ience, petitioner+s claim for refund "ased on speci%c taxes it
actually paid must expressly "e ranted in a statute stated in a lanuae too clear to
"e mistaken.
31
TAX REMISSION OR TAX CONDONATION
The word DremitJ means to desist or refrain from exactin, in9ictin or enforcin
somethin as well as to restore what has already "een taken. The remission of taxes
due and paya"le to the exclusion of taxes already collected does not constitute unfair
discrimination. )uch a set of taxes is a class "y itself and the law would "e open to
attack as class leislation only if all taxpayers "elonin to one class were not treated
alike, .-%an L%na &%5division v. &ar*iento, 1 "hil 3!01
The condonation of a tax lia"ility is e8uivalent to and is in the nature of a tax
exemption. Thus, it should "e sustained only when expressly provided in the law.
.&%ri)ao Consolidated Minin) v. Co**issioner o4 2nternal 'even%e, &C'#
!(,1.
TAX AMNEST#
Tax amnesty, "ein a eneral pardon or intentional overlookin "y the )tate of its
authority to impose penalties on persons otherwise uilty of evasion or violation of a
revenue or tax law, partakes of an a"solute foriveness or waiver "y the overnment
from its riht to collect what otherwise would "e due it and, in this sense, pre#udicial
to itself. $t is ranted particularly to tax evaders who wish to relent and are willin to
reform, thus ivin them a chance to do so and there"y "ecome a part of the new
society with a clean slate, .'e3%5lic v. 2#C, 16 &C'# 33+1.
:ike tax exemption, tax amnesty is never favored nor presumed in law. $t is ranted "y
statute. The terms of the amnesty must also "e construed aainst the taxpayer and
li"erally in favour of the overnment.
Tax a*nesty, tax condonation, and tax exe*3tion
Tax amnesty, "ein a eneral pardon or intentional overlookin "y the )tate of its
authority to impose penalties on persons otherwise uilty of evasion or violation of a
revenue or tax law, partakes of an a"solute foriveness or waiver "y the overnment
from its riht to collect what otherwise would "e due it and, in this sense, pre#udicial
to itself. $t is ranted particularly to tax evaders who wish to relent and are willin to
reform, thus ivin them a chance to do so and there"y "ecome a part of the new
society with a clean slate, .'e3%5lic v. 2#C, 16 &C'# 33+1.
:ike tax exemption, tax amnesty is never favored nor presumed in law. $t is ranted "y
statute. The terms of the amnesty must also "e construed aainst the taxpayer and
li"erally in favour of the overnment. Lnlike a tax exemption, however, a tax amnesty
has limited applica"ility as to cover a particular taxin period or transaction only
There is tax condonation or remission when the )tate desists or refrains from
exactin, in9ictin or enforcin somethin as well as to restore what has already "een
taken. The condonation of a tax lia"ility is e8uivalent to and is in the nature of a tax
exemption. Thus, it should "e sustained only when expressed in law.
Tax exemption, on the other hand, is the rant of immunity to particular persons or
corporations of a particular class from a tax which persons and corporations enerally
within the same state or taxin district are o"lied to pay. Tax exemption is not
favored and is construed strictissii &uris aainst the taxpayer.
SORCES' APPLICATION' INTERPRETATION AND ADMINISTRATION OF TAX
LAWS
&o%rces o4 tax la8s
-. Constitution
.. Kational $nternal Revenue Code
/. Tarif and Customs Code
0. :ocal Eovernment Code 1@ook $$3
4. :ocal tax ordinancesG City or Municipal tax codes
5. Tax treaties and international areements
6. )pecial laws
32
>. <ecisions of the )upreme Court and the Court of Tax Appeals
=. Revenue rules and reulations and administrative rulins and opinions
Tax treaty
A tax treaty is one of the sources of our law on taxation. The ;hilippine overnment
usually enters into tax treaties in order to avoid or minimi7e the efects of dou"le
taxation. A treaty has the force and efect of law.
REVENE RLES AND REGLATIONS AND ADMINISTRATIVE RLINGS AND OPINIONS
#%thority to 3ro*%l)ate r%les and re)%lations, and r%lin)s and o3inions
The )ecretary of Cinance, upon recommendation of the Commissioner of $nternal
Revenue, shall promulate needful rules and reulations for the efective enforcement
of the provisions of the K$RC.
This is without pre#udice to the power of the Commissioner of $nternal Revenue to
make rulins or opinions in connection with the implementation of the provisions of
the $nternal Revenue laws, includin rulins on the classi%cation of articles for sales
tax and similar purposes.
"%r3ose o4 r%les and re)%lations
-. To properly enforce and execute the laws.
.. To clarify and explain the law
/. To carry into efect the law+s eneral provisions "y providin details of administration
and procedure.
'e;%isites 4or validity o4 r%les and re)%lations1
-. They must not "e contrary to law and the Constitution.
.. They must "e pu"lished in the HFcial Ea7ette or a newspaper of eneral circulation.
Co**issioner v. C#, .(40 &C'# 36,1
The authority of the Minister of Cinance, in con#unction with the Commissioner of
$nternal Revenue, to promulate rules and reulations for the efective enforcement of
internal revenue rules cannot "e controverted. Keither can it "e disputed that such
rules and reulations, as well as administrative opinions and rulins, ordinarily should
deserve weiht and respect "y the courts. Much more fundamental than either of the
a"ove, however, is that all such issuances must not override, "ut must remain
consistent with, the law they seek to apply and implement. Administrative rules and
reulations are intended to carry out, neither to supplant nor to modify, the law.
La &%erte v. CT# .134 &C'# (1
!hen an administrative aency renders an opinion "y means of a circular or
memorandum, it merely interprets existin laws and no pu"lication is necessary for its
validity. Construction "y an executive "ranch of the overnment of a particular law,
althouh not "indin upon the courts, must "e iven weiht as the construction came
from the "ranch of the overnment which is called upon to implement the law.
EFFECTIVIT# OF REVENE RLES AND REGLATIONS
Revenue Memorandum Circular .A&>5 was issued to overn the draftin, issuance,
and implementation of revenue tax issuances, includin*
-. Revenue Reulations,
.. Revenue Audit Memorandum Hrders, and
/. Revenue Memorandum Circulars and Revenue Memorandum Hrders.
2xcept when the law otherwise expressly provides, the aforesaid revenue tax
issuances shall not "ein to "e operative until after due notice thereof may "e fairly
assumed.
33
<ue notice of the said issuances may "e fairly presumed only after the followin
procedures have "een taken*
-. Copies of the tax issuances have "een sent throuh reistered mail to the followin
"usiness and professional orani7ations*
a. ;hilippine $nstitute of Certi%ed ;u"lic Accountants
". $nterated @ar of the ;hilippines
c. ;hilippine Cham"er of Commerce and $ndustry
d. American Cham"er of Commerce
e. Cederation of Cilipino&Chinese Cham"er of Commerce, and
f. Japanese Cham"er of Commerce and $ndustry in the ;hilippines.
@ho8ever, other 3ersons or entities *ay re;%est a co3y o4 the said
iss%ances.
.. The @ureau of $nternal Revenue shall issue a press release coverin the hihlihts and
features of the new tax issuance in any newspaper of eneral circulation.
/. 2fectivity date for enforcement of the new issuance shall take place thirty 1/A3 days
from the date of the issuance had "een sent to the a"ove&enumerated orani7ations.
/2' r%lin)s
Administrative rulins, known as @$R rulins, are the less eneral interpretation of tax
laws "ein issued from time to time "y the Commissioner of $nternal Revenue. They
are usually rendered on re8uest of taxpayers to clarify certain provisions of a tax law.
These rulins may "e revoked "y the )ecretary of Cinance if the latter %nds them not
in accordance with law.
The Commissioner may revoke, repeal, or a"roate the acts or previous rulins of his
predecessors in oFce "ecause the construction of the statute "y those administerin
it is not "indin on their successors if, thereafter, such successors are satis%ed that a
diferent construction of the law should "e iven.
Rulins in the form of opinions are also iven "y the )ecretary of Justice who is the
Chief :eal HFcer of the Eovernment.
EFFECTIVIT# AND VALIDIT# OF A TAX ORDINANCE
T%azon v. C#, .(1( &C'# !31
$f the resolution is to "e considered as a tax ordinance, it must "e shown to have "een
enacted in accordance with the re8uirements of the :ocal Eovernment Code. These
would include the holdin of a pu"lic hearin on the measure and its su"se8uent
approval "y the )ecretary of Cinance, in addition to the usual re8uisites for pu"lication
of ordinances in eneral.
INTERPRETATION AND APPLICATION OF TAX LAWS
NATRE OF INTERNAL REVENE LAWS
-. $nternal revenue laws are not political in nature.
.. Tax laws are civil and not penal in nature.
Hot 3olitical in nat%re
$nternal revenue laws are not political in nature. They are deemed to "e the laws of
the occupied territory and not of the occupyin enemy.
Thus, our tax laws were in force durin the Japanese occupation.
Kilado v. C2', .100 "hil (,,1
34
$t is well known that our internal revenue laws are not political in nature and, as such,
continued in force durin the period of enemy occupation and in efect were actually
enforced "y the occupation overnment. $ncome tax returns that were %led durin
that period and income tax payments made were considered valid and leal. )uch tax
laws are deemed to "e the laws of the occupied territory and not of the occupyin
enemy.
Civil, not 3enal in nat%re
Tax laws are civil and not penal in nature, althouh there are penalties provided for
their violation.
The purpose of tax laws in imposin penalties for delin8uencies is to compel the
timely payment of taxes or to punish evasion or nelect of duty in respect thereof.
'e3%5lic v. <asan, . "hil 341
The war pro%ts tax is not su"#ect to the prohi"ition on ex post facto laws as the latter
applies only to criminal or penal matters. Tax laws are civil in nature.
CONSTRCTION OF TAX LAWS
-. Rule when leislative intent is clear.
Tax statutes are to receive a reasona"le construction with a view to carryin
out their purpose and intent.
$t should not "e construed as to permit the taxpayer to evade the payment of
taxes easily.
.. Rule when there is dou"t.
Ko person or property is su"#ect to taxation unless within the terms or plain
import of a taxin statute. $n every case of dou"t, tax statutes are construed strictly
aainst the overnment and li"erally in favour of the taxpayer. Taxes "ein "urdens,
are not to "e presumed "eyond what the statute expressly and clearly declares.
/. ;rovisions rantin tax exemptions
)uch provisions are construed strictly aainst the taxpayer claimin tax
exemption.
APPLICATION OF TAX LAWS
G+,+-./ -0/+1 Tax laws are prospective in operation "ecause the nature and
amount of the tax could not "e foreseen and understood "y the taxpayer at the time
the transactions which the law seeks to tax was completed.
E23+4567,1 !hile it is not favored, a statute may nevertheless operate retroactively
provided it is expressly declared or is clearly the leislative intent. @ut a tax law
should not "e iven retroactive application when it would "e harsh and oppressive.
>irectory and *andatory 3rovisions o4 tax la8s
<irectory provisions are those desined merely for the information or direction of
oFcers or to secure methodical and systematic modes of proceedins.
Mandatory provisions are those intended for the security of the citi7ens or which are
desined to ensure e8uality of taxation or certainty as to the nature and amount of
each person+s tax.
The omission to follow mandatory provisions renders invalid the act or proceedin to
which it relates while the omission to follow directory provisions does not involve such
conse8uence, ''oxas v, 'a=erty, 3! "hil +,(.
TAXPA#ERS SIT
7hat is a tax3ayerIs s%it9 7hen is it 3ro3er9
A taxpayer+s suit re8uires illeal expenditure of taxpayer+s money.
35
$n =aceda v. =acaraig, ABD #4R. DDA, the )C sustained the riht of )en. Maceda as a
taxpayer to %le a petition 8uestionin the leality of the tax refund to K;C "y way of tax
credit certi%cates, and the use of tax certi%cates "y oil companies to pay for their tax and
duty lia"ilities to the @$R and @ureau of Customs.
Iowever, in 1on%ales v. =arcos, CH #4R. C95, the )C held that the taxpayer had no
leal personality to assail the validity of 2H /A creatin the Cultural Center of the ;hilippines,
as the assailed order does not involve the use of pu"lic funds. The funds came "y way of
donations and contri"utions and not "y taxation.
INCOME TAXATION
2n )eneral
INCOME TAX
$ncome tax has "een de%ned as a tax on all yearly pro%ts arisin from property,
profession, trade or "usiness, or as a tax on person+s income, emoluments, pro%ts and
the like.
$t is enerally rearded as an excise tax. $t is not levied upon persons,property,funds
or
pro%ts "ut upon the riht of a person to receive income or pro%ts.
PRPOSES OF INCOME TAXATION
-. To provide lare amounts of revenues.
.. To ofset reressive sales and consumption taxes.
/. Toether with estate tax, to mitiate the evils arisin from the ine8ualities in the
distri"ution of income and wealth, which are considered deterrents to social proress,
"y imposin a proressive scheme of taxation.
7hat are the ele*ents o4 the i*3osition o4 2nco*e tax
-. There must "e ain or pro%t,
.. That the ain or pro%t is reali7ed or received, actually or constructively.
/. $t is not exempted "y law or treaty from income tax.
24"R v. 4. 6EA #4R. AH9*
INCOME
7hat is inco*e9
$ncome in tax laws is Dan amount of money comin to a person within a speci%ed time
whether as payment for services, interest or pro%t form investment.J $t means cash or its
e8uivalent. $t is ain derived and severed from capital, from la"or or from "oth com"ined.
)tock dividends issued "y the corporation are considered unreali7ed ain and cannot
"e su"#ected to income tax until that ain has "een reali7ed. @efore the reali7ation, stock
dividends are nothin "ut a representation of an interest in the corporate properties. As
capital, it is not yet su"#ect to income tax. Capital is wealth or fund whereas income is pro%t
or ain or the 9ow of wealth. The determinin factor for the imposition of income tax is
whether any ain or pro%t was derived from a transaction, 24oissioner of "nternal
Revenue v. 4. 6EA #4R. AH9
$ncome in its "road sense, means all 8ealth 8hich Po8s into the tax3ayer other
than as a *ere ret%rn o4 ca3ital. ' &ec. 36, '' ((.
$ncome means accession to wealth, ain of 9ow of wealth.
36
Con8i v. CT# .(13 &C'# ,31* $ncome may "e de%ned as an amount of money
comin to a person or corporation within a speci%ed time, whether as payment for
services, interest, or pro%t from investment.
C2' v. /<#C . 14 &C'# 3+1 * $ncome means Dcash received or its
e;%ivalent.E $t is the amount of money comin to a person within a speci%ed time. $t
is distinct from capital for, while the latter is a fund, income is a 9ow. As used in our
laws, income is 9ow of wealth. The source of an income is the property, activity or
service that produces the income. Cor the source of income to "e considered as
comin from the ;hilippines, it is suFcient that income is derived from activity within
the ;hilippines. $n @HAC+s case, the sale of tickets in the ;hilippines is the activity that
produces the income.
Fisher v. Trinidad .43 "hil !31 * )tock dividends is not an income. $t merely
evidences the interest of the stockholder in the increased capital of the corporation.
An income may "e de%ned as the amount of money comin to a person or corporation
within a speci%ed time, whether as payment for services, interest, or pro%t for
investment. A mere advance in the value of property of a person or corporation in no
sense constitutes the DincomeJ speci%ed in the revenue law. )uch advance
constitutes and can "e treated as merely an increase of capital. An income means
cash received or its e8uivalent. $t does not mean choses in action or unreali7ed
increments in the value of property.
-0>2C2#L >$F2H2T2<H* ains derived from*
-. Capital
.. :a"or
/. "oth la"or and capital
$ncludin ains derived from the sale or exchane of capital assets.
2nco*e and Ca3ital
Capital is a fund or property existin at one distinct point of time while income
denotes a 9ow of wealth durin a de%nite period of time.
The essential diference "etween capital and income is that capital is a fund or
property existin at one distinct point of time, income is a 9ow of services rendered
"y that capital "y the payment of money from it or any other "ene%t rendered "y a
fund of capital in relation to such fund throuh a period of time. Capital is wealth,
income is the service of wealth, .Madri)al v. 'a=erty, 3, "hil 4141.
Capital is the tree, and income the fruits.
SORCES OF INCOME
7hat 3rod%ces inco*e9
The term Dsource of incomeJ is not necessarily a place "ut may also "e the property,
activity or service that produced the income. $n the case of income derived from la"or,
it is the place where the la"or is performed, in the case of income from the use of
capital, it is the place where the capital is employed, and in the case of pro%ts from
the sale or exchane of capital assets, it is the place where the sale or transaction
occurs.
C2' v. /<#C? The source of income is the property, activity or service that produces
the income. Cor the source of income to "e considered as comin from the ;hilippines,
it is suFcient that the income is derived from acitivity within the ;hilippines. $n
@HAC+s case, the sale of tickets in the ;hilippines is the activity that produces the
income. The tickets exchaned hands here and payments for fares were also made in
;hilippine currency. The site of the source of income is the ;hilippines and the 9ow of
wealth proceeded from and occurred in ;hilippine territory, en#oyin the protection
accorded "y the ;hilippine overnment. Thus, said 9ow of wealth should share the
"urden of supportin the overnment.
&o%rces o4 inco*e
-. )ources within the ;hilippines,
37
.. )ources without 1outside of3 the ;hilippines,
/. )ources partly within and partly without the ;hilippines.
TAXABLE INCOME
The term Dtaxa"le incomeJ means the pertinent items of ross income speci%ed in the
K$RC, less deductions andGor personal and additional exemptions, if any, authori7ed "y
such types of income "y the K$RC or other special laws.
Taxa"le income, however, does not include items received which do not add to the
taxpayer+s net worth or does not redound to his "ene%t, such as amounts merely
deposited or entrusted to him.
'e;%isites 4or inco*e to 5e taxa5le
-. There must "e ain or pro%t.
.. The ain must "e reali7ed or received.
/. The ain must not "e excluded "y law or treaty from taxation.
6ain *%st 5e realized or received
This implies that not all economic ains constitute taxa"le income. Thus, a mere
increase in the value of property is not income, "ut merely an unreali7ed increase in
capital.
7hen is inco*e considered received or realized9
-. Actual receipt,
.. Constructive receipt.
2nco*e constr%ctively received
$ncome which is credited to the account of set apart for a taxpayer which may "e
drawn upon "y him at any time is su"#ect to tax for the year durin which so credited
or set apart, althouh not then actually reduced to possession.
To constitute receipt in such a case, the income must "e credited to the taxpayer
without any su"stantial limitation or restriction as to the time or manner of payment
of condition upon which payment is to "e made, .&ec. +(, '' (1.
:impan $nvestment Co. was deemed to have constructively received rental payments
in -=46, when they were deposited in court due to its refusal to receive them.
.Li*3an v C2', 1! &C'# !031.
$xa*3les o4 constr%ctive recei3t
-. $nterest coupons which have matured and are paya"le, "ut have not "een cashed.
.. <efaulted coupons are income for the year in which paid.
/. ;artner+s distri"utive share in the pro%ts of a eneral partnership is rearded as
received "y the partner, althouh not yet distri"uted.
7hen sho%ld inco*e 5e reco)nized9
Lnder the #ccr%al 5asis *ethod o4 acco%ntin), income is reporta"le when all the
events have occurred that %x the taxpayer+s riht to receive the income, and the amount can
"e determined with reasona"le accuracy. Thus, it is the riht to receive income, and not the
actual receipt that determines when to include the amount in ross income. Eleana"le from
this notion are the followin re8uisites of accrual method of accountin*
-. That the riht to receive the amount must "e valid, unconditional and enforcea"le, i.e.
not continent upon future time,
.. The amount must "e reasona"ly suscepti"le of accurate estimate, and
38
/. There must "e a reasona"le expectation that the amount will "e paid in due course.
#re the 4ollo8in) ite*s considered inco*e9
Cound treasure Q P2)
Award of punitive damaes Q P2)
Award of damaes for "reach of promise or alienation of afection Q P2)
!orthless de"ts su"se8uently collected Q P2)
Tax refund Q Eenerally KH, "ut, P2), if the tax was previously allowed as a deduction
and su"se8uently refunded or credited, as "ene%t accrued to the taxpayer, see
discussion on tax as a deducti"le item.
Kon&cash "ene%ts Q P2)
$ncome from illeal sources Q P2)
;sycholoical "ene%ts of work Q KH
Eive away pri7es Q P2)
)cholarshipsGfellowships Q P2)
)tock dividends Q KH
TESTS TO DETERMINE REALI9ATION OF INCOME
-. )everance test
.. )u"stantial alteration of interest test
/. Clow of wealth test
&everance test
As capital or investment is not su"#ect to tax, the ain or pro%t derived from the
exchane or transaction of said capital "y the taxpayer for his separate use, "ene%t
and disposal is income su"#ect to tax.
&%5stantial alteration o4 interest test
$ncome is earned when there is a su"stantial alteration of the interest of a taxpayer,
i.e. increase in proportionate share of a stockholder in a corporation.
$ncome to "e su"#ect to taxation, must "e fully and completely reali7ed. !here there
is no separation of ain or pro%t, or separation of increase in value from capital, there
is no income su"#ect to tax.
Thus, stock dividends are not income su"#ect to tax on the part of the shareholder for
he had the same proportionate interest in the assets of the corporation as he had
"efore, and the stockholder was no richer and the corporation no poorer after the
declaration of the dividend.
Iowever, the pre&existin proportionate interest of the stockholder is
su"stantially altered, the income is considered derived to the extent of the "ene%t
received.
Moreover, if as a result of an exchane of stocks, the person received
somethin of value which are essentially and fundamentally diferent from what he
had "efore the exchane, income is reali7ed within the meanin of the revenue law.
Flo8 o4 8ealth test
The essential diference "etween capital and income is that capital is a fund whereas
income is the 9ow of wealth comin from such fund, capital is the tree, income the
fruit. $ncome is the 9ow of wealth other than as a mere return of capital. Ience, any
proceeds from the use of capital, "eyond the amount of the capital is considered as
income.
39
CATEGORIES OF TAXABLE INCOME
-. ;assive investment income su"#ect to %nal tax.
.. Compensation income
/. Kon&compensation income
M$ncome su"#ect to %nal tax is not includi"le in the taxpayer+s taxa"le income.
MJustices and #udes are now su"#ect to income tax. Kot Lnconstitutional.
CLASSES OF INCOME
Ninds o4 taxa5le inco*e or )ain
-. Capital ain
.. Hrdinary ain
a. @usiness income
". Compensation income
c. ;assive income
d. Hther income from whatever source derived, e.. Cound treasure.
Ca3ital )ains
Capital ains are ains or income from the sale or exchane of capital assets. These
include*
-. $ncome from dealin in shares of stock of domestic corporations whether or not
done throuh the stock exchane.
.. $ncome from dealins in real property located in the ;hilippines.
/. $ncome from dealin in other capital assets other that 1a3 and 1"3.
<rdinary )ains
Hrdinary ains are ains or income from the sale or exhane of property which are not
capital assets.
/%siness inco*e
-. $ncome from tradin, merchandisin, manufacturin or minin.
.. $ncome from practice of profession.
Hote? The term Dtrade or "usinessJ includes the performance of the functions of a pu"lic
oFce, .&ec. ((AsB , H2'C1.
"assive inco*e
-. ;assive income from ;hilippine sources su"#ect to %nal tax.
.. ;assive income from ;hilippine sources not su"#ect to %nal tax.
/. ;assive income from sources outside the ;hilippines.
"assive inco*e
-. $nterest income
.. RentalsG leases
/. Royalties
0. <ividends
4. Annuities and proceeds of life insuranceG other types of insurance
5. ;ri7es and winnins, awards, and rewards
6. Eifts, "e8uests, and devises
>. Hther types of passive income
40
APPROAC$ES IN INCOME RECOGNITION
#33roaches in inco*e reco)nition
-. )chedular system
.. Elo"al system
&ched%lar syste*
The scheduler system is one where the income tax treatment varies and is made to
depend on the kind or cateory of taxa"le income of the taxpayer.
6lo5al syste*
The lo"al system is one where the tax treatment views indiferently the tax "ase and
enerally treats in common all cateories of taxa"le income of the taxpayer.
&ched%lar syste* and 6lo5al syste*
-. Lnder the scheduler treatment, there are diferent tax rates, while under the lo"al
treatment, there is a sinle tax rate.
.. Lnder the scheduler system, there are diferent cateories of taxa"le income, while
under the lo"al system, there is no need for classi%cation as all taxpayers are
su"#ected to a sinle tax rate.
/. The scheduler treatment is usually used in the income taxation of individuals while
the lo"al treatment is usually applied to corporations.
#33roach %sed in the "hili33ines
;artly schedular, and partly lo"al. The schedular approach is used in taxation of
individuals, while the lo"al approach is used in the taxation of corporations.
CLASSES OF INCOME TAXPA#ERS
/asis o4 classi:cation o4 tax3ayers
-. Corporations v individuals.
.. Kationality
/. Residence
Classes o4 inco*e tax3ayers
-. $ndividuals
a. Resident citi7ens
". Kon&resident citi7ens
c. Resident aliens
d. Kon&resident aliens
i. 2naed in trade or "usiness in the ;hilippines,
ii. Kot enaed in trade or "usiness in the ;hilippines.
M A non&resident alien individual who shall come to the ;hilippines and stay therein for an
areate period of more than one hundred and eihty 1->A3 days durin any calendar year
shall "e deemed a non&resident alien doin "usiness in the ;hilippines, .&ec. (+ A#B A1B,
H2'C1.
.. Corporations
a. <omestic corporations
41
". Resident forein corporations
c. Kon&resident forein corporations
/. )pecial
a. ;roprietary educational institutions and hospitals that are non&pro%t
". $nsurance companies
c. Eeneral professional partnerships
d. 2states and trusts
Hote? 2states and trusts are treated as individual taxpayers
7ho is a non-resident citizen9
The ter Lnon-resident citi%en eans:
-. A citi7en of the ;hilippines who esta"lished to the satisfaction of the
Commissioner the fact of his physical presence a"road with a de%nite
intention to reside therein.
.. A citi7en of the ;hilippines who leaves the ;hilippines durin the taxa"le
year to reside a"road, either as an immirant or for employment on a
permanent "asis.
/. A citi7en of the ;hilippines who works and derives income from a"road and
whose employment thereat re8uires him to "e physically present a"road
most of the time durin the taxa"le year.
0. A citi7en who has "een previously considered as a non&resident citi7en and
who arrives in the ;hilippines at any time durin the taxa"le year to reside
permanently in the ;hilippines.
Cor3oration
A corporation, as used in income taxation, includes partnerships, no matter how
created or orani7ed, #oint stock companies, #oint accounts 1cuentas en participacion3
and , associations or insurance companies.
Iowever, it does not include*
-. Eeneral professional partnerships, and
.. A #oint venture or consortium formed for the purpose of undertakin
construction pro#ects or enain in petroleum, coal, eothermal and other
enery operations pursuant to an operatin or consortium areement
under a service contract with the overnment.
'esident 4orei)n cor3oration
The term applies to a forein corporation enaed in trade or "usiness within the
;hilippines.
Hon-resident 4orei)n cor3oration
The term applies to a forein corporation not enaed in trade or "usiness in the
;hilippines.
GENERAL PROFESSIONAL PARTNERS$IP AND ORDINAR# BSINESS PARTNERS$IP
6eneral 3ro4essional 3artnershi3s
Eeneral professional partnerships are partnerships formed "y persons for the sole
purpose of exercisin their common profession, no part of the income of which is
derived from enain in any trade or "usiness, .&ec. (( A5B, H2'C1.
42
;ersons enain in "usiness as partners in a eneral professional partnership shall
"e lia"le for income tax only in their separate and individual capacities, .&ec. (6,
H2'C1.
Cor purposes of computin the distri"utive share of the partners, the net income of
the partnership shall "e computed in the same manner as a corporation, .&ec. (6,
H2'C1.
2ach partner shall report as ross income his distri"utive share, actually or
constructively received, in the net income of the partnership,.&ec. (6, H2'C1
$ncome of a eneral professional partnership are deemed constructively received "y
the partners, .&ec. !3 AdB, H2'C1.
<rdinary 5%siness 3artnershi3
An ordinary "usiness partnership is considered as a corporation and is thus su"#ect to
tax as such.
;artners are considered stockholders and, therefore, pro%ts distri"uted to them "y the
partnership are considered as dividends.
7hat are taxa5le %nre)istered 3artnershi3s9
The )C in /vangelista v. 4"R AE9 )hil A5E, held that )ec. .0 covered unreistered
partnerships and even associations or #oint accounts which have no leal personalities apart
form their individual mem"ers. Accordinly, a pool of individual real property owners dealin
in real estate "usiness was considered a corporation for tax purposes, 2.fsco "nsurance
4orporation v. 4., 6E9 #4R. A*.
Test to deter*ine 8hether co-o8nershi3 is a taxa5le %nre)istered 3artnershi3
Cind out whether the heirs have made su"stantial improvements on the inherited
property. $f so, the implication is that they will enae in "usiness for pro%t, A$van)elista
>octrineB. $f that happens, the co&ownership will "e taxed as an unreistered partnership.
<5illos -r. v. C2' 13 &C'# 43,
The father sold his rihts over two parcels of land to his four children sho that theycan
"uild their residence, "ut the latter after one year sold them and paid the capital ains. The
Commissioner, actin on the theory that the children had formed an unreistered partnership
or #oint venture within the meanin of )ections .0a and >0" of the Tax Code, re8uired the
si"lins to pay corporate income tax.
)C held that the petitioners should not "e treated as havin formed an unreistered
partnership and tax corporate income tax on the sale and dividend income tax on their
shares of the pro%ts from the sale. Their oriinal purpose was to divide the lots for residential
purposes. $f later on they found it not feasi"le to "uild their residences on the lots "ecause of
the hih cost of construction, then they had not choice "ut to resell the same to dissolve the
co&ownership. The division of the pro%t was merely incidental to the dissolution of the co&
ownership which was in the nature of thins in a temporary state.
<na v. C2', 4+ &C'# !4 A1!(B? 0nre)istered "artnershi3s
Althouh the CC$ already approved the pro#ect of partition of the estate of Julia @ernales
amon her survivin spouse, :oren7o Hna, and her %ve children, no attempt was made to
divide the properties left "y the decedent. $nstead, the properties remained under the
manaement of :oren7o Hna, who used said properties in "usiness "y leasin or sellin them
and investin the income derived therefrom and the proceeds from the sales thereof in real
property and securities. The said incomes are recorded in the "ooks of account kept "y
:oren7o, where the correspondin shares of the heirs in the net income for the year are also
found.
@ased on these facts, the Commissioner ruled that the heirs formed an unreistered
partnership which is thus su"#ect to corporate income tax. The Court of Tax Appeals and the
)upreme Court aFrmed.
;or tax purposes, the co-o!nership of inherited properties is autoatically converted into
an unregistered partnership the oent the said coon properties andMor the incoes
43
derived therefro are used as a coon fund !ith intent to produce profts for the heirs in
proportion to their respective shares in the inheritance as deterined in a pro&ect of partition
either duly executed in an extra&udicial settleent or approved by the court in the
corresponding testate or intestate proceeding.
The reason is simple. Crom the moment of such partition, the heirs are entitled already to
their respective de%nite shares of the estate and the incomes thereof, for each of them to
manae and dispose of as exclusively his own without the intervention of the other heirs,
and, accordinly, each "ecomes lia"le individually for all taxes in connection therewith. $f
after such partition, they allow their share to "e held in common with his co&heirs under a
sinle manaement to "e used with the intent of makin pro%t there"y in proportion to his
share, there can "e no dou"t that, even if no document or instrument were executed, for tax
purposes, at least, an unreistered partnership is formed.
Hote? The income derived from inherited properties may "e considered as individual income
of the respective heirs only as lon as the inheritance or estate is not distri"uted or, at least
partitioned, "ut the moment their respective known shares are used as part of the common
assets of the heirs to "e used in makin pro%ts, it is "ut proper that the income of such
shares "e considered as part of the taxa"le income of an unreistered partnership.
&ena v. Co**issioner A&ena >octrineB
The heirs inherited the properties from their deceased mother. The property was under
administration of an administrator. This administrator of the property was authori7ed to sell
these properties for pro%t, or lease properties for pro%t and to enae in income producin
activities.
The )upreme Court held that, when these heirs inherited the property from their
deceased mother, the co&ownership "ean. At this stae it is still exempt from tax, however,
when the heirs decided to invest such property in income producin activities, such co&
ownership was converted to a taxa"le unreistered partnership.
6atchalian v. Collector, .10( "hil 1401
;laintifs contri"uted money to "uy a sweepstakes ticket, which su"se8uently won. The
)upreme Court held that they formed an unreistered partnership. ;laintifs formed a
partnership of a civil nature since each of them contri"uted money to a common fund for the
sole purpose of dividin e8ually the pri7e money.
"asc%al v. Co**issioner
;etitioners "ouht two parcels of land in -=54, however, they did not sell the same nor
make any improvements thereon. $n -=55, they "ouht another three parcels of land. $t was
only in -=5>, that they sold the two parcels of land after which they did not make any
additional purchases. The remainin three parcels of land were sold in -=6A. Commissioner
assessed them corporate income taxes on the round that petitioners esta"lished an
unreistered partnership enaed in real estate transactions.
The )upreme Court ruled that no unreistered partnership was formed. The sharin of
returns does not itself esta"lish a partnership whether or not the persons therein have a #oint
or common riht or interest in the property. T?+-+ <085 :+ 3/+.- 6,5+,5 57 ;7-< .
4.-5,+-8?64' the existence of which creates a #uridical personality diferent from the
individual partners, and removes the freedom of each party to transfer, sell, or assin the
properties.
$n this case, there was no showin of intent to form a partnership. The transactions were
isolated, therefore, the character of ha"ituality peculiar to "usiness transactions enaed for
the purpose of ain was not present.
The +88+,56./ +/+<+,58 7; . 4.-5,+-8?64 .-+1 -3 an areement to contri"ute money,
property, or industry to a common fund, and .3 an intent to divide the pro%ts amon the
contractin parties.
0nre)istered 3artnershi3 and co-o8nershi3 4or tax 3%r3oses
$f the activities of co&owners are limited to the preservation of the property and the
collection of income therefrom, in which case, each co&owner is taxed individually on
his distri"utive share in the income of the co&ownership.
$f the co&owners invest the income in "usiness for pro%t, they would "e constitutin
themselves into a partnership taxa"le as a corporation.
-oint vent%reJ ho8 created
44
A #oint venture is created when two corporations, while reistered and operatin
separately, were placed under a sole manaement which operated the "usiness
afairs of said companies as thouh they constituted a sinle entity there"y o"tainin
su"stantial economy and pro%ts in the operation.
As stated, a #oint venture is not taxed as a corporation, #ust like a eneral professional
partnership.
GENERAL PRINCIPLES IN INCOME TAXATION IN T$E P$ILIPPINES
-. A citi7en of the ;hilippines residin therein is taxa"le on all income derived from
sources within and without the ;hilippines.
.. A non&resident citi7en is taxa"le only on income derived from sources within the
;hilippines.
/. An individual citi7en of the ;hilippines who is workin and derivin income from
a"road as an overseas contract worker, is taxa"le only on income derived from
sources within the ;hilippines. ;rovided, that a seaman who is a citi7en of the
;hilippines and who receives compensation for services rendered a"road as a
mem"er of the complement of a vessel enaed exclusively in international trade
shall "e treated as an overseas contract worker.
0. An alien individual, whether or not a resident of the ;hilippines, is taxa"le only on
income derived from sources within the ;hilippines.
4. A domestic corporation is taxa"le on all income derived from sources within and
without the ;hilippines.
5. A forein corporation, whether enaed or not in trade or "usiness in the ;hilippines,
is taxa"le only on income derived from sources within the ;hilippines.
SOME RLES ON TAXATION OF T$E VARIOS TAXPA#ERS
7ho are taxed on their )lo5al inco*e9
-. Resident citi7en
.. <omestic Corporations
7ho are taxed only in their inco*e 4ro* so%rces 8ithin the "hili33ines9
-. Kon&resident citi7en
.. Hverseas contract worker
/. Alien individual, whether a resident or not of the ;hilippines
0. Corein corporation, whether enaed in trade or "usiness in the ;hilippines or not.
7ho are taxed 5ased only on their net inco*e9
-. Resident and non&resident citi7ens
.. Resident alien and non&resident alien enaed in trade or "usiness in the ;hilippines
/. <omestic corporation
0. Resident forein corporation
7ho are taxed 5ased on their )ross inco*e9
-. Kon&resident alien not enaed in trade or "usiness in the ;hilippines
.. Kon resident forein corporation.
TREATMENT OF SPECIAL ITEMS
For)iveness o4 inde5tedness
45
The cancellation and forgiveness of indebtedness ay, dependent upon the
circustances, aount to:
-. a payment of income,
.. a ift, or
/. a capital transaction.
$f, for example, and individual performs services for a creditor who, in consideration
thereof cancels the de"t, income to that amount is reali7ed "y the de"tor as
compensation for his service.
$f, however, a creditor merely desires to "ene%t a de"tor and without any
consideration thereof cancels the de"t, the amount of the de"t is a ift from the
creditor to the de"tor and need not "e included in the latter+s ross income.
$f a corporation to which a stockholder is inde"ted forives the de"t, the transaction
has the efect of payment of dividends. .&ec. +0, 'ev. 'e). (1
'ecovery o4 a*o%nts 3revio%sly 8ritten o=
Considered as income
6%ide Q%estions in >eter*inin) Taxa5le 2nco*e
-. $s there ain or incomeR
.. $s the ain or income taxa"leR $s it excluded or exemptR
/. !hat type of income is it* income includi"le in the ross income, passive income,
capital ains, income derived from other sourcesR
0. To what class does the taxpayer "elon toR $ndividual or corporate, citi7en or not, or
domestic or forein, resident or not, enaed in trade or "usiness or notR
TAX ON INDIVIDALS
"reli*inary 3oints on taxation o4 individ%als
Ko8 taxed9
An individual citi7en, "ot resident and non&resident, and an individual resident alien,
are taxed similarly.
A non&resident alien enaed in trade or "usiness shall "e su"#ect to the same income
tax rates as a citi7en and a resident alien.
Thus, only a non&resident alien who is not enaed in trade or "usiness is taxed
diferently from other individual taxpayers.
<n 8hat inco*e taxed9
A resident citi7en is taxed on all income derived from sources within and without the
;hilippines. The tax "ase is net income.
A non&resident citi7en is taxed only on income derived from sources within the
;hilippines. The tax "ase is net income.
An alien, whether a resident or not, is taxed only on income from sources within the
;hilippines. Iowever, the tax "ase for a resident alien and non&resident alien enaed
in trade or "usiness is net income, while the tax "ase for a non&resident alien not
enaed in trade or "usiness is ross income.
@ 7hen a Hon-resident Citizen ret%rns to the "hils, his inco*e *ay also 5e taxed
as 'esident citizen or Hon-resident citizen.
2ll%stration?
A an HC!, arrived in the ;hilippines sometime in June -==>. Ie will "e taxed as a non&
resident citi7en as reards to the income which he earned that covers the period from
January to June, however, with respect to the income that he may earn from the period of his
arrival in June until <ecem"er, he will taxed as a Resident Citi7en.
46
$f the Kon&resident citi7en is not in the ;hilippines from the period of January to
<ecem"er, he will "e taxed as a Kon&resident citi7en for that period, if he, however, returns
and stays in the ;hilippines from January to <ecem"er, he will "e taxed as a Resident citi7en
for that period.
The Kon&resident citi7en must prove to the satisfaction of the Commissioner the fact
of physical presence a"road with the intention of residin therein.
!hen a Kon&resident citi7en returns to the ;hilippines, he must prove his intention to
reside here permanently.
Kow, the term Kon&resident citi7en, includes* overseas contract 8orLers,
i**i)rants, and those 8ho stay o%tside the "hili33ines d%e to e*3loy*ent.
T#PES OF INCOME TAXED
-. $tems of income included in the ross income
.. ;assive income
/. Capital ains from sale of shares of stock not traded in the stock exchane
0. Capital ains from the sale or exchane of real property
7here an individ%al has all three cate)ories o4 inco*e
-. Compensation income
.. Taxa"le net income
/. ;assive income su"#ect to %nal tax
NThe taxpayer shall treat separately his liability on each of such incoes.
TAX ON INDIVIDAL CITI9EN @RESIDENT AND NON-RESIDENTA AND INDIVIDAL
RESIDENT ALIEN
2te*s o4 inco*e incl%ded in the )ross inco*e
A schedular rate of %ve percent 14B3 to ;-.4,AAA S /.B of excess over ;4AA,AAA, "y
January -, .AAA, is imposed on items of income of an individual citi7en and individual
resident alien which are properly included in the ross income.
'ates o4 tax on certain 3assive inco*e
-. $nterest from any currency "ank deposit and yield or any other monetary "ene%t from
deposit su"stitutes and from trust funds and similar arranements Q .AB
.. Royalties, except on "ooks, as well as other literary works and musical compositions Q
.AB
/. Royalties on "ooks literary works and musical compositions Q -AB
0. ;ri7es over ;-A,AAA Q .AB
Hote? "rizes less than "10,000 are incl%ded in the inco*e tax o4 the individ%al
s%5Cect to the sched%lar rate o4 +R %3 to "1(+,000 S3(R o4 excess o4 "+00,000
4. Hther winnins, except ;C)H and :otto, derived from sources within the ;hilippines Q
.AB
5. $nterest income derived "y a resident individual 1Kote* non&resident citi7en not
included3 from a depositary "ank under the expanded forein service deposit system
Q 6.4B
6. $nterest income from lon term deposit or investment evidenced "y certi%cates
prescri"ed "y @);*
a3 2xempt, if investment is held for more than 4 years
"3 $f investment is pre&terminated, interest income on such investment shall
"e su"#ect to the followin rates*
47
.AB & $f pre&terminated in less than / years
-.B & $f pre&terminated after / years to less than 0 years
4B& $f pre&terminated after 0 years to less than 4 years
>. Cash andGor property dividends
-AB %nal tax, "y January -, .AAA, on the followin*
a3 Cash and or property dividend actually or constructively received from a
domestic corporation or from a #oint stock company, insurance or mutual
fund companies and reional operatin head8uarters of multinational
companies.
"3 )hare of an individual in the distri"utive net income after tax of a
partnership except a eneral professional partnership of which he is a
partner
c3 )hare of an individual in the net income after tax of an association, #oint
account, or a #oint venture or consortium taxa"le as a corporation of which
he is a mem"er or a co&venturer
=. Cash rewards for informants Q -AB
RC' NRC' RA NRA-ETB NRA-NETB
RO#ALTIES .AB except in the
case of literary
!or,s, boo,s and
usical
copositions !hich
are sub&ect to AEO
fnal tax
)ame as RC, KRC,
RA
.4B
PRI9ES
+23++B6,>
P10'000&00
"f it is )AE,EEE.EE
or less, it is N@T
sub&ect to fnal tax
but the sae ust
be included in
other incoe 1e..
compensation,
"usiness,
professional3
.AB

.AB .4B
WINNINGS except
)4#@ P (otto

.AB .AB .4B
INTERESTS ON
BAN) DEPOSITS'
+53.
.AB .AB

.4B
DIVIDENDS
RECEIVED ;-7<
B7<+8563 37-4&'
+53&
)u"#ect to
increasin rates of
5B if received in
-==>, >B in -===,
and -AB in .AAA.
.AB .4B
S$ARE OF A
PARTNER 6, 5?+
,+5 6,37<+ .;5+-
. 5.2 7; . 5.2.:/+
4.-5,+-8?64' +53.
& do& .AB .4B
48
5, > T -A
Ca3ital )ains 4ro* the sale o4 shares o4 stocL not traded in the stocL exchan)e
-. Kot over ;-AA,AAA & 4B
.. Hver ;-AA,AAA & -AB
Ca3ital )ains derived 4ro* the sale o4 real 3ro3erty
The real property involved must "e considered CA;$TA: A))2T.
A capital asset is property held "y the taxpayer whether or not connected in his trade
or "usiness except*
-. )tock in trade or other property of any kind which would "e included in the
inventory of the taxpayer if on hand at the end of the taxa"le year.
.. ;roperty primarily held for sale to customers in the ordinary course of trade or
"usiness.
/. ;roperty used in trade or "usiness su"#ect to depreciation.
0. Real property used in trade or "usiness.
G+,+-./ -0/+* A %nal tax of six percent 15B3 is imposed on the ross sellin price 7-
current fair market value, whichever is hiher, for every sale or exchane of real
property.
<3tional* $f the sale is made to the overnment nor any of its political su"divisions or
aencies or to overnment&owned or controlled corporations, the taxpayer has the
option to choose from the %nal tax of six percent 15B3 of ross sellin price or fair
market value, whichever is hiher, or the schedular tax rate of 4B up to ;-.4,AAA S
/.B of excess of over ;4AA,AAA.
$xce3tion* The sale or disposition of the principal residence of natural persons are
exempt from capital ains tax if certain conditions are met.
Conditions 4or tax exe*3tion o4 )ain 4ro* the sale or exchan)e o4 3rinci3al
residence?
-. ;roceeds are fully utili7ed in ac8uirin or constructin a new principal residence within
-> months from the date of sale or disposition,
.. Iistorical cost or ad#usted "asis or the real property sold or disposed shall "e carried
over to the new principal residence "uilt or ac8uired,
/. Kotice to the Commissioner of $nternal Revenue shall "e iven within thirty 1/A3 days
from the date of sale or disposition, and
0. $f the proceeds of the sale were not fully utili7ed, the portion of the ain presumed to
have "een reali7ed from the sale or disposition shall "e su"#ect to capital ains tax.
/%t the sale o4 real 3ro3erty 5y a real estate dealer is not a ca3ital
transaction, "ecause the property involved is one primarily held for sale to
customers in the ordinary course of "usiness. That is not a capital asset.
This cover not only DsaleJ of property, it also covers conditional sale of real property
includin the so&called 4.357 B+ -+5-7 8./+ under Art. -5.A of the KCC, or
disposition of property located in the ;hilippines.
$s this a tax on the "uyer on the sellerR
"t is a tax on the seller. @ut sometimes, throuh an areement, p!ede nilang "-
transfer sa buyer, and there+s nothin that can prevent the seller froAm transferrin the
tax to the "uyer in the contract of sale.
CAPITAL GAIN DERIVED FROM SALE OF S$ARES OF STOC)
49
Listed and traded thro%)h local stocL exchan)e- this is not su"#ect to income
tax "ut su"#ect to percentae tax of U of -B of the ross sellin price.
Hot listed and traded thro%)h local stocL exchan)e- this is the one su"#ect to
income tax.
Kot over ;-AA,AAA.AA 4B
Amount over ;-AA,AAA.AA -AB
"f the share of stoc, is not listed and traded through local stoc, exchange, the "asis of
the tax is net capital ain. )o, you should %rst deduct the capital loss.
"f listed and traded through local exchange, there is no deduction allowed "ecause the
"asis of the tax rate of U of -B of the ross sellin price.
The above-entioned tax rates apply to all individual taxpayers.
<istri"ution of TR2A)LRP )THCV) should "e considered taxa5le since the stocks are
not sourced from the unissued shares of the corporation and there "ein no transfer
from surplus to capital.
TAX ON NON-RESIDENT ALIEN INDIVIDAL
'e*%neration received 5y a non-resident alien as 3resident o4 a do*estic
co*3any taxa5le in the "hili33ines AMs. -%liane /aier-HicLel, as re3resented 5y
Marina Q. 6%z*an v. C2', CT# Case Ho. ++14 dated 4T(TB
A consultant, president of a domestic company or person involved with Dproduct
developmentJ is su"#ect to ;hilippine $ncome taxation. Any remuneration received
would stem from her employment as company president and thus, neates her
alleation that she is #ust a sales aent who receives commissions. !hile petitioner
tried to show that she stayed in the country for less than ->A days, her remuneration
in the form of commissions is still taxa"le in the ;hilippines since it is "orne "y a
permanent esta"lishment in the ;hilippines.
Hon-'esident #lien $n)a)ed in Trade or /%siness
A non&resident alien enaed in trade or "usiness shall "e su"#ect to the same income
tax rates as a citi7en and a resident alien.
E23+4567,1 Cash andGor property dividends received "y a non&resident alien
"ndividual shall "e su"#ect to a %nal tax of .AB for citi7ens and resident aliens, the
rate is -AB since year .AAA.
Hon-'esident #lien Hot $n)a)ed in Trade or /%siness
A non&resident alien individual not enaed in trade or "usiness shall pay a tax
e8uivalent to .4B on all items of income, exce3t, for ain on sale of shares of stock
in any domestic corporation and real property which shall "e su"#ect to the same rate
applied to other individual taxpayers.
6ain on sale o4 shares o4 stocL?
-. Kot over ;-AA,AAA & 4B
.. Hver ;-AA,AAA &-AB
Ca3ital )ains on sale or dis3osition o4 3ro3erty O 5B of E); or CM?, whichever
is hiher.
OT$ER INDIVIDAL TAXPA#ERS
-. Alien individual employed "y reional or area head8uarters and reional operatin
head8uarters of multinational companies.
.. Alien individual employed "y ofshore "ankin units
/. Alien individual employed "y petroleum service contractor and su"&contractor
Hote? The salaries, waes, annuities, compensation, remuneration and other emoluments,
such as honoraria and allowance received "y these individuals and their Cilipino counterparts
occupyin the same position as these alien individuals shall "e su"#ect to -4B tax.
50
All other income derived "y these individuals shall "e su"#ect to the same rate as that
of other individual taxpayers.
'e)ional or area head;%arters
A reional or area head8uarters is a "ranch esta"lished in the ;hilippines "y
multinational companies and which head8uarters do not earn or derive income from
the ;hilippines and which acts as supervisory, communications and coordinatin
center for their aFliates, su"sidiaries, or "ranches in the Asia&;aci%c reion and other
forein markets.
'e)ional o3eratin) head;%arters
A reional operatin head8uarter shall mean a "ranch esta"lished in the ;hilippines
"y multi&national companies which are enaed in certain speci%ed services, i.e.
eneral administration and plannin, "usiness plannin and coordination, sourcin
and procurement or raw materials and components, amon others.
Taxation o4 </0 e*3loyees A/2' r%lin) Ho. 14!-, dated <ct.16 1!,B
The -4B preferential rate shall apply only in cases where an alien concurrently holds
a position similar to that of the Cilipino employee. Thus, this preferential tax treatment
shall not apply where the counterpart expatriate is recalled to the head oFce or
reassined elsewhere, whether temporarily or otherwise, and only Cilipinos are the
ones so employed "y an H@L for the time "ein or where the post vacated "y the
expatriate is su"se8uently assumed "y a Cilipino to replace the expatriate, as a result
of which all top manaement posts are now "ein occupied "y Cilipinos.
Fili3ino sta= o4 the #>/ s%5Cect to 1+R 3re4erential tax rate AHo. (-, 3T11TB
Cilipino employees occupyin manaerial or technical positions as those of aliens
employed "y the Asian <evelopment @ank 1A<@3, which is not only a reional or area
head8uarters in the ;hilippines "ut the head8uarters itself, are su"#ect to the
preferential tax rate of -4B on their ross compensation income pursuant to )ec. .4
C, of the K$RC, -==6.
6eneral "ro4essional "artnershi3s
Eeneral professional partnerships are partnerships formed "y persons for the sole
purpose of exercisin their common profession, no part of the income of which is
derived from enain in any trade or "usiness.
;ersons enaed in "usiness as partners in a eneral professional partnership shall "e
lia"le for income tax only on their separate and individual capacities.
2ach partner shall report as ross income his distri"utive share, actually or constructively
received, in the net income of the partnership.
The net income of the eneral professional partnership shall "e computed in the sale
manner as a corporation for purposes of computin the distri"utive shares of the
partners.
TAX ON CORPORATIONS
CORPORATE TAXPA#ER
Corporation, includes, partnerships no matter how created or orani7ed, #oint account
companies, or insurance companies and other associations.
2t excl%des?
-. Eeneral ;rofessional ;artnerships,
.. Joint venture for the purpose of undertakin construction pro#ects,
/. Joint consortium for the purpose of enain in petroleum, eothermal and
other enery operations pursuant to a consortium areement with the
overnment.
RATES OF INCOME TAX ON DOMESTIC CORPORATIONS
2n 6eneral
Rate of tax, in eneral*
-==6 Q /4B
51
-==> Q /0B
-=== Q //B
.AAA onwards Q /.B
Tax is imposed on taxa"le or net income.
These rates are not applica"le if the amount correspondin to the rates are lower than
.B of the ross income of such corporate income taxpayer. This is called the
DMini*%* Cor3orate 2nco*e TaxE.
<3tional 1+R tax on )ross inco*e
The ;resident, upon the recommendation of the )ecretary of Cinance, may, efective
Jan. -, .AAA, allow corporations the option to "e taxed at 1+R of ross income,
provided certain conditions are satis%ed.
This is availa"le to %rms whose ratio of cost of sales to ross sales or receipts form all
sources does not exceed 44B.
Hnce elected "y the corporation, the option shall "e irrevoca"le for the succeedin
three consecutive years.
Conditions to 5e satis:ed 4or the availa5ility o4 the 1+R o3tional cor3orate tax?
-. A tax efort ratio of twenty percent 1.AB3 of the Eross Kational ;roduct,
.. A ratio of 0AB "etween total income tax collection and to total tax revenues,
/. A ?AT tax efort ratio of 0B of the Eross Kational ;roduct,
0. A A.=B ration "etween the Consolidated ;u"lic )ector Cinancial ;osition to the EK;.
&o*e de:nitions 4or this 3%r3ose?
6ross 2nco*e derived from "usiness shall "e e8uivalent to ross sales, less sales
returns, discounts and allowances, and cost of oods sold.
Cor taxpayers enaed in the sale of services, )ross inco*e means ross receipts
less sales returns, allowances and discounts.
Cost o4 )oods sold shall include all "usiness expenses directly incurred to produce
the merchandise to "rin them to their present location and use.
Tax rate 4or 3ro3rietary ed%cational instit%tions and hos3itals
-AB on taxa"le income, except of certain passive incomes.
"redo*inance test Q The ordinary rate on corporations shall apply to proprietary
educational institutions and hospitals when their ross income form unrelated trade,
"usiness or other activity exceeds 4AB of their total ross income derived from all
sources.
0nrelated trade, 5%siness or other activity
This means any trade, "usiness or other activity, the conduct of which is not
su"stantially related to the exercise or performance "y such educational institution or
hospital of its primary purpose or function.
"ro3rietary ed%cational instit%tion
A proprietary educational institution is any private school maintained and
administered "y private individuals or roups with an issued permit to operate from
the <ep2d, CI2<, or T2)<A, as the case may "e.
6<CCs, #6$HC2$& <' 2H&T'0M$HT#L2T2$&
All corporations, aencies or instrumentalities owned or controlled "y the overnment
shall pay such rate of tax upon their taxa"le income as are imposed upon
corporations or associations enaed in a similar "usiness, industry, or activity.
52
$xce3tions? EHCCs and instrumentalities not su"#ect to tax are the f*
-. E)$)
.. )))
/. ;hil Iealth $nsurance Corporation
0. ;C)H
4. ;AECHR
RATES ON CERTAIN PASSIVE INCOME SB*ECT TO FINAL TAX
-. $nterest from deposits and yield or any other monetary "ene%t from deposit
su"stitutes and from trust funds and similar arranements Q .AB
.. Royalties Q .AB
/. $nterest income derived from a depositary "ank under the expanded forein currency
deposit system Q 6 UB
0. Capital ains from sale of shares of stock not traded in the stock exchane
a. Kot over ;-AA,AAA Q 4B
". Hver ;-AA,AAA & -AB
4. Tax on income derived "y a depositary "ank under the expanded forein currency
deposit system from forein currency transactions Q -AB
Hote? This is diferent from interest income. This pertains to the income derived "y the
depositary "ank itself.
Hote? Any income of non&residents, whether individuals or corporations, from
transactions with a depositary "ank under the expanded system is exe*3t 4ro*
inco*e tax.
5. $ntercorporate dividends Q exempt
6. Capital ains reali7ed from sale, exchane or disposition of lands and or "uildins Q
5B
&ale o4 cor3orate real 3ro3erty that has ceased to 5e %sed in trade or 5%siness
s%5Cect to 6R ca3ital )ains tax
A %nal tax of 5B is imposed on the ains presumed to have "een reali7ed in the sale,
exchane or disposition of lands andGor "uildins which are not actively used in the
"usiness of a corporation and which are treated as capital assets "ased on the ross
sellin price or fair market value, whichever is hiher.
MINIMM CORPORATE INCOME TAX @MCITA
Applica"le only to <omestic Corporations and Resident Corein Corporations.
Conce3t? A minimum corporate income tax of .B of the ross income as of the end
of the taxa"le year is here"y imposed on a corporation su"#ect to income tax
"einnin on the fourth taxa"le year immediately followin the year in which such
corporation commenced its "usiness operations, when the minimum income tax is
reater than the reular corporate income tax for the taxa"le year.
The rates provided for the payment of income tax of corporate taxpayers are not
applica"le if the amount correspondin to the rates are lower than .B of the ross
income of such corporate income taxpayer. This is called the DMini*%* Cor3orate
2nco*e TaxE.
$xa*3le? $f a corporate taxpayer has a ross income of ;.AM. two percent of that
would "e ;0AA,AAA. $f the ross income is ;.AM, and the deductions is ;-=M, we only
have ;-M as net or taxa"le income. Multiply that "y /.B, there"y comin up with
;/.A,AAA, this amount should "e the tax paya"le, if not for the rule that corporate
taxpayers should pay a minimum of .B of their ross income. )ince the .B on the
ross income is hiher than the /.B on the net income, the .B or ;0AA,AAA, should
"e paid.
53
The *ini*%* cor3orate inco*e tax rule means that the taxpayer must pay
income tax not lower than the .B of its ross income. $f the tax lia"ility on the net
income is lower than .B, then the .B should "e paid, however, if the tax lia"ility on
the net income is hiher than the . B, then the actual tax lia"ility should "e paid.
Carry For8ard o4 excess *ini*%* tax Q Any excess of the minimum corporate
income tax over the normal income tax shall "e carried forward and credited aainst
the normal income tax paya"le for the next three years immediately succeedin the
taxa"le year in which the minimum corporate income tax was paid.
'elie4 4ro* the *ini*%* cor3orate inco*e tax %nder certain conditions
The )ec. of Cinance may suspend the imposition of the minimum corporate
income tax on any corporation which sufers losses on account of *
-. ;roloned la"or dispute,
.. force ma#eure,
/. or "ecause of leitimate "usiness reverses.
Meanin) o4 )ross inco*e and cost o4 )oods sold %nder *ini*%* cor3orate inco*e
tax A&ec. (! $B co*3ared 8ith the *eanin) o4 )ross inco*e and cost o4 )oods sold
%nder &ec. (! #
)ection .6 A )ection .6 2
Eross $ncome 28uivalent to ross sales less sales returns, discounts
and allowances and cost of oods sold.
Cost of oods sold $ncludes all "usiness expenses directly incurred to
produce the merchandise to "rin them to their present
location and use
Cost of oods sold on a
tradin or merchandisin
concern
$ncludes all costs of production of %nished oods, such
as raw materials used, direct la"or and manufacturin
overhead, freiht cost, insurance and other costs
incurred to "rin the raw materials to the factory or
warehouse.
Eross income for
taxpayers enaed in the
sale of service
Eross receipts less sales
returns, allowances and
discounts
Eross receipts less sales
returns, allowances and
discounts and cost of
service
Cost of services All direct costs and
expenses necessarily
incurred to provide the
services re8uired "y the
customers and clients
includin*
-. )alaries and employee
"ene%ts of personnel,
consultants and
specialists directly
renderin the service
and,
.. Cost of facilities
directly utili7ed in
providin service such
as depreciation and
rental or e8uipment
used and cost of
supplies.
Cor "anks it includes
interest expense.
Hote? de%nition of ross income for taxpayers enaed in the sale of service includes Dcost
of servicesJ in MC$T "ut not in the case of the optional -4B tax on ross income 1)ec. .6 A
K$RC3.
TAX ON RESIDENT FOREIGN CORPORATIONS
54
'esident Forei)n Cor3oration
A resident forein corporation is one orani7ed, authori7ed, or existin under the laws
of any forein country, enaed in the trade or "usiness within the ;hilippines.
$n order that a forein corporation may "e rearded as doin "usiness within a state,
there must "e continuity of conduct and intention to esta"lish a continuous "usiness,
such as the appointment of a local aent, and not one of temporary character.
Tax rates in 6eneral
Rate of tax, in eneral*
-==6 Q /4B
-==> Q /0B
-=== Q //B
.AAA onwards Q /.B
Tax is imposed on taxa"le or net income.
These rates are not applica"le if the amount correspondin to the rates are lower than
.B of the ross income of such corporate income taxpayer. This is called the
DMini*%* Cor3orate 2nco*e TaxE Asa*e as 8ith do*estic cor3orationB
<3tional 1+R tax on )ross inco*e O The option to "e taxed at -4B on its ross
income is also availa"le to Resident Corein Corporations, su"#ect to the same
conditions.
Availa"le to %rms whose ratio of cost of sales to ross sales or receipts from all
sources does not exceed 44B
Tax on s3eci:c resident 4orei)n cor3orations
-. $nternational Carrier Q . U of Eross ;hilippine @illins
.. Hfshore @ankin Lnits & WAB of income derived from forein currency transactions
with local commercial "anks, includin "ranches of forein "anks that may "e
authori7ed "y the @); to transact "usiness with ofshore "ankin units, includin any
interest income derived from forein currency loans ranted to residents
Any income of non&residents, whether individuals or corporations, from
transactions with said ofshore "ankin units shall "e exempt from income tax.
/. Tax on "ranch pro%ts remittances Q -4B of total pro%ts applied or earmarked for
remittance without deduction for the tax component thereof.
0. Reional or area head8uarters shall not "e su"#ect to income tax
4. Reional operatin head8uarters shall "e su"#ect to a tax of -AB of their taxa"le
income.
6ross "hili33ine /illin)s 4or 2nternational carriers
DEross ;hilippine @illinsJ refer to the amount of ross revenue derived from carriae
of persons, excess "aae, caro and mail oriinatin from the ;hilippines in a
continuous and uninterrupted 9iht, irrespective of the place of sale or issue and the
place of payment of the ticket or passae document.
Tickets revalidated, exchaned andGor endorsed to another international airline form
part of the Eross ;hilippine @illins of the passener "oards a plane in a port or point
in the ;hilippines.
Cor a 9iht which oriinates from the ;hilippines, "ut transhipment of passener takes
place at any port outside the ;hilippines on another airline, only the ali8uot portion of
the cost of the ticket correspondin to the le 9own from the ;hilippines to the point
of transhipment shall form part of the Eross ;hilippine @illin.
6ross "hili33ine /illin)s 4or 2nternational &hi33in)
55
DEross ;hilippine @illinsJ means ross revenue whether for passener, caro or mail,
oriinatin from the ;hilippines up to %nal destination, reardless of the place of sale
or payments of the passae or freiht documents.
Tax on 5ranch 3ro:t re*ittances
Any pro%t remitted "y a "ranch to its head oFce shall "e su"#ect to a tax of -4B
which shall "e "ased on the total pro%ts applied or earmarked for remittance without
any deduction for the tax component thereof except those activities which are
reistered with the ;hilippine 2conomic Oone Authority.
The follo!ing shall not be treated as branch profts unless the sae are e8ectively
connected !ith the conduct of its trade or business in the )hilippines:
-. $nterests
.. dividends
/. rents
0. royalties
4. remuneration for technical services
5. salaries
6. waes
>. premiums
=. annuities
-A. emoluments
--. other %xed or determina"le annual, periodic, or casual ains, pro%ts, income and
capital ains.
$n Mar%5eni v. Co**issioner, Maru"eni&Japan invested directly in AE T ; Manila.
)ince Maru"eni has a "ranch in the ;hilippines, AE T ; withheld -4B as "ranch pro%ts
remittance tax from the cash dividends. )C held that the dividends remitted were not
su"#ect to the -4B "ranch pro%t remittance tax as they were not income earned "y a
;hilippine "ranch of Maru"eni&Japan.
$n the -4B remittance tax, the law speci%es its own tax "ase to "e on the Dpro%t
remitted a"roadJ. There is a"solutely nothin e8uivocal or uncertain a"out the
lanuae of the provision. The tax is imposed on the amount sent a"road, and the law
calls for nothin further../anL o4 #*erica HT v. Co%rt o4 #33eals (34 &C'#
30(1.
Mar%5eni v. Co**issioner .1!! &C'# +001
Maru"eni Corporation is a resident forein corporation
A resident forein corporation is one that is incorporated under the laws of a
forein country and is enaed in trade or "usiness on the ;hilippines. Maru"eni
Corporation was duly orani7ed under the laws of Japan and it is duly licensed to
enae in trade or "usiness under ;hilippine laws. Maru"eni Corporation maintains a
"ranch oFce to carry out its "usiness in the country.
Maru"eni Corporation in Japan directly invested in AE T ; a domestic corporation. The
e8uity investments were investments of the mother corporation and not of the local
"ranch oFce.
@ranch pro%t remittance tax applies only to pro%ts remitted "y local "ranch oFces to
their mother corporation. $t does not apply to cash dividends paid to the mother
corporation directly, from other domestic corporations.
Hnly pro%ts remitted a"road "y a "ranch oFce to its head oFce which are efectively
connected with its trade or "usiness in the ;hilippines are su"#ect to the -4B pro%t
remittance tax.
To "e efectively connected, it is not necessary that the income "e derived from the
actual operation of taxpayer corporation+s trade or "usiness, it is suFcient that the
income arises from the "usiness activity in which the corporation is enaed.
The dividends received "y Maru"eni&Japan from AE T ; are not income arisin from
the "usiness activity in which the local "ranch of Maru"eni is involved. Accordinly,
said dividends if remitted a"road, are not considered "ranch pro%ts for purposes of
the -4B pro%t remittance tax.
56
Hote? The test of whether remittance of pro%t "y a "ranch to its head oFce comes
under the purview of the pro%t remittance tax, is whether the "ranch made the
remittance. $n this case, it was not Maru"eni+s "ranch in the ;hilippines, "ut AE T ;,
which remitted the dividends to Maru"eni&Japan.
Also, only the "ranch oFce is the authori7ed withholdin aent for the pro%t
remittance tax. AET;, "ein an investee of Maru"eni, erred in withholdin the pro%t
remittance tax from the dividends it remitted to Maru"eni.
2nterest received 5y a 4orei)n cor3oration 4ro* "hili33ine so%rces not e=ectively
connected 8ith the cond%ct o4 its 5%siness not considered 5ranch 3ro:ts.
AKon)Lon)-&han)hai Kotels, Ltd. V. C2', CT# Case Ho. +(43 dated 4T(TB
$nterest received "y a forein corporation durin each taxa"le year from all sources
within the ;hilippines is not considered "ranch pro%ts except when the same is
efectively connected with the conduct of its "usiness. $n the instant case, the
interest income from "ank placements is not efectively connected with the "usiness
of hotel manaement, thus, it is excluded from pro%ts su"#ect to the -4B "ranch
pro%t remittance tax.
'e)ional or area head;%arters o4 *%ltinational co*3anies
Reional or area head8uarters shall not "e su"#ect to income tax.
'e)ional o3eratin) head;%arters o4 *%ltinational co*3anies
Reional operatin head8uarters shall pay a tax of ten percent 1-AB3 on their taxa"le
income.
Tax on certain inco*es received 5y a resident 4orei)n cor3oration
-. $nterest from deposits and yield or any other monetary "ene%t from deposit
su"stitutes, trust funds and similar arranements and royalties.
$nterest income from any currency "ank deposit and yield or any other monetary
"ene%t from deposit su"stitutes and from trust funds and similar arranements and
royalties derived from sources within the ;hilippines shall "e su"#ect to a %nal income
tax at the rate of twenty percent 1.AB3 of such interest.
Iowever, interest income derived "y a resident forein corporation from a depository
"ank under the expanded forein currency deposit system shall "e su"#ect to a %nal
income tax at the rate of seven and one&half percent 16 UB3 of such interest income.
.. $ncome derived under the expanded forein currency deposit system
This refers to income derived "y a depositary "ank under the expanded forein
currency deposit system from forein currency transactions with local commercial
"anks includin "ranches of forein "ank that many "e authori7ed "y the @anko
)entral n ;ilipinas to transact "usiness with forein currency deposit system units
and other depositary "anks under the expanded forein currency deposit system,
includin interest income from forein currency loans ranted "y such depositary
"anks under said expanded forein currency deposit system to residents.
A %nal income tax at the rate of ten percent 1-AB3 is imposed on such income.
". Hver ;-AA,AAA Q -AB
0. $ntercorporate dividends
<ividends received "y a resident forein corporation from a domestic corporation
lia"le to
tax under the K$RC shall not "e su"#ect to income tax.
TAX ON NON-RESIDENT FOREIGN CORPORATION
57
Taxation o4 a non-resident 4orei)n cor3oration, in )eneral
Rates of tax, in eneral
-==6 Q /4B
-==> Q /0B
-=== Q //B
.AAA Q /.B
Iowever, the tax is imposed on ross income, not on taxa"le or net income.
)uch ross income may include interests, dividends, rents, royalties, salaries,
premiums 1except reinsurance premiums3, annuities, emoluments or other %xed or
determina"le annual, periodic or casual ains, pro%ts and income, and capital ains,
except capital ains from the sale of shares of stock not traded in the stock exchane.
Taxation o4 certain non-resident 4orei)n cor3orations
-. Kon&resident cinematoraphic %lm owner, lessor or distri"utor Q .4B of ross income
.. Kon&resident owner or lessor of vessels chartered "y ;hilippine nationals Q 0 UB of
ross rentals, lease or charter fees
/. Kon&resident owner or lessor of aircraft, machineries and other e8uipment Q 6 UB of
ross rentals or fees
Hon-resident cine*ato)ra3hic :l* o8ner, lessor or distri5%tor
A cinematoraphic %lm owner, lessor, or distri"utor shall pay a tax of twenty %ve
percent 1.4B3 of its ross income from all sources within the ;hilippines.
Hon-resident o8ner or lessor o4 vessel chartered 5y "hili33ine nationals
A non&resident owner or lessor of vessels shall "e su"#ect to a tax of four and one&half
percent 10 UB3 of ross rentals, lease or charter fees from leases or charters to
Cilipino citi7ens or corporations, as approved "y the Maritime $ndustry Authority.
Hon-resident o8ner or lessor o4 aircra4t, *achineries and other e;%i3*ent
Rentals, charters and other fees derived "y a non&resident lessor of aircraft,
machineries and other e8uipment shall "e su"#ect to a tax of seven and one&half
percent 16 UB3 of ross rentals or fees.
Tax on certain inco*es received 5y a non-resident 4orei)n cor3oration
-. $nterest on forein loans
A %nal withholdin tax at the rate of twenty percent 1.AB3 is here"y imposed on the
amount of interest on forein loans contracted on or after A- Auust -=>5.
.. $ntercorporate dividends
A Cinal withholdin tax at the rate of %fteen percent 1-4B3 is here"y imposed on the
amount of cash andGor property dividends received "y a non&resident forein corporation
from a domestic corporation, su"#ect to the condition that the country in which the non&
resident forein corporation is domiciled shall allow a credit aainst the tax due from the
non&resident forein corporation taxes deemed to have "een paid in the ;hilippines
e8uivalent to thirty two percent 1/.B3 in the year .AAA.
This is the so&called tax sparin rule.
". Hver ;-AA,AAA Q -AB
TAX SPARING RLE
$nvolves inter&corporate dividends received "y a ,7,--+86B+,5 ;7-+6>, 37-47-.567,
from a domestic corporation
58
Hnly -4B %nal withholdin tax on cash andGor property dividends is imposed
;rovided the country in which the non&resident forein corporation is domiciled shall
allow a credit aainst the tax due form the non&resident forein corporation taxes
deemed to have "een paid in the ;hilippines, which is /.B "y .AAA ')ec. .>, 1@3 143
1"3(
TAX SPARING CREDIT RLE
S650.567,1 KRCC received dividend, cash or property dividend from <C. That
dividend received from <C is su"#ect to -4B C$KA: !$TIIH:<$KE TAN.
This -4B may "e imposed on this dividend received from <C if the forein
overnment of the KRCC allows a tax credit at least -=B 1-==>3, ->B 1-===3, -6B 1.AAA3. $t
should "e credited form the taxed deemed paid "y this KRCC in the ;hils.
$f so, the forein overnment does not allow a tax credit of at least -=B, the tax there
is not -4B "ut /0B. Thus the tax spared or saved is -=B "ecause normally the tax is /0B.
)o, /0B less -4B e8uals -=B, that is the tax saved and that represents the tax credit
allowed "y the forein overnment.
(0+8567,1 Must the forein overnment actually rant a tax credit or is it enouh
that the forein overnment allow such tax creditR
A,8C+-1 There is no statutory provision that re8uires actual rant. Keither is there a
Revenue Reulation re8uirin actual rant. $t is clear that the provision of the law says
Dallows.J )H, it is enouh to prove that the forein corporation allows a tax credit. $t is not
incum"ent upon the forein corporation to prove the amount actually ranted.
(0+8567,1 <oes a withholdin aent or a su"sidiary corp. have the personality to %la
a written claim or refundR
A,8C+-1 The withholdin aent has the personality to %le a written claim for refund.
A withholdin aent is technically a taxpayer "ecause it is re8uired to deduct and withhold
the tax, and it has the o"liation to remit the same to the ovt. )o, withholdin aent is
lia"le for tax. $t has therefore the personality to %le a written claim for refund.
!ithholdin aent is not only an aent of the taxpayer "ut also an aent of the
overnment. )ince it is an aent of the taxpayer, it is ipso facto authori7ed to %le a written
claim for refund.
1"ack pae3 MM
& To #ustify an accumulation of earnins and pro%ts for the reasona"le
anticipated future needs, such accumulations must have "een used within a reasona"le
time after the close of a taxa"le period.
& $mmediacy Test Q $f the corporation did not prove an immediate need for accumulation of
earnins, the accumulation was not for reasona"le needs of the "usiness, and the surtax
would apply.
TAX ON IMPROPERL# ACCMLATED EARNINGS
2*3osition o4 the tax
$n addition of the other income taxes, there is here"y imposed for each taxa"le year
on the improperly accumulated taxa"le income of each corporation an improperly
accumulated earnins tax e8ual to ten percent 1-AB3 of the improperly accumulated
taxa"le income ')ection .=, K$RC(
Cor3orations s%5Cect to i*3ro3erly acc%*%lated earnin)s tax
The improperly accumulated earnins tax shall apply to every corporation formed or
availed for the purpose of avoidin the income tax with respect to shareholders or the
shareholders of any other corporation, "y permittin earnins and pro%ts to
accumulate instead of "ein divided or distri"uted.
$xce3tions to i*3ro3erly acc%*%lated earnin)s tax
The iproperly accuulated earnings tax shall not apply to:
-. ;u"licly&held corporations
.. @anks and other non&"ank %nancial intermediaries
/. $nsurance companies
59
$vidence o4 3%r3ose to avoid inco*e tax
P-6<. F.36+ ED6B+,3+* The fact that any corporation is a mere holdin company or
investment company shall "e pria facie evidence of a purpose to avoid the tax upon
its shareholders or mem"ers.
ED6B+,3+ D+5+-<6,.56D+ 7- P0-478+* The fact that the earnins or pro%ts of a
corporation are permitted to accumulate "eyond the reasona"le needs of the "usiness
shall "e determinative of the purpose to avoid the tax upon its shareholders or
mem"ers unless the corporation, "y clear preponderance of evidence, shall prove to
the contrary.
The term Dreasona"le needs of the "usinessJ includes the reasona"le anticipated
needs of the "usiness.
DReasona"le needs of the "usinessJ includes the reasona"ly anticipated needs of the
"usiness.
Co*3%tation o4 i*3ro3erly acc%*%lated taxa5le inco*e
Taxa"le income ad#usted "y*
-. $ncome exempt from tax,
.. $ncome excluded from ross income,
/. $ncome su"#ect to %nal tax, and
0. Amount of net operatin loss carry&over deducted,
And reduced "y the sum of*
-. <ividends actually or constructively paid, and
.. $ncome tax paid for the taxa"le year.
Covera)e
Cor corporations usin the calendar "asis, the accumulated earnins tax shall not
apply on improperly accumulated income as of /- <ecem"er -==6.
Cor corporations adoptin the %scal year accountin period, the improperly
accumulated income not su"#ect to this tax shall "e reckoned as of the end of the
month comprisin the -.&month period of %scal year -==6&-==>.
EXEMPTION OF CERTAIN ORGANI9ATIONS
$xe*3tion 4ro* tax on cor3orations
$f they have real property and lease it to another, the rent income is su"#ect to tax
$f they have deposit in a "ank, the interest income on the same is su"#ect to tax
$f they sell property for pro%t, that is su"#ect to tax
The 4ollo8in) or)anizations shall not 5e taxed in res3ect to inco*e received 5y
the* as s%ch?
-. :a"or, aricultural or horticultural orani7ation not orani7ed principally for pro%t,
may derive incidental income.
.. Mutual savins "ank not havin a capital stock represented "y shares, and
cooperative "ank without capital stock orani7ed and operated for mutual purposes
and without pro%t,
/. A "ene%ciary society, order or association, operatin for the exclusive "ene%t of the
mem"ers such as a fraternal orani7ation operatin under the lode system, or a
mutual aid association or a non&stock corporation orani7ed "y employees providin
for the payment of life, sickness, accident, or other "ene%ts exclusively to the
mem"ers of such society, order, or association, or non&stock corporation or their
dependents,
0. Cemetery company owned and operated exclusively for the "ene%t of its mem"ers,
60
4. Kon&stock corporation or association orani7ed and operated exclusively for reliious,
charita"le, scienti%c, athletic, or cultural purposes, or for the reha"ilitation of
veterans, no part of its net income or asset shall "elon to or inure to the "ene%t of
any mem"er, orani7ers, oFcer or any speci%c person,
5. @usiness leaue cham"er of commerce, or "oard of trade not orani7ed for pro%t and
no part of the net income of which inures to the "ene%t of any private stockholder or
individual,
6. Civic leaue or orani7ation not orani7ed for pro%t "ut operated exclusively for the
promotion of social welfare,
>. A non&stock, non&pro%t educational institution,
=. Eovernment educational institution,
-A. Carmers+ or other mutual typhoon or %re insurance company, mutual ditch or irriation
company, mutual or cooperative telephone company, or like orani7ation of a purely
local character, the income of which consists solely of assessments, dues, and fees
collected from mem"ers for the sole purpose of meetins its expenses, and
--. Carmers+ fruit rowers+, or like association orani7ed and operated as a sales aent for
the purpose of marketin the products of its mem"ers and turnin "ack to them the
proceeds of sales, less the necessary sellin expenses on the "asis of the 8uantity of
products %nished "y them. ')ection /A, K$RC(
2nco*e 5y exe*3ted cor3orations 8hich are not exe*3ted
DKotwithstandin the provisions in the precedin pararaphs, the income of whatever
kind and character of the foreoin orani7ations from any of their properties, real or
personal, or from any of their activities conducted for pro%t reardless of the
disposition made of such income, shall "e su"#ect to tax imposed under this Code.J
'.
nd
pararaph, )ection /A, K$RC(
Thus, the followin income of the exempted orani7ations shall not "e exempted*
-. $ncome of whatever kind and character from an of their properties, real or personal
.. $ncome from any of their activities conducted for pro%t
)ee C7<<68867,+- D& CA re. PMCA case in Eeneral ;rinciples of Taxation
Co**issioner v. C#, CT# and #teneo de Manila 0niversity, (!1 &C'# 60+
$n conductin researches and studies of social orani7ations and cultural values thru
its $;C, is Ateneo performin the work of an independent contractor and thus taxa"le for the
contractor+s taxR
KH. An academic institution conducin researches pursuant to its commitments to
education and ultimately to pu"lic service cannot "e considered as an independent
contractor when it accepts sponsorships for its research activities from international
orani7ations, private foundations and overnment aencies.
The research activity of the $;C is done in pursuance of maintainin Ateneo+s
university status and not in the course of an independent "usiness of sellin such research
with pro%t in mind.
$t is error to apply the principles of tax exemption without %rst applyin the well&
settled doctrine of strict interpretation in the imposition of taxes Q it is o"viously "oth illoical
and impractical to determine who are exempted without %rst determinin who are covered "y
a provision of the K$RC.
$7-,:77E B735-6,+ 6, 5?+ 6,5+-4-+5.567, 7; 5.2 /.C81
)tatus will not "e construed as imposin a tax unless it does so clearly, expressly, and
unam"iuously. A tax cannot "e imposed without clear and express words for that purpose.
Accordinly, the eneral rule of re8uirin adherence to the letter in construin statutes
applies with peculiar strictness to tax laws and the provisions of a taxin act are not to "e
extended "y implication.
61
GROSS INCOME
6ross inco*e
6ross inco*e *eans all inco*e derived 4ro* 8hatever so%rce, incl%din)
A5%t not li*ited toB the 4ollo8in) ite*s?
-. Compensation for services in whatever form, paid, includin, "ut not limited to, fees,
salaries, waes, commissions, and similar items. )$TL) Q place where services
rendered.
.. Eross income derived from the conduct or trade or "usiness or the exercise of a
profession 1@usiness income3. )$TL) Q place where these "usiness are undertaken
/. Eains derived from dealins in property,
0. $nterestes. )$TL) Q residence of the de"tor
4. Rents. )$TL) Q place of property su"#ect of the contract of lease
5. Royalties. )$TL) Q place where the intani"le property is used
6. <ividend. )$TL)
a. Received from domestic corporation Q This is income purely within.
". Received from forein corporation Q Consider the income of the forein corp. in
the ;hilippines durin the last precedin / taxa"le years*
Rules*
-. The income is purely within if the income derived from the ;hil. )ource is more
than >4B
.. $t is purely without if the proportion of its ;hilippine income to the total income is
less than 5AB
/. There should "e an allocation if it is more than 4AB "ut not exceedin >4B
>. Annuities. )$TL) Q ;lace where the contract was made
=. ;ri7es and winnins
& ;ri7es may "e iven on account of services rendered Q in which case,
the tax situs is the 4/.3+ C?+-+ 5?+ 8+-D63+8 C+-+ -+,B+-+B.
& $f these pri7es are not iven on account or services, the tax situs is
the 4/.3+ C?+-+ 5?+ 8.<+ C.8 >6D+,.
& Tax situs of winnins is the place where the same was iven.
-A. ;ensions. )$TL) Q ;lace where this may "e iven on account of services rendered.
--. ;artner+s distri"utive share form the net income of the eneral professional
partnership. )$TL) Q place where the exercise of profession is undertaken.
COMPENSATION FOR SERVICES
Co*3ensation 4or services
This means all remuneration for services performed "y an employee for his employer
under an employer&employee relationship.
62
$f deducti"le to the 2R, it is taxa"le to the 22.
Co*3ensation 3aid in Lind
Compensation may "e paid in money or in some medium other than money.
>i=erent 4or*s o4 co*3ensation inco*e
-. ;ropertyGVind Q Cair Market ?alue 1CM?3 of the property. $f there is a price stipulated, it
is the price stipulated that will "e followed in the a"sence of contrary evidence.
.. ;romissory not or other evidence of inde"tedness
a. $f it is not discounted, it is the face value of the promissory note.
". $f it is discounted, it is the fair discounted value of the promissory note.
/. )tock Q CM? of that shares of stock
0. Cancellation of inde"tedness Q Cancellation of inde"tedness has the followin tax
conse8uences*
a. $t may account to taxa"le compensation income if the inde"tedness has "een
cancelled in consideration of the services rendered.
". $t may account to taxa"le ift or donation of the inde"tedness has "een
cancelled without any consideration at all.
c. $f may amount to capital transaction if the creditor is a corporation and the
de"tor is stockholder. $f creditor corporation condoned the inde"tedness of the
de"tor stockholder, that may amount to taxa"le capital transaction. This is the
form of direct dividend.
4. Tax lia"ility of the employee paid "y the employer in consideration of services
rendered Q amount of tax lia"ility.
5. ;remiums paid "y the employer on the life insurance policy of the employee.
a. $t is a taxa"le compensation income if the "ene%ciary desinated are the heirs
of the employee or his family. <educti"le expense
". $t is not a taxa"le compensation income if the "ene%ciary desinated is the
employer "ecause it is #ust a mere return of capital. Kon deducti"le expense.
$f the desination of the employer as "ene%ciary is indirect 1e.., $t is the creditor of
the employer that is desinated as "ene%ciary3, that is still not taxa"le compensation
income.
2xample of $ndirect desination of the employer as a "ene%ciary*
a. @ene%ciary is the wife of the ;resident of a close corporation.
". $f the employer may secure a loan from the insurance police.
I; 5?+ 4.F<+,5 C.8 -+3+6D+B :F 5?+ +<4/7F++ C?+, ?+ C.8 ,7 /7,>+- 37,,+35+B
C65? ?68 +<4/7F+-' 65 68 856// 37,86B+-+B 37<4+,8.567, 6,37<+& !hat is important here
is that it must "e received durin the existence of the employer&employee relationship.
2mployees may "e dismissed "y the employer, and they may %le complaint for illeal
dismissal aainst the employer. Judment was rendered "y the ar"iter in favour of the
employee. All the waes supposed to "e paid 1e.. "ackwaes3 can "e taxed as
compensation income. !hat a"out attorney+s feesR That is exempt.
Livin) ;%arters or *eals
$f a person receives a salary as a remuneration for services rendered and, in addition
thereto, livin 8uarters or meals are provided, the value to such person of the
8uarters and meals so furnished shall "e added to the remuneration paid for the
purpose of determinin the amount of compensation su"#ect to withholdin.
2xception* 2mployers convenience rule.
63
Iowever, if livin 8uarters or meals are furnished to an employee for the convenience
of the employer, the value thereof need not "e included as part of compensation
income. ')ection ..6>.-, Revenue Reulations .&=>(
Facilities and 3rivile)es o4 a relatively s*all val%e
Cacilities are not considered as compensation su"#ect to withholdin if such facilities
or privilees are of relatively small value and are ofered or furnished "y the employer
merely as a means of promotin the health, oodwill, contentment, or eFciency of his
employees. ')ection ..6>.-, Revenue Reulations, .&=>(.
Ti3s and )rat%ities
Tips or ratuities paid directly to an employee "y a customer of the employer which
are not accounted for "y the employee to the employer are considered as taxa"le
income "ut not su"#ect to withholdin.
Fixed or varia5le trans3ortation, re3resentation and other allo8ances
$n eneral, %xed or varia"le transportation, representation or other allowances which
are received "y a pu"lic oFcer or employee or oFcer or employee of a private entity,
in addition to the reular compensation %xed for his position or oFce, is
compensation su"#ect to withholdin.
Any amount paid speci%cally, either as advancements or reim"ursements, for
travellin, representation and other bona fde ordinary and necessary expenses
incurred or reasona"ly expected to "e incurred "y the employee in the performance of
his duties are not compensation su"#ect to withholdin, if the followin conditions are
satis%ed*
-. $t is for ordinary and necessary travellin and representation or entertainment
expenses paid or incurred "y the employee in the pursuit of the trade, "usiness or
profession, and
.. The employee is re8uired to account or li8uidate for the foreoin expenses in
accordance with the speci%c re8uirements of su"stantiation for each cateory of
expenses. The excess of actual expenses over the advances made shall constitute
taxa"le income if such amount is not returned to the employer.
Vacation and sicL leave allo8ances
Amounts of vacation leave or leave credits which are paid to an employee constitutes
compensation. Thus, the salary of an employee on vacation or on sick leave, which
are paid notwithstandin his a"sence from work constitutes compensation.
Iowever, the moneti7ed value of unutili7ed leave credits of ten 1-A3 days or less
which were paid to the employee durin the year are not su"#ect to income tax.
IMPOSITION OF FRINGE BENEFIT TAX
X To manaerial and supervisory employees only
2*3osition o4 4rin)e 5ene:t tax
A %nal tax of /.B efective A- January .AAA is imposed on the rossed&up monetary
value of frine "ene%t furnished or ranted to the employee, except rank and %le, "y
the employer, whether an individual or a corporation.
The frine "ene%t tax is paid "y the employer.
Erossed&up monetary value is ac8uired "y dividin the actual monetary value of the
frine "ene%t "y 5>B efective A- January .AAA.
FRINGE BENEFIT
<educti"le from E$ Q rossed&up monetary value
;rovided C@T is paid
64
Crine "ene%t means any ood, service or other "ene%t furnished or ranted in cash
or in kind "y an employer to an individual employee, except rank and %le employees,
such as, "ut not limited, to the followin*
-. Iousin,
.. 2xpense account,
/. ?ehicle of any kind,
0. Iousehold personnel, such as maid, driver and others,
4. $nterests on loan at less than market rate to the extent of the diference "etween the
market rate and actual rate ranted,
5. Mem"ership fees, dues and other expenses "orne "y the employer for the employee
in social and athletic clu"s or other similar orani7ations,
6. 2xpenses for forein travel,
>. Ioliday and vacation expenses,
=. 2ducational assistance to the employee or his dependents, and
-A. :ife or health insurance and other non&life insurance premiums or similar amounts in
excess of what the law allows.
Frin)e 5ene:ts 8hich are not s%5Cect to F/T
-. Crine "ene%ts which are authori7ed and exempted from tax under special laws.
.. Contri"utions of the employer for the "ene%t of the employee to retirement, insurance
and hospitali7ation "ene%t plans.
/. @ene%ts iven to the rank and %le employees, whether ranted under a vollective
"arainin areement or not.
0. 0e iniis "ene%ts
4. Crine "ene%t is re8uired "y the nature of, or necessary to the trade, "usiness or
profession of the employer.
5. $t is for the convenience or advantae of the employer.
CONVENIENCE OF T$E EMPLO#ER RLE
Lnder this rule, allows furnished to the employee for , and as a necessary incident to,
the performance of his duties are not taxa"le.
Thus, the value of meals and livin 8uarters iven to a driver who is availa"le any
hour of the day when needed "y his doctor&employer is not considered income of the
said driver.
P-6,364/+ 7; E<4/7F+-8 C7,D+,6+,3+ R0/+1
Crine "ene%ts may "e exemptGnot su"#ect to tax if these are iven for the "ene%t or
advantae of the employer.
T?+ ;7//7C6,> .-+ 5?+ 47886:/+ ;-6,>+ :+,+G58' C?63? <.F :+ +2+<45 0,B+- 5?+
E<4/7F+-8 C7,D+,6+,3+ R0/+1 @$ V $ M TA
a. Iousin "ene%ts
". ?ehicles
c. Iousehold personnel
d. Mem"ership in a social or athletic clu" or similar orani7ation
e. Travellin expense "ene%t
$f the housin or livin 8uarters are provided outside the premises of the employer, even if
that is for the convenience of the employer, this is only exempt up to 4AB of the amount.
)o, 4AB taxa"le, 4AB exempt.
65
DE MINIMIS BENEFITS
These are facilities or privilees furnished or ofered "y an employer to his employees
that are of relatively small value and are ofered or furnished "y the employer merely
as a means of promotin the health, oodwill, contentment, or eFciency of his
employee.
D+ <6,6<68 :+,+G58
Hf relatively small value Q liited to facilities or privileges furnished by eployer to
his eployees erely as a eans of prooting health, good!ill, contentent, or
eQciency of eployees, such as:
a. Moneti7ed unused vacation leave credits not exceedin ten 1-A3 days durin the year,
". Medical cash allowance to dependents of employees not exceedin ;64A per
semester or ;-.4 per month,
c. Rice su"sidy of ;/4A per month,
d. Lniforms,
e. Medical "ene%ts,
f. :aundry allowance of ;-4A per month,
. 2mployee achievement awards, for lenth of service or safety achievement in the
form of tani"le personal property other than cash ift certi%cate, with an annual
monetary value not exceedin U month of the "asic salary of employee receivin the
award under an esta"lished written plan which does not discriminate in favour of
hihly paid employees,
h. Christmas and ma#or anniversary cele"rations for employees and their uests,
i. Company picnics and sports tournaments in the ;hilippines and are participated in
exclusively "y employees, and
#. Clowers, fruits, "ooks or similar items iven to employees under special circumstances
on account of illness, marriae, "irth of a "a"y, etc.
GROSS INCOME FROM T$E CONDCT OF TRADE OR BSINESS
"er4or*ance o4 the 4%nctions o4 a 3%5lic oMce
The term trade or "usiness includes the performance of the functions of a pu"lic
oFce. ')ection .. 1)3, K$RC(
INTEREST INCOME
&o%rces o4 interest inco*e
-. $nterest on "ank depositGdeposit su"stitutesGtrust fund and similar arranement
.. $nterest from lendinGinterest income from "onds
/. $nterest on uncollected salary
0. $nterest on forein "ondsGovernment "onds
4. $nterest on treasury "ills
5. $nterest earned from deposits maintained under the forein currency deposit system
6. $nterest income of pawnshop operators
2nterest inco*e earned 5y non-stocL, non-3ro:t ed%cational instit%tions
$nterest income shall "e exempt only when used directly and exclusively for
educational purposes. To su"stantiate this claim, the institution must su"mit an
annual information return and duly audited %nancial statement. A certi%cation of
actual utili7ation and the @oard resolution on the proposed pro#ect to "e funded out of
66
the money deposited in "anks must also "e su"mitted. '<epartment of Cinance Hrder
-0=&=4(
RLES ON INTEREST INCOME
R0/+81
-. $f it is an interest on forein currency deposit system, it is exempt. $f the recipient is
non&resident individual 1KRC, KRA&2T@, KRA&K2T@3.
.. $f the recipient is a resident individual 1RC, RA3, that is su"#ect to 6.4B
/. $nterest income is also exempt if it is an interest income on a lon&term deposit or
lon&term investment 1this must have a term of not less than 4 years3.
I; 5?+ 5+-< 68 /+88 5?., 5 F+.-8 65 68 80:H+35 57 5?+ ;7//7C6,> -.5+81
-. 0 years to less 4B than 4 years.
.. / years to less -.B than 0 years.
/. :ess than / .AB years.
RENTALS
<3eratin) lease
An operatin lease is a contract under which the asset is not wholly amorti7ed durin
the primary period of the lease, and where the lessor does not rely solely on the
rentals durin the primary period for his pro%ts, "ut looks for the recovery of the
"alance of his costs and for the rests of his pro%ts from the sale or re&lease of the
returned assets at the end of the primary lease period.
Financial lease
Also called Dfull payout leaseJ is a contract involvin payment over an o"liatory
period 1also called primary or "asic period3 of speci%ed rental amounts for the use of a
lessor+s property, suFcient in total to amorti7e the capital outlay of the lessor and to
provide for the lessor+s "orrowin costs and pro%sts.
H"liatory period is primary non&cancella"le period of the lease which in no case shall
"e less than 6/A days.
:esee exercise choice over the asset.
T?+ ;7//7C6,> 37,856505+8 5.2.:/+ -+,5 6,37<+1
-. The -+>0/.- -+,5 may "e monthly, semi&annually or annually.
.. ABB6567,./ -+,5 6,37<+ which includes*
a. <5li)ation o4 the lessor ass%*ed 5y the lesee. The followin are
o"liations which may "e assumed "y the lessee* 'R&I&D&I&O&(
a.-. Real property taxed on leased premises
a... H"liation to pay insurance premium on the insured leased premises.
a./. $f the lessor is a corp., the o"liation to distri"ute <ividends to its
stockholders
a.0. H"liation to pay interest on the "onds issued "y the lessor.
a.4. Hther o"liations of the lessor which may "e assumed "y the lesee.
". Val%e o4 3er*anent i*3rove*ents on leased 3re*ises. This may "e
reported throuh*
".-. Hutriht method at the time of permanent is completed, he may report
that as additional rent income Q CM? of the "uildin or permanent
improvement.
67
"... )pread out method "y allocatin the depreciation amon throuhout the

remainin term of the leased.
c. #dvanced rentals
c.-. $f in the nature of the prepaid rentals without restriction on the use of the

amount, it is taxable.
c... $f it is in the nature of security deposit, it is taxa"le rent income if there is
a
violation of the term of the lease.
c./. $f it is in the nature of a loan to the lessor, it is not taxa"le.
DIVIDEND INCOME
>ividends
D<ividendsJ means any distri"ution made "y a corporation to its shareholders out of
its earnins on pro%ts and paya"le to its shareholders, whether in money or in other
property.
D6D6B+,B8 -+3+6D+B ;-7< . D7<+8563 C7-47-.567,
-. This is exempt from tax if the recipient is a forein overnment, %nancin institution,
reional %nancin institution, international %nancin institution esta"lished "y a
forein overnment. &ec. 3( /!a
.. $t is also exempt if the recipient of such dividend is another domestic corporation or
resident forein corporation, &ec. (, #!d
)INDS OF DIVIDEND INCOME
-. Cash
.. )tock dividendGstock rihts
/. ;roperty dividend
0. :i8uidatin dividend
&tocL dividend
As a rule stock dividends are not taxa"le. This is so, "ecause there is no income here. $t
merely represents the transfer of surplus accounts to the capital account.
$xce3tion to the r%le? #toc, dividend ay be sub&ect to tax under the follo!ing
exceptional cases:
-. $f there is a chane in the stockholder+s interest in the net assets of the
corporation,
.. $f it is one issued "y another corporation. This is called Ddividend stocL.J
&tocL dividend vs. >ividend stocL? )tock dividend is not taxa"le, while
dividend stock is taxa"le.
/. Redemption of stock dividend,
0. $f the corporation had issued to a stockholder . diferent classes of shares of
stock, any stock dividend that may "e issued to such stockholder shall "e
taxa"le. 2xample*
O0585.,B6,> 8573E S573E B6D6B+,B T.2.:6/65F
-. ;referred Common Kot Taxa"le
.. Common ;referred Kot taxa"le
/. ;referred ;referred Kot taxa"le
68
0. Common Common Kot taxa"le
4. ;referred and Common ;referred Taxa"le
5. Common and preferred Common Taxa"le
A stock dividend representin the transfer of surplus to capital account shall not "e
su"#ect to tax.
$t shall "e taxa"le only if su"se8uently cancelled and redeemed "y the corporation.
$t is also taxa"le if it leads to a su"stantial alteration in the proportion of tax
ownership in a corporation.
W?+, -+B+<4567, 7; 8573E B6D6B+,B8 :F . 37-47-.567, 68 I+88+,56.//F +J06D./+,5 57
. B685-6:0567, 7; 5.2.:/+ B6D6B+,B8K @CIR D& CA' +5& ./&' G&R& N7& 1085"6 B.5+B
1L20L!!A
$f the source of the redeemed shares is the oriinal capital su"scriptions upon
esta"lishment of the corporation or from initial capital investment in an existin
enterprise, its redemption to the concurrent value of ac8uisition would not "e income
"ut a mere return of capital. Hn the other hand, if the redeemed shares are from
stock dividend declarations, the proceeds of the redemption is additional wealth, for it
is not merely a return of capital, and thus, deemed as taxa"le dividends.
>ividends 3aid in 3ro3erty
<ividends paid in securities or other property, in which the earnins of a corporation
have "een invested, are income to the recipients to the amount of the full market
value of such property when receiva"le "y individual stockholders.
A dividend paid in a stock of another corporation is not a stock dividend, even thouh
the stock distri"uted was ac8uired throuh the transfer "y the corporation declarin
the dividends of property to the corporation the stock of which is distri"uted as a
dividend. ')ection .4-, Revenue Reulations .(.
Li;%idatin) dividend
!here a corporation distri"utes all its assets in complete li8uidation or dissolution, the
ain reali7ed or loss sustained "y the stockholder, whether individual or corporation,
is a taxa"le income or deducti"le loss, as the case may "e.
>is)%ised dividends
These are payments which are e8uivalent to dividend distri"ution.
$n the case of excessive payments "y corporations, if such payments correspond or
"ear a close relationship to stockholdins, and are found to "e a distri"ution of
earnins or pro%ts, the excessive payments will "e treated as dividends. ')ection 6-,
Revenue Reulation .(
EXCLSION
2xclusion refers to income received or earned "ut is not taxa"le as income "ecause it
is exempted "y law or "y treaty. )uch tax&free income is not to "e included in the
income tax return unless information reardin it is speci%cally called for.
EXCLSIONS FROM GROSS INCOME
-. ;roceeds from life insurance
.. Amount received "y insured as return of premium
/. Eifts, "e8uests and devises
0. Compensation for in#uries or sickness
4. $ncome exempt under treaty
5. Retirement "ene%ts, pensions, ratuities, etc.
6. $ncome derived "y forein overnment
69
>. $ncome derived "y the ;hilippine Eovernment or its political su"divisions
=. ;ri7es and awards made primarily in reconition of reliious, charita"le, scienti%c,
educational, artistic, literary or civic achievement.
-A. ;ri7es and awards in sports competitions sanctioned "y the national sports
associations
--. -/
th
month pay and other "ene%ts not exceedin ;/A,AAA.AA. Applies "oth to pu"lic
and private employees.
-.. E)$), ))), Medicare and other contri"utions
-/. Eains from the sale of "onds, de"entures or other certi%cate of inde"tedness. 4 eyars
or more. $f maturity is less than 4 years, it is taxa"le.
-0. Eains from redemption of shares in mutual fund. $t must "e emanate from the mutual
fund.
IPROCEEDS OF LIFE INSRANCEK
&%5Cect to tax i4 ?
-. the insurer and insured agreed that the amount of the proceeds shall "e withheld "y the
insurer with the o"liation to pay interest in the same, the interest is the one sub&ect to tax,
.. there is transfer of the insurance policy,
/xaple:
A transferred to @ his life insurance policy. The value of the policy is ;- M. @ paid a
consideration amountin to ;/AA,AAA. @ continued payin the premiums after the transfer
such that the premiums amounted to ;.AA,AAA. Lpon the death of the insured, the ;- M may
"e received "y the heirs.
(& $s the full amount of ;- M exemptR
A& KH, only the consideration iven and the total premiums paid may "e excluded. That is,
;- M less ;4AA,AAA.
)roble:
A o"tained a life insurance policy for @. @ is the president of A+s corporation. Corp.
has an insura"le interest in the life of its oFcers, so premiums may "e paid "y the employer
A. Lpon the death of @, his desinated "ene%ciaries will receive the proceeds.
a. $s the amount representin the proceeds of the life insurance policy taxa"leR
". !hat a"out the premium paid "y the employer AR <oes this amount form part of the
ross compensation incomeR
c. <oes the amount representin the proceeds of life insurance policy from part of the
estate of the decedentR
.ns!ers:
a. :et us %rst make t!o F9G assuptions. :et us assume that*
-. the "ene%ciary desinated is the employer,
.. the "ene%ciary desinated is the heir of the family of the insured.
The Tax 4ode ho!ever, a,es no distinction. Regardless of the designated
benefciary is the eployer or the heirs, or the faily of the insured proceeds of life
insurance policy should al!ays be excluded.
". )reius of life insurance policy paid "y the employer may form part of
compensation income, hence, taxable if the benefciary designated are the heirs or
the faily or the eployees.
$t is not taxable copensation incoe if the designated benefciary is the eployer "ecause
that is #ust a mere return of capital.
70
c. )roceeds of life insurance policy ay be excluded fro the gross estate of the
decedent under the follo!ing cases:
-. if the "ene%ciary desinated is a /
rd
person and the desination is irrevoca"le,
.. it is a proceed of a roup insurance policy.
Iowever, it is included in the gross estate of the decedent:
-. if the "ene%ciary desinated in the estate, executor or administrator of the
estate or the family of heirs of the decedent,
.. if the "ene%ciary desinated is a /
rd
person and the desination is revoca"le
'see )ection >4 1e3(
.s far as #ec. 3H FeG is concerned, an eployer ay be considered a 6
rd
person.
IAMONT RECEIVED B# INSRED AS RETRN OF PREMIMK
Reason for 2xclusion* "t represents a ere return of capital.
The 870-3+8 7; 5?68 -+50-, 7; 4-+<60<1 @L&E&A&A
-. :ife $nsurance ;olicy
.. 2ndowment contracts
/. Annuity contracts
&&&+hether the preius are returned during or at the aturity of the ter entioned in the
contract or upon surrender of thee contract
)roble:
A took out an endowment policy amountin to ;- M. Ie paid premiums amountin to
;>AA,AAA. Lpon the maturity of the policy, A received that ;-M.
Iow much is the taxa"le amountR
.ns!er:
That is ;-,AAA,AAA. Q value of endowment policy
:2))* ; >AA,AAA. Q representin amount of premium
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
; .AA,AAA. Q taxa"le amount
MIGIFTS' BE(ESTS .,B DEVISESK
Rationale* !hat is contemplated here are donations which are purely gratuitous in character
in order that it may "e excluded.

1ifts are excluded "ecause these are su"#ect to donor$s tax.
Be'uests and devises are excluded "ecause these may "e su"#ect to estate
tax.
!hat a"out remuneratory donationsR Reuneratory donations are sub&ect to
incoe tax.
$FC$"T2<H& to the '%le*XXX the income or fruit of such money iven "y donation,
"e8uests or devise, includin the income of this ift, "e8uest or devise in cases of transfer of
divided interest.
MICOMPENSATION FOR IN*RIES OR SIC)NESSK
Reason for 2xclusion* This is #ust an indenifcation for the in&uries or daages su8ered. This
is compensatory in nature.
The so%rces are*
-. The compensation may "e paid by virtue of a suit,
.. $t may "e paid by virtue of health insurance, accident insurance or +or,en$s
4opensation .ct
But as regards daages representing loss of anticipated incoe, this is the one that is
taxable.
"f daages are in the nature of oral, exeplary, noinal, teperate, actual and li'uidated
daages, as a rule, these ay not be sub&ect to tax.
2xample*
$f a person sufered in#ury as a result of a vehicular accident, and an action is %led in
court, the Court awards the followin*
Moral & ;-AA,AAA.
2xemplary & ;-AA,AAA.
71
Actual & ; 5A,AAA. 1hospitali7ation expenses3
; .A,AAA. 1repair of car3
; 5A,AAA. 1loss of income3
MMM .ll daages a!arded are tax-exept except daages of representing loss of incoe.
Zuestion* Are damaes awarded "y the Court on account of "reach of contract taxa"leR
Answer* Zualify your answer. !ith reards to damaes awarded on account of loss of
earnins of the contractin party, it is taxa"le.
.n a!ard for unreali%ed proft or earnings !ould only be taxable if such aounts are
due to loss or daage to property.
IINCOME EXEMPT NDER TREAT#K
Reason for the 2xclusion* Treaty has obligatory force of contract.
$xce3tion? As may "e provided for in the treaty.
'etire*ent 5ene:ts, 3ensions, )rat%ities, etc.
#uch exclusions include:
-. Retirement "ene%ts under RA Ko. 650- or a reasona"le private "ene%t plan
.. Amount received "y an oFcial or employee or "y his heirs from the employer due to
separation form the service "ecause of death, sickness or other physical disa"ility or
for any cause "eyond the control of the oFcial or employee.
/. )ocial security "ene%ts, retirement ratuities, pensions and other similar "ene%ts
received "y residents or non&resident citi7ens or resident aliens form forein
overnment aencies and other institutions, private or pu"lic
0. ;ayment of "ene%ts to a resident person under the Lnited )tates ?eterans
Administration. Recipient must "e a resident veteran.
4. @ene%ts received from or en#oyed under the )ocial )ecurity )ystem
5. @ene%ts received from the Eovernment )ervice $nsurance )ystem, includin
retirement ratuity received "y overnment oFcials and employees.
'e;%isites 4or excl%sion o4 retire*ent 5ene:ts
-. $t must "e received under RA 650- or in accordance with a reasona"le private "ene%t
plan maintained "y the employer. Approved "y the @$R. ;rivate "ene%t plan
esta"lished for the common "ene%t of all employees or oFcials.
.. Retirin employee or oFcial has "een in the service of the same employer for at least
ten 1-A3 years and is not less than %fty 14A3 years of ae at the time of his retirement.
/. @ene%ts ranted under the provision shall "e availed of "y an oFcial or employee
only once. 2xcept if second employer is overnment entity or institutions
'easona5le 3rivate 5ene:t 3lan
$t means a pension, ratuity, stock "onus or pro%t sharin plan maintained "y an
employer for the "ene%t of some or all of his oFcials or employees, or "oth, for the
purpose of distri"utin to such oFcials and employees the earnins and principal of
the fund thus accumulated, and wherein it is provided in said plan that at no time
shall any part of the corpus or income of the fund "e used for, or "e diverted to, any
purpose other than for the exclusive "ene%t of the said oFcials and employees.
&e3aration 3ay and a*o%nts received d%e to invol%ntary se3aration
Any amount received "y an oFcial or employee or "y his heirs from the employer due
to death, sickness or other physical disa"ility or for any cause "eyond the control of
the said oFcial of employee is excluded form ross income.
Ca%se 5eyond the control o4 the e*3loyee
72
The phrase Dfor any cause "eyond the control of the said oFcial or employeeJ
connotes involuntariness on the part of the oFcial or employee. The separation from
the service of the oFcial or employee must not "e asked for or initiated "y him.
')ection ..6>.-, Revenue Reulation .&=>( The separation was not of his own makin.
Resination of an employee is a cause within his control "ut not involuntary
resination.
Ter*inal leave 3ay
$n case of compulsory retirement
Commutation of leave credits or terminal leave pay are iven not only at the same
time "ut also for the same policy considerations overnin retirement "ene%ts. This,
not "ein part of the ross salary or income "ut a retirement "ene%t, terminal pay is
not su"#ect to income tax. 'Commissioner v. Court of Appeals, .A/ )CRA 6.(
Terminal leave pay is exempt form income tax. 'Oialicita case, -=A )CRA >4-(
2nco*e derived 5y a 4orei)n )overn*ent
"ncoe derived fro investents in the )hilippines in loans, stoc,s, bonds or other
doestic securities, or fro interest on deposits in ban,s in the )hilippines by:
-. Corein overnments,
.. Cinancin institutions owned, controlled, or en#oyin re%nancin from forein
overnments, and
/. $nternational or reional %nancial institutions esta"lished forein overnments.
2nco*e 5y the "hili33ine )overn*ent
-. $ncome derived form any pu"lic utility or from the exercise of any essential
overnmental function.
.. Accruin to the Eovernment or to any political su"division thereof.
AMONT OF T$E ACCMLATED SIC) LEAVE AND VACATION LEAVE CREDITS
The oneti%ed value of these benefts ay be sub&ect to tax if these !ill not
for part of the terinal leave pay.
The oneti%ed value of sic, leave credit is al!ays tax exept, if it fors part
of the terinal leave pay.
As reards LKL)2< ?ACAT$HK :2A?2 CR2<$T, this is exempt only if the num"er
of days is -A days or less in excess of -A days, it is already su"#ect to tax.
$f the unused sic, leave beneft is oneti%ed, if the employer allow such
practice, and the same is iven at the end of this year, it is su"#ect to
!ithholding tax "ecause in this case, it does not form part of the terminal
leave pay.
Reason for exemption of terminal leave pay*
The accumulated value of unused sick leave and vacation leave credits
included in the terminal leave pay is exempt from income tax "ecause it is one
received on account of a cause "eyond the control of the employee. This
terminal leave pay is usually iven under a compulsory retirement. Compulsory
retirement is a cause "eyond the control ofte employee.
"rizes and a8ards in reco)nition o4 reli)io%s, charita5le, scienti:c, ed%cational,
artistic, literary or civic achieve*ent
-. Made primarily in reconition of reliious, charita"le, scienti%c, educational, artistic,
literary or civic achievement.
.. The recipient was selected without any action on his part to enter the contest or
proceedin.
/. The recipient is not re8uired to render su"stantial future services as a condition to
receivin the pri7e or award.
"rizes and a8ards in s3orts co*3etitions
73
-. ;ri7es and awards must "e ranted to athletes in local and international sports
competitions and tournaments.
.. )ports competition or tournament held either in the ;hilippines or a"road.
/. )ports competition or tournament must "e sanctioned "y their national sports
associations. $f not accredited Q .AB tax.
DEDCTIONS
IN GENERAL
>ed%ctions
<eductions are items or amounts which the law allows to "e deducted under certain
conditions from ross income in order to arrive at taxa"le income.
>ed%ction v. exe*3tion
<eduction is an amount allowed "y law to "e su"tracted from ross income to arrive
at taxa"le income. 2xemption from taxation is the rant of immunity to particular
persons or corporations or to persons or corporations of a particular class from a tax
which others enerally within the same taxin district are o"lied to pay.
>ed%ction v. excl%sion
<eduction is an amount allowed "y law to "e su"tracted from ross income to arrive
at taxa"le income. 2xclusion refers to income received or earned "ut is not taxa"le as
income "ecause exempted "y law or "y treaty. )uch tax&free income is not to "e
included in the income tax return unless information reardin it is speci%cally called
for. ')ection 5-, Revenue Reulation .(
/asic 3rinci3les )overnin) ded%ctions
-. The taxpayer seekin a deduction must point to some speci%c provisions of the
statute authori7in the deduction, and
.. Ie must "e a"le to prove that he is entitled to the deduction authori7ed or allowed.
Ninds o4 ded%ctions
-. $temi7ed deduction which is availa"le to individual and corporate taxpayers
.. Hptional standard deduction which is availa"le to individual taxpayers only, except a
non&resident alien.
/. )pecial deductions which is availa"le, in addition to the itemi7ed deductions, to
certain corporations, i.e. insurance companies and propriety educational corporations
Ti*e 8ithin 8hich to clai* ded%ction
-. As a rule, if a taxpayer does not, within a year, deduct certain of his expenses, losses,
interests, taxes, or other chares, he cannot deduct them from the income of the next
or any succeedin year.
.. $f he keeps his "ooks on the cash receipts "asis, the expenses are deducti"le in the
year they are paid.
/. $f on the actual "asis, then in the year they are incurred, whether paid or not.
7ho *ay not avail o4 ded%ctions 4or* )ross inco*e9
-. Citi7ens and resident aliens whose income is purely compensation income.
M They are allowed personal and additional exemptions and deduction for premium
payments on
health and hospitali7ation insurance.
.. Kon&resident aliens not enaed in trade or "usiness in the ;hilippines
74
/. Kon&resident forein corporations
DEDCTIONS FROM GROSS INCOME
-. 2xpenses
.. $nterest
/. Taxes
0. :osses
4. @ad de"ts
5. <epreciation
6. <epletion of oil and as wells and mines
>. Charita"le and other contri"utions
=. Research and development
-A. ;ension trusts
--. ;remium payments on health andGor hospitali7ation insurance of an individual
taxpayer
&o*e r%les on ded%ction
$temi7ed deduction may apply to corporate tax payer as well as individual taxpayer.
A corporation may avail only of the deduction from 1-3 to 1-A3* premium payments on
health andGor hospitali7ation insurance is deducti"le only "y an individual taxpayer.
A corporation may avail only of the itemi7ed deductions* an individual, except a non&
resident alien, may elect the itemi7ed deductions or the optional standard deduction.
Thus, the optional standard deduction is not availa"le to corporations.
An individual earnin purely compensation income is not allowed itemi7ed deductions,
except premium payments on health andGor hospitali7ation insurance. $n addition, he
is also ranted personal and additional exemptions.
An individual, who earns income other than purely compensation income, is allowed
personal additional exemptions in addition to the itemi7ed deductions or the optional
standard deductions.
T8o Linds o4 ded%ction availa5le to individ%als, exce3t a non-resident alien
-. $temi7ed deduction
.. Hptional standard deduction
N75+1 Hptional standard deduction is not availa"le to corporations.
ORDINAR# AND NECESSAR# BSINESS EXPENSES
/%siness ex3ense v. ca3ital ex3enses
@usiness expenses refer to all the ordinary and necessary expenses paid or incurred
durin the taxa"le year in carryin on or which are directly attri"uta"le to the
development, manaement, operation andGor conduct of the trade, "usiness or the
exercise of a profession.
Capital expenses are expenditures for extraordinary repairs which are capitali7ed and
su"#ect to depreciation. These are expenses which tend to increase the value or
prolon the life of the taxpayer+s property.
<rdinary and necessary ex3enses
75
An expense is ordinary when it is commonly incurred in the trade or "usiness of the
taxpayer as distinuished from capital expenditures. The payments, however, need
not "e normal or ha"itual in the sense that the taxpayer will have to make them often.
The payment may "e uni8ue or non&recurrin to the particular taxpayer afected.
An expense is necessary when it is appropriate and helpful to the taxpayer+s "usiness
or if it is intended to reali7e a pro%t or to minimi7e a loss.
<'>2H#'G U H$C$&&#'G $F"$H&$&
X !hen we speak of HR<$KARP, this simply refers to the expenses which are normal, usual
or common to the "usiness, trade or profession of the taxpayer. This may not "e recurrin.
/xaple* if an action is %led in court, it is "ut normal to hire the services of a "lawyer. )o, the
taxpayer has to pay attorney+s fees. $t is an ordinary expense under this circumstances.
K2C2))ARP& $t is one which is useful and appropriate in the conduct of the taxpayer+s trade
or profession.
ORDINAR# N NECESSAR# EXPENSES
&are those which are incurred or paid in the development, operation manaement of the
"usiness, trade or profession of the taxpayer.
2NTRA&HR<$KARP 2N;2K)2) Q Hot >ed%cti5le. These are amorti7ed or in lieu of the same,
you may claim that so&called allowance for depreciation. And if it involves intani"le asset,
the word used is AMHRT$OAT$HK.
There is no hard and fast rule. .n expense ay be ordinary insofar as a
particular taxpayer is concerned and it ay not be an ordinary as
regards another taxpayer.
2xample*
$f you have "usiness here in Manila and you also have "usiness in Tawi&tawi, what is
the expense that you may incur in Tawi&tawi which you may not possi"ly incur in ManilaR
$n Tawi&tawi, you may need people to uard your "usiness. @ut here in Manila, you
may need not "ecause of our new ;resident&elect.
)INDS OF ORDINAR# N NECESSAR# EXPENSES %C&A&R&T&E&R&S&O
-. Compensation for services rendered
.. Advertisin T promotional expenses
/. Rent expenses
0. Travellin expenses
4. 2ntertainment expenses
5. Repairs T maintenance expenses
6. )upplies and materials
R+J06865+8 ;7- B+B0356:6/65F 7; :086,+88 +24+,8+
-. The expense must "e ordinary and necessary.
.. $t must "y paid or incurred durin the taxa"le year.
/. $t must "e paid or incurred in carryin on any trade or "usiness or profession.
0. $t must "e reasona"le in amount
4. $t must "e su"stantiated "y suFcient evidence such as oFcial receipts and other
oFcial records.
5. $t must not "e aainst the law, morals, pu"lic policy or pu"lic order.
&%5stantiation re;%ire*ent 4or 5%siness ex3ense
Taxpayer needs to su"stantiate with suFcient evidence such as oFcial receipts or
other ade8uate records*
-. The amount of the expense "ein deducted, and
76
.. The direct connection or relation of the expense "ein deducted to the development,
manaement, operation andGor conduct of the trade, "usiness or profession of the
taxpayer.
7hat are incl%ded in 5%siness ex3enses9
@usiness expenses include*
-. )alaries, waes and other forms of compensation for personal services actually
rendered, includin the rossed&up monetary value of frine "ene%t ranted provided
the frine "ene%t tax has "een paid.
.. Travel expenses, here and a"road, while away from home.
/. Rentals anGor other payments of property to which the taxpayer has not taken or is
not takin title or in which he has no e8uity other than that of a lessee, user or
possessor.
0. 2ntertainment, amusement and recreation expenses.
'e;%isites 4or ded%cti5ility o4 co*3ensation 3ay*ents
-. The payments are reasona"le.
.. They are, in fact, payments for personal services actually rendered. ')ection 6A,
Revenue Reulation .(
Treat*ent o4 excessive co*3ensation
$n the case of excessive payments "y corporations, if such payments correspond or
"ear a close a relationship to stockholdins, and are found to "e distri"ution of
earnins or pro%ts, the excessive payments will "e treated as dividends. ')ection 6-,
Revenue Reulations .(
$f such payments constitute payment for property, they should "e treated "y the
payor as capital expenditure and "y the recipient as part of the purchase price.
')ection 6-, Revenue Reulations .(
'e;%isites 4or ded%cti5ility o4 5on%ses to e*3loyees
-. The "onuses are made in ood faith
.. They are iven for personal services actually rendered.
/. They do not exceed a reasona"le compensation for the services rendered, when
added to the stipulated salaries, measured "y the amount and 8uality of services
performed in relation to the taxpayer+s "usiness. ')ection 6., Revenue Reulations .(
$n )0+,=/+ D& CIR '.> )CRA /54( and C&M& $78E6,8 D& CIR '/A )CRA 0/0(, the
)upreme Court disallowed deductions for "onuses iven to the top oFcers of the
involved corporations "ein unreasona"le.
"ensions and co*3ensation 4or inC%ries
Amounts paid for pensions to retired employees or to their families or others
dependent upon them, or on account of in#uries received "y the employee, and lump
sum amounts paid or accrued as compensation for in#uries are proper deductions as
ordinary and necessary expenses. )uch deductions are limited to the amount not
compensated for "y insurance or otherwise.
'%les on re3airs
2xpenses for repairs are deducti"le if such repairs are incidental or ordinary, that is,
made to keep the property used in the trade or "usiness of the taxpayer in an
ordinarily eFcient operatin condition.
Repairs in the nature of replacement to the extent that they arrest deterioration and
prolon the life of the property are capital expenditures and should "e de"ited aainst
the correspondin allowance for depreciation. ')ection 5>, Revenue Reulations .(
& @nly ordinary or inor repairs are deductible.
77
- /xtra-ordinary repairs cannot be claied as deduction and in lieu of that, the taxpayer may
"e allowed to claim depreciation.
- "f the cost of the repair increases the life of an asset for a period of ore than one FAG year,
that amount is considered extra&ordinary repair. @ther!ise, it is considered ordinary repair.
Travel ex3enses
Travel expenses include transportation expenses and meals and lodin of an
employee paid for the "y employer. ')ection 55, Revenue Reulations .(
& This must "e incurred or paid !hile La!ay fro hoe.
& L-oe does not refer to your residence "ut to the station assinment or post.
/xaple: Crom home oFce to "ranch oFce, the travelin expenses incurred are
deducti"le. And this includes not only the transporatiotion expenses "ut also meal allowance
and hotel accommodations.
'e;%isites 4or ded%cti5ility o4 travel ex3enses
-. The expenses must "e reasona"le and necessary.
.. They must "e incurred or paid Dwhile away from home.J
/. They must "e paid or incurred in the conduct of trade or "usiness.
Tax ho*e
Tax home is the principal place of "usiness, when referrin to Daway from home.J
RENTAL EXPENSE
A reasona"le allowance for rentals andGor other payments which are re8uired as a
condition for the continued use or possession, for purposes of the trade, "usiness or
property to which the taxpayer has not taken of is not takin title or in which he has
no e8uity other than that of a lesee, user or prossessor is deducti"le from the ross
income.
!here a leasehold is ac8uired for "usiness purposes for a speci%ed sum, the
purchaser may take as a deduction in his return an ade8uate part of such sum each
year, "ased on the num"er of years the lease has to run.
Taxes paid "y a tenant to or for a landlord for "usiness property are additional rent
and constitute a deducti"le rent to the tenant and taxa"le income to the landlord, the
amount of tax "ein deducti"le "y the latter.
The cost "orne "y the lessee in erectin "uildins or makin permanent
improvements on round of which he is a lessee is held to "e a capital investment and
not deducti"le as a "usiness expense.
'e;%isites 4or rental ex3ense
-. Re8uired as a condition for continued use or possession
.. Cor purposes of the trade, "usiness or profession
/. Taxpayer has not taken or is not takin title to the property or has no e8uity other
than that of a lessee, user or possessor.
$ntertain*ent, a*%se*ent and recreation ex3enses
-. Reasona"le in amount
.. $ncurred durin the taxa"le period
78
/. <irectly connected to the development, manaement, and operation of the trade,
"usiness, or profession of the taxpayer, or that are directly related to or in furtherance
of the conduct of his or its trade, "usiness or profession
0. Kot to exceed such ceilins as the )ecretary of Cinance may, "y rules and reulations,
prescri"e
4. Any expense incurred for entertainment, amusement or recreation which is contrary
to law, morals, pu"lic policy, or pu"lic order shall in no case "e allowed as a deduction
& Ience, bribes, ,ic,bac,s, and siilar payents are not deductible.
&Also, the expenses incurred "y the taxpayer in entertainin ov+t oFcials in 4&star
hotel to ain
political in9uence are not deducti"le.
<3tion to 3rivate ed%cational instit%tions
$n addition to the allowa"le deductions, a private educational institution may, as its
option, elect either*
-. To deduct expenditures otherwise considered as capital outlays of deprecia"le assets
incurred durin the taxa"le year for the expansion of school facilities, or
.. TH deduct allowance for depreciation thereof.
TREATMENT OF OT$ER EXPENSES
9.<7-. D& C7//+357- SCRA 163 Q ;romotion expense held to constitute an ordinary
and "usiness expense
1. #dvertisin) ex3ense
M Kot deducti"le "usiness expense. 2forts to esta"lish reputation are akin to
ac8uisition of capital assets and, therefore, expenses related thereto are not "usiness
expense "ut capital expenditures.
(. "ro*otional ex3enses
)ame advertisin expense
3. Liti)ation ex3enses
M :itiation expenses that are incurred in the defense or protection of title are capital
in nature and not deducti"le.
$n G0656+--+8 D& CIR '-0 )CRA /0(, it was held that litiation expenses defrayed "y a
taxpayer to collect apartment rentals and to e#ect delin8uent tenants are ordinary and
necessary expenses in pursuin his "usiness.
INTEREST EXPENSE
2nterest
The amount of interest paid or incurred within a taxa"le year on inde"tedness in
connection with the taxpayer+s profession, trade or "usiness shall "e allowed as
deduction from ross income.
/acL-to-5acL interest
The taxpayer+s allowa"le deduction for interest expense shall "e reduced "y an
amount e8ual to />B "y A- January .AAA of the interest income earned "y him which
has "een su"#ected to a %nal tax.
2nterest 8hich cannot 5e ded%cted
-. $nterest is paid in advance throuh discount or otherwise "y an individual taxpayer
reportin income on the cash "asis. )uch interest shall "e allowed as a deduction in
the year the inde"tedness is paid.
.. $nterest "etween related taxpayers.
79
/. $f the inde"tedness is incurred to %nance petroleum exploration.
0. $nterest expense on preferred stock
4. !hen there is no areement in writin to pay interest
5. $nterest paid for cost cuttin purposes
6. $nterest on unclaimed salary
RE(ISITES FOR DEDCTIBILIT#
-
.
This must "e paid or incurred <LR$KE the taxa"le year.
.
.
This must "e paid or incurred in connection with the trade, "usiness or
profession of the taxpayer
/
.
There must "e an o"liation which is valid and su"sistin.
0
.
There must "e an areement in writin to pay interest.
Zuestion -*
!hat a"out that interest on unclaimed salaries of the employees, is that interest
deductionsR
AnswerGIeld*
KH, "ecause there is no o"liation or inde"tedness. $t is the fault of the employees in
case they failed to claim their salaries.
Zuestion .*
!hat a"out that interest chared to the capital of the taxpayer, is that deducti"leR
Answer*
$nterest on cost&keepin purposes is not deducti"le. This does not arise under an
interest&"earin o"liation.
TK$<'$T2C#L 2HT$'$&T O an interest which is computed or calculated, not paid or
incurred, for the purposes of determinin the opportunity cost of investin in a "usiness. This
does not arise from leally demanda"le interest&"earin o"liation. This is not a deductible
interest.
Zuestion /*
!hat a"out interest on preferred stock, is this deducti"leR
Answer*
As a rule, interest on 3re4erred stocL is not ded%cti5le, "ecause there is no
o"liation to speak of. $t is in efect an interest on dividend. The reason why it is not
deducti"le is that the payment is dependent upon the pro%ts of the corp. $t will only "e paid if
the corp. earn pro%ts. And would not "e paid of the corp. incurs losses.
/0T i4 it is not de3endent %3on cor3orate 3ro:ts or earnin)s, that is
ded%cti5le. $f is paya"le on a particular on a particular date or maturity without reard to
the corporate pro%ts, it is deducti"le.
The #upree 4ourt entions T+@ F9G ;.4T@R#:
-. not dependent upon corporate pro%ts, and
.. areement as to the date or term within which payment will "e made.
2HT$'$&T <H 6<VIT &$C0'2T2$& is no8 taxa5le.
)o, if the taxpayer o"tained a loan from ;K@ and used the proceeds in purchasin ov+t
securities, the interest is now taxa"le. :ikewise, the interest expense paid on that loan, the
proceeds of the same, had "een use to purchase ov+t securities is now deducti"le.
(& !hat a"out an interest on a loan paid in advance, is this deducti"leR :et us say that the
taxpayer o"tained a loan from a "ank and it is paya"le within 4 years. The loan o"tained is
;4A,AAA.AA. Kow, it was deducted in advance, can that "e claimed as deductionsR
A& KH. Pou can only deduct the same when the installment is due a particular year.
<3tional treat*ent o4 interest ex3ense
80
At the option of the taxpayer, interest incurred to ac8uire property used in trade,
"usiness or exercise of a profession may "e allowed as a deduction or treated as a
capital expenditure.
>elin;%ency interest on tax 3ay*ent ded%cti5le
Cor interest to "e allowed as deduction from ross income, it must "e shown that
there "y an inde"tedness, that there should "e interest upon it, and that what is
claimed as an interest deduction should have "een paid or accrued within the year.
The term Dinde"tednessJ has "een de%ned as an unconditional and leally
enforcea"le o"liation for the payment of money. !ithin the meanin of that
de%nition, a tax may "e considered as an inde"tedness. Ience, interest paid for late
payment of the donor+s tax in deducti"le from ross income. 'C7<<68867,+- D&
P-6+57' -A= ;hil 4=.(
INTEREST EXPENSES W$IC$ ARE NON-DEDCTIBLE %PARCAPO
-. $nterest expense on ;R2C2RR2< )THCV,
.. !hen there is KH AER22M2KT in writin to pay interest,
/. $nterest expense on loan entered into "etween R2:AT2< TAN;AP2R).
0. $nterest paid or calculated for CH)T&V22;$KE ;LR;H)2)
4. $nterest paid in A<?AKC2
5. $nterest on o"liation to %nance ;2TRH:2LM 2N;:HRAT$HK
6. $nterest on LKC:A$M2< )A:AR$2) of the employees
'elated tax3ayers:
a. ebers of the sae faily !hich includes:
a.-. spouses
a... "rothers and sisters
a./. descendants and ascendants
". bet!een t!o F9G corporations o!ned or controlled by one individual. Ie must have
a controllin interest over these two corporations. HR, if one corp. is considered as
personal holdin company of another corp.
c. bet!een a corp. and an individual> that individual o!ns or controls ore than HEO
of the outstanding capital stoc, of the such corp.
d. parties to a trust,
d.-
.
rant or %duciary
d..
.
%duciary of one trust and %duciary of another trust "ut there is only
one rantor
d./
.
"ene%ciary and %duciary
MPour knowlede of related taxpayers is also important in determinin
whether losses are deducti"le or not. "f losses !ere incurred or paid in
connections !ith the transactions bet!een these related taxpayers, these
are not deductible.
Zuestion* Iow much interest expense is deducti"leR
Answer* The interest that may "e claimed as deductions shall "e reduced
"y*
a. 0-B & @einnin January -, -==>
". /=B & @einnin January -, -===
c. />B & @einnin January -, .AAA of the income su"#ect to
%nal tax.
/<.=)(/ @; "N4@=/ #KBR/4T T@ ;"N.( T.<:
-. interest on "ank deposit
.. interest on deposit maintained under the forein currency deposit system
)o, if the interest income on "ank deposit amounted to ;-AA,AAA.AA. And the total interest
expense incurred or paid "y the taxpayer is ;.AA,AAA.AA. $f this is incurred in -==>, 0-B of
;-AA,AAA.AA is ;0-,AAA.AA. That ;.AA,AAA.AA interest expense incurred or paid, should "e
81
reduced to ;0-B of that ;-AA,AAA.AA to arrive at ;-4=,AAA.AA which is the interest that may
"e claimed as deduction.
;.AA,AAA.AA
& 0-,AAA.AA
&&&&&&&&&&&&&&&&&&&&&&&
;-4=,AAA.AA
The rule has "een esta"lished that T.</# are N@T @R0"N.RJ @B("1.T"@N#. @ut the
#upree 4ourt in t!o F9G cases relaxed the distinction bet!een taxes and ordinary
obligations.
-. The interest on de:ciency donorIs tax is ded%cti5le. The )C explained that
taxes here are considered o"liations or inde"tedness. And it ruled that we have
to relax the distinction "etween tax and ordinary o"liation in this respect.
.. 2nterest on de:ciency inco*e tax can also 5e clai*ed as ded%cti5le
interest ex3ense "ecause taxes here are considered ordinary o"liations.
TAXES
7hat taxes are ded%cti5le9
As a eneral rule, all taxes, national or local, paid or incurred with the taxa"le year in
connection with the taxpayer+s trade, "usiness or profession are deducti"le from ross
income.
Taxes means taxes proper and, therefore, no deductions are allowed for amounts
representin interest, surchares and %nes or penalties incident to delin8uency.
7hat taxes are not ded%cti5le 4ro* )ross inco*e9
-. ;hilippine income tax
.. $ncome taxes imposed "y the authority of any forein country "ut deduction is
allowed only in the case of a taxpayer who is entitled to tax credit for taxes of forein
countries "ut does not avail of the same.
/. 2state and donor+s taxes
0. )pecial assessments or levies assessed aainst local "ene%ts of a kind tendin to
increase the value of the property assessed.
'$Q02&2T$& F<' >$>0CT2/2L2TG*
-. This must "e paid or incurred durin the taxa"le year.
.. This must "e taxes paid or incurred in connection with the trade, "usiness or profession of
the taxpayer.
MMM Taxes that ay be claied as deductions ay be national or local taxes.
TK$ F<LL<72H6 #'$ H<H->$>0CT2/L$ T#F$& %S&I&N&EO
-. #)/4".( .##/##=/NT Q tax imposed on the improvement of a parcel of land
.. "N4@=/ T.< Q This includes forein income tax. $n this reard, the so&called
forein income tax may "e claimed as a deduction from ross income or this
may "e claimed as tax credit aainst ;hil. income tax. $n the event that he
claims that as tax credit, he can no loner claim the same as deduction.
/. Taxes which are N@T 4@NN/4T/0 +"T- T-/ TR.0/, BK#"N/## @R )R@;/##"@N
@; T-/ T.<).J/R
0. /#T.T/ T.<, 0@N@R$# T.< 1see also discussion on tax "ene%t rule3
T#F #& >$>0CT2<H& vs. T#F C'$>2T
Taxes as deductions may "e claimed as deductions from ross income.
Tax credit is a deduction from ;hil. income tax.
Tax as deduction includes those taxes which are paid or incurred in connection
with the trade, "usiness or profession of the taxpayer. Iowever, the sources of
a tax credit is forein income tax paid, war pro%t tax, excess pro%t tax paid to
the forein country.
82
The forein income tax paid to the forein country is not always the amount
that may "e claimed as tax credit "ecause under the limitation provided under
the Tax Code, it must not "e more than the ratio of forein income to the total
income multiplied "y the ;hil. income tax.
Taxes are deducti"le only "y the person upon whom the tax is imposed
/xcept:
-. )hare holder
.. corporate "onds & tax free Covenant clause
The 4ollo8in) are entitled to clai* tax credit?
-.RC .. <C
Tax s%5se;%ently re4%nded or credited
Taxes previously allowed as deductions, when refunded or credited, shall "e included
as part of ross income in the year of receipt to the extent of the income tax "ene%t
of said deduction.
Li*itations on ded%ctions 4or non-resident alien en)a)ed in trade or 5%siness and
resident 4orei)n cor3oration
$n the case of a non&resident alien individual enaed in trade or "usiness in the
;hilippines and a resident forein corporation, deductions for taxes shall "e allowed
only if and to the extent that they are connected with income from sources within the
;hilippines.
TAX CREDIT
Tax credit refers to the taxpayer+s riht to deduct from the income tax due the amount
of tax he has paid to a forein country su"#ect to limitations.
Tax ded%ction v. tax credit
$n the former, the taxes are deducted from the ross income in computin the net
income, while in the latter, the taxes are deducted from ;hilippine income tax itself.
$n the former, all taxes as a eneral rule, are allowed as deductions with some
exemptions 1enumerated a"ove3, while in the latter, only forein income taxes may "e
claimed as credits aainst ;hilippine income tax.
"roo4 o4 credits
The credit shall "e allowed only if the taxpayer esta"lishes to the satisfaction of the
Commissioner the followin*
-. The total of income from sources without the ;hilippines
.. The amount of income derived from each country, the tax paid or incurred to which is
claimed as a credit, and
/. All other information necessary for the veri%cation and computation of such credits.
Credit a)ainst tax 4or taxes o4 4orei)n co%ntries
Credit may "e claimed "y a citi7en, domestic corporation, mem"er of eneral
professional partnerships, and "ene%ciaries of estates and trusts.
An alien individual and a forein corporation are not allowed to claim credits aainst
the tax for taxes of forein countries.
Li*itations on credit
The amount of the credit taken shall "e su"#ect to each of the followin limitations*
-. The amount of the credit in respect to the tax paid or incurred to any country shall not
exceed the same proportion of the tax aainst which such credit is taken, which the
taxpayer+s taxa"le income from sources within such country "ears to his entire
taxa"le income for the same taxa"le year, and
83
.. The total amount of the credit shall not exceed the same proportion of the tax aainst
which such credit is taken, which the taxpayer+s taxa"le income form sources without
the ;hilippines taxa"le under this Title "ears to his entire taxa"le income for the same
taxa"le year.
LOSSES
Losses
The term implies an unintentional partin with somethin of value.
$t is used in the income tax law in a very "road sense to comprehend all losses which
are not eneral or natural to the ordinary course of "usiness.
'e;%isites 4or ded%cti5ility o4 loss
-. The loss must "e incurred in the trade, "usiness or profession of the taxpayer.
.. $t must "e actually sustained and chared of within the taxa"le year.
/. $t must "e evidenced "y a closed and completed transaction
C7<4/+5+B T-.,8.3567, this means that the loss must "e %xed "y identi%a"le
event.
/xaple* $f it is a loss sustained from sale, the event that may identify or
complete the transaction is the consummation of the contract of sale.
)uppose it is in the nature of casualty losses like %reR
The %re destroyed your property in -==4, no payment has "een made "ecause
the insurer and the insured were still under neotiation. $t was only in -==6 that
they areed on the amount. The amount arees upon is ;-AA,AAA. The taxpayer
may claim that casualty losses only in -==6 when payment was actually made.
This is the event that will complete the transaction.
0. $t must not "e compensated for "y insurance or other forms of indemnity.
4. $f it is a casualty loss, the taxpayer has %led a sworn declaration of loss within 04 days
after the date of the discovery of the casualty or ro""ery, theft, or em"e77lement.
&o*e reco)nized losses
-. Hrdinary lossesG"usiness losses Q sustained in the course of trade, "usiness or
profession
.. Casualty losses
/. Capital losses Q involved are capital assets.
0. )ecurities "ecomin worthless
4. :osses from wash sales of stock or securities
5. !aerin losses
N75+1 Capital losses and securities "ecomin worthless are overned "y rules on loss from
the sale or exchane of capital assets.
Cas%alty loss
This must "e reported to the @$R earlier than /A days "ut not later than 04 days
followin the date of loss.
:oss arises from %res, storms, shipwreck, or other casualties, or from ro""ery, theft or
em"e77lement.
Loss li*itation r%le 4or ca3ital losses
:osses from sales or exchanes of capital assets shall "e allowed only to the extent of
the ains from such sales or exchanes.
84
&ec%rities 5eco*in) 8orthless
-. )ecurities "ecome worthless durin the taxa"le year
.. )ecurities are capital assets
/. :osses are considered as losses from the sale or exchane, on the last day of such
taxa"le year, of capital assets.
Het o3eratin) loss
$t means the excess of allowa"le deduction over ross income of the "usiness in a
taxa"le year.
NET OPERATING LOSS CARR#-OVER @NOLCOA
KH:CH shall "e carried over as a deduction from the ross income for the next three
1/3 consecutive taxa"le years immediately followin the year of loss.
)uch loss shall "e allowed as a deduction if it had not "een previously ofset as
deduction from ross income.
Iowever, any net loss incurred in a taxa"le year durin which the taxpayer was
exempt from income tax shall not "e allowed as a deduction
KH:CH shall "e allowed only if there has "een no su"stantial chane in the ownership
of the "usiness or enterprise.
There is no su"stantial chane when*
-. Kot less than 64B in nominal value of outstandin issued shares, if the
"usiness is in the name of a corporation, is held "y or on "ehalf of the same
persons, or
.. Kot less than 64B of the paid up capital of the corporation, if the "usiness is in
the name of a corporation, is held "y or on "ehalf of the same persons.
Losses 4or* 8ash sales o4 stocL or sec%rities
Ko deduction for loss shall "e allowed for wash sales unless the claim is made "y a
dealer in stock or securities and with respect to a transaction made in the ordinary
course of the "usiness of such dealer.
WAS$ SALE
A wash sale occurs where it appears that within a period "einnin thirty 1/A3 days
"efore the date of the sale or disposition of shares of stock or securities and endin
thirty 1/A3 days after such date, the taxpayer has ac8uired 1"y purchase or exchane3
or has entered into a contract or option to so ac8uire, su"stantially identical stock or
securities.
7a)erin) losses
:osses from waerin shall "e allowed only to the extent of ains form such
transactions.
The amount that is deducti"le must not exceed the ains
#5andon*ent losses
$n the event a contract area where petroleum operations are undertaken is partially or
wholly a"andoned, all accumulated exploration and development expenditures
pertainin thereto shall "e allowed as a deduction.
$n case a producin well is su"se8uently a"andoned, the unamorti7ed costs thereof,
as well as the undepreciated costs of e8uipment directly used therein, shall "e
allowed as a deduction in the year such well, e8uipment or facility is a"andonment "y
the contracto.
&"$C2#L L<&&$& Q incl%de the 4ollo8in):
a. loss arising fro voluntary reoval of buildings as an incident to rene!al or replaceent
85
;ro"lem*
)upposed the taxpayer had a "uildin constructed on a parcel of land. Ie
owned this as well as the "uildin erected thereon. Ie had "usiness and his
"usiness was conducted within the premises. Then, he decided to remove
such "uildin as to construct a new "uildin for new "usiness.
$s the cost of demolition to ive way to a new "uildin deducti"le lossR
#ES&
)uppose A purchased that parcel of land of @ and included in that sale was
that of the "uildin. A demolish this "uildin in order to construct a new
"uildin. $s the cost of demolition deducti"le insofar as A is concernedR
NO& That can only "e claimed as deductions if the one demolishin the
same is the taxpayer. The moment that is sold to another claim that as
deducti"le loss. The treatment here is, the cost of demolition should "e
capitali7ed in the sellin price.
E23+4567,*A may claim that as deducti"le loss if this was demolished "y
value of a court order "ecause the ov+t considered this as a %re ha7ard,
loss of useful value of property or capital asset.
BAD DEBTS
/ad >e5ts
@ad de"ts are de"ts due to the taxpayer which are actually ascertained to "e
worthless and chared of within the taxa"le year.
'e;%isites 4or ded%cti5ility o4 5ad de5ts
-. There must "e a valid and su"sistin de"t.
.. The de"t must "e actually ascertained to "e worthless and uncollecti"le durin the
taxa"le year.
/. The de"t must "e chared of durin the taxa"le year.
0. The de"t must "e connected with the trade, "usiness or profession of the taxpayer,
and not sustained in a transaction entered into "etween related taxpayers.
2)R4 v. 4. 9HC #4R. CCD*
K<7 T< "'<V$ TK$ 7<'TKL$&&H$&& <F </L26#T2<H?
.ccording to the #upree 4ourt, the follo!ing #T/)# ust be coplied*
-. There must "e a statement of account sent to the de"tor,
.. A collection letter,
/. $f he failed to pay, refer the case to a lawyer,
0. $f lawyer may send a demand letter to the de"tor,
4. $f the de"tor still fails to pay the same, %le an action in court for collection.
"n proving that the debtor is insolvent of ban,rupt, mere alleation of the same
is not enouh. Pou should prove that the de"tor is indeed "ankrupt or insolvent.
)o, you may secure a copy of that decision by the #/4 or other aency as the
case may "e, declarin the de"tor as "ankrupt or insolvent. And then there must
"e a demand letter sent to him. "n case the debtor !as robbed, there must "e a
police report to that efect.
The debtor ay be a NR;4, so you may arue that he may not "e sued here.
Accordin to the )upreme Court, as a rule that is not an excuse. Pou should still
send a deand letter to that NR;4. $n other words, there ust be diligent e8orts
to collect the indebtedness and to prove that in the near future such obligation
is no longer collectible.
MMM "f the recovery of bad debts, resulted in a tax beneft to the taxpayer, that is
taxa"le. "f it did not result in any tax beneft to the taxpayer, that is not taxa"le.
@TAX BENEFIT RLEA
K.@
.
Read the case of )hil. Refning 4opany vs. 4oissioner, a -=>= case.
86
>ili)ent e=orts to collect
$n addition to the four re8uisites, the taxpayer must show that the de"t is indeed
uncollecti"le even in the future.
Curthermore, there are steps outlined to "e undertaken "y the taxpayer to prove that
he exerted dilient eforts to collect the de"ts, vi7* a3 sendin of statement of
accounts, "3 sendin of collection letters, c3 ivin the account to a lawyer for
collection, and d3 %lin a collection case in court. 'P?6/6446,+ R+G,6,> C7& D& C70-5
7; A44+./8' .45 )CRAAa 556(
E(ITABLE DOCTRINE OF TAX BENEFIT@TAX BENEFIT RLEA
This doctrine holds that a recovery of "ad de"t previously deducted from ross
income constitutes taxa"le income if in the year that account was written of, the
deduction resulted in a tax "ene%t, that is, in the reduction of taxa"le income of the
taxpayer.
DEPRECIATION
<epreciation is the radual diminution in the useful value of tani"le property used in
trade, "usiness or profession resultin from exhaustion, wear and tear, and
o"solescence.
The term is also applied to amorti7ation of the value of intani"le assets, the use of
which in trade or "usiness is de%nitely limited in duration.
The income tax law does not authori7e the depreciation of an asset "eyond its
ac8uisition cost. Ience, a deduction over and a"ove the cost cannot "e claimed and
allowed. 'B.86/., D& CIR' .- )CRA -6(
The idea here is not to recover proft, but to recover the cost of property invested in
business. !hen the properties are used in trade, "usiness or profession of the taxpayer, the
law considers or reconi7es the radual loss or sale of property.
>e3reciation is a ;%estion o4 4act
<epreciation is a 8uestion of fact and is not measured "y a theoretical yardstick, "ut
should "e determined "y a consideration of actual facts.
'e;%isites 4or the ded%cti5ility o4 de3reciation
-. The allowance for depreciation must "e reasona"le.
.. $t must "e for property used in the trade, "usiness, or profession.
/. $t must "e chared of durin the taxa"le year.
0. A statement of the allowance should "e attached to the return.
'$Q02&2T$& F<' >$>0CT2/2L2TG? % P R A C O
-. The property must "e used in trade, business or profession of the taxpayer,
.. There must "e depreciable properties.
The non-de3recia5le 3ro3erties are
a. ;ersonal property not used in trade, "usiness or profession of the
taxpayer,
". $nventoria"le stock and securities
c. :and
d. Minin and other natural resources
/. The allo!ance for depreciation ust be reasonable
0. The ethod in coputing the allowance for depreciation must "e in
accordance !ith the ethod prescribed "y the )ec. of Cinance upon the
recommendation of the @$R Commissioner.
This 3rescri5ed *ethod incl%des*
a. <eclinin "alance method
". )um of the years diit method
c. )traiht line method
d. Any other method as may "e prescri"ed "y the )ec. of Cinance upon the
87
recommendation of the @$R Commissioner
4. This must "e charged o8 during the taxable year.
>ed%ction 4or o5solescence
$f the whole or any portion of the physical property is clearly shown "y the taxpayer as
"ein afected "y economic conditions that will result in its "ein a"andoned at a
future date prior to the end of its natural life, so that depreciation deductions alone
would "e insuFcient to return the cost at the end of its economiv terms of usefulness,
reasona"le deduction for o"solescence, in addition to depreciation, may "e allowed.
"ro3erty held 4or li4e
$n case of property held "y one person for life with remainder to another person, the
deduction, shall "e computed as if the life tenant were the a"solute owner of the
property and, shall "e computed as such to the life tenant.
2n case o4 3ro3erty held in tr%st
Allowa"le deductions shall "e apportioned "etween the income "ene%ciaries and the
trustees in accordance with the pertinent provisions of the instrument creatin the
trust, or in the a"sence of such provisions, on the "asis of the trust income allowa"le
to each.
Certain *ethods in co*3%tin) de3reciation
-. The straiht line method Q 28ual depreciation per unit of time, reardless of use or
production output of the property.
.. <eclinin "alance method Q Amount of depreciation is su"tracted annually from the
cost of the property and the rate then only applied to the resultin "alance.
/. )um of the year diit method Q application of a chanin fraction to the taxpayer+s
cost "asis for the property, reduced "y the estimated residual salvae value.
0. Lnit of work or unit of production method Q A provision is made for e8ual depreciation
per unit of use reardless of the lapse of time.
4. Jo" "asis method Q The allowance is computed as "ein e8ual to the diference
"etween the cost of depreciation of the asset purchased for a particular #o", and the
salvae value at the end of the #o".
5. Retirement method Q The cost of the property retired each year is credited to the
capital asset account and less net salvae value actual or estimated. Chared to
expense in lieu of an annual provision for depreciation deductions.
6. )uch other methods as may "e allowed "y the )ec. of Cinance upon recommendation
"y the Commissioner.
#)ree*ent as to %se4%l li4e on 8hich de3reciation rate is 5ased
!here the taxpayer and the commissioner have entered into an areement in writin,
speci%cally dealin with the useful life and rate of depreciation of any property, the
rate so areed upon shall "e "indin on "oth the taxpayer and the Kational
Eovernment in the a"sence of facts and circumstances not taken into consideration
durin the adoption of such areement. The responsi"ility of esta"lishin the
existence of such facts and circumstances shall rest with the party initiatin the
modi%cation.
!here the taxpayer has adopted such useful life and depreciation rate for any
deprecia"le asset and claimed the depreciation expenses as deduction from his ross
income without any written o"#ection on the part of the commissioner or his duly
authori7ed representative, the aforesaid useful life and depreciation rate so adopted
shall "e considered "indin.
>e3reciation o4 3atent and co3yri)ht
$n computin a depreciation allowance in the case of a patent or copyriht, the capital
sum to "e replaced is the cost or other "asis of the patent or copyriht.
88
The allowance should "e computed "y an apportionment of the cost or other "asis of
the patent or copyriht over the life of the patent or copyriht since its rant, or since
its ac8uisition "y the taxpayer, or since March -, -=-/, as the case may "e.
DEPLETION OF OIL AND GAS WELLS AND MINES
<epletion is the exhaustion of natural resources such as oil and as wells and mines
as a result of production or severance from such mines or wells.
[ This involves natural resources such as oil, gas wells and mines. These are
non-replaceable assets.
[ The requisites for deductibility are the same as that of depreciation except
that the properties involved are natural resources

[ The idea here is not for proft but to recover the cost of investment through
this allowance for depletion.
>eter*ination o4 a*o%nt o4 de3letion
$n determinin the amount of allowa"le depletion cost, the followin three factors are
essential, namely*
-. The "asis for the cost of the property,
.. The estimated total recovera"le units in the property, and
/. The num"er of units recovered durin the taxa"le year in 8uestion.
.Consolidated Mines V. CT# +, &C'# 61,1
@asis, means the amount of the taxpayer+s capital or investment in the property
which he is entitled to recover tax&free durin the period he is removin mineral in the
deposit.
I,5.,>6:/+ 3785 6, 4+5-7/+0< 74+-.567,8
This refers to any cost incurred in petroleum operations which in itself has no salvae
value and which is incidental to and necessary for the drillin of wells and preparation
of wells for the production of petroleum.
>e3letion and >e3reciation
@oth are predicated upon the same "asic premise of avoidin tax on capital.
Iowever, depletion is "ased upon the concept of the exhaustion of a natural resource,
whereas, depreciation is "ased upon the concept of exhaustion of the property, not
otherwise a natural resource, used in trade or "usiness or held for the production of
income. Thus, depletion and depreciation are made applica"le to diferent types of
assets.
C$ARITABLE AND OT$ER CONTRIBTIONS
Ninds o4 charita5le contri5%tions
-. Hrdinary or those which are su"#ect to limitations as to the amount deducti"le from
ross income.
.. )pecial or those which are deducti"le in full from ross income.
'e;%isite 4or ded%cti5ility o4 charita5le contri5%tions
-. The contri"ution must actually "e paid, or made paya"le to the ;hilippine overnment
or any political su"division thereof, or any domestic corporation or association
speci%ed "y the K$RC.
89
.. Ko part of the net income of the "ene%ciary must inure to the "ene%t of any private
stockholder or individual.
/. $t must "e made within the taxa"le year.
0. $t must not exceed -AB in case of an individual, and 4B in case of a corporation, of
the taxpayer+s taxa"le income 1except when the donation is deducti"le in full3 to "e
determined without the "ene%t of the contri"ution.
4. $t must "e evidenced "y ade8uate records or receipts.
Contri5%tions ded%cti5le in 4%ll
-. <onations to the ;hilippine Eovernment or to any of its political su"divisions
accordin to a national priority plan determined "y the K2<A.
.. <onations to forein institutions or international orani7ations which are fully
deducti"le in pursuance of or in compliance with areements, treaties or
commitments entered into "y the ;hilippines or in pursuance of special laws.
/. <onations to accredited non&overnmental orani7ations.
M These are 4%lly ded%cti5le i4 the contri5%tions are )iven to the 4ollo8in)? %F& A&
G&O
-. 1overnent or its political su"divisions, aencies or instrumentalities, for the
purpose of undertakin priority pro&ects of the overnment,
These 3riority 3roCects incl%de? %S&$&E&O
a. )ports development, science and invention
". Iealth and human settlement
c. 2ducational and economic development
.. ;oreign governent or institution and international civic orani7ations,
/. .ccredited N1@
H.6.<. eans non-proft doestic corporation !hich are fored and organi%ed
for any of the follo!ing purposes* %C&$&E&R&S&O
a. Research
". Iealth
c. 2ducation
d. Charita"le, cultural, character "uildin
e. )ports development and social welfare
The a*o%nt o4 charita5le contri5%tion that *ay 5e clai*ed as ded%ction *ay 5e?
-. "n the case of individual taxpayer:
& Kot more than -AB of the net income "efore charita"le contri"ution
.. "n the case of corporate taxpayer:
& Kot more than 4B of the net income "efore the charita"le contri"ution
[2F the reci3ient o4 s%ch contri5%tion is any o4 the 4ollo8in) >C 4or*ed or
or)anized 4or* 'R&E&C&S&(
-
.
Reliious purpose and reha"ilitation of veterans
.
.
2ducational purpose like educational corporations which are not 8uali%ed as
KEH
/
.
Charita"le, cultural purpose
0
.
)cienti%c, sports development an social welfare purpose
I10P 7- 5P 7; 5?+ ,+5 6,37<+ :+;7-+ 3?.-65.:/+ 37,5-6:0567,K
E2.<4/+1
$f an individual taxpayer has a ross income of ;-AA,AAA and the allowa"le deduction,
except charita"le contri"ution, is ;4A,AAA. The Charita"le contri"ution is ;4,AAA.
<eduction %rst ;4A,AAA from ;-AA,AAA and the result is ;4A,AAA.
90
This ;4A,AAA is the "asis of that D-AB or 4B of net income "efore charita"le
contri"utionJ. )o, -AB of the ;4A,AAA is ;4,AAA. Ience, the actual contri"ution of ;4,AAA
may "e fully claimed as deduction.
@ut let us say, the amount of charita"le contri"ution is ;-A,AAA. )o, he can only
deduct ;4,AAA as charita"le contri"ution, and not the actual amount of ;-A,AAA "ecause the
law imposes a limitation that the amount that may "e claimed as deduction must not "e
more than -AB of net income "efore charita"le contri"ution.
Hon-)overn*ental or)anization
$t means a non&pro%t domestic corporation*
-. Hrani7ed and operated exclusively for scienti%c, research, educational, character&
"uildin, and youth and sports development, health, social welfare, cultural or
charita"le purposes, or any com"ination thereof, where no part of the net income of
which inures to the "ene%t of any private individual.
.. Ltili7es the contri"ution directly for the active conduct of the activities constitutin
the purpose or function for which it is orani7ed and operated not later than the -4
th
day of the month after the close of accredited KEH+s taxa"le year in which the
contri"ution were received.
/. Administrative expenses shall, in no case, exceed thirty percent 1/AB3 of the total
expense.
0. The assets, in the event of dissolution, would "e distri"uted to another non&pro%t
domestic corporation orani7ed for a similar purpose, or to the state for pu"lic
purpose, or would "e distri"uted "y a court to another orani7ation.
0tilization
-. Any amount of cash or kind 1includin administrative expenses3 paid or utili7ed to
accomplish one or more purposes for which the accredited non&overnmental
orani7ation was created or orani7ed.
.. Any amount paid to ac8uire an asset used 1or held for use3 directly in carryin out one
or more purposes for which the accredited non&overnmental orani7ation was
created or orani7ed.
"roo4 o4 ded%ctions
Contri"utions or ifts shall "e allowa"le deductions only if veri%ed under the rules and
reulations prescri"ed "y the )ec. of Cinance.
RESEARC$ AND DEVELOPMENT
A taxpayer may treat research and development expenditures which are paid or incurred
"y him durin the taxa"le year in connection with his trade, "usiness or profession, as
ordinary expenses and necessary expenses which are not charea"le to capital account. The
expenditures so treated shall "e allowed as deduction durin the taxa"le year when paid or
incurred.
This *ay not 5e clai*ed as ded%ction i4 the a*o%nt is*
-. )pent for the ac8uisition or improvements of land or for the improvement or
development of natural resources, or a character which is su"#ect to
depreciation and depletion.
.. ;aid or incurred for the purpose of ascertainin the existence, location,
extent or 8uality of any natural resources like deposits of ore or other minerals
includin oil or as.
PENSION TRSTS
'e;%isites 4or the ded%cti5ility o4 3ay*ents to 3ension tr%sts
-. The employer must have esta"lished a pension or retirement plan to provide for the
payment of reasona"le pensions to his employees.
.. The pension plan is reasona"le and sound.
91
/. it must "e funded "y the employer.
0. the amount contri"uted must no loner "e su"#ect to the control or disposition of the
employer.
4. the payment has not "een allowed as deduction.
5. the deduction is apportioned in e8ual parts over a period of ten 1-A3 consecutive
years "einnin with the year in which the transfer or payment was made.
4ontribution to pension trust ay refer to the current year or past years.
4KRR/NT J/.R- this is considered as ordinary P necessary expenses
2mployer may also make a contri"ution to the pension plan in reard to the services
rendered for the past -A years.
DECCTIONS ALLOWED ONL# TO INDIVIDAL TAXPA#ERS
>ed%ctions allo8ed only to individ%al tax3ayers
-. ;ersonal exemption
.. Additional exception
/. ;remium payments on health andGor hospitalisation insurance Q if the taxpayer has no
compensation income, this can "e claimed as deduction from ross income from
"usiness, trade or profession.
"re*i%*s on health and hos3ital ins%rance
Li*itations:
.& $t must not "e more than ;.,0AA.AA a year. $n other words, ;.AA.AA a
month. The ;.,0AA.AA is the maximum amount that may "e claimed as
deductions.
:. The family must have an income of not more than ;.4A,AAA.AA a year.
3. The claimant must "e the spouse claimin the additional exemption.
)reius on life insurance policy is also included here because it is included under
the health insurance policy.
@ 24 tax3ayer has no co*3ensation inco*e, these ded%ctions *ay 5e clai*ed
a)ainst the )ross inco*e o4 his 5%siness, trade, or 3ro4ession.
PERSONAL EXEMPTIONS
;ersonal exemptions are ar"itrary amounts allowed, in the nature of a deduction from
taxa"le income, for personal, livin or family expenses of an individual taxpayer.
They are considered to "e the e8uivalent of the minimum of su"sistence of the
taxpayer.
7ho are allo8ed 3ersonal exe*3tions9
-. Citi7ens
.. Resident aliens
/. Kon&resident aliens enaed in trade or "usiness in the ;hilippines under
certain conditions
0. 2states and trusts, which are treated for purposes of personal exemptions, as a
sinle individual
#*o%nt o4 3ersonal exe*3tions allo8ed to citizens and resident aliens
;.A,AAA Q sinle person or a married person #udicially decreed as leally separated
from his or her spouse with no 8uali%ed dependents. Applies also to estates under
#udicial settlement and irrecovera"le trusts.
;.4,AAA Q head of the family
92
;/.,AAA Q married person
N75+1 Hnly the spouse derivin taxa"le income can claim the ;/.,AAA personal exemption,
if "oth have taxa"le income, each can claim ;/.,AAA exemption.
Kead o4 the 4a*ily
$t means an unmarried or leally separated man or woman with one or "oth parents,
or with one or more "rothers or sisters, or with one or more leitimate, reconi7ed
natural or leally adopted children livin with and dependent upon him or her for their
chief support.
)uch "rothers or sisters or children should "e not more than .- years old, unmarried
and not ainfully employed, or where such children, "rothers or sisters, reardless or
are, are capa"le of self&support "ecause of mental or physical defect.
A head of family is an individual who actually supports and maintains in one
household one ore more individuals, who are closely connected with him "y "lood
relationship, relationship "y marriae, or "y adoption, and whose riht to exercise
family control and provide for these dependent individuals is "ased upon some moral
or leal o"liation.
N75+1 Consider discrepancy "etween de%nition of Lhead of faily and Ldependent i.e.
children.
To "e a head of a family, one or more /+>656<.5+' -+37>,6=+B ,.50-./ 7- /+>.//F
.B745+B 3?6/B-+, must live with and depend on an unmarried or leally separated man or
woman.
A dependent, on the other hand, may "e a /+>656<.5+' 6//+>656<.5+ 7- /+>.//F
.B745+B 3?6/B&
@oth, however, de%ne or 8ualify diferent terms.
Livin) 8ith
The term Lliving !ith the person ivin support does necessarily mean actual and
physical dwellin toether at all times and under all circumstances.
Fa*ily
The term Lfaily includes an unmarried or leally separated person with*
-. one or "oth parents,
.. one or more "rothers or sisters, or
/. one ore more leitimate, reconi7ed natural, or leally adopted children livin with
and dependent upon him or her for their chief support.
#dditional exe*3tion
A married person or a head of a family may claim an additional exemption of ;>,AAA
for each dependent, not exceedin four 103.
The additional exemption shall "e claimed "y only one of the spouses in the case of
married individuals.
$n the case of leally separated spouses, it may "e claimed only "y the spouse who
has custody of the child or children.
>e3endent
Refers only to the leitimate, illeitimate or leally adopted child of the taxpayer
The child is*
-. livin with the taxpayer,
.. chie9y dependent upon the taxpayer for support,
93
/. not more than .- years of ae,
0. not married, and
4. not ainfully employed or, even thouh over .- years old, incapa"le of self support
"ecause of mental or physical defect.
Chan)e o4 stat%s
Taxpayer marries or have additional dependents
Taxpayer dies durin the taxa"le year
$f the spouse or any of the dependents dies or if any of such dependent marries,
"ecomes .- years old, or "ecomes ainfully employed
N75+1 As a eneral rule, interpret in favour of taxpayer. ;resumed that the chane of status
transpired at the end of the taxa"le year.
PERSONAL EXEMPTIONS TO NON-RESIDENT ALIEN INDIVIDAL
Hnly personal exemption
Kon&resident alien individual enaed in trade or "usiness
2ntitled only to personal exemption
Amount allowed is limited to exemptions ranted to Cilipino citi7ens who are not
residents in the alien+s domicile country Q "ut not to exceed the amount allowed to
citi7ens or residents of the ;hilippines in the K$RC.
)INDS OF PERSONAL EXEMPTION*
-. /asic 3ersonal exe*3tion*
a. sinle or leally separated without dependent, P?420'000&00
". head of the family, P?425'000&00
c. each married individual if "oth of them are earnin
Compensation income P?432'000&00
1in case only one of the spouses is derivin ross income,
only such spouse shall "e allowed the personal
exemptions3
.. #dditional exe*3tion
& This only applies to 8uali%ed dependent child and
children such as leitimate and illeitimate children.
P?48'000&00 for every
'ualifed dependent child
but not to exceed 5
[ "ersonal $xe*3tion Q only individual taxpayers, includin estate and trust, are entitled.
[2n case o4 estate and tr%st Q ;hp.A,AAA.AA
R&C& N&R&C& R&A& NRA-NTB NRA-NETB
"ersonal
$xe*3tio
n
G G
within
G
within
Gsu"#ect to
the rule on
reciprocity.
@ut it must
not exceed
the
maximum
allowa"le
personal
exemption.
N
#ddition G G
N
Rule on
94
al
$xe*3tio
n
G within within reciprocity
does not
apply.
N
L+>+,B1 L & available, X Q not available
$+.B 7; 5?+ ;.<6/F Q unarried an or !oan legally separated an or !oan !ho has
the follo!ing 'ualifed dependents:
-. "arents & Hne or "oth parents. Must "e livin with the taxpayer and
dependent upon the taxpayer for chief support.
& )arents ust be natural parents.
.. /rothers or sister & To be 'ualifed they ust be:
a. :ivin with the taxpayer,
". <ependent upon the taxpayer for chief support,
c. Lnmarried,
d. Kot ainfully employed.
e. Ko more than .- years old except if physically or mentally
incapacitated,
S ust be brothers or sisters by blood
S one is enough
/. Children- =ust be legitiate , illegitiate, legally adopted or stepchildren
Conditions?
a. :ivin with the taxpayer,
". <ependent upon the taxpayer for chief support,
c. Lnmarried,
d. Kot ainfully employed,
e. Kot more than .- years old except if physically or mentally
incapacitated.
[ <ependent is considered Dlivin) 8ith the tax3ayerJ even if the former or the
latter are not physically toether if that is "rouht a"out "y force of circumstances.
/xaple if one of the parents will have to undero "y&pass operation in the L.).
[C?6+; S0447-5 Q means more than 4AB of the needs of the dependents are
provided "y the taxpayer.
P-7:/+<* $f the child or the "rotherGsister ot married and then he has found to "e
physically or mentally incapacitated, so "umalik si tatay at dependent sa tatay for
chief support, can he 8ualify as dependentR
A,8C+-1 Ko, physical or ental defect applies only to age re'uireent. @nce the
child or brotherMsister got arried, he is autoatically dis'ualifed as dependent.
[ CK#H6$ <F &T#T0&*
-. <eath of spouse durin the taxa"le year,
.. <eath of dependent durin the taxa"le year,
/. <eath of the taxpayer durin the taxa"le year, estate of the taxpayer ay clai
the basic personal exeption>
0. Additional dependent durin the taxa"le year,
4. Taxpayer ot married durin the taxa"le year,
5. Eainful employment of the dependent durin the taxa"le year
6. <ependent "ecame more than .- years old durin the taxa"le year.
[ /ven if the above-entioned change of status happened during the taxable year, the
taxpayer ay still clai the basic personal exeption because it is as if the change of status
happened at the end of the taxable year.
[ There is a provision in the Tax Code, which is not so clear. Cor purposes of head o4 the
4a*ily' in the case of natural children or child, there is that word DacLno8led)ed or
reco)nizedE.
[ ;or purposes of the defnition of head of the faily, it is clear that to 8ualify as dependent,
the natural child or leitimate child must "e acknowleded or reconi7ed "y the taxpayer.
95
[ /%t in the de%nition of the dependent, de3endent means leitimate, illeitimate or
leally adopted child or children. There is no word acknowleded or reconi7ed.
[ !as this deli"erately omitted "y our ConressmenR <oes this imply that since they have so
may illeitimate children, they may not "e re8uired to acknowlede or reconi7e them and
they can claim this illeitimate child as their dependentR This is not clear. $f we will try to
interpret the law literally, there is no need of any reconition on the part of the taxpayer.
[ $s this really the intention of lawR
[ Ko. The intention of the la! has al!ays been to recogni%e this illegitiate child and this is
one !ay of copelling the taxpayers to recogni%e this child.
[ The "resident o4 the 'e3%5lic o4 the "hils. cannot iss%e an exec%tive order to
increase the 5asic 3ersonal exe*3tion "ecause the provision under the Hld Tax Code
authori7in the ;resident to increase the personal and additional exemption upon the
recommendation of the )ec. of Cinance has "een removed or deleted "y RA >0.0.
[ No!, you can only increase the aount of personal and additional exeption by legislative
enactent.
ITEMS NOT DEDCTIBLE
2te*s not ded%cti5le
-. ;ersonal, livin or family expenses
.. Capital expenditures
a. Any amount paid out for new "uildins or for permanent improvements, or
"etterments made to increase the valued of any property or estate
". Any amount expended in restorin property or in makin ood the exhaustion
thereof for which an allowance is or has "een made
/. ;remiums paid on any life insurance policy coverin the life of any oFcer or
employee, or of any person %nancially interested in any trade or "usiness carried on
"y the taxpayer, individually or corporate, when the taxpayer is directly or indirectly a
"ene%ciary under such policy ')ection /5, K$RC(
0. :osses "etween related taxpayers
4. :osses on wash sales
5. $lleal expense i.e. "ri"es, kick"acks, and other similar payments ')ection /0 1A3 1-3
1c3, K$CR(
CAPITAL EXPENDITRES
-. Any amount paid out for new "uildins or for permanent improvements, or
"etterments made to increase the value of any property or estate.
.. Any amount expended in restorin property or in makin ood the exhaustion thereof
for which an allowance is or has "een made
/. Cost of defendin or perfectin title to property constitutes a part of the cost of the
property and is not a deducti"le expense
0. The amount expended for architect+s services is part of the cost of the "uildin
4. 2xpenses of the administration of an estate such as court costs, attorney+s fees, and
executor+s commissions are charea"le aainst the Lcorpus of the estate and are
not allowa"le deductions
5. $n case of a corporation, expenses for orani7ations, such as incorporation fees,
attorney+s fees and accountant+s chares are ordinarily capital expenditures, "ut
where such expenditures are limited to purely incidental expenses, a taxpayer may
chare such items aainst income in the year in which they are incurred. ')ection
-.A, Revenue Reulations, .(
96
Li4e or health ins%rance and other non-li4e ins%rance 3re*i%*s or si*ilar a*o%nts
in excess o4 8hat the la8 allo8s
G+,+-./ -0/+1 The cost of life or health insurance and other non&life insurance
premiums "orne "y the employer for his employee shall "e treated as taxa"le frine
"ene%t.
E23+4567,8
-. Contri"ution of the employer for the "ene%t of the employee pursuant to the
provisions of existin law, i.e. ))), E)$), amon others
.. The cost of premiums "orne "y the employer for the roup insurance of his
employees. 'Revenue Reulations /&=>(
RLES1
[ )reius paid on the insurance policy of the oQcer or eployee ay be claied as
deduction by the eployer, $f the "ene%ciary is the family or the heirs of the oFcer or the
employee.
[ "t is not deductible on the part of the eployer, $f the "ene%ciary desinated directly or
indirectly is the employer. "f the benefciary designated is the creditor or the heirs of the
eployer, the desination is indirect, hence, that premium is not deducti"le.
[ Hn the other hand, on the part of the employees, these premiums may "e a taxa"le
compensation income. "t is taxable copensation incoe on the part of the eployee if the
"ene%ciary desinated is the family of heirs of the employee.
[ There4ore, if these preius are deductible on the part of the eployer, that is taxable
on the part of the eployee. "f these preius are not deductible on the part of the
eployer, that is not taxable on the part of the eployee.
N&B& )ersonal, living and faily expenses are deductible for the simple reason that these are
not connected with the "usiness, trade or profession of the taxpayer. $n lieu of the same, the
taxpayer may claim the so&called D;ersonal and Additional 2xemptionJ in the case of
individual taxpayers.
RELATED TAXPA#ERS
-. @etween mem"ers of a family 1which shall include only his "rothers and sisters,
spouse, ancestors and lineal descendants3
.. @etween an individual and a corporation more than 4AB in value of the outstandin
stock of which is owned, directly or indirectly, "y or for such individual Q except in the
case of distri"utions in li8uidation
/. @etween two corporations more than 4AB in value of the outstandin stock of each of
which is owned, directly or indirectly "y or for the same individual
0. @etween the rantor and the %duciary of a trust
4. @etween the %duciary of a trust and the %duciary of another trust if the same person
is a rantor with respect to each trust
5. @etween the %duciary of a trust and a "ene%ciary of such trust ')ection /51@3, K$RC(
'elevant 3oints re)ardin) related tax3ayers
-. ;ayment of interests is not deducti"le
.. @ad de"ts are not deducti"le.
/. :osses from sales or exchanes of property are not deducti"le
CAPITAL GAINS AND LOSSES
G.6,8 B+-6D+B ;-7< B+./6,>8 6, 4-74+-5F ;7-< 4.-5 7; G-788 I,37<+
@S+3& 32 A& ,7& 3A
- This may include sale or exchane of oods or properties.
- $f the property is sold for cash, that is considered as 8./+&
97
- $f it property for another property, this may "e classi%ed as +23?.,>+&
ORDINAR# ASSET
-. )tock in trade of the taxpayer or other property of a kind which would properly "e
included in the inventory of the taxpayer if on hand at the close of the taxa"le year.
.. ;roperty held "y the taxpayer primarily for sale to customers in the ordinary course of
his trade or "usiness
/. ;roperty used in the trade or "usiness, of a character which is su"#ect to the
allowance for depreciation.
0. Real property used in the trade or "usiness of the taxpayer
CAPITAL ASSET
All properties not used in trade or "usiness are considered capital assets
;roperty held "y the taxpayer, whether or not connected with his trade or "usiness,
which is not an ordinary asset
ORDINAR# GAIN OR INCOME
Hrdinary income or ain includes any ain from the sale or exchane of property
which is not a capital asset.
CAPITAL GAIN OR INCOME
Capital ain or income is any ain from the sale or exchane of a capital asset.
6R Final 'ate
Hn the ross sellin price or current fair market value prevailin at the time of the
sale whichever is hiher.
The tax is paya"le within /A days from the sale or disposition.
;ayment is condition precedent for the reistration of the sale.
$n foreclosure sales, the tax shall "e on the sellin price at the foreclosure sale.
'eal $state dealers
The 5B Cinal rate is not applica"le.
Eain from the sale of real property is treated as ordinary income.
:oss, is deducti"le from the ross income, "ut not from compensation income.
&hares o4 stocL o4 do*estic cor3oration
-. )tocks not listed, or sale not efected throuh the stock exchane*
- 4B of %rst ;-AA,AAA
- -AB of excess of ;-AA,AAA
.. :isted and traded in the stock exchane*
- U of -B, reardless of the resultin ain or loss
/. $nitial pu"lic oferin
- 0B if .4B of stocks is ofered
- .B if over .4B to //B
- -B if over //B
&ale or exchan)e is voida5le or rescissi5le
The sale or exchane is valid until annulled.
98
Tax is leally due, and should "e paid.
24 ann%lled?
Ko re"ate or refund. The tax had already accrued and no supervenin event will
constitute a round for recoupment.
24 sale or exchan)e is void?
Tax did not leally accrue.
Re"ate or refund is proper.
Het ca3ital )ain
Ket capital ain means the excess of the ains from sales or exchanes of capital
assets over the losses from such sales or exchanes.
Het ca3ital loss
Ket capital loss means the excess of the losses from sales or exchanes of capital
assets over the ains from such sales or exchanes.
&3ecial Ca3ital Transactions O deemed capital transactions
-. Cailure to exercise option to sell or "uy property.
.. <istri"ution of assets or shares of stock to stockholders upon li8uidation of a
corporation.
/. Read#ustment of a partner+s interest in a partnership.
0. Retirement of "onds.
4. )hort sale
Three r%les on the reco)nition o4 ca3ital )ains and losses
-G/ apply only to individual taxpayers and not to corporate taxpayers.
-. Ioldin rule
.. :oss limitation rule
/. Kew capital loss carry&over rule
N75+1 The holdin and net capital loss carry&over rules apply only to individual taxpayers
and not to corporate taxpayers.
1& $OLDING PERIOD RLE
Lnder this rule, if the property has "een held "y the taxpayer for a period of not more
than -. months, the ain or loss is -AAB reconi7ed. $f it is more than -. months, the ain or
loss is 4AB reconi7ed.
)o, the ain or loss may "e -AAB or 4AB taxa"le deducti"le as the case may "e.
E2.<4/+1 Pou sell your personal car. This is a capital transaction "ecause the asset
involved is a capital asset. :et us say that you sell the car at ;.AA,AAA and the cost of the car
is ;-4A,AAA. Iere, there is a ain of ;4A,AAA.
Pou must %nd out the date of the ac8uisition and the date of sale or disposition. $f the
date of ac8uisition and the date of sale fall within the -. month period, this ;4A,AAA is
;-AA,AAA taxa"le. @ut if exceedin -. months, this ;4A,AAA is only taca"le up to ;.4,AAA.
This is an example of tax avoidance.
N&B& This rule is applica"le only to individual taxpayers. This is so "ecause the capital ain
derived from capital transaction of corporate taxpayers is always -AAB reconi7ed
respective of the num"er of months durin which the property was in the possession of the
corp. taxpayer.
"ercenta)e taLen into acco%nt or holdin) r%le
99
$n case of an individ%al taxpayer, only the followin percentaes of the ain or loss
reconi7ed upon the sale or exchane of a capital asset shall "e taken into account in
computin net capital ain, net capital loss, and net income*
-AAB & $f the capital asset has "een held for not more than -. months
4AB & $f the capital asset has "een held for more than -. months
CAPITAL LOSS LIMITATION RLE
- meanin, capital losses are deducti"le only to the extent of capital ain
- so, it follows that there is no capital ain, there is no deducti"le losses.
- Capital loss cannot "e deducted from capital ain
- Hrdinary loss is deducti"le from ordinary ain.
N&B& This rule .44/6+8 57 6,B6D6B0./ .,B 37-47-.5+ 5.24.F+-8 2NC2;T on "anks and
trust companies "ecause they are considered as dealer in securities as far as issuance of
"ond and evidence of inde"tedness are concerned.
:osses from sales or exchanes of capital assets shall "e allowed only to the extent of
the ains from such sales or exchanes.
NET CAPITAL LOSS CARR#-OVER
$f any taxpayer, other than a corporation, sustains in any taxa"le year a net capital
loss, such loss 1in an amount not in excess of the net income for such year3 shall "e
treated in the succeedin taxa"le year as a loss from the sale or exchane of a capital
asset held for not more than -. months.
E2.<4/+1 $n -==5, the capital ain is ;-AA,AAA and capital loss is ;.AA,AAA. )H, there is
a capital loss of ;-AA,AAA which may "e carried over in -==6 "y the taxpayer. This net
capital loss in -==5 may "e claimed as deductions from the capital ain in -==6.
@ut if in -==5 the net income is ;-4A,AAA and the net capital loss is ;-AA,AAA, so the
net capital loss does not exceed the net income. Thus, the entire amount of ;-AA,AAA net
capital loss can "e carried over in -==6.
Can that ;-AA,AAA net capital loss "e carried over in -==>R
KH, "ecause the law says durin the Dsucceedin taxa"le yearJ. Tax exemption must "e
strictly construed aainst the taxpayer and li"erally in favor of the ovt.
N&B& T?68 -0/+ .44/6+8 57 6,B6D6B0./ 5.24.F+-8&
$n this reard, there is such a thin as no operatin loss carry over. H;2RAT$KE :H))
are losses incurred in the course of trade or "usiness of the taxpayer. Ket operatin loss may
"e carried over "y the taxpayer, whether corporate or individual, to the next three 1/3
consecutive years provided that durin that year, such taxpayer is not exempt from taxation
and there must "e no su"stantial chane in ownership of the corporation, in the case of the
corporation. )u"stantial chane may arise if less than 64B of the outstandin capital stock or
paid up capital stock is held "y the same person.
C.8+1 The @H$ reistered industries are allowed to carry over operatin losses. This time,
those losses that were incurred durin that period of -5 years operation may "e carried over
to succeedin taxa"le year.
T?+ -0/+ 5?.5 C+ ?.D+ +85.:/68?+B 68* +24+,8+8 <085 :+ 4.6B 7- 6,30--+B
B0-6,> 5?+ 5.2.:/+ F+.-. Pou can claim those expenses as deduction durin the year when
the same were incurred or paid. The +23+4567, to this rule are net operatin loss carry&over
and net capital loss carry&over.
6ains and losses 4ro* short sales, etc.
Eains or losses from short sales of property shall "e considered as ains or loses from
sales or exchanes of capital assets.
Eains or losses attri"uta"le to the failure to exercise privilees or options to "uy or
sell property shall "e considered as capital ains or losses.
S$ORT SALE
- this is also considered as Capital Transaction.
100
- )hort sale is really ., 7:/6>.567, 4.F.:/+ ,75 6, 3.8? :05 6, >77B8& The
seller of securities or stock will decline. And if it declines, he earns pro%t.
Iowever, if the price of securities increases, he incurs loss.
- E2.<4/+1 $ "orrow your securities on June -A and $+ll pay it on June -4. The
price of securities on June -A is ;4A and you speculate that said price will
decline on June -4. Hn June -4, the price has "een lowered to ;0A. )o, you
earn a pro%t of ;-A "ecause $ will pay my o"liation at ;4A on June -4 and not
;0A.
- T.2 37,8+J0+,3+ 7; 8?7-5 8./+1
MM $f there is a ain, the ain is taxa"le. !e call this Capital Eain.
MM $f there is a loss, the loss is deducti"le
WAS$ SALE D8& S$ORT SALE
M @HTI may "e classi%ed as C.465./ T-.,8.3567,8&
M The "asic distinction is in wash sale, the loss that may "e incurred is not
deducti"le, whereas in short sale, the loss is deducti"le.
6eneral r%le on the reco)nition o4 )ain or loss %3on the sale or exchan)e o4
3ro3erty
The eneral rule is that the entire amount of the ain or loss, as the case may "e,
shall "e reconi7ed, i.e. taxa"le or deducti"le.
$xce3tions
-. Transactions where ains and losses are not reconi7ed
a. 2xchane of property where the property received is not su"stantially diferent
from the property disposed of. ')ection -0A, Re. Ko..(
". 2xchane of property solely in kind in pursuance of corporate merers and
consolidations. )tock for stock.
c. 2xchane "y a person of his property for stocks in a corporation as a result of
which said person, alone or toether with others not exceedin four persons,
ains control of said corporation.
.. Transactions where ain is reconi7ed "ut not the loss
a. Transactions "etween related taxpayers
". $lleal transactions
c. !ash sales "y non&dealers "y securities and when not su"#ect to the stock
transfer tax
d. )ales and exchanes that are not in arms lenth
e. 2xchanes of property, not solely in kind, in pursuance of corporate merers
and consolidations
2n deter*inin) the )ain or loss in the sale or exchan)e o4 3ro3erty, this is the
5asic 4or*%la?
D Amount received or reali7ed LESS Cost or ad#usted "asis.J
$7C 57 B+5+-<6,+ 5?+ 3785 7- .BH085+B :.868Q
MMM I5 B+4+,B8 047, 5?+ <.,,+- 7; .3J0686567,&
1& I; 65 C.8 .3J06-+B 5?-70>? 40-3?.8+' 65 68 5?+ 3785 7; 5?+ 4-74+-5F&
E2.<4/+1
$ sell a property in the amount of ;-AA,AAA. $t is previously purchased the same at ;5A,AAA,
this ;5A,AAA is the cost of property.
101
2& I; 5?+ 4-74+-5F 87/B C.8 4-+D6708/F .3J06-+B 5?-70>? 6,?+-65.,3+' 65 68 5?+ ;.6-
<.-E+5 D./0+ @FMVA 7; 5?+ 4-74+-5F .5 5?+ 56<+ 7; 5?+ .3J0686567,&
IA5 5?+ 56<+ 7; .3J0686567,K means at the time of the death of the decedent or testator.
3& I; 5?+ 4-74+-5F 87/B C.8 .3J06-+B 5?-70>? B7,.567,' 5?+ :.868 8?.// :+ 5?+ 8.<+
.8 6; 65 C70/B :+ 6, 5?+ ?.,B8 7; 5?+ B7,7-&
S650.567,1
A, the donor donated property to @, the donee. )u"se8uently, such donated property was
sold "y the donee for ;.AA,AAA. !hat must "e the costR
A,8C+-1
The law says, the same "asis in the hands of the donor. )o, the donee should ask the donor
the "asis.
$t is also that A, the donor ac8uired the property from another either throuh purchase or
donation. )o, you should ask A, the last donor, his "asis.
E23+4567, 57 5?+ >+,+-./ -0/+1
$f the "asis is reater than the CM? of the property at the time of the donationGift then, for
the purpose of determinin loss, the "asis shall "e such CM?.
4& I; 5?+ 4-74+-5F 87/B C.8 .3J06-+B ;7- /+88 5?., ., .B+J0.5+ 37,86B+-.567, 6,
<7,+F 7- <7,+F8 C7-5?' 5?+ :.868 7; 803? 4-74+-5F 68 5?+ .<70,5 4.6B :F 5?+
5-.,8;+-++ ;7- 5?+ 4-74+-5F&
S650.567,1
The seller ac8uired the property from A in the amount of ;6A,AAA. The CM? of said property is
;-AA,AAA. )o, the seller here is the transferee and A is the transferor. The seller sold the
property at ;.AA,AAA. !hat must "e the costR
A,8C+-1
$t is the amount paid "y the transferee. And the amount paid "y the transferee who
su"se8uently sold the property is ;6A,AAA. )o, he will have a ain of ;-/A,AAA.
MMM Remem"er, it is not the CM? of the property "ut the amount paid "v the transferee.
S04478+ 5?+ 4-74+-5F C.8 .3J06-+B 6, . 5-.,8.3567, C?+-+ >.6, 7- /788 68 ,75
-+37>,6=+BQ @NO GAIN' NO LOSS RECOGNI9EDA
@efore we answer that, we should know these transactions where the ain is not reconi7ed
1meanin it is not taxa"le3 and the loss is not reconi7ed 1meanin, it is not deducti"le3.
The "asic rule is, in the sale or exchane of property if there is a ain, the ain taxa"le, $f
there is loss, the loss is deducti"le3.
E23+4567, 57 5?+ :.863 -0/+ @,7 >.6, 7- /788 8?.// :+ -+37>,6=+BA1
1& T-.,8.3567,8 <.B+ 40-80.,5 57 4/., 7; <+->+- 7- 37,86B+-.567,& )ometimes, we
call this D T.2 E2+<45 T-.,8.3567,8K or IT-.,8.3567,8 S7/+/F 6, )6,BK&
a. A corporation, party to merer or consolidation exchanes its properties solely for
stock in corp., which is a party to the merer or consolidation.
I//085-.567,1

P-74+-5F
C7-4& A C7-4& B 4-74+-5F ;7- S573E

S573E
". A stockholder of a corp. party to a merer or consolidation exchanes his stock solely
for stock in another corp. party to that merer or consolidation.
102
I//085-.567,1
S+30-65F 7- S573E

S573E?7/B+- ------------------------ C7-4& 1& S573E ;7- S573E
2& S+30-656+8 ;7- 8573E
3& S+30-656+8 ;7- S+30-656+8
S+30-65F 7- S573E
MM )ometimes, we call the a"ove&mentioned transactions as IT-.,8.3567,8 87/+/F 6, E6,BK
or IT.2 E2+<45 T-.,8.3567,8K&
.. $f a person alone or toether with others or not exceedin four 103 1so, the total num"er
should "e %ve 143 exchanes his property for stock in a corp. and this person or persons,
after this exchane, ac8uired controllin interest over that corp. This means that they
ac8uired at least -4B of the shares of stock of such corp.
& This is also a transaction solely in kind.
(0+8567,1 )uppose these persons, at the time of transaction, already ac8uired controllin
interest over such corp., is the transaction or exchane taxa"leR
A,8C+-1 2ven if these persons ac8uired controllin interest at the time of the
transaction, the rule is still applica"le in which case that is still tax exempt.
(0+8567,1 )o, if these properties ac8uired under this tax exempt transactions are
su"se8uently disposed of, how will you determine the "asisR
A,8C+-1 The "asis of the stock or properties ac8uired under this no ain, no loss
reconi7ed shall "e the same "asis in the hands if the transferor.
S04478+ 5?+ 4-74+-5F C.8 .3J06-+B 0,B+- 5-.,8.3567,8 C?+-+ >.6, 68 -+37>,6=+B
.,B /788 68 ,75 -+37>,6=+BQ @GAIN RECOGNI9ED' LOSS NOT RECOGNI9EDA
T-.,8.3567, 87/+/F 6, E6,B this means that there are other consideration iven other than
those mentioned under transactions solely in kind 1nos. - and . a"ove, "ut cash is added3.
E2.<4/+1 Corp. A party merer or consolidation transfers its cash and property to Corp.
@, also a party to such merer or consolidation.
Corp. @, in exchane, transfers its stocks to Corp. A.
I//085-.567,1
P-74+-5F .,B C.8?
P-74+-5F1 P50'000
C.8?1 P50'000
C7-4& A C7-4& B P100'000

S573E FMV S573E1 P100'000
:et us say that CM? of stock iven "y Corp. @ is ;-AA,AAA. The value of the property
transferred "y Corp. A is ;4A,AAA while cash is also ;4A,AAA.
)o if you add all of these, the amount received or reali7ed is ;.AA,AAA.
Kow, you deduct the cost of the stock disposed of. :et us say that the cost of stock is
;>A,AAA. )o, Corp. @ derived ain of ;-.A,AAA. $8 5?68 5.2.:/+Q
A,8C+-1
P2), "ut only ;-AA,AAA is the amount that is taxa"le. This is so "ecause of the limitation that
it must not exceed the total cash and the CM? of the property. And if you add the CM? of the
property and the total cash iven, the total is ;-AA,AAA.
103
Lnder the law, there is that limitation in transactions which involves not only the property "ut
also cash. The ain is reconi7ed or taxa"le "ut the taxa"le ain must not exceed the cash
iven and the CM? of the property which forms part of the consideration.
Hn the other hand, supposed the cost of stock disposed of or transferred to Corp. A is
;.4A,AAA. )o, there is a loss of ;4A,AAA, is this reconi7ed or deducti"leR KH.
I; 5?68 4-74+-5F -+3+6D+B 0,B+- 5?68 5-.,8.3567,8 C?63? 68 ,75 87/+/F 6, E6,B 68
80:8+J0+,5/F B68478+B 7;' ?7C B7 F70 B+5+-<6,+ 5?+ :.868 7; 5?.5Q
A,8C+-1 The "asis of the property in the hands of the transferor less the CM? of the
property, less cash received plus the ain reconi7ed, if any, plus the dividend that may "e
treated as such, if there is any.
B.868 6, 5?+ ?.,B8 7; 5?+ 5-.,8;+-7-
L+881 CM? of the property
Cash received
P/081 Eain reconi7ed, if any
<ividend reconi7ed, if any
T-.,8.3567,8 C+-+ >.6, 68 -+37>,6=+B .,B /788 68 ,75 -+37>,6=+B @<+.,6,>' 6; 5?+-+
68 . >.6,' 5?+ >.6, 68 5.2.:/+ .,B 6; 5?+ /788 68 ,75 B+B0356:/+A .-+1 %W&I&R&N&O
-. !ash )ale
.. $lleal transactions
/. Those transactions involvin Related taxpayers
0. Transactions Kot solely in kind.
MERGER OR CONSOLIDATION
Merers or consolidations shall "e understood to mean the 1a3 ordinary merer or
consolidation of 1"3 the ac8uisition "y one corporation of all or su"stantially all the
properties of another corporation solely for stock.
)uch merer or consolidation must "e undertaken for a bona fde "usiness purpose
and note solely for the purpose of escapin the "urden of taxation.
SORCES OF TAXATION
&o%rce o4 inco*e
The term Lsource of incoe is not a place "ut the property, activity, or services that
produces the income. 'C7<<68867,+- D& BOACO&
>issent o4 -%stice Feliciano in Co**issioner v. /<#C
The source of income relates not to the physical sourcin of a 9ow of money or the
physical situs of payment "ut rather to the Lproperty, activity or service !hich
produced the incoe. !here a contract for rendition of services is involved, the
applica"le source rule may "e simply stated as follows* The income is sourced in the
place where the service contracted for is rendered.
&o%rces o4 taxation
-. $ncome from sources within the ;hilippines
.. $ncome from sources without the ;hilippines
/. $ncome from sources partly within and partly without the ;hilippines
6ross inco*e 4ro* so%rces 8ithin the "hili33ines
The followin items of ross income shall "e treated as ross income from sources
within the ;hilippines*
-. $nterests from sources within the ;hilippines, and interests on "onds, notes or other
interest&"earin o"liations of residents, corporate or otherwise.
.. <ividends received from a domestic corporation and from a forein corporation,
unless less than 4AB of the ross income of such forein corporation for the three&
year period endin with the close of its taxa"le year precedin the declaration of such
dividends was derived from sources within the ;hilippines.
104
/. Compensations for la"or of personal services performed in the ;hilippines.
0. Rentals and royalties from property located in the ;hilippines.
4. Eains, pro%ts and income from the sale of real property located in the ;hilippines.
5. Eains, pro%ts and income from the sale of personal property if sold within the
;hilippines. ')ection 0.1A3, K$RC(
2nterest inco*e
The residence of the o"lior who pays the interest, rather than the physical location of
the securities, "onds or notes or the place of payment, is the determinin factor of the
source of interest income. 'N.567,./ D+D+/74<+,5 C7-47-.567, D& C7<<68867,+-'
-4- )CRA 06.(.
6ross inco*e 4ro* so%rces 8itho%t the "hili33ines
Just the exact opposite of the items of ross income from sources within the
;hilippines. ')ection 0.1@3, K$RC(
2nco*e 4ro* so%rces 3artly 8ithin and 3artly 8itho%t the "hili33ines
Eains, pro%ts and income from the sale of personal property produced "y the
taxpayer within and sold without the ;hilippines, or produced "y the taxpayer without
and sold within the ;hilippines shall "e treated as derived partly from sources within
and partly from sources without the ;hilippines. ')ection 0.123, K$RC(
"%rchase or sale 3ersonal 3ro3erty
Eains, pro%ts and income derived from the purchase of personal property within and
its sale without the ;hilippines, or from the purchase of personal property without and
its sale within and ;hilippines shall "e treated as derived entirely form sources within
the country in which sold. ')ection 0.123, K$CR(
6ain 4ro* sale or shares o4 stocL o4 a do*estic cor3oration 8ithin
Eain from the sale of shares of stock in a domestic corporation shall "e treated as
derived entirely from sources within the ;hilippines reardless of where the said
shares are sold.
The transfer "y a non&resident alien or a forein corporation to anyone of any share of
stock issued "y a domestic corporation shall not "e efected or made in its "ook
unless*
-. The transferor has %led with the Commissioner a "ond conditioned upon the future
payment "y him or any income tax that may "e due on the ains derived from such
transfer, or
.. The commissioner has certi%ed that the taxes, if any, imposed and due on the ain
reali7ed from such sale or transfer have "een paid. ')ection 0.123, K$CR(
ACCONTING PERIODS AND MET$ODS OF ACCONTING
Methods or acco%ntin)
G+,+-./ R0/+1 The taxa"le income shall "e computed upon the "asis of the
taxpayer+s annual accountin period in accordance with the method of accountin
reularly employed in keepin the "ooks of such taxpayer.
E23+4567,1 Computations shall "e made in accordance with such method as in the
opinion of the Commissioner clearly re9ects the income*
a. $f no such method of accountin has "een so employed, or
". $f the method employed does not clearly re9ect the income. ')ection 0/, K$RC(
105
Taxa5le year
Taxa"le year means the calendar year or the %scal year endin durin such calendar
year, upon the "asis of which the net income is computed.
#cco%ntin) 3eriods
-. Calendar year Q January - to <ecem"er /-
.. Ciscal year Q an accountin period of twelve 1-.3 months endin on the last day of any
month other than <ecem"er.
7hen calendar year %sed9
-. $f the taxpayer chooses the calendar year
.. $f the taxpayer has no annual accountin period
/. $f the taxpayer does not keep "ooks
0. $f the taxpayer is an individual
7hen Co**issioner is a%thorized to ter*inate taxa5le 3eriod
-. !hen a taxpayer retires from "usiness su"#ect to tax
.. !hen he intends to leave the ;hilippines
/. !hen he removes his property from the ;hilippines
0. !hen he hides or conceals his property
4. !hen he performs any act tendin to o"struct the proceedins for the collection of
the tax for the past or current 8uarter or year
5. !hen he renders the collection of the tax totally or partly inefective
Methods o4 acco%ntin)
-. Cash @asis
$ncome, pro%ts and ains earned "y taxpayer are not included in ross income until
received.
2xpenses are not deducted until paid within the taxa"le year.
.. Accrual Method
$ncome, ains and pro%ts are included in the ross income when earned, whether
received or not.
2xpenses are allowed as deductions when incurred, althouh not yet paid.
/. MixedGIy"rid
Com"ination of the cash and accrual method.
0. Any other method which clearly re9ects the income
Cash v. accr%al *ethod o4 acco%ntin)
Eains, pro%ts and income are to "e included in the ross income for the taxa"le year
in which they are received "y the taxpayer, unless they are included when they
accrue to him in accordance with the approved method of accountin followed "y him.
Tax acco%ntin) v. :nancial acco%ntin)
!hile taxa"le income is "ased on the method of accountin used "y the taxpayer, it
will always difer from accountin income. This is so "ecause of a fundamental
diference in the ends the two concepts serve. Accountin attempts to match cost
aainst revenue. Tax law is aimed at collectin revenue. $t is 8uick to treat an item as
income, slow to reconi7e deductions as losses. Thus, tax law will not reconi7e
106
deductions for continent future losses except in very limited situations. Eood
accountin, on the other hand, re8uires their reconition. 'C7,87/6B.5+B M6,+8 D&
CTA, 4> )CRA 5->(
Lon)-ter* contracts
The term Llong ter contract means "uildin, installation or construction contracts
coverin a period in excess of one year. ')ection 0>, K$RC(
Treat*ent o4 inco*e 4ro* lon)-ter* contracts
-. ;ercentae of completion "asis
.. Completed contract "asis
N75+1 )ection 0> of the K$RC provides that L)ersons !hose gross incoe is derive in !hole
or in part fro such Flong terG contracts shall report such incoe upon the basis of
percentage of copletion.
The return should "e accompanied "y a return certi%cate of architects or enineers
showin the percentae of completion durin the taxa"le year of the entire work performed
under the contract.
&ales o4 dealers in 3ersonal 3ro3erty
A person who reularly sells or otherwise disposes of personal property on the
instalment plan may return as income there from in any taxa"le year that proportion
of the instalment payments actually received in that year, which the ross pro%t
reali7ed or to "e reali7ed when payment is completed, "ears to the total contract
price. ')ection 0=, K$RC(
Treat*ent o4 sales o4 realty and cas%al sales o4 3ersonality
These include:
-. Casual sale or other casual disposition of personal property 1other than property
included in the inventory at the close of the taxa"le year3 for a price exceedin
;-AAA, and
.. )ale or other disposition of real property.
Treated either on instalment "asis or deferred sales "asis.
$nstallment "asis Q if the initial payments do not exceed .4B of the sellin price.
<eferred sales "asis Q if the initial payments exceed .4B of the sellin price ')ection
0=, K$RC and )ection -64, Revenue Reulations .(
2nitial 3ay*ents
These include the payments received in cash or property other than evidences of
inde"tedness of the purchaser durin the taxa"le period in which the sale or other
disposition is made.
The term Linitial payents contemplates at least one other payment in addition to
the initial payment. ')ection -64, Revenue Reulations .(
Ter*ination o4 leasehold
:essor who ac8uires "uildin or improvements made "y the lessee after the
termination of the lease has two options in reportin said income*
-. :essor may report as income at the time when such "uildins or improvements are
completed the fair market value of such "uildins or improvements, or
.. :essor may spread over the life of the lease the estimated depreciated value of such
"uildins or improvements at the termination of the lease and report as income for
each of the lease an ade8uate part thereof. ')ection 0=, Revenue Reulations .(
#llocation o4 inco*e and ded%ctions
107
$n the case of two or more orani7ations, trades or "usinesses 1whether or not
incorporated and whether or not orani7ed in the ;hilippines3 owned or controlled,
directly or indirectly, "y the same interests, the Commissioner is authori7ed to
distri"uted, apportion or allocation ross income or deductions "etween or amon
such orani7ation, trade or "usiness, if he determines that such distri"ution,
apportionment or allocation is necessary in order to prevent evasion taxes or clearly
to re9ect the income of any such orani7ation, trade or "usiness. ')ection 4A, K$RC(
RETRNS AND PA#MENT OF TAX
INDIVIDAL INCOME TAX RETRNS
7ho are re;%ired to :le individ%al ret%rns9
-. 2very Cilipino citi7en residin in the ;hilippines
.. 2very Cilipino citi7en residin outside the ;hilippines, on his income from sources
within the ;hilippines
/. 2very alien residin in the ;hilippines, on income derived from sources within the
;hilippines
0. 2very non&resident alien enaed in trade or "usiness or in the exercise of a
profession in the ;hilippines
7ho are not re;%ired to :le individ%al ret%rns9
-. An individual whose ross income does not exceed his total personal and additional
exemptions.
M Iowever, a Cilipino citi7en and any alien individual enaed in "usiness or practice
of profession within the ;hilippines shall %le an income tax return, reardless of the
amount of ross income.
.. An individual with respect to pure compensation income derived from sources within
the ;hilippines, the income tax on which has "een correctly withheld.
M Iowever, an individual derivin compensation concurrently from two or more
employees at any time durin the taxa"le year shall %le an income tax return.
M Curther, an individual whose pure compensation income derived from sources within
the
;hilippines exceeds ;5A,AAA shall also %le an income tax return.
/. An individual whose sole income has "een su"#ected to a %nal withholdin tax.
0. An individual who is exempt from income tax pursuant to the K$RC and other laws,
eneral or special.
7here to :le
-. Authori7ed aent "ank
.. Revenue <istrict HFcer
/. Collection aent
0. <uly authori7ed Treasurer of the city or municipality in which such person has his leal
residence or principal place of "usiness in the ;hilippines
4. HFce of the Commissioner if there "e no leal residence of place of "usiness in the
;hilippines
7hen to :le
Hn or "efore April -4 of each year coverin income from the precedin taxa"le year
108
Thirty 1/A3 days from each transaction and a %nal consolidated return on or "efore
April -4 coverin all stock transactions of the precedin year in case of sale or
exchane of shares or stock not traded throuh a local stock exchane.
Thirty 1/A3 days followin each sale or other disposition in case of sale or disposition
of real property
K%s5and and 8i4e
Married individuals, whether citi7ens, resident or non&residents aliens, who do not
derive income purely from compensation, shall %le a return for the taxa"le year to
induce the income of "oth spouses.
Iowever, if it is impractica"le for the spouses to %le one return, each spouse may %le
a separate return of income "ut the returns so %led shall "e consolidated "y the @$R
for purposes of veri%cation for the taxa"le year.
'et%rn o4 3arent to incl%de inco*e o4 children
The income of unmarried minors derived from property received from a livin parent
shall "e included in the return of the parent, except*
-. !hen the donor+s tax has "een paid on such property, or
.. !hen the transfer of such property is exempt from donor+s tax.
SELF-EMPLO#ED INDIVIDALS
>eclaration o4 inco*e tax 4or individ%als
2very individual su"#ect to income tax, who is receivin self&employment income,
whether it constitutes the sole source of his income or in com"ination of salaries,
waes and other %xed or determina"le income, shall make and %le a declaration of his
estimated income for the current taxa"le year on or "efore April -4 of the same
taxa"le year.
Kon&resident Cilipino citi7ens with respect to income from without the ;hilippines and
non&resident aliens not enaed in trade or "usiness in the ;hilippines are not
re8uired to render a declaration of estimate income tax.
&el4-e*3loy*ent inco*e
)elf employment income consists of the earnins derived "y the individual from the
practice of profession or conduct of trade or "usiness carried on "y him as a sole
proprietor or "y a partnership of which he is a mem"er.
'et%rn and 3ay*ent o4 esti*ate inco*e tax 5y individ%als
The amount of estimated income shall "e paid in four 103 instalments.
$sti*ated tax
2stimated tax means the amount which the individual declared as income tax in his
%nal ad#usted and annual income tax return for the precedin taxa"le year minus the
sum of the credits allowed aainst the said tax.
$f, durin the current taxa"le year, the taxpayer reasona"ly expects to pay a "ier
income tax, he shall %le an amended declaration durin any interval of instalment
payment dates.
CORPORATE RETRNS
Cor3orate ret%rns
109
2very corporation su"#ect to income tax, except forein corporations not enaed in
trade or "usiness in the ;hilippines, shall render, in duplicate, a true and accurate*
-. Zuarterly income tax return, and
.. Cinal or ad#ustment return.
The return shall "e %led "y the president, vice president or other principal oFcer, and
shall "e sworn to "y such oFcer and "y the treasurer or assistant treasurer.
A corporation may employ either the calendar year or %scal year as "asis for %lin its
annual income tax return
2very corporation derivin capital ains from the sale or exchane of shares of stock
not traded throuh a local stock exchane shall %le a return within thirty 1/A3 days
after each transaction and a %nal consolidated return of all transactions durin the
taxa"le year on or "efore the %fteenth 1-4
th
3 day of the fourth month followin the
close of the taxa"le year.
>eclaration o4 ;%arterly cor3orate inco*e tax
2very corporation shall %le in duplicate a 8uarterly summary declaration of its ross
income and deductions on a cumulative "asis for the precedin 8uarter or 8uarters
upon which the income tax shall "e levied, collected and paid.
The tax computed shall "e decreased "y the amount of tax previously paid or
assessed durin the precedin 8uarters and shall "e paid not alter than sixty 15A3
days from the close of each of the %rst three 1/3 8uarters of the taxa"le year, whether
calendar or %scal year.
Fiscal adC%st*ent ret%rn
2very corporation lia"le for tax shall %le a %nal ad#ustment return coverin the total
taxa"le income for the precedin calendar or %scal year.
$f the sum of the 8uarterly tax payments made durin the said taxa"le year is not
e8ual to the total tax due on the entire taxa"le income of that year, the corporation
shall either*
-. ;ay the "alance of tax still due, or
.. Carry over the excess credit, or
/. @e credited or refunded with the excess amount paid, as the case may "e.
Carryin)-over or creditin) or excess to s%cceedin) ;%arters
$n case the corporation is entitled to a tax credit or refund of the excess estimated
8uarterly income taxes paid, the excess amount shown on its %nal ad#ustment return
may "e carried over and credited aainst the estimated 8uarterly income tax
lia"ilities for the taxa"le 8uarters for the succeedin taxa"le years.
@ut this is not automatic. Keed to apply for creditin of such excess or tax credit to
succeedin 8uarters.
Co*3%tation o4 inco*e tax
For*%la?
-. All $ncome for taxa"le year less exclusions Y 1ross "ncoe
.. :ess Allowa"le deductions Y Net "ncoe
/. :ess ;ersonal and additional exemptions Y Taxable Net "ncoe
0. Multiply with appropriate tax rate Y "ncoe Tax 0ue
4. :ess Credita"le !ithholdin tax or Tax Credits Y Het 2nco*e Tax "aya5le
PA#MENT AND ASSESSMENT OF INCOME TAX
110
"ay*ent o4 tax, in )eneral
The total amount of tax shall "e paid "y the person su"#ect thereto at the time the
return is %led.
2nstall*ent 3ay*ent
A taxpayer, other than a corporation, may opt to pay the tax in two e8ual instalments
when the tax due is in excess of two thousand pesos 1;.,AAA3.
$n such cases, the %rst instalment shall "e paid at the time the return is %led and the
second instalment on or "efore July -4 followin the close of the calendar year.
"ay*ent o4 ca3ital )ains tax
$t shall "e paid on the date the return prescri"ed therefore is %led "y the person lia"le
thereto.
$n case the taxpayer elects and is 8uali%ed to report the ain "y instalments, the tax
due from each installment payment shall "e paid within thirty 1/A3 days from the
receipt of such payments.
#ssess*ent and 3ay*ent o4 de:ciency tax
The ter defciency eans:
-. The amount "y which the tax imposed "y this Title exceeds the amount shown as the
tax "y the taxpayer upon his return.
Iowever, the amount so shown on the return shall "e increased "y the amount
previously
assessed 1or collected without assessment3 as a de%ciency, and decreased "y the
amount
previously a"ated, credited, returned or otherwise repaid in respect of such tax, or
.. $f no amount is shown as the tax "y the taxpayer upon his return, or if no return is
made "y the taxpayer, then the amount "y which the tax exceeds the amounts
previously assessed 1or collected without assessment3 as a de%ciency.
Iowever, such amounts previously assessed or collected without assessment shall
%rst "e decreased "y the amounts previously a"ated, credited, returned or otherwise repaid
in respect of such tax.
WIT$OLDING OF TAX AT SORCE
T8o Linds o4 8ithholdin)
-. !ithholdin of %nal tax on certain incomes
.. !ithholdin of credita"le tax at source
F%nd 8ithheld held in tr%st 5y 8ithholdin) a)ent
The taxes deducted and withheld "y the withholdin aent shall "e held as a special
fund in trust for the overnment until paid to the collectin oFcers.
All taxes withheld pursuant to the K$RC and its implementin rules and reulations are
here"y considered trust funds and shall "e maintained in a separate account and not
comminled with any other funds of the withholdin aent.
ESTATES AND TRSTS
Taxation o4 estates and tr%sts
$ncome tax imposed upon individuals shall also apply to the income of estates or of
any kind of property held in trust.
The tax shall "e computed upon taxa"le income of the estate or trust and shall "e
paid "y the %duciary.
$ts status is dependent on the status of the decedent immediately prior to his death.
111
"arties to a Tr%st?
a. T-0857- 7- >-.,57- & one who created the trust
". T-085++ 7- GB036.-F Q one who may hold the property for the "ene%t of other person
known as :+,+G36.-F& )ometimes, the %duciary is also the "ene%ciary&
3& B+,+G36.-F
2state may "e the su"#ect to tax, if it is under your administration. $t may only
"e under administration or settlement if the properties of the decedent are
settled under #udicial settlement.
$f the estate is under extra&#udicial settlement, it is not su"#ect to tax "ecause
that will not earn income considerin that the heirs areed to settle the estate
extra&#udicially.
!hen we speak of #udicial settlement, this may include estate or intestate
proceedins.
T-085 <.F :+ 80:H+35 57 5.2 6; 5?+ 5-085 68 6--+D73.:/+.
N7,-5.2.:/+ 5-085 .-+1
1& R+D73.:/+ T-085& The income here will "e taxed in so far as the recipient of the
same is
concerned.
2& E<4/7F++8 T-085& $f an employer esta"lishes a pension trust for the "ene%t of
the employees, that pension trust is not taxa"le.
T?+ 5-085 68 -+D73.:/+ 6; 5?+ 47C+- 57 -+D+85 5?+ 565/+ 57 5?+ 4-74+-5F 7; 5?+ 5-085 68
D+85+B1
-. in the rantor or in con#unction with other person who does not have the
su"stantial adverse
interest in the disposition of the property
.. in any person who does not have su"stantial adverse interest in the disposition of
the property.
$n irrevoca"le trust, you cannot transfer or revest the title of the property.
DKo su"stantial interest in the disposition of the propertyJ Q he must not "e the
"ene%ciary.
$f the properties of the estate is not invested in a "usiness, so ten heirs are #ust
co&owners of the property, that is not taxa"le "ecause co&ownership as a rule
is not taxa"le.
$f the heirs decide to continue the "usiness, such that the administrator may
manae the same, that will "ecome an unreistered taxa"le partnership.
2state and trust may "e taxed on the same manner and on the same "asis as
in the case of individual taxpayers. )o, they may claim the deductions under
)ection /0 as lon as these deductions were paid or incurred in connection
with the "usiness of that estate or trust.
2state and trust are entitled to personal exemptions ;.A,AAA.
SPECIAL DEDCTIONS @5?68 3., :+ .D.6/+B 7; 7,/F :F +85.5+ .,B 5-085A1
-. $n the case of intestate, the executor, or administrator may deduct the income
distri"uted to the heirs durin the particular year when such estate is still under
settlement.
.. $n the case of a trust, the income may "e distri"uted to the "ene%ciaries durin
that year may also "e deducted. The trustee or %duciary may distri"ute the income or
accumulate the income. The trustee has the discretion whether to distri"ute the
income to the "ene%ciaries durin the taxa"le year or to accumulate the same and
distri"ute such income after the lapse of certain period of time or year. $n the
event that income of the trust is distri"uted to the "ene%ciary, this particular amount
may also "e claimed as deductions.
112
(0+8567,81 $f there are two 1.3 trust created "y one trustor or rantor, how do we tax the
income of that trustR
A,8C+-1 Lnder the law, the taxa"le income of these two 1.3 trust must "e consolidated.
That trust should "e taxed as if they constitute one trust.
S650.567,1
Erantor N created . trust. Hne is A trust created and the other is @ trust. There is only
one "ene%ciary named P.
:et us assume that the taxa"le income of trust A is ;-A,AAA. The taxa"le income of @
trust is ;.A,AAA. The total taxa"le income is ;/A,AAA. !e will tax these . trust separately "ut
throuh consolidation.
$n payin the tax after applyin the applica"le tax rate to the taxa"le income of
;/A,AAA, the tax due should "e apportioned to trust A and @.
)o, for purposes of income tax, the taxa"le income of these . trust should "e
consolidated, "ut for purposes of payin the tax, the tax due should "e apportioned.
7hat are the inco*e o4 the estates or tr%sts 8hich are incl%ded 4or taxation9
-. $ncome accumulated in trust for the "ene%t of un"orn or unascertained person or
persons with continent interests, and income accumulated or held for future
distri"ution under the terms of the will or trust.
.. $ncome which is to "e distri"uted currently "y the %duciary to the "ene%ciaries, and
income collected "y a uardian of an infant which is to "e held or distri"uted as the
court may direct.
/. $ncome received "y estates of deceased persons durin the period of administration
or settlement of the estate.
0. $ncome, which in the discretion of the %duciary, may "e either distri"uted to the
"ene%ciaries or accumulated.
$xce3tion 4ro* taxation o4 estates or tr%sts
2mployee+s trust which forms part of a pension, stock "onus or pro%t&sharin plan of
an employer for the "ene%t of some or all of his employees shall "e exempt from
income tax*
-. $f contri"utions are made to the trust "y such employer, or employees, or "oth, for the
purpose of distri"utin to such employees the earnins and the principal of the fund
accumulated "y the trust in accordance with such plan, and
.. $f under the trust instrument, it is impossi"le, at any time prior to the satisfaction of
all lia"ilities with respect to employees under the trust, for any part of the corpus or
income to "e used for or diverted to purposes other than for the exclusive "ene%t of
the employees.
Iowever, any amount actually distri"uted to any employee or distri"utee shall "e
taxa"le to him in the year in which so distri"uted to the extent that it exceeds the
amount contri"uted "y such employee or distri"utee.
Taxa5le inco*e o4 estates or tr%sts
The taxa"le income of the estate or trust shall "e computed in the same manner and
on the same "asis as in the case of an individual.
Iowever, there shall "e allowed as a deduction in computin the taxa"le income of
the estate or trust the amount of the income of the estate or trust for the taxa"le year
which is to "e distri"uted currently "y the %duciary to the "ene%ciaries, and the
amount of the income collected "y a uardian of an infant which is to "e held or
distri"uted as the court may direct, "ut the amount so allowed as a deduction shall "e
included in computin the taxa"le income of the "ene%ciaries, whether distri"uted or
not.
$n the case of income received "y estates or deceased persons durin the period of
administration or settlement of the estate, and in the case of income which, in the
discretion of the %duciary, may "e either distri"uted to the "ene%ciary or
accumulated, there shall "e allowed as an additional deduction in computin the
113
taxa"le income of the estate or trust the amount of the income of the estate or trust
for its taxa"le year, which is properly paid or credited durin such year to any leatee,
heir or "ene%ciary, "ut the amount so allowed as a deduction shall "e included in
computin the taxa"le income of the leatee, heir or "ene%ciary.
The deductions allowed a"ove shall not "e allowed in case of a trust administered in a
forein country.
$xe*3tion allo8ed to estates and tr%sts
There shall "e allowed an exemption of twenty thousand pesos 1;.A,AAA3 from the
income of the estate or trust.
Fid%ciary ret%rns
Euardians, trustees, executors, administrators, receivers, conservators and all
persons or corporations actin in any %duciary capacity shall render a return of the
income of the persons, trust or estate for whom or which they act, and "e su"#ect to
all the provisions of this Title, which apply to individuals in case such person, estate or
trust has a ross income of twenty thousand pesos 1;.A,AAA3 or over durin the
taxa"le year.
)uch %duciary or person %lin the return for him or it, shall take oath that he has
suFcient knowlede of the afairs of such person, trust or estate to ena"le him to
make such return and that the same is, to the "est of his knowlede and "elief, true
and correct, and "e su"#ect to all provisions of this Title which apply to individuals.
Fid%ciaries inde*ni:ed a)ainst clai*s 4or taxes 3aid
Trustees, executors, administrators and other %duciaries are indemni%ed aainst the
claims or demands of every "ene%ciary for all payments of taxes which they shall "e
re8uired to make under the provisions of this Title, and they shall have credit for the
amount of such payments aainst the "ene%ciary or principal in any accountin which
they make as such trustees or other %duciaries.
TRANSFER TAXES
IN GENERAL
TRANSFER TAXES
Transfer taxes are taxes imposed upon the ratuitous disposition of private property.
They are not taxes on property as such "ecause their imposition does not rest upon
eneral ownership "ut on the passin of the property.
Ninds o4 trans4er taxes
-. 2state tax
.. <onor+s tax
;residential <ecree Ko. 5= eliminated the inheritance tax and the donee+s tax.
ESTATE TAX
2state tax is the tax on the riht to transmit property at death and on certain transfer
which are made "y the statute the e8uivalent of testamentary dispositions.
114
Tax on ratuitous transfers ortis causa.
Tax imposed on the riht or privilee to transmit properties upon death of a decedent
or testator
DONORS TAX
$t is tax on ratuitous transfer inter vivos.
$t is imposed on the privilee of the donor to ive. %L/.B73 D& C7<<68867,+-O
Tax imposed on the riht or privilee to transmit properties ratuitously in favor of
another who accepts the same. This transmission of properties occurs durin the
lifetime of the donor and the donee.
ESTATE TAX
ESTATE TAX
2state tax is the tax on the riht to transmit property at death an on certain transfers
which are made "y the statute the e8uivalent of testamentary dispositions.
Tax on ratuitous transfers ortis causa.
DECEDENTS INTEREST
assets that are still owned "y decedent at the time of death to the extent of his
e8uity or interest in any property whether as exclusive owner, con#ual owner,
or common owner.
N2H>& <F $&T#T$ T#F"#G$'1

1& R+86B+,5 +85.5+ 5.24.F+- includes citi7en of the ;hils., resident alien who died in the
;hils., and such alien, at the time of his death, is a resident of the ;hils,
2& N7,--+86B+,5 +85.5+ 5.24.F+- is limited to non&resident alien individual.
Real properties, personal tani"le properties and personal intani"le properties
of resident decedent 1R<3 are taxed wherever situated.
Real and personal tani"le properties of non&resident decedent 1KR<3 are
taxa"le only if they are located in the ;hils.
Real and personal tani"le properties of KR< are taxa"le only if they ac8uire
tax situs in the ;hils.
P+-87,./ 6,5.,>6:/+ 4-74+-56+8 5?.5 .-+ B++<+B 57 ?.D+ .3J06-+B P?6/& 86508 .-+1 %F'
SOB @DC' FC-85P' FC-SPA' SR PO
-. Cranchise which is exercised in the ;hils.
.. )hares of stock, o"liation or "onds issued "y domestic corporation or sociedad
anoni*a
/. )hares of stock, o"liation or "onds issued "y forein corp., >4B of the "usiness of which
is conducted in the ;hils
0. )hares, o"liations or "onds ac8uire "usiness suits in the ;hils.
X )uch shares, o"liations or "onds ac8uire "usiness situs in the ;hils. of they are
used "y forein corp. in furtherance of its trade or "usiness.
4. )hares or rihts in any partnership, "usiness or in any partnership, "usiness or industry,
esta"lished in the ;hils.
[ $f the personal intani"le properties of a KR< does not "elon to the a"ove&mentioned
enumeration, they may not form part of his ross income or we may also apply the doctrine
of obilia se'untur persona.
115
[ Mo5ilia se;%nt%* 3ersona*, accordin to the )upreme Court, is a mere %ction of law.
)o, it must yield to the provision of law which provides tax situs.
(0+8567,1 )uppose the personal intani"le properties of KR< ac8uired tax situs in the ;hils.,
can this "e exempt from real estate taxR
A,8C+-1 P2), "y applyin the rule on reciprocity.
RLE ON RECIPROCIT# the forein country of that KR< does not impose or allows
exemption on tax on the properties of the citi7ens of the ;hils. who died in that forein
country.
M The phrase Ddoes not imposeJ and Dallows exemptionJ are diferent from each other.
!hen we say Ddoes not imposeJ, this means totally exempt. DAllows exemptionJ
means this may not cover all properties "ut only certain properties.
C.8+1 Country of Morocco has no international personality. $f it rants exemptions to the
intani"le personal properties to Cilipino citi7ens who died in that country, will you apply also
that rule on reciprocityR
$+/B1 P2). $t does not matter whether the country has international personality or not. !hat
is important is it allows or rants exemption from estate tax.
IS+3& 85' 6ross $state The value 1CM?3 of the ross estate of the decedent shall "e
determined "y includin the value, at the time of his death, of all property, real or personal,
tani"le or intani"le, wherever situated* ;rovided, however, That in the case of a non&
resident decedent who at the time of his death was not a citi7en of the ;hilippines, only that
part of the entire ross estate which is situated in the ;hilippines shall "e included in his
taxa"le estate.J
$state tax v. inheritance tax
$nheritance tax is a tax on the privilee of inheritin the property of a person upon his
death. 2state tax, on the other hand, is a tax on the privilee of transmittin or
transferrin property ratuitously upon one+s death.
Hat%re and o5Cect o4 estate tax
2state tax is not a property tax. $t is a privilee or excise tax.
The o"#ect of estate tax is to tax the shiftin of economic "ene%ts and en#oyment of
property from the dead to the livin.
FOR T$EORIES RE1 PRPOSE OF ESTATE TAX
1. /ene:t-received theory
M The tax is in return for the services rendered "y the state in the distri"ution of the
estate of the decedent and for the "ene%ts that accrue to the estate and the heirs.
(. &tate-3artnershi3 theory
M The tax is in the share of the state as a Lpassive and silent partner in the
accumulation of property.
3. #5ility-to-3ay theory
M The tax is "ased on the fact that that receipt of inheritance creates an a"ility to pay
and thus to contri"ute to overnmental income.
4. 'edistri5%tion-o4-8ealth theory
M The tax is imposed to help reduce undue concentration of wealth in society to which
the receipt of inheritance is a contri"utin factor.
2ncidence o4 estate taxation
-. ;redecessor
.. )uccessor
116
/. Ko personal incidence Q it merely falls on the estate
#33lica5le la8 in estate taxation
2state taxation is overned "y the statute in force at the time of the death of the
decedent. ')ection /, Revenue Reulations -6&=/(
.> July -==. & amendments under RA 60== took efect. Lnder said law, %rst
;.AA,AAA is exempt from estate taxation and the tax rate ranes from >B to /4B.
A- January -==> Q amendments under the K$RC took efect. Lnder this law, the %rst
;.AA,AAA is also exempt "ut the tax rate only ranes from 4B to .AB.
>ate o4 accr%al v. date o4 3ay*ent o4 estate tax
S+3567, 3' R+D& R+>& 1"-!31 Accrual of the estate tax as of the date of the death of
the decedent is distinct from the o"liation to pay the same.
L7-+,=7 D& P78.B.81 The accrual of the tax is to "e distinuished from the
o"liation to pay the same. The time when the heir leally succeeds to the
inheritance may difer from the time when he actually receives such inheritance. The
property "elons to the heir at the moment of the death of the ancestor as completely
as if the latter had executed and delivered to the former a deed for the same "efore
his death. Iowever, it does not follow that the o"liation to pay the tax arises as of
that date. The time for payment is clearly %xed "y law.
Trans4ers covered 5y the estate tax
-. Eratuitous transfers ortis causa
.. "nter vivos transfers which are treated "y the K$RC as su"stitutes for testamentary
dispositions
2nter vivos trans4ers treated as testa*entary dis3ositions
-. Transfers in contemplation of death
.. Transfers with retention or reservation of certain rihts
/. Revoca"le transfers
0. Transfers of property arisin under a eneral power of appointment
4. Transfers for insuFcient consideration
2nter vivos trans4ers excl%ded
Transfers "y virtue of a bona fde sale of property for an ade8uate and full
consideration in money or money+s worth.
$xe*3tion o4 certain ac;%isitions and trans*issions 4ro* estate tax
-. The merer of the usufruct in the owner of the naked title
.. The transmission of delivery of the inheritance or leacy "y the %duciary heirs or
leatee to the %deicomissary.
/. The transmission from the %rst heirs, leatee or donee in favour of another
"ene%ciary, in accordance with the desire of the predecessor.
0. All "e8uests, devises, leacies or transfers to social welfare, cultural and charita"le
institutions, no part of the net income of which inures to the "ene%t of any individual.
;rovided that not more than thirty percent 1/AB3 of the said "e8uests, devises,
leacies or transfers shall "e used for administrative purposes.
<ther exe*3tions 4ro* estate tax %nder s3ecial la8s
-. @ene%ts received "y mem"ers from the E)$) and the ))) "y reason of death.
117
.. Amounts received from the ;hilippines and the L.). Eovernments for damaes
sufered durin the last war.
/. @ene%ts received "y "ene%ciaries residin in the ;hilippines under laws administered
"y the L.). ?eterans Administration.
$xe*3tion to non-resident aliens 4or intan)i5le 3ersonal 3ro3erty
$nvolves only intani"le personal property
:aws of forein country did not impose transfer tax or allows a similar exemption to
Cilipinos not residin in that forein country
'ationale 4or exe*3tion to non-resident aliens
A decedent+s intani"le personal property may "e su"#ect to transfer taxes "oth in his
place of domicile or residence and in the place where such property has a situs or is
found. $n order to prevent multiplicity of taxation of the same intani"le personal
property with a situs in the ;hilippines left "y a non&resident alien decedent, the K$RC
provides that no tax shall "e collected as to such property in two instances*
-. Corein country does not impose transfer tax, and
.. Corein country imposes transfer tax "ut rants similar exemption.
INTER VIVOS TRANSFERS TREATED AS E(IVALENT TO TESTAMENTAR#
DISPOSITIONS
TRANSFER IN CONTEMPLATION OF DEAT$
Trans4er in conte*3lation o4 death
Any transfer made, "y trust or otherwise, "y the decedent at any time in
contemplation of death.
The words mean that it is the thouht of death, as a controllin motive, which induces
the disposition of the property for the purpose of avoidin the tax
Kote that it is contemplation of death and not necessarily of imminent death to which
the statute refers.
Circ%*stances a=ectin) s%ch trans4er
Ae and state of health of decedent at the time of ift, especially where he was aware
or serious illness
:enth of time "etween the ift and the date of death
Concurrent makin of a will or makin a will within a short time after the transfer
Motives 8hich 3recl%de a trans4er 4ro* 5ein) cate)orized as one *ade in
conte*3lation o4 death
-. To relieve the donor from the "urden of manaement
.. To save income or property taxes
/. To settle family litiated and unlitiated disputes
0. To provide independent income for dependents
4. To see the children en#oy the property while the donor is alive
5. To protect the family from the ha7ards of "usiness
6. To reward services rendered
TRANSFERS WIT$ RETENTION OR RESERVATION OF RIG$TS
118
Trans4ers 8ith retention or reservation o4 ri)hts
Transfers "y trust or otherwise*
-. !ithout retention of interest, "ut efect postponed.
$ntended to take efect in possession or en#oyment at or after his death, or
.. !ith retention of interest to income or riht to desinate persons to en#oy
property or income.
Lnder which he has retained for his life or for any period not ascertaina"le
without reference to his death or for any period which does not in fact end "efore his death*
a. the possession or en#oyment of or the riht to the income from the property, or
". the riht either alone or in con#unction with any person, to desinate the persons
who shall possess or en#oy the property or the income therefrom.
REVOCALBE TRANSFERS
'evoca5le trans4ers
-. !ith reserved power to alter, amend, revoke or terminate
M Transfer, "y trust or otherwise, where the en#oyment thereof was su"#ect at the date
of his
death to any chane throuh the exercise of a power 1in whatever capacity
exercisa"le3 "y the decedent alone or "y the decedent in con#unction with any other
person to alter, amend, revoke or terminate it.
.. !ith such power relin8uished
M !hen any such power which would "rin the property in the taxa"le estate is
relin8uished in contemplation of the decedent+s death.
PROPERT# PASSING NDER A GENERAL POWER OF APPOINTMENT
"o8er o4 a33oint*ent
This refers to a riht to desinate the person who shall en#oy or possess certain
property from the estate of a prior decedent.
Cor purposes of estate taxation, the power to dispose of property at death "y the
exercise of appointment is the e8uivalent of ownership. $t is a potential source of
wealth to the appointee and the disposition of wealth efected "y its exercise or
relin8uishment at death is one form of en#oyment of wealth.
'e;%isites
-. The existence of a eneral power of appointment.
.. An exercise of such power "y the decedent 1donee or appointee3 "y will or "y deed in
certain cases.
/. The passin of the property "y virtue of such exercise.
6eneral 3o8er o4 a33oint*ent
A power of appointment is eneral when it authori7es the donee to appoint any
person he pleases, includin himself, his spouse, his estate, his executor or
administrator, and his creditor, thus havin as full dominion over the property as
thouh he owned it.
&3ecial 3o8er o4 a33oint*ent
$t is special when the donee can appoint only amon a restricted or desinated class
of persons other than himself.
"ro3erty 3assin) %nder a )eneral 3o8er o4 a33oint*ent
119
Eeneral power of appointment exercised "y the decedent*
-. "y will,
.. "y deed executed in contemplation of or intended to take efect in possession or
en#oyment at or after his death,
/. "y deed under which he has retained for his life or any period not ascertaina"le
without reference to his death or for any period which does not in fact end "efore
his death*
a. the possession or en#oyment of, or the riht to the income from, the
property, or
". the riht either alone or in con#unction with any person to desinate the
persons who shall en#oy or possess the property of the income therefrom.
TRANSFER FOR INSFFICIENT CONSIDERATION
$f any one of the transfers, trusts, interests, rihts or powers enumerated a"ove is
made, created, exercised or relin8uished for a consideration in money or money+s
worth, "ut is not a bona fde sale for an ade8uate and full consideration in money or
money+s worth.
$n such a case, the excess of the fair market value of the transferred property at the
time of death over the value of the consideration received, shall "e included in the
ross estate.
Fictitio%s sale
$f the purported a"solute sale inter vivos "y decedent is shown to "e %ctitious, then
the total value of the property transferred is su"#ect to inclusion in the taxa"le estate.
DETERMINATION OF T$E GROSS ESTATE
6ross estate, in )eneral
-. Resident and non&resident citi7ens and resident alien
M Eross estate includes the value, at the time of the decedent+s death, of all his
property, real or personal, tani"le or intani"le, wherever situated.
.. Kon&resident alien
M Hnly that part of the entire ross estate which is situated in the ;hilippines shall "e
included in his taxa"le estate.
'esidence
Cor the purposes of estate taxation, residence refers to the Dpermanent home, the
place to which whenever a"sent, for "usiness or pleasure, one intends to return, and
depends on facts and circumstances, in the sense that they disclose intent.J $t is not
necessarily the actually place of residence.
A3567, 50' C6D6/ C7B+1 Cor the exercise of civil rihts and the ful%lment of civil
o"liations, the domicile of natural persons is the place of their ha"itual residence.
V+/6//. D& P78.B.81 Arthur Moody+s residence is still the ;hilippines. Iere, he left the
;hilippines "ecause he was a fuitive, not from #ustice, "ut from con%nement in a
leper colony. To efect an a"andonment of one+s domicile, there must "e a deli"erate
and prova"le choice of a new domicile, coupled with residence in the place chosen.
There was no efective a"andonment in this case.
C7//+357- D& L.-.1 Residence is synonymous with domicile.
&3eci:c ite*s incl%ded in the )ross estate
-. Real and personal property, whether tani"le or intani"le wherever situated.
.. Cranchise which must "e exercised in the ;hilippines.
120
/. )hares, o"liations or "onds issued "y any corporation or socieded anonia
orani7ed or constituted in the ;hilippines in accordance with its laws.
0. )hares, o"liations or "onds issued "y any forein corporation >4B of the "usiness of
which is located in the ;hilippines.
4. )hares, o"liations or "onds issued "y any forein corporation if such shares,
o"liations or "onds have ac8uired a "usiness situs in the ;hilippines.
5. )hares or rihts in any partnership, "usiness or industry esta"lished in the ;hilippines.
6. ;roceeds of a life insurance policy taken out "y the decedent upon his own life.
'e;%isites 4or incl%sion o4 li4e ins%rance
-. $t must "e taken out "y the decedent upon his own life.
.. The "ene%ciary is*
a. the estate of the decreased, his executor or administrator, irrespective of
whether or not the insured retained the power of revocation, or
". other than the decedent, where the insured reserved to himself the power to
chane or revoke the name of the "ene%ciary durin his lifetime.
N75+1 $f the desination of the "ene%ciary is irrevoca"le, then the proceeds of the life
insurance will not "e included in the ross estate.
The co*3osition o4 the )ross estate *ay incl%de?
1& D+3+B+,58 I,5+-+85& 1includes yields, fruits and interest3
- The ross estate may include the fruits and income of the properties and that
may constitute the decedent+s interest.
- $n the case of parcel of land, it may produce income in the form of harvest
which harvest may form part of the ross estate.
- $n the case of apartment, the rental of such apartment should also "e included,
not only the value of the property.
- <ividends
- ;artnership pro%ts
- Rihts of usufruct
2& T-.,8;+- :F D6-50+ 7; >+,+-./ 47C+- 7; .4476,5<+,5
- $t implies that if the transfer is made under special power of appointment that
should "e excluded from ross estate.
- $n eneral power of appointment, the power is exercisa"le or in favor of the
estate, executor, administrator or a creditor of the estate. $f the power is
exercisa"le other than these 1estate, administrator, administrator or creditor of
the estate3, that may "e considered as special power of appointment.
3& R+D73.:/+ T-.,8;+- Any transfer made "y the decedent durin his lifetime where the
decedent has reserved the riht to A:T2R, AM2K<, T2RM$KAT2, or R2?HV2. such transfer, it
is suFcient that the decedent had the power to R2?HV2, thouh he did not exercise such
power.
- $rrevoca"le transfers should "e excluded from ross estate.
- Revoca"le transfers are transfers which are su"#ect to alteration, termination,
amendment or modi%cation "y the decedent.
4& T-.,8;+-8 ;7- I,80R36+,5 C7,86B+-.567,
- The amount that may form part of the ross estate is the diference "etween
the CM? of the property and the consideration iven.
E2.<4/+1 $f the property has a CM? of ;-AA,AAA and the consideration iven is
only ;4A,AAA, the diference of ;4A,AAA represents insuFcient consideration.
5& P-73++B8 7; L6;+ I,80-.,3+ P7/63F
- P-73++B8 7; /6;+ 6,80-.,3+ 47/63F <.F :+ 6,3/0B+B 6;1
a. the "ene%ciary desinated is the estate executor, administrator or heirs of the
decedent Q whether revoca"le or not revoca"le
b. the "ene%ciary desinated is a /
rd
person who is revoca"ly desinated as
"ene%ciary
121
- P-73++B8 7; /6;+ 6,80-.,3+ 47/63F 68 +23/0B+B ;-7< 5?+ >-788 +85.5+ 6,
5?+ ;7//7C6,> 3.8+81
a. /
rd
person is irrevoca"ly desinated as "ene%ciary
". proceeds of roup insurance policy Q taken out "y the co. for its employees
c. proceeds of accident insurance policy except accident insurance policy as
characteristic
d. proceeds of E)$) :ife $nsurance ;olicy 1ovt. employees3
e. proceeds of life insurance paya"le to the heirs of deceased L. ). and ;hil. Army
N75+1 As reards the estate executor, administrator or heirs as "ene%ciary, it
is immaterial whether the desination is irrevoca"le or revoca"le.
6& T-.,8;+- 6, C7,5+<4/.567, 7; D+.5?
- $f such transfer was induced "y the thouht of death principally, R2EAR<:2))
of whether the death is impendin forthcomin or not
- TRAK)C2R may "e done "efore, at the time of or even after the decedent+s
death
- /&P2AR ;R2)LM;T$HK 'deleted "y ;.<. -6A4. Au. -, -=>53
EXCEPTIONSLEXCLSIONS ;-7< GROSS ESTATE
-3 merer of L)LCRLCT in the MAV2< T$T:2
.3 C$<2$CHM$))ARP
/3 transmission from -
st
heir to another "ene%ciary
& will of the testator
03 @2ZL2)T, <2?$)22), :2EAC$2) or TRAK)C2R
& )HC$A: !2:CAR2, CL:TLRA: and CIAR$TA@:2 institutions
& no part of net income inures to any individual
& not more than /AB for admin. purposes
DEDCTIONS FROM GROSS ESTATE
DEDCTIONS FROM GROSS ESTATE T$AT MA# BE1
-. Con#ual deductions 'CI, J2, C2, M2, CA2, :, L1MG$3,T, )<, );, C&$;(
.. A"solute deductions
/. 2xclusive deductions '?<, T&;L, LM, 2&2;( 1share of ))3
HTI2R)* 'M&L, C, T&-
)T
&@, E&C$(
I& CON*GAL AND ABSOLTE DEDCTIONS 6,3/0B+1
-. Camily home
.. Judicial and funeral expenses
/. Casualty losses
0. $nde"tednessGunpaid claim aainst the estate
4. Accrued taxes 1"efore the death of the decedent3
5. )tandard <eduction
6. )eparation pay iven to the heirs of the decedent on account of death
D68308867,1
-. F.<6/F ?7<+ 1even unmarried person may have a family home3 su"#ect to the followin
conditions*
a. there must "e only one 1-3 family home,
". there must "e certi%cation issued "y the @aranay Captain that the decedent is a
resident of and own that family home in that particular locality,
c. the amount that is deducti"le or the CM? of the family home should not "e more than
;-M, excess shall "e su"#ect to tax
d. the CM? must "e included in the ross estate of the decedent.
M $f the CM? of the family home is ;4M, this should "e included in the ross estate of the
decedent. @ut when you claim deductions, you can only claim up to ;-M.
.. 2xpenses which may "e in the nature of H0B636./ +24+,8+8 7- ;0,+-./ +24+,8+8.
122
M+B63./ +24+,8+8 are also deducti"le su"#ect to the followin conditions*
a. the amount deducti"le, is limited only to ;4AA,AAA,
". it must "e incurred within one 1-3 year "efore the death of the decedent,
c. this must "e su"stantiated "y receipts
$n the case of funeral expenses, the amount deducti"le is the actual funeral expenses on
the amount which is not more than 4B of the ross estate whichever is lower, "ut in no case
to exceed ;.AA,AAA.
There is no limitation as to amount with reard to #udicial expenses. As lon as it is paid or
incurred in connection with the preservation, administration or settlement of the estate, it
may "e claimed as deductions. Judicial expenses also include extra&#udicial expenses.
/. L788+8 that may arise from casualty or casualty losses such as %re, storm, shipwreck,
ro""ery, em"e77lement, theft and other casualty losses.
These losses must "e sustained not later than six 153 months after the death of the
decedent.
not compensated "y insurance
0. I,B+:5+B,+88 which partake of the nature of the unpaid claims aainst the estate.
These must "e supported "y notari7ed documents. These o"liations must "e incurred
within three 1/3 years prior to death of the decedent.
Another inde"tedness which may "e claimed as deduction is claim aainst insolvent
persons. Iere, the claimant is the decedent. $n order to "e deducti"le, this claim must "e
included in the ross estate.
deduction from the ross estate shall "e the collecti"le portion
4. T.2+8 which must accrue "efore the death of the decedent.
5. S5.,B.-B B+B03567,
The amount is ;-M. )o, this may only "e applied if the ross estate of the decedent is
more than ;-M.
6. S+4.-.567, 4.F iven to the heirs of the decedent on account of death.
The procedure is to include the amount in the ross estate and then claim this thereafter
deductions&
>ed%ctions allo8ed to the estate o4 a citizen or a resident
-. 2xpenses, losses, inde"tedness and taxes
.. ;roperty previously taxed or vanishin deduction
/. Transfers for pu"lic use
0. Camily home not exceedin one million pesos 1;-,AAA,AAA3
4. )tandard deduction e8uivalent to tone million pesos 1;-,AAA,AAA3
5. Medical expenses 1;4AA,AAA3 within a one year period
6. Amount received "y heirs under Repu"lic Act Ko. 0=-6 1Retirement "ene%ts of
employees of private %rms not su"#ect to levy, attachment, etc.3
>. Ket share of the survivin spouse in the con#ual partnership property
>ed%ctions allo8ed to non-resident aliens
-. 2xpenses, losses, inde"tedness and taxes
.. ;roperty previously taxed 1vanishin deductions3
/. Transfers for pu"lic use
0. Ket share of the survivin spouse in the con#ual partnership property
N75+1 To "e entitled to deductions, executor, administrator, or anyone of the heirs, as the
case may "e, must include in the return re8uired to "e %led the value at the time of his death
of that part of the ross estate of the non&resident not situated in the ;hilippines.
$x3enses, losses, inde5tedness and taxes
123
-. Cuneral expenses Q maximum ;.AA,AAA. 14B or actual cost3
.. Judicial expenses of testamentary or intestate proceedins
/. Claims aainst the estate
0. Claims of the deceased aainst insolvent persons
4. Lnpaid mortaes upon, or any inde"tedness in respect to, property
5. Casualty losses
'e;%isites 4or 4%neral ex3enses
-. Cuneral expenses must "e actually paid and incurred "y the estate. 2xpenses must
"e duly supported "y receipts or other evidence.
.. The amount thereof is limited to %ve percent 14B3 of the ross estate or the actual
amount spent, whichever is lower, "ut in no case to exceed ;.AA,AAA.
-%dicial ex3enses
2xpenses of administration
These expenses include Dadministration expensesJ or those actually and necessarily
incurred in the administration of the estate, that is, in the collection of assets,
payment of de"ts, and distri"ution amon persons entitled to the estate.
$ncludin reasona"le attorney+s fees
2xpenses not deducti"le include those incurred for the individual "ene%t of the heirs,
leatees or devises.
There is no limit as to the amount of #udicial expenses. As lon as it is incurred in
connection with the preservation, administration, or settlement of the estate, it may
"e claimed as deductions.
2xpenses incurred in the extra&#udicial settlement may "e allowed as deductions from
the ross estate, as part of the #udicial expenses.
'e;%isites 4or ded%cti5ility o4 clai*s a)ainst the estate
-. They were contracted in ood faith and for an ade8uate and full consideration in
money or money+s worth.
.. They must "e existin aainst the estate.
/. They must "e leally enforcea"le o"liations of the decedent and ouht to "e
enforced "y the claimants.
0. They must "e reasona"le certain in amount
4. At the time the inde"tedness in incurred, the de"t instrument was duly notari7ed and,
if the loan was contracted within three 1/3 years "efore the death of the decedent, the
administrator or executor shall su"mit a statement showin the disposition of the
proceeds of the loan.
'e;%isites 4or ded%cti5ility o4 clai*s o4 deceased a)ainst insolvent 3ersons
-. The amount of said claims has "een initially included as part of his ross estate.
.. The incapacity of the de"tors to pay their o"liations is proven, not merely alleed.
'e;%isites 4or ded%cti5ility o4 %n3aid *ort)a)es
-. The fair market value without deductin the mortae inde"tedness has "een initially
included as part of the ross estate.
.. The mortae inde"tedness was contracted in ood faith and for an ade8uate and full
consideration in money or money+s worth.
0n3aid taxes
124
Taxes owed "y the decedent and unpaid, "ein de"ts in favour of the overnment, are
deducti"le as a claim aainst the estate.
Iowever, income taxes upon income received after the death of the decedent, or
property taxes not accrued "efore his death, or any estate tax, are not deducti"le
"ecause they are not charea"le to the income of the estate.
Cas%alty losses
$ncludes all loss arisin from %re, storms, shiprwreck or other casualties, or from
ro""ery, theft, or em"e77lement.
'e;%isites 4or the ded%cti5ility o4 Cas%alty losses
-. There must "e loss arisin from %re, storm, shipwreck, or other casualties, or from
ro""ery, theft, or em"e77lement.
.. )uch loss is not compensated "y insurance or otherwise.
/. )uch loss has not "een claimed as a deduction for income tax purposes.
0. )uch loss was incurred not later than the last day for the payment of the estate tax 15
months3.
"ro3erty 3revio%sly taxed or Vanishin) ded%ctions
The deduction which is commonly referred to as vanishin deduction, is an amount,
allowed to reduce the taxa"le estate of a decedent where property received "y him
from a prior decedent "y ift, "e8uest, devise, or inheritance, or transferred to him "y
ift, has "een the o"#ect of previous transfer taxation. The rate of deduction radually
diminishes and entirely vanishes dependin upon the time interval "etween the two
successive transfers.
The deduction operates to reduce the harshness of successive taxation of the same
property within a relatively short period of time 1up to 4 years3 occasioned "y the
untimely death of the transferee after the receipt of the property from a prior
decedent or a donor, as the case may "e.
VANIS$ING DEDCTION
- is an allowa"le deduction aainst the exclusive property of the decedent
- may "e claimed as deduction under the followin conditions*
a. D+.5? 7; . B+3+B+,5 which must take place within C$?2 P2AR) from the death of the
prior incident or "efore ift was iven.
)ituation*
A died. @ is the heir. Kow, you may recall that properties ac8uired throuh ratuitous
title durin the marriae is classi%ed as exclusive property.
Hne of the properties of A which forms part of his ross estate had already "een
taxed. This property will "e transmitted to @ "y way of succession. $f @ died, take note
that one of his properties was ac8uired throuh inheritance from A and that is an
exclusive property. This property had already "een taxed "ecause that forms part of the
ross estate of A. Aain, this same property may "e su"#ect to estate tax "ecause this
exclusive property forms part of the ross estate of @. There seems to "e dou"le taxation.
That is why, the purpose of vanishin deduction is to mitiate the harshness of dou"le
taxation. )o, @ may "e entitled to that vanishin deduction which may reduce his estate
tax.
The condition set "y law is that @ must have died within the 4&year period. $f @ died 5
years after the death of A, @ can no loner claim such vanishin deductions.
". IB+,565F 7; P-74+-5F Q located in the ;hils.
)o, there must "e evidence to that efect that this is the same property which forms
part of the ross estate of A.
3& I,3/0867, 7; 5?+ 5.2 4-74+-5F 6, 5?+ >-788 +85.5+ 7; 5?+ 4-67- B+3+B+,5&
The property must have formed part of the ross estate, situated in the
;hilippines, of the prior decedent, or have "een included in the total amount of the ifts
of the donor, made within %ve years prior to the present decedent+s death.
125
B& P-+D6708 5.2.567,
The estate of A which included the property su"#ect of vanishin deduction had
"een taxed, meanin, that estate tax had "een paid "y prior estate.
+& N7 4-+D6708 D.,68?6,> B+B03567,8&
Ko such deduction on the property, or the property iven in exchane
therefore, was allowed in determinin the value of the net estate of the prior decedent.
Q%estion? )o, if @ died and the property is transmitted to C, his heir, that property
is also considered as exclusive property of C "ecause it was ac8uired throuh inheritance.
Can C claim vanishin deductionsR
#ns8er? KH, "ecause this had already "een claimed "y @. Pou can only claim vanishin
deduction once.
$t is impossi"le that @ ac8uired the property not throuh inheritance "ut throuh
donation. <onor+s tax had already "een paid. This is an exclusive property of @ "ecause
under the law, property ac8uired durin the marriae "y ratuitous title is an exclusive
property and forms part of his ross estate.
4an !e apply this vanishing deductionT
P2). Iere, @ must have died within the 4&year period from the date of donation.
Li*itations on the a*o%nt allo8ed 4or vanishin) ded%ction
a3 ?alue of the property is that %nally determined for the purpose of the prior estate tax
or donor+s tax, or the value of the property in present decedent+s ross estate,
whichever is lower.
"3 <eduction for total amount paid, if any, "y the present decedent on any mortae or
other lien on the property.
c3 Curther deduction "y an amount which "ears the same ratio to the amounts allowed
as deduction and transfers for pu"lic use as the amount otherwise deducti"le for
property previously taxed "ears to the value of the decedent+s ross estate.
d3 ;ercentae of deduction
-AAB & within one year from death of prior decedent
>AB & more than one year, "ut not more than two years
5AB & more than two years "ut not more than three years
0AB & more than three years "ut not more than four years
.AB & more than four years, "ut not more than %ve years
Trans4ers 4or 3%5lic %se
The amount of all "e8uests, leacies, devises, or transfers to or for the use of the
Eovernment of the ;hilippines or any political su"division thereof, for exclusive pu"lic
purposes.
The transfer must "e testamentary in character.
The full amount of the property transferred is deducti"le.
Fa*ily ho*e
A deduction allowed for the decedent+s family home in an amount e8uivalent to the
fair market value of the decedent+s home.
2ven an unmarried person may have a family home.
The appraised value shall "e the current or fair market value as determined "y the
Commissioner of the fair market value as shown in the schedule of values of the
;rovincial and City Assessors.
Iowever, if the current or fair market value exceeds one million pesos, the excess
shall "e su"#ect to estate tax.
As a sine 8ua non condition for the exemption of deduction, said family home must
have "een the decedent+s home as certi%ed "y the "aranay captain of the locality.
126
The total value of the family home must "e included as part of the ross estate of the
decedent.
<3tional &tandard >ed%ction
An amount e8ual to one million pesos.
Medical ex3enses
Medical expenses incurred "y the decedent within one year prior to his death which
shall "e duly su"stantiated with receipts.
)hall not exceed ;4AA,AAA.
#*o%nt received 5y heirs %nder '# 41!
Any amount received "y the heirs from the decedent+s employer as a conse8uence of
the death of the decedent&employee in accordance with RA 0=-6 or otherwise known
as DAn Act ;rovidin that Retirement @ene%ts of 2mployees of ;rivate Cirms )hall not
"e )u"#ect to Attachment, :evy, 2xecution or any tax whatsoever.
Het share o4 s%rvivin) s3o%se
-G. of the net estate should "e deducted as the share of the survivin spouse, for
purposes of imposin the estate tax.
Val%ation o4 the $state
The estate shall "e appraised at its fair market value as of the time of decedent+s
death. Iowever, the appraised value of real property as of the time of death shall "e
whichever is hiher "etween the fair market value as determined "y the
Commissioner, and the fair market value as shown in the schedule of values
determined "y the ;rovincial and City Assessors.
1. Real )roperty
The CM? e8uivalent to the value as determined "y the @$R or 7onal value HR that of
the value as determined "y the provincial or city assessor whichever is hiher.
.. )ersonal )roperty
a. Tani"le ;ersonal ;roperty if not "ein sold, pawn value x /, The CM? is e8uivalent to
the sellin price of the property. 1@rand new items3
". $ntani"le ;roperty Q includes interest, shares of stock
- $t must "e the CM? of the interest or shares of stock.
- $f the intani"le personal property is account receiva"le, it should "e ;rincipal
;:L) interest unpaid upon the death of the decedent except if worthless3
- $f it is in the nature of usufruct, we must take into consideration the "asic
standard of mortality rate.
- American tropical experience ta"le
- $C :$)T2< Q mean or ave. value "etween the hihest and lowest stock
8uotation
- $C KHT :$)T2< Q @HHV value
Hotice o4 death to 5e :led
The executor, administrator, or any of the leal heirs, as the case may "e, shall ive a
written notice to the Commissioner of the death of the decedent within . months after
decedent+s death or within a like period after 8ualifyin as such executor or
administrator*
a3 $n all cases of transfers su"#ect to tax, or
"3 !here, thouh, exempt from tax, the ross value of the estate exceeds two
hundred thousand pesos.
7hen :lin) o4 estate tax ret%rn is re;%ired
a3 $n all cases of transfers su"#ect to estate tax.
127
"3 !here, thouh, exempt from tax, the ross value of the estate exceeds two hundred
thousand pesos.
c3 Reardless of the value of the estate, where the estate consists of reistered or
reistera"le property, such as real property, motor vehicles, shares of stock, or other
similar property for which a clearance form the @$R is re8uired as a condition
precedent for the transfer of ownership thereof in the name of the transferee.
Contents o4 the estate tax ret%rn
a3 The value of the ross estate of the decedent at the time of his death, or in case of a
non&resident alien of that part of his ross estate situated in the ;hilippines.
"3 The deductions allowed from the ross estate
c3 )uch information as may, at the time, "e ascertaina"le and such data as may "e
necessary to esta"lish the correct taxes.
#dditional re;%ire*ent 4or estate 8ith )ross val%e exceedin) t8o *illion 3esos
2state tax returns showin a ross value exceedin two million pesos shall "e
supported with a statement duly certi%ed to "y a Certi%ed ;u"lic Accountant
containin the followin*
a3 $temi7ed assets of the decedent with their correspondin ross value at the time of his
death, or in the case of a non&resident alien, of that part of his ross estate located in
the ;hilippines.
"3 $temi7ed deductions from the ross estate
c3 The amount of tax due whether paid or still outstandin
7hen to :le inco*e tax ret%rn
A return should "e %led within six months from the decedent+s death.
The Commissioner has the authority to rant an extension, in meritorious cases, not
exceedin thirty days, for the %lin of the return.
"lace o4 :lin) o4 ret%rn
a3 Authori7ed aent "ank
"3 Revenue <istrict HFcer, with #urisdiction over property
c3 Collection HFcer
d3 <uly authori7ed Treasurer of the City or Municipality in which the decedent was
domiciled at the time of his death
e3 HFce of the Commissioner, if the decedent has no leal residence in the ;hilippines
>istri5%tion o4 the estate *ay only 5e ordered 8hen?
-. $nheritance tax is paid,
.. )uFcient "ond is iven to meet the payment of inheritance tax and all other
o"liations,
/. ;ayment of said tax and all other o"liations mentioned has "een provided for.
"ay*ent o4 tax
;aid at the same time the return is %led.
!hen the Commissioner %nds 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,
he may extend the time for payment of such tax or any part thereof not to exceed*
a3 4 years if the estate was settled #udicially
"3 . years if the estate was extra&#udicially settled.
128
The Commissioner may, "efore rantin the extension, re8uire the furnishin of a
performance "ond in an amount not exceedin dou"le the amount of the tax due
conditioned upon the payment of said tax in accordance with the terms of the
extension.
Ko extension will "e ranted where the taxes are assessed "y reason of*
a3 Kelience
"3 $ntentional disreard of rules and reulations
c3 Craud on the part of the taxpayer.
The estate tax imposed shall "e paid "y the executor or administrator "efore delivery
of any property to any "ene%ciary or heir.
)uch "ene%ciary shall, to the extent of his distri"utive share of the estate, "e
su"sidiarily lia"le for the payment of such portion of the estate tax as his distri"utive
share "ears to the value of the total net estate.
&a4e)%ards in the H2'C 4or the 3ay*ent o4 estate tax
a3 ;ayment "efore dischare from personal lia"ility of the executor or administrator
1&ec.(3
"3 Jude shall not issue authori7ation to deliver distri"utive shares until the certi%cation
of payment of tax is presented 1&ec.43
c3 Reister of deeds shall not reister transfer of property unless certi%cation of payment
is shown 1&ec.+3
d3 :awyer, notary pu"lic, or any overnment oFcer intervenin in the preparation or
acknowledment of documents reardin the partition or disposal of donations inter
vivos or mortis causa, leacy or inheritance, shall furnish the Commissioner of $nternal
Revenue of such documents 1&ec.+3
e3 <e"tor shall not pay to heirs, leatees, executor or administrator without certi%cation
of payment of tax 1&ec. +3
Iowever, he may pay the executor or #udicial administrator without the certi%cation if
the o"liation is included in the inventory of the estate of the deceased.
f3 Corporation shall not reister transfer of shares, "onds, o"liations, or rihts 1&ec.!3
3 @anks shall not allow any withdrawal 1with prior approval of Commissioner3 in excess
of ;.A,AAA 1&ec. !3
DONORS TAX
2n )eneral
DONATION OR GIFT
Lnder Art. 6.4 of the Civil Code, a donation is an act of li"erality where"y a person
1donor3 disposes ratuitously of a thin or riht in favour of another who accepts it.
Eenerally, therefore, a ift is a voluntary transfer of property from one person to
another without any consideration or compensation therefore.
DONORS TAX Q is an excise tax "ecause what is "ein tax here is the riht or privilee to
transmit or dispose of property ratuitously in favor of another.
- Tax imposed on the privilee of transmittin property "y and livin person to
another "y way of donation
- ;revents avoidance of estate tax
"0'"<&$ <F ><H<'I& T#F?
-. The primary purpose is to raise revenue,
.. To supplement income tax and estate tax.
/. To prevent the avoidance of income tax throuh the scheme of splittin income to various
donees who usually are mem"ers of the same family, where"y the donor, escapes the
proressive rates of tax.
129
<HKAT$HK Q the act of li"erality where"y a person disposes ratuitously of a TI$KE or a
R$EIT in favor of another who accepts it.
DONATIONS SB*ECT TO DONORS TAX
- trust or not
- real or personal
- tani"le or intani"le
-
-. $ndirect donation Q 2xample* Cancellation of inde"tedness
.. <irect donation
<onor+s tax applies to "oth natural and #uridical persons
The law says, Ddonor+s tax apply whether the transfer is in trust or otherwiseJ.
)o, property held in trust may "e the su"#ect of donation. @ut, this
contemplates of a transfer where the dominion, the riht over such property,
use, en#oyment of the same other rihts, must all "e transferred to the donee
so that it will constitute as taxa"le donation.
Read )ection -A0.
Citizens, resident aliens and do*estic cor3orations
)u"#ect to the tax reardless where the ift was made or where the property donated
is located, /%t, they would "e entitled to a tax credit e8uivalent to the amount of
donor+s taxes paid to and imposed "y the authority of the forein country where the
ift was made.
Hon-resident aliens and 4orei)n cor3orations
!hether or not doin "usiness in the ;hilippines, they are su"#ect to tax only on their
donations of property located in the ;hilippines
A donation "y a forein corporation of its own shares of stock to resident employees is
not su"#ect to ift tax, /%t, if the donation was iven in consideration of the latter+s
services, the value of the shares can constitute taxa"le income.
C$ARACTERISTICS OF VALID DONATION1 'C, A, C, $, <(
-. $t must "e iven durin the lifetime of the donor.
.. $t must "e irrevoca"le.
/. $t must comply with the formalities of donation.
0. Acceptance of the donee.
RE(ISITES OF VALID DONATION
-. $t <085 37<4/F C65? 5?+ ;7-<./656+8 7; B7,.567,&
- $f the amount of personal property is ;4,AAA or less, the donation may "e
made orally.
- $f the amount of personal property is more than ;4,AAA the acceptance shall "e
in writin.
- <onation of real property must "e made in a pu"lic instrument irrespective of
the amount
.. A33+45.,3+ :F 5?+ B7,++ 7; 5?+ B7,.567,.
- Acceptance must "e made durin the lifetime of the donor.
- $f the amount of personal property is ;4,AAA or less, acceptance may "e made
orally.
- $f the amount of personal property is more than ;4,AAA, the acceptance shall
"e in writin.
- $n the case of donation of real property, acceptance must "e made in the same
deed of donation or in a separate pu"lic instrument.
/. C.4.365F 7; 5?+ B7,7- .,B 5?+ B7,++*
a. Those made "etween persons who were uilty of adultery or concu"inae at the time
of the donation.
". Those made "etween persons found uilty of the same criminal ofense, in
consideration thereof,
130
c. Those made to a pu"lic oFcer or his wife, descendants and ascendants "y reason of
his oFce.
INCAPACITATED DONEES ARE1 ';, R&;, E, <, K;:(
a. The priest who heard the confession of the donor durin his illness, or the minister of
the ospel who extended spiritual aid to him durin the same period.
". The relatives of such priest or minister of the ospel within the 0
th
deree, the church,
order, chapter, community, orani7ation or institution to which such priest or minister
"elons.
c. A uardian with respect to donation made "y a ward in his favor "efore the %nal
accounts of the uardianship have "een approved, even if donor should die after the
approval thereof, nevertheless, any donation made "y ward in favor of the uardian
when the latter is his ascendant, "rother and sister, or spouse, shall "e valid.
d. Any physician, sureon, nurse, health oFcers or druist who took care of the donor
durin his last illness.
e. $ndividuals, association T corporations not permitted "y the law to receive donations.
The 4ollo8in) are also inca3a5le o4 receivin) donations 5y reason o4 %n8orthiness?
'; 1AC, $<, A?3, C&A:, A&5 yrs., I&V?<, A or C, C&<, C(
a. ;arents who have a"andoned their children or induced their dauhters to lead a
corrupt or immoral life, or attempted aainst their virtue.
". Any person who has "een convicted of an attempt aainst the life of the donor, his or
her spouse, descendants or ascendants.
c. Any person who has accused the donor of a crime for which the law prescri"es
imprisonment for 5 years or more, if the accusation has "een found roundless.
d. Any heir full of ae who, havin knowlede of the violent death of the donor, should
fail to report it to an oFcer of the law within a month unless the authorities have
already taken action, this prohi"ition shall not apply to cases wherein, accordin to
law, there is no o"liation to make an accusation.
e. Any person convicted of adultery or concu"inae with the spouse of the donor.
f. Any person who "y fraud, violation, intimidation, or undue in9uence should cause the
donor to make a donation or to chane one already made.
. Any person who "y the same means prevents another from makin a donation, or
from revokin one already made, or who supplants, conceals, or alters the latter+s
donation.
h. Any person who falsi%es or fores a supposed donation of the decedent.
N Knder .rt. 3D of the ;.4., husband and !ife are prohibited fro a,ing donation to
each other.
0. I,5+,567, 57 B7,.5+ the property of the donee 1or <HKAT$?2 $KT2KT3.
2xception* Transfer of insuFcient consideration in the case of a contract of sale.
2xample* $f the CM? of the property is ;-AA,AAA and ;4A,AAA was the consideration iven.
The diference of ;4A,AAA is considered a donation.
M The amount received "y a disinherited heir is su"#ect to donor+s tax "ecause he has no
riht to such property and the same was ratuitously iven, so there is no donative intent.
4. D+/6D+-F 7; 5?+ 4-74+-5F.
Kote* $f there is no valid donation, the recipient is su"#ect to income tax "ecause of the
provision Dfro !hatever source derived.J
Classi:cation o4 donor s%5Cect to donorIs tax?
131
-. Resident donor 1R<3 & this includes citi7en of the ;hils. or a resident alien.
.. Kon&resident alien 1KR<3 Q he must "e a non&resident alien.
RD Q Real properties, personal tani"le properties, and personal intani"le properties of
resident donor are su"#ect to donor+s tax wherever situated.
NRD Q Real properties and personal tani"le properties of a non&resident donor are su"#ect to
donor+s tax only if they are located in the ;hils\ ;ersonal intani"le properties of KR< are
su"#ect to donor+s tax only if they ac8uire tax situs in the ;hils\
P+-87,./ I,5.,>6:/+ 4-74+-56+8 5?.5 .-+ B++<+B 8650.5+B 7- .3J06-+ 86508 6, 5?+
P?6/8& .-+1 GROSS GIFTS %F' SOB @DC' FC-85P' FC-SPA' SR' PO
-. Cranchise which is exercised in the ;hils.
.. )hares of stock, o"liation or "onds issued "y domestic corp. or sociedad anonia.
/. )hares of stock, o"liations or "onds issued "y forein corporation, >4B of the "usiness of
which is conducted in the ;hils.
0. )hares, o"liations, "onds issued "y a forein corp. which ac8uires "usiness situs in the
;hils.
M )uch shares, o"liations or "onds ac8uires "usiness situs in the ;hils. if they are
used "y such
forein corp. in furtherance
4. )hares or rihts in any partnership, "usiness or industry esta"lished in the ;hils.
5. Real, $ntani"le and $ntani"le ;ersonal property or Mixed
X 2ven if the personal intani"le properties of the KR< ac8uired tax situs in the ;hils.
it may still
"e exempt from donor+s tax "y applyin the rule on reciprocity.
'%le on 'eci3rocity Q $f the forein country of that KR< does not impose, or allows
exemption on the donor+s tax on the properties of citi7ens of the ;hils. who died in that
forein country.
)ec. -A0 is applica"le to "oth estate tax and donor+s tax.
2*3osition o4 >onorIs tax
There shall "e levied, assessed, collected and paid upon the transfer "y any person
resident or not of the property "y ift or donation, a tax.
The tax shall apply whether the transfer is in trust or otherwise, whether the ift is
direct or indirect, and whether the property is real or personal, tani"le or intani"le.
Hat%re o4 trans4ers s%5Cect to donorIs tax
-. $nter ?ivos
Made "etween livin persons, which is perfected from the moment the donor
knows of the acceptance of the donee A #rt. !34 CCB
Transfer of property "y ift is "etween two or more persons who are livin at
the time of the transfer or is without relation to the death of the donor.
.. <irect or $ndirect ift
<onative $ntent must "e present in a direct ift or property. )uch an intent
coupled with donative acts is essential to constitute a ift.
)ale, exchane or any transfer of property, other than capital assets, for less
than the ade8uate and full consideration constitutes an indirect ift to the extent of the
diference where there is no donative intent to make a ift.
/. $n trust or otherwise
Trust is transfer made "y rantor to a "ene%ciary "y indirectly as lon as
transfer is ratuitous.
132
!hen property is later transfrerred from the trustee to the "ene%ciary, it is no
loner su"#ect to estate tax provided that the trust is irrevoca"le.
"irovano v. Co%rt o4 #33eals
<ela Rama steamship ceded its rihts to the insurance proceeds from the life of
;irovano, its president, to the latter+s heirs. The )upreme Court held that it is a ift or
donation taxa"le under the Tax Code. The true consideration for the donation was the
company+s ratitude for ;irovano+s services, not the services themselves. Ience, no value
can "e deducted from the property transferred as a ift "ecause ratitude has no economic
value and does not constitute DconsiderationJ as used "y the Code, capa"le of "ein
evaluated in money.
'ates o4 tax
The tax for each calendar year shall "e computed on the "asis of the total net ifts
made durin the calendar year.
Cirst ;-AA,AAA is exempt from <onor+s tax. The rates rane from .B to -4B.
Tax 3aya5le 5y donor i4 donee is a stran)er
!hen the donee or "ene%ciary is a straner, the tax paya"le "y the donor shall "e
thirty percent of the net ifts.
A straner is one who is not a*
-. @rother, sister 1whether full or half&"lood3, spouse, ascendant, or lineal
descendant, or
.. Relative "y consanuinity in the collateral line within the fourth civil deree of
relationship.
Het )i4t
Ket ifts is the total amount of ifts after deductin the exemptions and allowa"le
deductions.
The donor+s tax is computed on the "asis of the total net ifts made durin the
calendar year.
"ro3erties 8hich are incl%ded in the ter* )i4t
Real and personal property, whether tani"le or intani"le, or mixed, wherever
situated, when the donor is a resident or citi7en of the ;hilippines at the time of the
donation.
Real and personal property situated in the ;hilippines when the donor is a non&
resident alien at the time of the donation.
"ro3erties 8hich are excl%ded
Real and personal property situated outside the ;hilippines where the donor is a non&
resident alien at the time of the donation.
>onation 5et8een h%s5and and 8i4e
#uch donation during their arriage is void, except:
-. donations mortis cause, or
.. moderate ifts which the spouses may ive each other on the occasion of any
family re#oicin.
Void donations
?oid donations are not su"#ect to donor+s tax.
Iowever, if you have already paid the donor+s tax, you only have two 1.3 years from
the date of payment to ask or %le for a claim for a refund, reardless of any
supervisin event.
133
'en%nciation o4 inheritance not a )i4t
!hen one of the heirs renounced his share, the same "ecomes the property of the
persons to whom the "ene%t is iven and is additional inheritance of the latter and
not a donation from the former. Kothin is received "y the heir who makes
renunciation of his share.
Contri5%tion 4or election ca*3ai)n
The term Lcontribution includes a ift, donation, loan, advance or deposit of money
or anythin of value, or a contract, promise of areement to contri"ute, whether or
not leally enforcea"le, made for the purpose of in9uencin the results of the
elections "ut shall not include services rendered without compensation "y individuals
volunteerin a portion or all of their time in "ehalf of a candidate or political party. $t
shall also include the use of facilities voluntarily donated "y other persons, the money
value of which can "e assessed "ased on the rates prevailin in the area.
The K$RC provides that L.ny contribution in cash or in ,ind to any candidate, political
party or coalition of parties for capaign purposes shall be governed by the /lection
4ode, as aended.
Repu"lic Act Ko. 6-55 providin for synchroni7ed national and local elections provides
that L.ny provision of la! to the contrary not!ithstanding any contribution in cash or
,ind to any candidate, or political party or coalition of parties for capaign purposes,
duly reported to the 4oission, shall not be sub&ect to the payent of any gift tax.
Trans4er 4or less than ade;%ate and 4%ll consideration
!here property, other than real property considered as capital assets, is transferred
for less than an ade8uate and full consideration in money or money+s worth, then the
amount "y which the fair market value of the property exceeded the value of the
consideration shall, for the purpose of the donor+s tax, "e deemed a ift, and shall "e
included in computin the amount of ifts made durin the calendar year.
RLE 7, INADE(ATE CONSIDERATION
M if the property transferred is real property classi%ed as capital asset, the transfer is su"#ect
to capital ains tax of 5B and not to donor+s tax
M where the consideration is %ctitious, the entire value of the property transfer shall "e
su"#ect to donor+s tax
M the amount "y which the value of the property exceed the amount of consideration shall "e
deemed a ift for purposes of the donor+s tax
Conce3t o4 consideration
Consideration must "e measura"le in money or money+s worth, mere leal
consideration is not suFcient,
The consideration must 9ow form the donor. Mere detriment to the donee does not
satisfy the purpose of the statute.
Marria)e as consideration
Marriae is not a consideration that can "e reduced to a monetary value.
$f a person transfers a property to a trust in consideration of marriae, a ift is made
"ecause no monetary consideration 9ows to the transferorGdonor.
$xe*3tion o4 certain )i4ts 5y a resident
2xemption Q donations not exceedin -AA,AAA for every year.
-. <owries or ifts made on account of marriae and "efore its cele"ration or within one
year thereafter "y parents to each of their leitimate, reconi7ed natural, or adopted
children to the extent of the %rst ten thousand pesos 1;-A,AAA3.
134
.. Eifts made to or for the use of the Kational Eovernment or any entity created "y any
of its aencies which is not conducted for pro%t, or to any political su"division of the
said Eovernment.
/. Eifts in favor of an educational andGor charita"le, reliious, cultural or social welfare
corporation, institution, accredited non&overnmental orani7ation, trust or
philanthropic orani7ation, or research institution or orani7ation, provided, however,
that not more than thirty percent 1/AB3 of said ifts shall "e used "y such donee for
administration purposes.
'eco)nized nat%ral child
A reconi7ed natural child is one "orn outside wedlock of parents who, at the time of
the conception of the former, were leally free to marry each other, and is the
reconi7ed "y one or "oth parents.
Hon-3ro:t ed%cational andTor charita5le cor3oration, instit%tion, accredited non-
)overn*ental or)anization, tr%st or 3hilanthro3ic or)anization, or research
instit%tion or or)anization
A non&pro%t educational andGor charita"le corporation, institution, accredited non&
overnmental orani7ation, trust or philanthropic orani7ation, or research institution
or orani7ation is a school, collee or university andGor charita"le corporation,
accredited non&overnmental orani7ation, trust or philanthropic orani7ation, andGor
research institution or orani7ation*
-. incorporated as a non&stock entity,
.. payin no dividends,
/. overned "y trustees who received no compensation, and
0. devotin all its income, whether students+ fees or ifts, donations su"sidies or other
forms of philanthropy, to the accomplishment of promotion of the purposes
enumerated in its Articles of $ncorporation.
$xe*3tions allo8ed to a non-resident alien
-. Eifts made to or for the use of the Kational Eovernment or any entity created "y any
of its aencies which is not conducted for pro%t, or to any political su"division of the
said Eovernment.
.. Eifts in favor of an educational andGor charita"le, reliious, cultural or social welfare
corporation, institution, accredited non&overnmental orani7ation, trust of
philanthropic orani7ation, or research institution or orani7ation, provided, however,
that not more than thirty percent 1/AB3 of said ifts shall "e used "y such donee for
administration purposes.
<ther ded%ctions
2ncum"rance on the property donated if assumed "y the donee.
Those speci%cally provided "y the donee as a diminution from the property donated
1e.. where donation is su"#ect to the condition that the donee would ive ;-A,AAA to
charity3.
Tax credit 4or donorIs taxes 3aid to a 4orei)n co%ntry
The tax imposed upon a donor who was a citi7en or a resident at the time of the
donation shall "e credited with the amount of any donor+s tax of any character and
description imposed "y the authority of a forein country.
Li*itations on credit
The amount of the credit taken under this )ection shall "e su"#ect to teach of the
followin limitations*
-. The amount of the credit in respect to the tax paid to any country shall not exceed the
same proportion of the tax aainst which such credit is taken, which the decedent+s
135
net estate situated within such country taxa"le under this Title "ears to his entire net
estate.
.. The total amount of the credit shall not exceed the same proportion of the tax aainst
which such credit is taken, which the decedent+s net estate situated outside the
;hilippines taxa"le under this Title "ears to his entire net estate.
ADMINISTRATIVE MATTERS
Val%ation o4 )i4ts *ade in 3ro3erty
;ersonal property Q fair market value at the time of the ift
Real property Q whichever is hiher of a3the fair market value determined "y the
Commissioner or "3 the fair market value as shown in the schedule of values %xed "y
the ;rovincial or City Assessor
Cash Q amount of cash
7ho *%st :le donorIs tax ret%rn9
Any individual who makes any transfer "y ift, except those which are exempt from
the tax, shall make a return under oath in duplicate.
Contents o4 ret%rn
-. 2ach ift made durin the calendar year which is to "e included in computin net
ifts.
.. The deductions claimed and allowa"le.
/. Any previous net ifts made durin the same calendar year.
0. The name of the donee.
4. )uch further information as may "e re8uired "y rules and reulations made pursuant
to law.
Ti*e o4 :lin) and 3ay*ent
The return of the donor shall "e %led within thirty 1/A3 days after the date the ift is
made and the tax due thereon shall "e paid at the time of %lin.
"lace o4 :lin) and 3ay*ent
2xcept in cases where the Commissioner otherwise permits, the return shall "e %led
and the tax paid to*
-. an authori7ed aent "ank,
.. the Revenue <istrict HFcer,
/. Revenue Collection HFcer,
0. duly authori7ed Treasurer of the city or municipality where the donor was
domiciled at the time of the transfer, or
4. if there "e no leal residence in the ;hilippines, with the HFce of the
Commissioner.
$n the case of ifts made "y a non&resident, the return may "e %led with the ;hilippine
2m"assy or Consulate in the country where he is domiciled at the time of the transfer,
or directly with the HFce of the Commissioner.
136
TAX REMEDIES
Accordin to the )C, overnment and taxpayers must stand on reasona"ly
e8ual terms.
@asically, the remedies that may "e availed of "y the Eovernment or the
taxpayer may "e rouped into*
a. Administrative remedies
". Judicial remedies
$f the tax law is silent on administrative remedies, the overnment may still
avail of the usual administrative remedies such as D685-.6,5 of personal
property, or L+DF on real property. @ut that may "e resorted to "y the
overnment in the collection of taxes are*
a. D685-.6,5 of personal property
b. E,;7-3+<+,5 of tax lien
c. L+DF on real property&
- <istrain and levy can only "e done if ,7563+ is iven.
$f the tax law is silent on administrative remedies, the taxpayer may still avail
of the usual administrative remedies of protest and refund for purposes of
convenience and expediency.
$f the tax law is explicit on administrative remedies, the taxpayer must o"serve
the principle of exhaustion of administrative remedies. Lnder the Tax Code, if
an assessment is made "y the @$R, the remedy of the taxpayer is to protest
%rst the assessment. $t is the decision of the @$R on that disputed assessment
that is "ein appealed to the CTA.
$n claimin for tax refund, the taxpayer have to %le %rst a written claim for
refund with the @$R Commissioner.
E23+4567, 57 5?+ P-6,364/+ 7; E2?.08567, 7; AB<6,685-.56D+ R+<+B6+81
a. if it involves H0B636./ J0+8567,8
b. if it involves B68-+>.-B8 7; B0+ 4-73+88
c. if it involves an 6//+>./ .35.
*DICIAL REMEDIES1
$C the tax law is silent on #udicial remedies, the overnment can still avail of
the usual #udicial remedy. 2xample* %lin an action for collection with the
court.
$f the tax is silent on #udicial remedies, the taxpayer may %le a special civil
action for declaratory relief. @ut this does not apply as far as the K:RC or the
TCC is concerned "ecause these particular tax laws are explicit on this #udicial
remedies.
$f the tax law is explicit on #udicial remedies, the overnment should o"serve
the provisions of the law.
137
E2.<4/+1The %lin of an action for collection with the Court must "e approved "y
the @$R Commissioner.
DISTINCTION BETWEEN T$E DISTRAINT AND LEV#
D685-.6,5 7; 4+-87,./ 4-74+-5F
-. The su"#ect matter is personal property, stocks and securities, "ank accounts, de"ts and
credits.
.. $n the event that the taxpayer failed to pay the tax, the @$R will issue warrant of distraint.
/. The only re8uirement is postin of notice of sale in . pu"lic or conspicuous places
0. $f the "id is not e8ual to the amount of tax lia"ility, the @$R may purchase the property
distrained for and in "ehalf of the overnment.
4. There is no riht of redmption
5. There is that remedy of constructive distraint of personal property.
L+DF 7; -+./ 4-74+-5F
-. The su"#ect property is real property
.. !hat is issued is in the nature of an authenticated certi%cate descri"in the property and
statin the name of the taxpayer as well as the amount due
/. Re8uires not only postin "ut also pu"lication of the notice of sale in a newspaper of
eneral circulation in / consecutive weeks.
0. $f the "id is not e8ual to the tax lia"ility of there is no "idder, the @$R may forfeit such real
property levied "y the overnment.
4. There is riht of redemption within - year from the date of sale plus -4B interest.
5. There is no such remedy as constructive levy of property.
C7,85-0356D+ D685-.6,5 3., 7,/F :+ -+87-5+B 57 0,B+- 5?+ ;7//7C6,> 8650.567,1 C7B+1
@C&A&R&L&A
-. !hen a taxpayer cancels or hides his property
.. $f he performs any act which will o"struct the collection eforts of the @$R
/. $f he is retirin from "usiness su"#ect to tax
0. !hen he is a"out to leave the ;hilippines
2nforcement of the tax lien*
$f the taxpayer failed despite receipt of notice to pay the @$R, a lien is created
aainst the properties of the taxpayer.
$t is the discretion of the @$R to avail itself of remedies which may result in the
expeditious collection of taxes.
C.8+1 !hich is preferred, the claim of the overnment arisin from tax lien or the claim of
the workers predicated on the #udment rendered "y the K:RCR
$+/B1 The claim of the overnment arisin from tax lien is superior to the claim of a private
litiant predicated on a #udment.
E23+4567,1 The claim of the la"orers may "e superior under Art. --A of the :a"or Code
when the employer was declared "ankrupt of #udicial li8uidation.
M$n o"servin the provisions of the tax code in reard to distraint or levy, the
@$R cannot apply or invoke the presumption of reularity in administrative
proceedins.
138
)o, if the procedure had "een 8uestioned "y the taxpayer, it is not for
the taxpayer to prove that the procedures under the K:RC in reard to distraint
on levy had "een complied with.
Revenue taxes are self&assessin taxes.
R+J06865+8 7; A88+88<+,51
-. !ritten notice statin that the amount is due as tax.
.. !ritten notice must contain a demand for the payment of such tax.
Assessment is not a condition sine 8ua non for purposes of collectin taxes.
This is so "ecause demand is not re8uired. The rule under Art. --5= of the KCC
that demand is re8uired "efore a person may incur in delay cannot "e applied.
Taxpayer incurred in delay if he fails to pay the tax on date %xed "y Tax Code.
Assessments, made "y the @$R Commissioner are presumed correct. The
presumption does not violate the due process under the Constitution "ecause
the presumption is merely disputa"le.
Kormally, the @$R may re8uire the taxpayer to su"mit reports, documents,
"ooks of accounts and other report to esta"lish his tax lia"ility. $n the a"sence
of these reports, documents, etc., the @$R may determine the tax lia"ility "y
usin other methods.
MThe @$R can determine the tax lia"ility of the taxpayer on the "asis of that so&
called "est evidence o"taina"le in the a"sence of said reports etc. $n one case,
aents of the @$R used the "ooks of account sei7ed as a result of raid "y
means of search warrant.
TAX ADMINISTRATION AND ENFORCEMENT
IN GENERAL
#)encies involved in tax ad*inistration
-. @ureau of $nternal Revenue
.. @ureau of Customs
/. ;rovincial, city and municipal assessors and treasurers
/%rea% o4 2nternal 'even%e
Ieaded "y the Commissioner and two <eputy Commissioners
Assistant Commissioners and <ivision Chiefs
Reional <irectors
Revenue <istrict HFcers
Revenue 2nforcement HFcers or 2xaminers
POWERS OF T$E COMMISSIONER OF INTERNAL REVENE
6eneral 3o8ers o4 the Co**issioner o4 2nternal 'even%e
-. $nterpret tax laws and to decide tax cases.
.. H"tain information and to summon, examine, and take testimony of persons.
/. Make assessments and prescri"e additional re8uirements for tax administration and
enforcement.
"o8er to inter3ret tax la8s
139
The power to interpret the provisions of the K$RC and other tax laws shall "e under
the exclusive and oriinal #urisdiction of the Commissioner.
This power is su"#ect to review "y the )ecretary of Cinance.
-%risdiction o4 Co**issioner re. tax cases
The Commissioner has the power to decide*
-. disputed assessments,
.. refunds of the internal revenue taxes, fees, or other chares,
/. penalties imposed in relation thereto, or
0. other matters arisin under this Code or other laws or portions thereof
administered "y the @ureau of $nternal Revenue
This is su"#ect to the exclusive appellate #urisdiction of the Court of Tax Appeals.
"o8er o4 the Co**issioner to o5tain in4or*ation, and to s%**on, exa*ine, and
taLe testi*ony o4 3ersons
4oissioner has po!er to obtain inforation and to suon, exaine and ta,e
testiony of persons in:
-. ascertainin the correctness of any return, or
.. in makin a return when none has "een made, or
/. in determinin the lia"ility of any person for any internal revenue tax, or
0. in collectin any such lia"ility, or
4. in evaluatin tax compliance
#uch po!er includes:
-. To examine any "ook, paper, record or other data which may "e relevant or
material to such in8uiry.
.. To o"tain or a reular "asis from .,F 4+-87, other than the person whose internal
revenue tax lia"ility is su"#ect to audit or investiation, or from any oFce or oFcer
of the national and local overnments, overnment aencies and instrumentalities
any information.
/. To summon the person lia"le for tax or re8uired to %le a return, or any oFcer or
employee of such persons, or any person havin possession, custody, or care of
the "ooks of accounts and other accountin records, or any other person, to
appear "efore the Commissioner or his duly authori7ed representatives.
0. To take such testimony of the person concerned, under oath, as may "e relevant
or material to such in8uiry.
4. To cause revenue oFcers and employees to make a canvass from time to time of
any revenue district or reion and in8uire after and concernin persons therein
who may "e lia"le to pay any internal revenue tax.
"o8er o4 the Co**issioner to *aLe assess*ents and 3rescri5e additional
re;%ire*ents 4or tax ad*inistration and en4orce*ent
-. 2xamination of returns and determination of the tax due.
.. Assess the proper tax on the "est evidence o"taina"le.
140
/. Conduct inventory&takin, surveillance and to prescri"e presumptive ross sales and
receipts.
0. $ssue #eopardy assessments and terminate the taxa"le period.
4. ;rescri"e real property values.
5. $n8uire into "ank deposit accounts.
6. Accredit and reister tax aents.
>. ;rescri"ed additional procedural or documentary re8uirements.
$xa*ination o4 ret%rns and deter*ination o4 the tax d%e
After the %lin of the return, the Commissioner or his duly authori7ed representative
may authori7e the examination of any taxpayer and the assessment of the correct
amount of tax.
Iowever, failure to %le a return does not prevent the Commissioner from authori7in
the examination of the taxpayer.
Any return, statement or declaration %led in any oFce authori7ed to receive the same
shall not "e withdrawn
Iowever, such may "e modi%ed, chaned or amended within three 1/3 years from the
date of their %lin provided no notice for audit or investiation for such return,
statement or declaration has "een actually served upon the taxpayer.
#ssess the 3ro3er tax on the 5est evidence o5taina5le
A Commissioner is iven the power to assess de%ciency tax "ased on the "est
evidence o"taina"le*
-. when a report re8uired "y law as a "asis for the assessment of any national
internal revenue tax shall not "e forthcomin within the time limit %xed "y law or
rules and reulations, or
.. when there is reason to "elieve that any such report is false, incomplete or
erroneous.
$n /oni4acia &y "o V. CT#, the )upreme Court upheld the assessment made "y the
Commissioner on the "asis of the "ottles of wine sei7ed and the worn statements of
the former employees of the )ilver Cup !ine Cactory for failure of the latter+s
proprietor to su"mit the factory+s "ook of accounts and related records despite
repeated demands "y the @$R.
Cond%ct inventory-taLin), s%rveillance and to 3rescri5e 3res%*3tive )ross sales
and recei3ts
Commissioner may, at any time, durin the taxa"le year, order inventory&takin of
oods of any taxpayer as a "asis for determinin his internal revenue tax lia"ilities.
Commissioner may also place the "usiness operations of any person, natural or
#uridical, under o"servation or surveillance if there is reason to "elieve that such
person is not declarin his correct income, sales or receipts for internal revenue tax
purposes.
Commissioner may also prescri"e presumptive ross sales and receipts in the
followin instances*
-. !hen it is found that a person has failed to issue receipts and invoices in violation
of the K$RC, or
.. !hen there is reason to "elieve that the "ooks of accounts or other records do not
correctly re9ect the declarations made or to "e made in a return.
Lnder the presumptive ross sales or receipts method, the Commissioner, after takin
into account the sales, receipts, income, or other taxa"le "ase of other persons
enaed in similar situations or circumstances or after considerin other relevant
141
information, prescri"e a minimum amount of such ross receipts, sales, and taxa"le
"ase.
)uch amount so prescri"ed shall "e pria facie correct for purposes of determinin
the internal revenue tax lia"ilities of such person.
2ss%e Ceo3ardy assess*ents and ter*inate the taxa5le 3eriod
A #eopardy assessment is one issued "y the Commissioner if the "elieves that the
collection of the tax is in #eopardy due to delay and other causes.
The Commissioner may issue a #eopardy assessment when it comes to his knowlede
that a taxpayer is*
-. retirin from "usiness su"#ect to tax, or
.. intendin
a. to leave the ;hilippines, or
". to remove his property therefrom, or
c. to hide or conceal his property, or
/. performin any act tendin to o"struct the proceedins for the collection of the
tax for the past or current 8uarter or year or to render the same totally or partly
inefective.
$n such cases, the Commissioner may assess and collected the tax immediately
without the usual formalities. Amon others, the Commissioner shall*
-. declare the tax period of such taxpayer terminated any time, and
.. send the taxpayer a notice such decision toether with a re8uest for the
immediate payment of the tax for the period so declared terminated and the tax
for the precedin year or 8uarter, or such portion thereof as may "e unpaid.
)aid taxes shall "e due and paya"le immediately and shall "e su"#ect to all the
penalties prescri"ed "y law, unless paid within the time %xed in the demand made "y
the Commissioner.
"rescri5e real 3ro3erty val%es
Commissioner is empowered to divide the ;hilippines into diferent 7ones or areas and
to determine the fair market value of real properties located in each 7one or area after
consultation with private and pu"lic appraisers.
Cor purposes of computin any internal revenue tax, the value of the property shall
"e, whichever is hiher of*
-. the fair market value as determined "y the Commissioner, or
.. the fair market value as shown "y the schedule of values of the ;rovincial and City
Assessors.
2n;%ire into 5anL de3osit acco%nts
Commissioner may in8uire into the "ank deposits of*
-. a decedent to determine his ross estate, and
.. any taxpayer who has %led an application for compromise of his tax lia"ility "y
reason of %nancial incapacity to pay his tax lia"ility.
There is really no con9ict with RA -0A4 or the :aw on )ecrecy of @ank <eposit Act in
case of compromises due to the %nancial ina"ility to pay of the taxpayer since an
application for compromise shall not "e considered unless and until the taxpayer
waives in writin his privilee under RA -0A4. )uch waiver constitutes the authority
of the Commissioner to in8uire into the "ank deposits of the taxpayer.
RLE ON ESTOPPEL AND SOME COMPLIANCE RE(IREMENTS
142
'%le on no esto33el a)ainst the )overn*ent
$t is settled rule of law that in the performance of its overnmental functions, the
)tate cannot "e estopped "y the nelect of its aents and oFcers. Kowhere is this
more true than in the %eld of taxation. 'C7<<68867,+- D& P-735+- .,B G.<:/+
C7&' E.R. Ko. 55>/>, April -4, -=>>(
)imilarly, estoppel does not apply to deprive the overnment of its riht to raise
defenses even if these defenses are "ein raised for the %rst time on appeal.
'C7<<68867,+- D& P-735+- .,B G.<:/+ C7&' E.R. Ko. 55>/>, April -4, -=>>(
Iowever, this was reversed in a su"se8uent resolution issued "y the )upreme Court
in the same case. 'C7<<68867,+- D& P-735+- .,B G.<:/+ C7&' E.R. Ko. 55>/>,
<ecem"er ., -==-, Resolution3(
$sto33el a)ainst the tax3ayer
!hile the principle of estoppel may not "e invoked aainst the overnment, this is not
necessarily true in the case of the taxpayer.
&o*e co*3liance re;%ire*ents
All corporations, companies, partnerships or persons re8uired "y law to pay internal
revenue taxes shall keep a #ournal and a leder or their e8uivalents.
Those earnin "elow ;4A,AAA 8uarterly may adopt a simpli%ed set of "ookkeepin
records.
Those earnin more than ;-4A,AAA 8uarterly shall have their "ooks of accounts
audited and examined yearly "y independent certi%ed pu"lic accountants.
They have option to keep su"sidiary "ooks as the needs of their "usiness may re8uire.
All "ooks or records must "e in a native lanuae, 2nlish or )panish, if not, translate
to these lanuaes.
All the "ooks of accounts, includin the su"sidiary "ooks and other accountin
records, shall "e preserved for a period "einnin from the last entry in such "ook
until the last day prescri"ed "y )ection .A/ within which the Commissioner is
authori7ed to make an assessment.
)aid "ooks are records may "e examined only once in a taxa"le year, with some
exceptions.
ASSESSMENT OF INTERNAL REVENE TAXES
Tax assess*ent
An assessment is the oFcial action of an administrative oFcer in determinin the
amount of tax due from a taxpayer, or it may "e a notice to the efect that the
amount therein stated is due from a taxpayer as a tax with a demand for payment of
the tax or de%ciency stated therein.
An assessment is a %ndin "y the taxin aency that the taxpayer has not paid his
current taxes. $t is also notice to the efect that the amount stated therein is due as
tax and is a demand for payment thereof.
The :ocal Eovernment Code de%nes assessment as the act or process of determinin
the value of a property or portion thereof su"#ect to tax, includin the discovery,
listin, classi%cation, and appraisal of properties.
The @$R assessment is usually em"odied in a demand letter or in a @$R form known as
the assessment notice.
Letter o4 a%thority
This is the authority issued "y the Revenue Reional <irector and iven to a revenue
oFcer assined to perform assessment functions to examine taxpayers within the
#urisdiction of the district in order to collect the correct amount of tax, or to
recommend the assessment of any de%ciency tax due in the same manner that the
said acts could have "een performed "y the Revenue Reional <irector himself.
143
Ninds o4 assess*ent
-. )elf assessment
.. <e%ciency assessment
/. $lleal and void assessment
0. 2rroneous assessment
&el4 assess*ent
Hne in which the tax is assessed "y the taxpayer himself.
The amount of tax is re9ected in the tax return that is %led "y him and the tax
assessed is paid at the time he %les the return. This system of %lin of return and
payment of tax is known as the Dpay&as&you&%leJ system.
Tax so assessed is known as self assessed tax.
>e:ciency assess*ent
This is an assessment made "y the tax assessor himself where"y the correct amount
of the tax is determined after an examination or investiation is conducted.
The lia"ility is determined and is thereafter assessed for the followin reasons*
-. The amount ascertained exceeds that which is shown as the tax "y the taxpayer in
his return,
.. Ko amount of tax is shown in the return, or
/. The taxpayer did not %le any return at all.
2lle)al and void assess*ent
This is an assessment wherein the tax assessor has no power to act at all.
$rroneo%s assess*ent
This is an assessment wherein the assessor has the power to assess "ut errs in the
exercise of the power.
"rinci3les )overnin) tax assess*ents
-. Assessments are pria facie presumed correct and made in ood faith.
.. $t is the taxpayer and not the @$R who has the duty of provin otherwise.
/. Assessments should not "e "ased on presumptions "ut on actual facts.
0. Assessment is discretionary on the Commissioner who cannot therefore "e compelled
to assess a tax when he or she "elieves that there is no "asis for such assessment.
4. The authority vested in the Commissioner to assess taxes may "e deleated.
Iowever, it is settled that the power to make G,./ assessment cannot "e deleated.
5. Assessments must "e directed to the riht party.
2nvesti)ative 3o8er o4 the Co**issionerJ 4act%al 5asis o4 assess*ents
$nasmuch as assessments are "ased on facts, the Commissioner is iven the power to
o"tain information which serves as "asis for said assessments, and is also iven the
means to secure them. ')ee powers of the Commissioner(
Means e*3loyed in the assess*ent o4 tax
144
-. 2xamination of returns and determination of the tax due
.. Assess the proper tax on the "est evidence o"taina"le
/. Conduct inventory&takin, surveillance and to prescri"e presumptive ross sales and
receipts
0. $ssue #eopardy assessments and terminate the taxa"le period
4. ;rescri"e real property values
5. $n8uire into "ank deposit accounts
6. Accredit and reister tax aents
>. ;rescri"e additional procedural or documentary re8uirements.
The net 8orth *ethod
A very efective method of determinin taxa"le income and the de%ciency income tax
due thereon is the net worth method or what is otherwise known as the Linventory
ethod of incoe tax verifcation.
The method is an extension of the accountin principle* Assets minus lia"ilities
e8uals net worth. The taxpayer+s net worth is determined "oth at the "einnin and
at the end of the same taxa"le year. The increase or decrease in net worth is
ad#usted "y addin all non&deducti"le items and su"tractin therefrom non&taxa"le
receipts.
The leal "asis for the use of the net worth method is the authority of the
Commissioner to adopt an accountin method that clearly re9ects the income.
Conditions 4or the %se o4 the net 8orth *ethod
-. That the taxpayer+s "ooks do not clearly re9ect his income or the taxpayer has no
"ooks, or if the has "ooks, he refuses to produce them.
.. That there is evidence of a possi"le source or sources of income to account for the
increases in net worth or the expenditures.
/. The there is a %xed startin point or openin net worth.
0. That the circumstances are such that the method does re9ect the taxpayer+s income
with reasona"le accuracy and certainty and proper and #ust additions of personal
expenses and other non&deducti"le expenditures were made and correct, fair and
e8uita"le credit ad#ustments were iven "y way of eliminatin non&taxa"le items.
'e;%isites o4 a valid assess*ent
-. ;ost&reportin notice or notice for an informal conference after the tax audit.
.. ;re&assessment notice sent to the taxpayer, except in several instances.
/. The taxpayers shall "e informed in writin of the law and the facts upon which the
assessment is made.
0. Assessment must "e made within the prescri"e period.
"re-assess*ent notice
This is a notice in writin which is sent to the taxpayer at the address indicated in his
return or at his last known address as stated in his notice of chane of address if the
Commissioner or his duly authori7ed representative %nds that taxes should "e
assessed aainst the taxpayer. As such, the taxpayer is %rst noti%ed of said %ndins
"efore an assessment is issued.
7hen 3re-assess*ent notice not re;%ired
-. !hen the %ndin for any de%ciency tax is the result of a mathematical error in the
computation of the tax as appearin on the face of the return,
145
.. !hen a discrepancy has "een determined "etween the tax withheld and the amount
actually remitted "y the withholdin aent,
/. !hen a taxpayer who opted to claim a refund or tax credit of excess credita"le
withholdin tax for a taxa"le period was determined to have carried over and
automatically applied the same amount claimed aainst the estimated tax lia"ilities
for the taxa"le 8uarter or 8uarters of the succeedin taxa"le year,
0. !hen the excise tax due on excisa"le articles has not "een paid, or
4. !hen an article locally purchased or imported "y an exempt person, such as, "ut not
limited to, vehicles, capital e8uipment, machineries and spare parts, has "een sold,
traded or transferred to non&exempt persons.
>e:ciency or delin;%ency
<e%ciency is the amount "y which the tax due exceeds the sum of the amount of the
tax shown on a taxpayer+s return plus amounts previously assessed or collected as
de%ciency, less any credits, refunds, or other payments due the taxpayer, i.e. the
amount a taxpayer is de%cient in his tax payments.
<elin8uency is the state of a person upon whom the personal o"liation to pay the tax
has "een %xed "y lawful assessment and he thereafter fails to pay the tax within the
time prescri"ed "y law.
PERIOD OF LIMITATION PON ASSESSMENT AND COLLECTION
ASSESSMENT
6eneral '%le
Assessment shall "e made within three 1/3 years after the last day prescri"ed "y law
for the %lin of the return or from the day the return was %led in case the return was
%led "eyond the period prescri"ed "y law.
A return %led "efore April -4 shall "e considered %led on such date.
$xce3tions
-. Also a proceedin in court for the collection of such tax may "e %led without
assessment
.. Assessment may "e made within ten 1-A3 years after the discovery of the falsity,
fraud or omission in the followin cases*
a. in case of the false or fraudulent return with intent to evade tax, or
". failure to %le a return
c. "y mutual areement "etween overnment and taxpayer 1which must "e in
writin3 "efore the lapse.
/. $n case the Commissioner and the taxpayer aree in writin to a diferent period
:+;7-+ the expiration of the oriinal prescriptive period. The period so areed upon may
"e extended "y su"se8uent written areement "efore the expiration of the period
previously areed upon.
PRESCRIPTIVE PERIOD FOR MA)ING AN ASSESSMENT N COLLECTION
W65? 4-67- .88+88<+,5 W65?705 4-67-
.88+88<+,5
$. Return %led is not false
or fraudulent
a. Return was %le "ut
there exist a
de%ciency
". Return was %led "ut
no payment has
"een made
3 F+.-8 ;-7< 5?+ B.5+
7; .350./ G/6,>& $f it was
%led earlier than the date
%xed "y the Tax Code.
CH::2CT$HK* !ithin 3
F+.-8 from the date of
3 F+.-8 ;-7< 5?+ B.5+ 7;
.350./ G/6,> or from the
last day %xed "y law for
%lin such return.
146
assessment
$$. CailureGCalsifyGCraudulent
a. $ntentional failure
to %le a return
". Calse return
c. Craudulent return
10 F+.-8 ;-7< 5?+
B6837D+-F of such
omission of failure, falsity
or fraud
COLLECTION1 3 F+.-8
from the date of
assessment.
Taxes may "e collected
even without prior
assessment and
prescriptive period is 10
F+.-8 from the discovery
of failure or omission,
falsity or fraud.
N75+81 The rule is if prior assessment has "een made, the @$R can avail of the
administrative and #udicial remedy. @ut if without prior assessment, the @$R can only avail of
the #udicial remedies.
Return must "e the one prescri"ed "y the @$R. )H, if you %le your @ooks of Accounts in
lieu of that return, that does not constitute return.
7hen is assess*ent dee*ed *ade9
$t is not the issue date of the demand andGor notice that is the reckonin point in
prescription "ut rather it is the date when the demand letter is released, mailed or
sent to the taxpayer that constitutes an actual assessment.
E2.<4/+1 $f it was received "y the taxpayer in a particular date 1<ec. 4, -==63, you
should count the prescriptive period for makin an assessment from the date it was mailed,
released or sent "y the @$R and not from the receipt of the notice of assessment "y the
taxpayer.
The assessment may "e su"#ect to revision "y the @$R. $f revised, the prescriptive
period will commence to run from the safe when such revised assessment is mailed, released
or sent. )o, it is not from the date the oriinal assessment is mailed etc. "ut from the date
the revised assessment has "een mailed.
X The makin of assessment is prescripti"le.
The )upreme Court held in case that so lon as the release thereof is efected "efore
prescription sets in, the assessment is deemed made on time even thouh the same
is actually received "y the taxpayer after the expiration of the prescription period.
'/asilan $states, 2nc. v. Co**issioner, .- )CRA -6( The law does not re8uire
that the demand or notice "e received within the prescriptive period.
"rescri3tion as an aMr*ative de4ense
)ince prescription is an aFrmative defense, it is incum"ent upon the taxpayer to
prove that a return had "een %led "y him, otherwise, there is a "asis for the @$R to
assess the tax within the -A year period, on the round that no return was %led "y the
taxpayer.
$f what was %led was a wron return, the -A year period still applies. This is true even
if the information em"odied in the wron return could ena"le the @$R to assess the tax
lia"ility of the taxpayer.
2*3ortant considerations on 3rescri3tion o4 the )overn*entIs ri)ht to assess
taxes
-. <ate of %lin of tax returns
.. 2fect of %lin of an amended return
/. 2fect of the %lin of a wron return 1as if no return %led, thus, -A&year prescriptive
period3
0. ;eriod applica"le when the law does not re8uire the %lin of a return 1-A&year
prescriptive period unless taxpayer %les a return to ena"le him to avail of the "ene%t
of the three&year prescriptive period3
#*ended ret%rn
147
The )upreme Court held that where the amended return is su"stantially diferent from
the oriinal return, the riht of the @ureau of $nternal Revenue to assess the tax is
counted from the %lin of the amended return. .Co**issioner v. "hoenix
#ss%rance Co. Ltd. L-11(!, May (0, 16+1.
False vs. Fra%d%lent ret%rn
Calse return is a deviation from the truth or fact whether intentional or not.
Craudulent return is intentional and deceitful with the aim of evadin the correct tax
due.
<istinction must "e made "etween false returns due to mistakes, carelessness or
inorance and fraudulent returns with intent to evade taxes.
The fraud contemplated "y law is actual and not constructive. $t must amount to
intentional wron doin with the sole o"#ect of avoidin the tax. $t necessarily follows
that a mere mistake cannot "e considered as fraudulent intent. Thus, if "oth the
petitioner and the respondent Commissioner committed mistakes in makin the
entries in the returns and the assessment respectively under the inventory method of
determinin tax lia"ility, it would "e unfair to treat the mistakes of the petitioner and
the respondent, as tainted with fraud for each year from -=05 to -=4-, inclusive.
.#znar v. Co**issioner, #%). (3, 1!41
Fra%d
Craud is a 8uestion of fact and the circumstances constitutin fraud must "e alleed
and proved.
Craud must "e a product of a deli"erate intent to evade taxes. Ience, mere under&
declaration does not necessarily imply fraud.
Craud must "e actual and not constructive. $t must amount to intentional wron doin
with the sole purpose of avoidin the tax. A mere mistake cannot "e considered as
fraudulent intent.
7aiver o4 the &tat%te o4 Li*itations
)ec. ...@ of the K$RC allows the taxpayer and the overnment to extend "y mutual
areement the prescriptive periods for the assessment and collection of taxes. )uch
an areement must "e in writin.
The waiver must "e sined "y the parties "efore the lapse of the three&year
prescriptive period. A waiver is inefectual if it is executed "eyond the oriinal
prescriptive period.
The extended period may aain "e extended provided the new period "e areed upon
"efore the lapse of the extended period.
"roced%re 4or 8aiver o4 3rescri3tion 3eriod %nder 'ev. Me*. <rder (0-0
-. !aiver must "e in accordance with the prescri"ed form,
.. !aiver must "e sined "y the taxpayer himself or his authori7ed representative,
/. The Commissioner of his duly authori7ed aent must sin the waiver indicatin the
@$R+s acceptance of the waiver.
#&&$&&M$HT "'<C$>0'$
-. Cile tax return
.. :etter of authority to examine
$f satis%ed, collection.
/. Kotice of $nformal Conference
$f satis%ed with explanation, collection.
148
0. ;re&assessment notice
4. Response Q -4 days
5. Kotice of assessment and letter of demand
6. Administrative protest Q Reconsideration or reinvestiation
)u"mission of all relevant supportin documents Q within 5A days from protest
>. <enial or non&action of the Commissioner Q ->A days
=. Appeal to the CTA Q within /A days from decision or the lapse of ->A days
-A. Appeal to the CA Q within -4 days from notice
CA decides within -. months
--. ;etition for review on certiorari to the )upreme Court
COLLECTION
6eneral '%le
Collection may "e instituted within 4 years followin the assessment of the tax
')ec. ...C(
$xce3tion
A proceedin in court for collection, without assessment, may "e instituted within ten
years after the discovery of falsity, fraud, or omission in the case of a false or
fraudulent return with intent to evade tax or failure to %le a return ')ec. ...A(
PRINCIPLES GOVERNING T$E FILING OF AN ACTION FOR COLLECTION B# T$E BIR
C7//+3567, 68 4-74+- 0,B+- 5?+ ;7//7C6,> 8650.567,81
a. @$R assessment is considered %nal and executory, if no protest or dispute has "een
made "y the taxpayer. $C protested "y the taxpayer "ut he did not appeal, the @$R
decision on such protest, the efect is that the @$R decision shall "e considered %nal
and executory.
". $C he appeal the decision of the @$R of the Commissioner to the CTA "ut he did not
appeal the decision of the CTA to CA, the decision of the CTA shall "e %nal and
executory.
c. $f he appeal to the CA "ut the CA decision aFrmin that decision of the @$R was not
appealed to the )C, CA decision shall "e %nal and executory.
d. $f appealed to )C "ut )C aFrm the decision of the CA, )C decision is %nal and
executory.
$f the decision of the @$R is %nal and executory, the assessment made cannot
"e 8uestioned. The issue of prescription can no loner "e raised except if the
@$R su"mitted the particular issue for the resolution of the Court, that is
considered as waiver on the part of the @$R and such issue of prescription may
"e su"#ect to resolution.
There is no provision in the TAN Code that prohi"its the @$R from %lin an
action for collection even if the resolution on the motion for reconsideration on
the assessment made is still pendin.
!hen the case is pendin "efore the CTA, collection may also "e made "y
%lin of an answer to the petition for review with the CTA. This is tantamount to
a %lin of collection of tax. This will also stop the runnin of the prescriptive
period for collection of taxes.
Collection of taxes is prescripti"le.
7hen does the :ve year 3rescri3tive 3eriod start to r%n9
149
The period of limitation to collect is counted from the assessment of the tax.
Assessment is deemed made at the time the demand or assessment notice has "een
sent, released or mailed to the taxpayer.
The actual sendin or release to the taxpayer of the assessment notice or demand is,
therefore, necessary in order to determine the actual date when the tax "ein
collected was assessed.
7hen is the tax dee*ed collected 4or 3%r3oses o4 the 3rescri3tive 3eriod
Collection throuh summary remedies is efectuated "y summary methods when the
overnment avails of the distraint and levy procedure.
$f collection is to "e efected throuh #udicial remedies, the collection of the tax is
"eun "y the %lin of the complaint with the proper court.
Iowever, if the decision of the Commissioner on a protested assessment is appealed
to the CTA, the collection of the tax is considered "eun when the overnment %les its
answer to the taxpayer+s petition for review.
May there 5e a C%dicial action to collect a tax lia5ility even i4 there is no 3revio%s
assess*ent9
Pes. A proceedin in court for collection&without&assessment may "e instituted within
ten years after the discovery of falsity, fraud, or omission in the case of a false or
fraudulent return.
"rescri3tion o4 the )overn*entIs ri)ht to recover an erroneo%sly re4%nded tax
)ame as the three&year prescriptive period for makin assessments. .6%a)%a
$lectric Co., 2nc. v. Co**issioner 1 &C'# !01
Tax o5li)ation sec%red 5y 5ond
!here the tax o"liation is secured "y a "ond, the prescriptive period for the action
for the forfeiture of the "ond is overned "y the Civil Code* -A years to enforce a
written contractual o"liation.
&%s3ension o4 the r%nnin) o4 the &tat%te o4 li*itations
The runnin of the )tatute of :imitations provided in )ec. .A/ and ... on the makin
of assessment and the "einnin of distraint or levy or a proceedin in court for
collection, in respect of any de%ciency, shall "e suspended under any of the followin
circumstances*
-. !hen the Commissioner is prohi"ited from makin the assessment or
"einnin the distraint, levy, or proceedin in court and for sixty days
thereafter,
.. !hen the taxpayer re8uests for a reinvestiation which is ranted "y the
Commissioner,
/. !hen the taxpayer cannot "e located in the address iven "y him in the return
%led upon which tax is "ein assessed or collected, unless the taxpayer has
informed the Commissioner of any chane in address,
0. !hen the warrant of distraint or levy is duly served upon the taxpayer, his
authori7ed representative, or a mem"er of his household with suFcient
discretion, and no property could "e located, and
4. !hen the taxpayer is out of the ;hilippines.
$xa*3les 8hen the Co**issioner is 3rohi5ited 4ro* assessin) or collectin) the
tax
-. The %lin of a petition for review in the Court of Tax Appeals from the decision of the
Commissioner on a protested assessment interrupts the runnin of the prescriptive
period for collection. .'e3%5lic v. Ner U Co., Ltd. 1, &C'# (0!1
150
.. !hen the CTA en#oins the collection of the tax under )ec. -- of RA --.4.
'e;%est 4or reinvesti)ation 8hich sho%ld 5e )ranted or acted %3on 5y the
Co**issioner
$t should "e emphasi7ed that a mere re8uest for reinvestiation without any
correspondin action on the part of the Commissioner does not interrupt the runnin
of the prescriptive period.
7ill an extra-C%dicial de*and interr%3t the 3rescri3tion 3eriod9
Ko. )ec. .. of the K$RC enumerates the instances when the prescription is
interrupted, and an extra&#udicial demand is not one of them.
GRONDS FOR T$E SSPENSION OF PRESCRIPTIVE PERIOD IN T$E COLLECTION OF
TAXES1 1Code* N&A&P&O&C&A&R&3
-. No property could "e allocated,
.. Areement "etween the @$R and the taxpayer to the efect that the prescriptive period
shall "e suspended pendin the neotiation,
/. $f the @$R is Prohi"ited from a distraint or levy of real property,
0. $f the taxpayer is Out of the ;hilippines,
4. $f the address of the taxpayer Cannot "e located,
5. The %lin of an Answer to the petition for review executed "y a taxpayer with the CTA,
6. !hen a Re8uest for reinvestiation has "een ranted "y the @$R.
REMEDIES OF T$E TAXPA#ER
2n 6eneral
'e*edies o4 the tax3ayer
-. Remedies "efore payment of tax* ;rotest of assessment
a. ;rotest of pre&assessment notice Q -4 days upon receipt
". ;rotest of Cinal Assessment Q /A days upon receipt
c. Appeal to CTA of the decision of the Commissioner Q /A days from receipt of
decision of the Commissioner, or from the lapse of ->A days.
d. Appeal decision of the CTA to the CA Q -4 days
.. Remedy after payment of tax* Claim for tax refund or credit
a. . years from payment of tax.
M @2CHR2 ;APM2KT, the taxpayer may dispute or protest the assessment. Ie ma also invoke
the power of the @$R Commissioner to compromise tax lia"ility.
M $f you R2C2$?2< AK A))2))M2KT "y the @$R, the remedies are*
a. Cile a re8uest for reconsideration of the assessment or this is a claim for re&evaluation
of the assessment "ased on the existin records.
151
". Cile a re8uest for investiation of the assessment &&& it is also a claim for a re&
evaluation of the assessment on the "asis of newly discovered evidence, or additional
evidence that the taxpayer intends to present in the reinvestiation.
!I2R2 TH C$:2* 1a3 T 1"3 XXXXX @$R Commissioner
$))L2) which may "e raised XXXXX Zuestion of law or fact
or "oth 8uestions of law and fact
!I2K XXXXXXXXXXXXXXXXXXX W65?6, 30 B.F8 from receipt the %nal assessment
!IH MAP C$:2 Taxpayer of authori7ed representative
IF 5?+ -+J0+85 ;7- 6,D+856>.567, 7- -+37,86B+-.567, ?.8 :++, B+,6+B :F 5?+ BIR1
-. Cile a motion for reconsideration of the decision with the @$R, HR
.. Appeal the decision with the CTA.
MMM Motion for reconsideration must raise new rounds, meanin rounds which have not
"een raised in that re8uest for reconsideration or reinvestiation. Htherwise, it is #ust a pro&
forma motion, it will not suspend the period within which to appeal the @$R decision to the
CTA which is /A days from receipt of the @$R decision.
$))L2) that may "e raised on appeal with the CTA XXX Zuestions of law or fact HR "oth
I; CTA .R-<8 5?+ B+36867, 7; 5?+ BIR1
Appeal the CTA decision to CA.
ISSES XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Zuestions of law
W$EN SSSSSSSSSSSSSSSSSSSSS !ithin -4 days from receipt of the CA decision.
"'<T$&T <F #&&$&&M$HT
"roced%re
-. Taxpayer may %le an administrative protest "y %lin a re8uest for reconsideration or
reinvestiation within /A days from the receipt of the assessment.
.. !ithin 5A days from the %lin of the protest, the taxpayer, shall su"mit all relevant
supportin documents, otherwise the assessment "ecomes %nal.
/. $f protest is denied in whole or in part, or is not acted upon within ->A days from the
su"mission of documents, the taxpayer adversely afected "y the decision or inaction
may appeal to the CTA within /A days from the receipt of the decision or from the
lapse of the ->A day period, otherwise, the decision "ecomes %nal, executory, and
demanda"le ')ec. ..> K$RC(
0. <ecision of the CTA may "e appealed to the CA throuh a veri%ed petition for review
within -4 days from the receipt of the decision of the CTA. This may "e extended for
another -4 days upon proper motion and the payment of the full amount of the docket
fee "efore the expiration of the relementary period. Ko further extensions shall "e
ranted except for the most compellin of reasons and in no case shall exceed -4
days.
>is3%ted #ssess*ent
This is an assessment which has "een protested "y the taxpayer.
Hnly disputed assessments may "e made su"#ect of an appeal to the CTA. A taxpayer
who receives an assessment and does not protest the same, cannot %le an appeal to
152
the CTA, since it is the decision of the Commissioner, and not the assessment itself,
which is reviewa"le "y the CTA.
>ecisions o4 the 'e)ional >irector
$t should "e noted that the Reional <irector may also render decisions on protests.
Revenue Reulations -.&>4 authori7es appeals to the CTA from decisions of the
Reional <irector on administrative protests within the same /A day period. )ec. 6 of
RA --.4, however, mentions only decisions of the Commissioner.
@e that as it may, it is very well within the perimeter of correct procedure if the
taxpayer, instead of oin directly to the CTA, appeals the decision of the Reional
<irector to the Commissioner, since it is the Commissioner who has the %nal authority
to decide, assessment protests.
T8o 8ays o4 3rotestin) ad*inistratively
-. Re8uest for reconsideration* This refers to a plea for re&evaluation of an assessment
on the "asis of existin records without the need of additional evidence. $t may
involve a 8uestion of fact or law or "oth.
.. Re8uest for reinvestiation* This refers to a plea for re&evaluation of an assessment on
the "asis of newly&discovered or additional evidence. $t may also involve a 8uestion of
fact or law or "oth.
CL#2M& F<' '$F0H> #H> C'$>2T <F T#F$&
X The taxpayer may, instead of %lin a protest, %le a written claim for refund.
RE(ISITES FOR FILING REFND1
-. This must "e %led within the two 1.3 year period from the date of payment,
.. The fact of withholdin must "e proven,
/. This must "e included in the income tax return of the taxpayer,
0. $t must "e shown that the payment or the amount stated in the return was received "y the
overnment.
!IH MAP C$:2 Taxpayer or withholdin aent
!I2R2 TH C$:2 R2CLK<* &&& @$R
$))L2)* &&& Zuestions of law or fact HR
&&& "oth HR
&&& the taxes are illeally or erroneously collected
ILLEGALL# COLLECTED TAX D8& ERRONEOSL# COLLECTED TAX1
I//+>.//F 37//+35+B 5.2 means it violates certain provision of the law. $t may not "e
authori7ed "y a peculiar Tax :aw or statute.
E--7,+708/F 37//+35+B 5.2 means there may "e a law passed "ut there was a
mistake in the collection.
W$EN TO FILE1 W65?6, 2 F+.-8 from the date of payment
X ;ayment must "e proven in contemplation of Tax :aw, there is payment when the tax
lia"ility is fully paid. )o, if it is paya"le in installment, there can only "e payment when the
%nal installment has "een paid.
REFND AND CREDIT
153
These are remedies of the taxpayer after payment of tax.
@oth are modes of recoverin taxes which are either erroneously or illeally paid to
the overnment.
Tax refund is when there is actually a reim"ursement of the tax, improperly collected
and paid. $n tax credit, the overnment applies the amount determined to "e
improperly collected, after proper veri%cation, aainst any sum that may "e due and
collecti"le from the taxpayer.
7hen *ay clai* 4or re4%nd or credit 5e :led9
-. !hen tax has "een erroneously or illeally collected.
.. !hen any penalty is claimed to have "een collected without authority.
/. !hen any sum is alleed to have "een excessively or in any manner wronfully
collected, 2#ec. 99B, N"R4*.
0. Commissioner is also iven the authority to refund the value of $nternal Revenue
)tamps when they are returned in ood condition "y the purchaser, and in his
discretion redeem or chane unused stamps that have "een rendered un%t for use
and refund their value upon proof of destruction. 2#ec. 9E5, N"R4*
'e;%isites 4or re4%nd or credit
-. A written claim for refund or credit must "e %led with the Commissioner.
.. The claim for refund or credit must "e a cateorical demand for reim"ursement, and
/. $t must "e %led within two years from the date of payment of the tax or penalty
reardless of any supervenin event that may arise after the payment.
0. The tax should have "een paid in full.
;ayment under protest is not re8uired. )ec. ..= of the K$RC provides that a suit or
proceedin for refund or credit may "e maintained whether or not such tax, penalty,
or sum has "een paid under protest or duress.
7hen 3ay*ent %nder 3rotest re;%ired
-. $n real property protest cases
.. ;rotest in customs cases
7hy is a 8ritten clai* 4or re4%nd is necessary9
-. To aford the Commissioner an opportunity to correct the action of su"ordinate
oFcers.
.. To notify the overnment that the taxes souht to "e refunded are under 8uestion and
that, therefore, such notice should "e "orn in mind in estimatin the revenue
availa"le for expenditure.
T8o thin)s to 5e esta5lished 5e4ore re4%nd or credit is )ranted
-. There was an actual collection and receipt "y the overnment of the tax souht to "e
recovered. This needs factual proof.
.. There is leal "asis for rantin the refund or credit.
PROCEDRE FOR REFND OR CREDIT
-. Cile claim in writin with the Commissioner. This is a condition precedent "efore one
can %le action with the CTA for refund or credit.
.. $f claim is denied or is not acted upon "y the Commissioner, the taxpayer must %le an
appeal to the CTA within /A days after the receipt of the decision of the Commissioner.
154
/. @oth the written claim and the appeal to the CTA must "e %led within the two&year
prescriptive period.
The t8o-year 3rescri3tive 3eriod 4or over3aid ;%arterly cor3orate inco*e tax
$n case of an overpaid 8uarterly income tax for corporations, the prescriptive period of
two years within which a claim for refund should "e %led is counted, not from the time
the corporation %les its 8uarterly income tax return and pays the tax thereon, "ut
from the date the %nal ad#ustment return is %led after the end of the taxa"le year.
"rescri3tive 3eriod 4or taxes 8ithheld
$n the case of taxes withheld under the withholdin tax system, the two&year
prescriptive period for refunds is counted not from the date the tax is withheld and
remitted to the @ureau of $nternal Revenue "ut from the end of the taxa"le year.
Taxes 3aya5le in install*ents
$n cases of taxes which are paya"le in installments, the two&year prescriptive period is
counted from the payment of the last installment. .Co**issioner v. "alanca 1,
&C'# 461.
Zuarterly income taxes are considered installments, until the %nal ad#ustment return.
Cor3orate dissol%tion
The two year prescription period should "e counted from /A days after the approval of
the )2C of its plan for dissolution.
Tax credit )ranted 5y la8
A tax credit ranted "y law, is not considered a refund, and prescri"es in -A years
under Art. --00 of the Civil Code.
&%s3ension o4 the t8o-year 3rescri3tive 3eriod
The period for claimin claims for refund is suspended provided two conditions are
present*
-. There is pendin litiation "etween the overnment and the taxpayer as to the proper
tax to "e paid and of the proper interpretation of the taxpayer+s charter in relation to
the disputed tax, and
2. The Commissioner in that disputed case areed to a"ide "y the decision of the
)upreme Court as to the collection of the tax relative thereto. ."anay $lectric Co. v.
Collector May (,, 1+,1
'e4%nd 8itho%t clai*
The Commissioner may, even without a written claim therefore, refund or credit any
tax, where on the face of the return upon which payment was made, such payment
appears clearly to have "een erroneously made.
For4eit%re o4 re4%nd and tax credit
A refund check or warrant which shall remain unclaimed or uncashed within 4 years
from the date said warrant or check was mailed or delivered shall "e forfeited in favor
of the overnment and the amount thereof shall revert to the eneral fund.
A tax credit certi%cate which shall remain unutili7ed after 4 years from the date of
issue, shall, unless revalidated, "e considered invalid.
E(ITABLE RECOPMENT
$t is a principle which allows a taxpayer whose claim for refund has "een "arred due to
prescription to recover said tax "y settin of the prescri"ed refund aainst a tax that
may "e due and collecti"le from him.
155
This rule is not applica"le in the ;hilippines.
Le)al ca3acity o4 8ithholdin) a)ents to clai* a tax re4%nd
Corporate withholdin aents in the ;hilippines of non&resident forein corporations
are entitled to claim the refund of excess withholdin tax paid on income of said
corporations in the ;hilippines.
The )upreme Court ruled that a withholdin aent should "e allowed to claim the tax
refund "ecause, under the law, it is the one who is held lia"le for any violation of the
withholdin tax law should such a violation occur. .Co**issioner v. 7ander "hils.
2nc. #3ril 1+, 1,,1
2nterest on tax re4%nds
The eneral rule is that the overnment cannot "e re8uired to pay interest on taxes
refunded to taxpayer. .&8eeney v. Co**issioner #%). (1, 1+1
2xceptions
-. !hen the Commissioner acted with patent ar"itrariness. Ar"itrariness
presupposes inexcusa"le or o"stinate disreard of leal provisions.
.Co**issioner v. Victorias Millin) Cor3. Hov. (, 1661
.. $n cases of refunds or credits made after three months from April -4 to
employees for any excess of the taxes withheld, the rate of which is 5 percent
per annum 2#ec. DB4, N"R4*
CORT TAX APPEALS
La8 creatin) the CT#
Repu"lic Act Ko. --.4
7hy 8as the CT# created9
-. To have a centrali7ed "ody well versed in tax matters Q a reular court formin part of
the #udicial system which could exclusively hear and determine tax cases.
2. To prevent delay in the disposition of tax cases in view of the "acklo of civil and
criminal cases in the reular courts. .0rsal v. Co%rt o4 #33eals 101 "hil (01
Hat%re o4 the CT#
-. $t is a #udicial and not an administrative "ody.
.. $t is a court of special #urisdiction, and as such can only take coni7ance of such
matters as are clearly within its #urisdiction.
/. $t is not overned strictly "y the technical rules of evidence.
<r)anization, ;%or%*, and dis3osition o4 cases 5y the CT#
The CTA is composed of a ;residin Jude and two Associate Judes, each of whom is
appointed "y the ;resident form a list of nominees prepared "y the Judicial and @ar
Council. )uch appointments need no con%rmation.
Any two #udes of the CTA shall constitute a 8uorum and the concurrence of two
#udes shall "e necessary to promulate any decision thereof. 2#ec. A and 9, R. AA9H*
Cases "rouht "efore the CTA shall "e decided within /A days after the su"mission
thereof for decision, which shall "e in writin, statin clearly and distinctly the facts
and the law on which they are "ased, and sined "y the #udes who concurred
therewith. 2#ec. A9, R. AA9H*. This re8uirement, however, is merely directory.
-%risdiction o4 the CT#
CTA shall exercise exclusive appellate #urisdiction to review "y appeal the followin*
156
-. <ecisions of the Commissioner of $nternal Revenue, involvin disputed
assessments, refunds of internal revenue taxes, fees or other chares,
penalties imposed in relation thereto, or other matters arisin under the K$RC
or other law or part of law administered "y the @$R.
.. <ecisions of the Commissioner of Customs in cases involvin lia"ility for
customs duties, fees or other money chares, sei7ure, detention or release of
property afected, %nes, forfeitures, or other penalties imposed in relation
thereto, or other matters arisin under the Customs law or other law or part of
law administered "y the @ureau of Customs.
/. <ecision of the )ec. of Cinance, on an assessment which the Commissioner of
Customs decided in favor of the taxpayer. F0ecisions of the 4oissioner of
4ustos !hich are adverse to the governent, ay be raised on appeal to
the #ec. of ;inance, !hose decision is appealable to the 4T.G.
Jurisdiction over decisions of the :ocal @oard of Assessment Appeals is now loded
with the Central @oard of Assessment Appeals.
Hecessity o4 decisions in order to vest the CT# 8ith C%risdiction
<ecisions of either the Commissioner or $nternal Revenue or the Commissioner of
Customs is of the essence in appeal of cases to the CTA for it is axiomatic in taxation
that mere assessments of the Commissioner are not appeala"le to the CTA. $t is
settled that assessments are not decisions of the Commissioner.
$n a case, the )upreme Court held that the word DdecisionJ in )ec. 6 of RA --.4
means decisions of the Commissioner on the protest of the taxpayer aainst the
assessments. <e%nitely, the word does not sinify the assessment itself.
.Co**issioner v. Villa, -an. (0, 16,1
Co*3ro*ise 3enalties and the CT#
Collection of compromise penalties comes within the scope of )ec. 6 of RA --.4 which
speaks of Dpenalties imposed in relation theretoJ and that therefore follows that the
CTA has #urisdiction thereon. .0& Li4e 2ns%rance Co. v. Co**issioner CT# Case
Ho. 1(6! >ec. (, 1641
7hat decision is a33eala5le9
!hen it constitutes the %nal action taken "y him, or his authori7ed deputies with
respect to the taxpayer+s lia"ility.
The appeala"le decision is that letter of denial where the Commissioner not only
demanded payment of the tax "ut wherein he also ave the warnin that in the event
that the taxpayer fails to pay the same, the Commissioner would "e constrained to
enforce the collection thereof "y means of the remedies prescri"ed "y law. .&%ri)ao
$lectric Co. v. Co**issioner ,+ &C'# +4!1
Iowever, the %lin of a #udicial action for collection, i.e., criminal and civil action
durin the pendency of an administrative protest, constitutes a denial of the protest.
.Co**issioner v. 0nion &hi33in) 1. $n such a situation, the taxpayer may %le an
appeal with the Court of Tax Appeals.
7hose decisions are a33eala5le99
<ecisions of the Commissioner of $nternal Revenue are "y statutory provision
appeala"le to the CTA, "ut it appears that under Rev. R2. -.&>4, decisions of the
Reional <irector of a revenue reion of the @$R is also appeala"le.
There is a court rulin to the efect that the decisions of a Reional <irector may "e
appeala"le to the CTA, .Fortalez, -r. v. Collector, 'esol%tion, CT# Case no. 1(+!,
>ec. ((, 1641
Appeals on customs cases seem to "e limited only to decisions of the Commissioner
of Customs
157
"rescri3tion o4 assess*ent and action
The defense of prescription of assessment should "e raised while the case is pendin
with the @$R, whereas, the defense of prescription of action may "e raised for the %rst
time, even on appeal to the CTA, "ut not for the %rst time in an appeal with the )C.
7ho *ay a33eal to the CT#9
Any person, association or corporation afected "y a decision of the Commissioner of
$nternal Revenue or the Collector of Customs.
Collection case in 'TC 8hile a33eal is 3endin) in the CT#
$f the @ureau of $nternal Revenue, durin the pendency of an appeal in the CTA, %les a
civil action in the RTC, for the collection of the tax lia"ility, the taxpayer may %le a
motion in the RTC for the dismissal of the case on the round that there is no "asis for
collectin the tax due where the assessment thereof is still under dispute in the CTA.
Tax collection not s%s3ended d%rin) a33eal
An appeal to the CTA from a decision of the Commissioner shall not suspend the
collection of the payment or collection of the tax lia"ility of the taxpayer, unless a
motion to the efect, shall have "een presented to the CTA and ranted "y it on the
round that such collection #eopardi7es the interest of the overnment andGor the
taxpayer.
Ho inC%nction to restrain tax collection
Eeneral rule* Ko court shall have the authority to rant an in#unction to restrain the
collection of any national internal revenue tax, fee or chare imposed "y the K$RC,
2#ec. 9A3, N"R4*.
2xception* CTA may suspend or restrain the collection of the tax when, in its opinion,
the collection of the tax may #eopardi7e the interest of the overnment andGor the
taxpayer, 2#ec. AA, R.AA9H*
'e;%isites 4or inC%nction
-. That the collection of the tax may #eopardi7e the interest of the overnment andGor
the taxpayer.
.. That the taxpayer is willin to deposit the amount e8ual to the taxes assessed or to a
"ond amountin to not more than twice the value of the tax "ein assessed.
/. That the CTA may issue an in#unction only in the exercise of its appellate #urisdiction.
The thirty-day 3rescri3tive 3eriod o4 a33eal
The thirty&day prescriptive period starts to run from the date the taxpayer receives
the appeala"le decision of the Commissioner.
The /A day period is #urisdictional. The failure of the taxpayer to appeal from a
decision of the Commissioner on time renders the assessment %nal, executory and
demanda"le.
Re8uests or motions %led "y the taxpayer with the @$R for the reconsideration of the
Commissioner+s decision operate to suspend the runnin of the /A day prescriptive
period.
Iowever, mere reiterations of previous petitions for reconsideration do not suspend
the runnin of the prescriptive period. )ro fora motions, which do not raise new
issues, will not suspend the period.
'e*edy i4 tax3ayer 4ails to a33eal 8ithin the 30 day 3eriod
$f the taxpayer fails to appeal within the /A day period, his remedy is to pay the
disputed assessment then su"se8uently claim a refund within the . year period.
2nterloc%tory orders
158
$nterlocutory orders of the CTA are not appeala"le.
#33eal 4ro* decisions o4 the CT#
Hne motion for reconsideration may "e allowed for decisions of the CTA.
<ecisions of the CTA are appealed to the Court of Appeals throuh a veri%ed petition
for review. ')ections - and 4, Rule 0/, Rules of Court(
Appeals period is %fteen 1-43 days from receipt of the decisions or #udment. The
Court of Appeals may rant an additional period of %fteen 1-43 days only within which
to %le the petition for review. Ko further extension shall "e ranted except for the
most compellin reasons and in no case to exceed %fteen 1-43 days. ')ection 0, Rule
0/, Rules of Court(
7hen decision o4 the CT# is adverse to the 6overn*ent
The )olicitor Eeneral, "ein the chief leal oFcer of the overnment, is aptly the
oFcer who should appeal to the CA or )C.
Findin)s o4 4act o4 CT# not revie8a5le
Cindins of fact of the CTA, when supported "y su"stantial evidence, is %nal.
>a*a)es in CT# 3roceedin)s
)ection -5 of RA --.4 provides that L!here an appeal is found to be frivolous or that
proceedings have been instituted erely for delay, the 4T. ay assess daages
against the appellant in an aount not exceeding )HEE !hich shall be collected in the
sae anner as fne or other penalties authori%ed by la!.
REMEDIES OF T$E GOVERNMENT
IN GENERAL
'e*edies o4 the )overn*ent
-. Tax lien
.. Compromise
/. <istraint
0. :evy
4. Civil action
5. Criminal action
6. Corfeiture
>. )uspension of "usiness operations in violation of ?AT
=. 2nforcement of administrative %ne
TAX LIEN
Tax lien
Hnly one property su"#ect to tax
!hen a taxpayer nelects or refuses to pay his internal revenue tax lia"ility after
demand, the amount so demanded shall "e a lien in favor of the overnment from the
time the assessment was made "y the Commissioner until paid with interest,
penalties, and costs that may secure in addition thereto, upon all property and rihts
to property "elonin to the taxpayer. ')ection .-=, K$RC(
159
:ien shall not "e valid aainst any mortaee, purchaser or #udment creditor until
notice of such lien shall "e %led "y the Commissioner in the Reister of <eeds of the
province or city where the property of the taxpayer is located.
A tax lien created in favor of the overnment is superior to all other claims and
preferences, even to that of a private litiant predicated on a court #udment.
Tax lien and >istraint
Tax lien is directed to the property su"#ect to the tax, reardless of the owner.
$n distraint, property sei7ed must "e that of the taxpayer, althouh it need not "e the
property in respect to which the tax is assessed.
COMPROMISE
Co*3ro*ise v. a5ate*ent
C$R may compromise "oth civil and criminal lia"ility of the taxpayer
Lnlike compromise which involves a reduction of the taxpayer+s lia"ility, a"atement of
tax means that the entire tax lia"ility of the taxpayer is cancelled.
Compromise and a"atement have diferent rounds.
6ro%nds 4or co*3ro*ise
-. A reasona"le dou"t as to the validity of the claim aainst the taxpayer exists,
or
.. The %nancial position of the taxpayer demonstrates a clear ina"ility to pay the
assessed tax
6ro%nds 4or a5ate*ent
-. !hen the tax or any portion thereof appears to "e un#ustly or excessively assessed.
.. !hen the administration and collection costs involved do not #ustify the collection of
the amount due.
Cases that *ay 5e co*3ro*ised
-. <elin8uent accounts
.. Cases under administrative protest
/. Cases disputed "efore the courts
0. Cases for collection already %led in courts
4. Criminal violations except those already %led, and those involvin fraud.
Cases that cannot 5e co*3ro*ised
-. !ithholdin tax cases
.. Criminal tax fraud cases
/. Criminal cases already %led in court
0. <elin8uent accounts with duly approved schedule of installment payments
4. Cases where reduction of payments had already "een ranted.
5. cases already decided and are %nal and executory
Co*3ro*ise o4 cri*inal violation
$n criminal violations, the compromise must "e made prior to the %lin of the
information in court.
.ll criinal violations ay be coproised except:
160
-. those already %led in court, and
.. those involved in fraud.
Li*itations on co*3ro*ise
$n case of lare taxpayers or excise taxpayers & not less than 4AB
Cor cases of %nancial incapacity, a minimum compromise rate e8uivalent to -AB of
the "asic assessed tax, and
Cor other cases, a minimum compromise rate e8uivalent to 0AB of the "asic assessed
tax
!here the "asic tax exceeds one million pesos 1;-,AAA,AAA3 or where the settlement
ofered is less than the prescri"ed minimum rates, the compromise shall "e su"#ect to
the approval of the 2valuation @oard which shall "e composed of the Commissioner
and the four <eputy Commissioners.
>ele)ation o4 the 3o8er o4 co*3ro*ise
The Commissioner may deleate his power to compromise to the <eputy
Commissioners and the Reional <irectors su"#ect to such limitations and restrictions
as may "e imposed under rules and reulations to "e promulated for the purpose.
DISTRAINT AND LEV#
Collection 5y distraint and levy
@oth are summary administrative enforcement remedies and cannot "e a"ailed of
where the amount of tax involved is not more than ;-AA.
<istraint is enforced on personal property of the taxpayer while levy is enforced on
real property.
$K distraint, forfeiture "y the overnment is not provided, while in levy, forfeiture is
authori7ed.
The taxpayer is not iven them riht of redemption with respect to distrained personal
property, while such riht is ranted in case of real property levied upon and sold, or
forfeited, to the overnment.
:evy may "e made "efore, simultaneously or after distraint.
The remedy of distraint and levy may "e made repeatedly until the full amount of the
tax due includin expenses is satis%ed.
;roperty in custodia leis may "e distrained, su"#ect to the outcome and efects of the
court+s %nal #udment.
#ct%al v. constr%ctive distraint
Actual distraint is resorted to when delin8uency in the payment sets in, that is, when
at the time re8uired for payment, a person fails to pay his tax o"liation. $t consists of
action sei7ure and distraint of personal property to the taxpayer.
$n constructive distraint, no actual delin8uency is necessary "efore it may "e resorted
to. $t may "e availed of in the followin instances* a3 Taxpayer is retirin from
"usiness su"#ect to tax, "3 Ie intends to leave the ;hilippines, c3 Ie removes his
property therefrom, d3 Ie hides or conceals his property, or e3 Ie performs any act
tendin to o"struct the proceedins for collectin the tax due or which may "e due
from him. $n addition, constructive distraint may also "e resorted to when the
taxpayer is already delin8uent.
Constructive distraint is a preventive remedy whose aim is to forestall a possi"le
dissipation of the taxpayer+s asset when delin8uency takes place.
There are diferent procedures in enforcin actual and constructive distraint.
Ko8 to e=ect constr%ctive distraint9
161
$t shall "e efected "y re8uirin the taxpayer or any person havin possession or
control of such property to sin a receipt coverin the property distrained and o"liate
himself to preserve the same intact and unaltered and not to dispose of the same in
any manner whatever without the express authority of the Commissioner.
$f the taxpayer or any other person refuses or fails to sin the receipt, the revenue
oFcer efectin the constructive distraint shall proceed to prepare a list of such
property and, in the presence of two witnesses, leave a copy thereof in the premises
where the property distrained is located, after which the said property shall "e
deemed to have "een placed under constructive distraint.
"roced%re 4or act%al distraint
-. Commencement of distraint proceedins
.. )ervice of warrant of distraint
/. Kotice of sale of distrained property Q not less than .A days
0. )ale of property distrained Q pu"lic auction
MANNER OF SERVING WARRANT OF DISTRAINT
1. 6oods, chattels, e=ects or other 3ersonal 3ro3erty
The oFcer servin the warrant of distraint shall make or cause to "e made an account
of oods, chattels, efects or other personal property distrained, sined "y himself, which
includes a statement of the sum demanded and note of the time and place of the sale.
The copy shall "e left either with the owner or person from whose possession such
oods, chattels, or efects or other personal property were taken, or at the dwellin of
"usiness of such person and with someone of suita"le ae and discretion.
(. &tocLs and other sec%rities
)tocks and other securities shall "e distrained "y servin a copy of the warrant of
distraint upon the taxpayer and upon the president, manaer, treasure or other responsi"le
oFcer of the corporation, company or association, which issued the said stocks or securities.
3. >e5ts and credits
<e"ts and credits shall "e distrained "y leavin with the person owin the de"ts or
havin in his possession or under his control such credits, or with his aent, a copy of the
warrant of distraint.
The warrant of distraint shall "e suFcient authority to the person owin the de"ts or
havin his possession or under his control any credits "elonin to the taxpayer to pay to the
Commissioner the amount of such de"ts or credits.
4. /anL acco%nts
@ank accounts shall "e arnished "y servin a warrant of arnishment upon the
taxpayer and upon the president, manaer, treasurer or other responsi"le oFcer of the "ank.
Lpon receipt of the warrant of arnishment, the "ank shall turn over to the
Commissioner so much of the "ank accounts as may "e suFcient to satisfy the claim of the
Eovernment.
"%rchase 5y )overn*ent at sale %3on distraint
The 4oissioner or his deputy ay purchase the property distrained in behalf of the
National 1overnent !hen:
-. the amount "id for the property under distraint is not e8ual to the amount of
the tax, or
.. the amount is very much less than the actual market value of the articles for
sale.
;roperty so purchased may "e resold "y the Commissioner or his deputy.
162
PROCEDRE ON LEV# OF REAL PROPERT#
-. )ervice of warrant of levy
.. Advertisement of the sale Q .A days after levy, period of at least /A days
/. ;u"lic sale of the property under levy or forfeiture of the property to the overnment
for want of "idder
0. Redemption of property or consolidation of ownership and title in the purchaser
Ko8 to e=ect levy9
$nternal revenue oFcers shall prepare a duly authenticated certi%cate showin the
name of the taxpayer and the amount of the tax and penalty due from him.
)uch certi%cate shall operate with the force of a leal execution throuhout the
;hilippines
:evy shall "e efected "y writin upon said certi%cate a description of the property
upon which levy is made. At the same time, written notice of the levy shall me mailed
to or served upon the Reister of <eeds to the province or city where the property is
located and upon the delin8uent taxpayer, or if he is a"sent from the ;hilippines, to
his aent or manaer, or to the occupant of the property in 8uestion.
A failure of notice is a fatal defect.
#dvertise*ent o4 sale
!ithin .A days after levy.
;ostin a notice of sale at least /A days at the main entrance of the municipal or city
hall and in pu"lic and conspicuous place in the city or municipality where the property
is located.
;u"lication once a week for three weeks in a newspaper of eneral circulation in the
municipality or city where the property is located.
'ede*3tion o4 real 3ro3erty sold
<elin8uent taxpayer have the riht to redeem the real property sold "y him or any
one for him within one 1-3 year from the date of sale.
Taxpayer must pay the amount of pu"lic taxes, penalties, and interest from the date
of delin8uency to the date of sale, toether with interest on said purchase price at the
rate of -4B per annum from the date of purchase to the date of redemption.
The owner shall not, however, "e deprived of the possession of the said property and
shall "e entitled to the rents and other income thereof until the expiration of the time
allowed for its redemption.
For4eit%re to )overn*ent 4or 8ant o4 5idder in sale o4 real 3ro3erty
$nternal revenue oFcer conductin the sale of real property levied shall declare the
property forfeited to the Eovernment in satisfaction of the claim when*
-. here is no "idder for real property exposed for sale, or
.. the hihest "id is for an amount insuFcient to pay the taxes, penalties and costs.
'esale o4 real estate taLen 4or taxes
The Commissioner shall have chare of any real estate o"tained "y the Eovernment
in payment or satisfaction of taxes, penalties or costs arisin under the K$RC or in
compromise or ad#ustment or any claim thereof.
The Commissioner may, upon ivin not less than .A days notice, sell and dispose of
the said property at pu"lic auction or, with the prior approval of the )ecretary of
Cinance, dispose of the same at private sale.
Fatal de4ects in the levy o4 real 3ro3erty
163
-. Cailure of sendin notice to parties.
.. Mistake in the name of owner of the property
/. Misdescription of the property
0. $naccurate date of sale as posted or pu"lished or sent in notice.
Fore4eit%re and seiz%re or 3ro3erty
-. $n sei7ure, a tax lien is "ein enforced. Any amount in excess of the tax lien shall "e
returned to the owner.
.. $n forfeiture, the whole amount shall "e forfeited in favor of the overnment.
FORFEITRE
For4eit%re
The efect of forfeiture is to transfer the title to the speci%c thin from the owner to
the overnment. May "e redeemed.
I, 3.8+ 7; 4+-87,./ 4-74+-5F1 The forfeiture of chattels and remova"le %xtures of
any sort is enforced "y sei7ure and sale or destruction of the speci%c forfeited
property.
I, 3.8+ 7; -+./ 4-74+-5F1 This forfeiture of real property is enforced "y a #udment
of condemnation and sale in a leal action or proceedin, civil or criminal, as the case
may re8uire.
For4eit%re o4 3ro3erty %sed in %nlicensed 5%siness or dies %sed 4or 3rintin) 4alse
sta*3s, etc
All chattels, machinery, and remova"le %xtures of any sort used in the unlicensed
production of articles su"#ect to excise tax shall "e forfeited.
<ies and other e8uipment used for the printin or makin of any internal revenue
stamp, la"el or ta which is in imitation of or purports to "e a lawful stamp, la"el or
ta shall also "e forfeited.
For4eit%re o4 )oods ille)ally stored or re*oved
Lnless otherwise speci%cally authori7ed "y the Commissioner, all articles su"#ect to
excise tax should not "e stored or allowed to remain in a distillery, distillery
warehouse, "onded warehouse or other place where made, after the tax thereon has
"een paid, otherwise all such articles shall "e forfeited.
Articles withdrawn from any such place or from customs custody or imported into the
country without the payment of the re8uired tax shall likewise "e forfeited.
CIVIL AND CRIMINAL ACTIONS
Civil and cri*inal actions
Civil and criminal actions and proceedins instituted in "ehalf of the Eovernment
under the authority of the K$RC or other law enforced "y the @ureau of $nternal
Revenue shall "e "rouht in the name of the Eovernment of the ;hilippines and shall
"e conducted "y leal oFcers of the @ureau of $nternal Revenue, "ut no civil or
criminal action for the recovery to taxes or the enforcement of any %ne, penalty or
forfeiture under this Code shall "e %led in court without the approval of the
Commissioner. ')ection ..A, K$RC(
$n a fraud assessment which has "ecome %nal and executory, the fact of fraud shall
"e #udicially taken coni7ance of in the civil or criminal action for the collection
thereof.
Civil action
164
Civil action, as a mode of tax collection, is resorted to when a tax lia"ility "ecomes
collecti"le.
Collecti"ility of a tax arises in the followin instances*
-. !hen a tax is assessed "ut the assessment "ecomes "anal and unappeala"le
"ecause the taxpayer fails to %le an administrative protest within /A days.
.. !hen a protest aainst the assessment is %led "y the taxpayer and a decision is
rendered "y the Commissioner "ut said decision "ecomes %nal, executory and
demanda"le for failure of the taxpayer to %le an appeal within /A days.
A civil action may also "e %led in order to collect the so called self assessed tax
Ko civil action for recovery of taxes shall "e %led without the approval of
Commissioner Q also criminal.
2ns%Mcient 3rotest allo8in) collection case
$n D.F-65 D& C-0= ':&/==-A, )eptem"er .5, -=>>(, the )upreme Court ruled that the
re8uest for reconsideration cannot "e considered as a protest aainst the assessment.
Accordin to the )upreme Court, the failure of the heirs to su"stantiate their claim
aainst the assessment due to the non&su"mission of their position paper #usti%ed the
Commissioner in collectin the estate and inheritance taxes in the settlement
proceedins.
$n R+40:/63 D& L+B+8<. ' :&=64=, Ce"ruary .>, -=5=(, the )upreme Court held that
the taxpayer+s failure to dispute the assessment efectively "y complyin with the
conditions laid down "y the @ureau of $nternal Revenue provided a leal "asis for the
overnment to collect the taxpayer+s lia"ility "y ordinary civil action.
2s Co**issioner re;%ired to r%le on a 3endin) 3rotest 5e4ore :lin) a collection
case9
Ko. $n R+40:/63 D& L6.< T6., T+,> S7,8' I,3& '-5 )CRA 4>01-=543(, the )upreme
Court held that nowhere in the Tax Code is the Commissioner re8uired to rule %rst on
a taxpayer+s re8uest for reinvestiation "efore he can to o court for the purpose of
collectin the tax assessed. Accordin to the )upreme Court, the leislative policy is
to ive the Commissioner much latitude in the speedy and prompt collection of taxes
"ecause it is on taxation that the overnment depends to o"tain the means to carry
out its operations.
Kote however that civil or criminal case is tantamount to denial of the re8uest for
reinvestiation. Thus, the taxpayer may %le an appeal with the Court of Tax Appeals.
'C7<<68867,+- D& ,67, S?6446,>(
Cri*inal action
The %lin of a criminal action is one of the reconi7ed modes of collectin delin8uent
taxes. )ection -A4 of the K$RC further states that the #udment in the criminal case
shall not only impose the penalty "ut shall also order payment of the taxes su"#ect of
the criminal case as %nally decided "y the Commissioner.
Criminal action is, however, not resorted to as a collection remedy only. There are
other cases not involvin non&payment of taxes where criminal action is utili7ed.
2*3ortant considerations re)ardin) cri*inal action
-. Ko criminal action for the recovery of taxes or the enforcement of a %ne shall "e %led
in court without the approval of the Commissioner. ')ection ..A, K$RC(
.. Criminal actions instituted in "ehalf of the overnment under the authority of the K$RC
or other law enforcement "y the @ureau of $nternal Revenue shall "e "rouht in the
name of the overnment and shall "e conducted "y leal oFcers of the @ureau of
$nternal Revenue. ')ection ..A, K$RC(
/. The ac8uittal of the taxpayer in a criminal action does not necessarily result in the
exoneration of said taxpayer form his civil lia"ility to pay taxes.
0. $K a criminal action that was instituted aainst the taxpayer for havin %led a false
and fraudulent return and failure to pay taxes, the )upreme Court held that the
165
su"se8uent satisfaction of the tax lia"ility "y payment or prescription will not operate
to extinuish the taxpayer+s criminal lia"ility.
;ayment of the tax due after apprehension shall not constitute a valid defense in any
prosecution for violation of any provision of the K$RC or in any action for forfeiture of untaxed
articles. ')ection .4/, K$RC(
4. )u"sidiary imprisonment is provided for in cases of non&payment of the %ne due to
the taxpayer+s insolvency "ut not for failure to pay the tax due to the taxpayer+s
insolvency.
)ection .>A provides that* L"f the person convicted of violation of any provisions of
this 4ode has no property !ith !hich to eet the :ne iposed upon hi by the court or is
unable to pay such fne, he shall be sub&ect to a subsidiary personal liability.
5. $n 0n)a5 v. C%si, the )upreme Court held that no assessment is re8uired "efore a
criminal prosecution. This was modi%ed in a later case, Co**issioner v. Co%rt o4
#33eals, where the )upreme Court ruled that assessment is necessary "efore the
criminal prosecution of Cortune To"acco. The )upreme Court, however, harmoni7ed
this decision with the earlier one. ')ee later discussion(
6. $n cases of violations committed "y associations, partnerships, or corporations, the
penalty shall "e imposed on the partner, president, eneral manaer, "ranch
manaer, treasurer, oFcer&in&chare, and employees responsi"le for the violation.
Civil lia5ility in tax cri*inal cases
$n ordinary criminal cases, the civil lia"ility is incurred "y reason of the ofender+s
criminal act.
$n taxation, the civil lia"ility to pay taxes arises not "ecause of any felony "ut upon
the taxpayer+s failure to pay taxes. Criminal lia"ility in taxation arises as a result of
one+s lia"ility to pay taxes. Conse8uently, the extinction of one+s criminal lia"ility
does not necessarily result in the extinuishments of his civil lia"ility to pay taxes.
L+ith regard to the tax proper, the state correctly points out in its brief that the
ac'uittal in the criinal case could operate to discharge the petitioner fro the duty
to pay the tax since that duty is iposed by statute prior to and independent of any
attepts on the part of the taxpayer to evade payent. The obligation to pay the tax
is not aere conse'uence of the felonious acts charged in the inforation, nor is it a
ere civil liability derived fro crie that !ould be !iped out by the &udicial
declaration that the criinal acts charged did not exist. 'C.85-7 D& C7//+357-, 0
)CRA -A=/(
Heed 4or assess*ent 5e4ore cri*inal action
0n)a5 v. C%si .L-411-(4, May 30, 1,01
Zuirico Lna" %led a motion to 8uash the criminal complaints aainst him in view of
his pendin protest aainst the assessment made "y the @ureau of $nternal Revenue.
The )upreme Court ruled that his contention is without merit. !hat is involved here is
not the collection of taxes where the assessment of the Commissioner may "e
reviewed "y the Court of Tax Appeals "ut a criminal prosecution for violation of the
K$RC which is within the coni7ance of the Court of Cirst $nstance 1now RTC3
!hile there can "e no civil action to enforce collection "efore the assessment
procedures in the K$RC have "een followed, there is no re8uirement for the precise
computation of the tax "efore there can "e criminal prosecution under the K$RC.
A crime is complete when the violator has knowinly and willfully %led a fraudulent
return with intent to evade and defeat the tax.
Co**issioner o4 2nternal 'even%e v. Co%rt o4 #33eals A1!B
Assessment re8uired "efore criminal prosecution of Cortune for tax evasion can "e
pursued.
The )upreme Court diferentiated this case from 0n)a5 v. C%si "y rulin that, even
thouh this is also a criminal prosecution, there must "e a pria facie showin of a
willful attempt to evade taxes "efore one can proceed with such prosecution. $n
0n)a5, there was willful attempt to evade taxes while in the case at "ar, there was
166
none, as Cortune was even payin taxes accordin to the @$R re8uirements. Thus,
there is still need for a %nal determination of the tax due "efore criminal prosecution
can "e commenced aainst Cortune.
ADDITIONS TO T$E TAX
#dditions to the tax
Additions to the tax are increments to the "asic tax incident to the taxpayer+s non&
compliance with certain leal re8uirements like the taxpayer+s refusal or failure to pay
taxes on time andGor violations of taxin provisions in the law.
7hat are the additions to the tax9
-. Civil penalty or surchare
.. $nterest
/. Hther civil penalties and administrative %nes
Civil 3enalty or s%rchar)e
The civil penalty or surchare may either "e .4B or 4AB of the tax dependin on the
nature of the violation.
The payment of the surchare is mandatory and the Commissioner is not vested with
any authority to waive or dispense with the collection thereof.
An extension of time to pay taxes ranted "y the Commissioner does not excuse
payment of the surchare.
The 4AB surchare is not a criminal penalty "ut a civil or administrative sanction
provided primarily as a safeuard for the protection of the )tate revenue and to
reim"urse the overnment for the heavy expense of investiation and the loss
resultin from the taxpayer+s fraud.
Cases 8here the civil 3enalties or s%rchar)es are i*3osed
-. .4B
a. Cailure to %le any return and to pay the tax due thereon as re8uired "y the
K$RC or rules.
". Cilin a return with an internal revenue oFcer other than those with whom the
return is re8uired to "e %red. Kot authori7ed oFcer.
c. Cailure to pay the de%ciency tax within the time prescri"ed for its payment in
the notice of assessment.
d. Cailure to pay the full or part of the amount of tax shown on any return, or the
full amount of tax due for which no return is re8uired to "e %led, on or "efore
the date prescri"ed for its payment.
.. 4AB
a. $n case of willful nelect to %le the return within the period prescri"ed "y the
K$RC or rules
". $n case a false or fraudulent return is willfully made.
&%5stantial %nderdeclaration or overdeclaration
A su"stantial underdeclaration of taxa"le sales, receipts or income, or a su"stantial
overstatement of deductions shall constitute pria facie evidence of a false or
fraudulent return.
Cailure to report sales, receipts or income in an amount exceedin /AB of that
declared per return and a claim of deductions in an amount exceedin /AB of actual
deductions shall render the taxpayer lia"le for su"stantial underdeclaration of sales,
receipts or income or for overstatement of the deductions.
167
2nterest
This is an increment on any unpaid amount of tax assessed at the rate of .AB per
annu or such hiher rate as may "e prescri"ed "y the reulations from the date
prescri"ed for payment until the amount is fully paid.
Classes o4 interest
-. <e%ciency interest
.. <elin8uency interest
/. $nterest on extended payment
>e:ciency interest
Any de%ciency in the tax due shall "e su"#ect to the interest of .AB per annu which
shall "e assessed and collected from the date prescri"ed for its payment until the full
payment thereof.
7hen delin;%ency interest i*3osed9
<elin8uency interest is imposed in case of failure to pay*
-. The amount of the tax due on any return re8uired to "e %led, or
.. The amount of tax due for which no return is re8uired, or
/. A de%ciency tax or any surchare or interest thereon on the issue date appearin
in the notice and demand of the Commissioner.
Rate is .AB per annu until the amount is fully paid which interest shall form part of
the tax.
2nterest on extended 3ay*ent
This is imposed when taxpayer has opted to pay "y installment "ut he fails to pay the
tax or any installment on the prescri"ed date for payment.
$t is also imposed where Commissioner has authori7ed the extension of the time for
payment of the tax.
#d*inistrative :nes or 3enalties
-. Cailure to %le certain information returns
.. Cailure of a withholdin aent to collect and remit the tax
/. Cailure of a withholdin aent to refund excess withholdin tax
STATTOR# OFFENSES AND T$EIR PENALTIES
6eneral 3oints re. cri*es and o=enses
Any person convicted of a crime penali7ed "y the K$RC shall, in addition to "ein
lia"le for the payment of the tax, "e su"#ect to the penalties imposed in the Code.
;ayment of the tax due after apprehension shall not constitute a valid defense in any
prosecution for violation of any provision of the K$RC or in any action for the forfeiture
of untaxed articles.
Any person who willfully aids or a"ets in the commission of a crime penali7ed in K$RC
or who causes the commission of any such ofense "y another shall "e lia"le in the
same manner as the principal.
$f the ofender is not a Cilipino Citi7en, he shall "e deported immediately after servin
the sentence without further proceedin for deportation.
168
$f the ofender is a pu"lic oFcer or employee, the maximum penalty prescri"ed for the
ofense shall "e imposed and in addition, he shall "e dismissed from the pu"lic service
and perpetually dis8uali%ed from holdin any pu"lic oFce, to vote and to participate
in any election.
$f the Hfender is a Certi%ed ;u"lic Accountant, his certi%cate as a C;A, shall, upon
conviction, "e automatically revoked or cancelled.
$n the case of associations, partnerships, or corporations, the penalty shall "e
imposed on the partner, president, eneral manaer, "ranch manaer, treasurer,
oFcer&in&chare, and employees responsi"le for the violation.
6ive exa*3les o4 cri*es and o=enses
-. Attempt to evade or defeat tax
Any person who willfully attempts in any manner to evade or defeat any tax imposed
under the K$RC or the payment thereof.
.. Cailure to %le return, supply correct information, pay tax, withhold and remit tax, and
refund excess tax withheld on compensation.
/. Lnlawful pursuit of "usiness.
0. Lnlawful possession or removal of articles su"#ect to excise tax without payment of
the tax.
4. Cailure or refusal to issue receipts or sales or commercial invoices, violations related
to the printin of such receipts or invoices and other violations.
"rescri3tion 4or violations o4 any 3rovision o4 the H2'C
All violations of any provision of the K$RC shall prescri"e in 4 years.
;rescription shall "ein to run from the day of the commission of the violation of the
law, and if the same "e not known at the same time, from the discovery thereof and
the institution of #udicial proceedins for its investiation and punishment.
The prescription shall "e interrupted when proceedins are instituted aainst the
uilty persons and shall "ein to run aain if the proceedins are dismissed for
reasons not constitutin #eopardy.
The term of prescription shall not run when the ofender is a"sent from the
;hilippines.
7hen is in4or*erIs re8ard )iven9
An informer+s reward is iven to persons instrumental in the*
-. discovery of violations of the K$RC, and
.. discovery and sei7ure of smuled oods.
'e;%isites 4or in4or*erIs re8ard 4or violations o4 the H2'C
-. This may "e claimed "y any person, except an internal revenue oFcial or employee or
other pu"lic oFcial or employee, or his relatives within the sixth deree of
consanuinity.
.. ;ersons voluntarily ives de%nite and sworn information, not yet in the possession of
the @ureau of $nternal Revenue. $nformation should not refer to a case already
pendin or previously investiated or examined "y the Commissioner or any of his
aents.
/. $nformation leads to the discovery of frauds upon the internal revenue laws or
violations or any of the provisions thereof.
0. There is recovery of revenues, surchares and fees andGor conviction of the uilty
party andGor the imposition of any %ne or penalty. $n the reverse, if no revenue,
surchares or fees "e actually recovered or collected, such person shall not "e
entitled to a reward.
169
4. Reward shall "e e8uivalent to ten percent 1-AB3 of the revenues, surchares or fees
recovered andGor any %ne or penalty imposed and collected or ;-,AAA,AAA per case,
whichever is lower.
The same amount of reward shall "e also iven to an information where the ofender
has ofered to compromise the violation of law committed "y him and his ofer has
"een accepted "y the Commissioner and collected from the ofender.
>iscovery and seiz%re o4 s*%))led )oods
To encourae the pu"lic to extend full cooperation in eradicatin smulin, a cash
reward e8uivalent to -AB of the fair market value of the smuled and con%scated
oods or ;-,AAA,AAA per case, whichever is lower.
'e8ard s%5Cect to inco*e tax
The cash rewards of informers shall "e su"#ect to income tax collected as a %nal
withholdin tax, at the rate of ten percent 1-AB3.
LOCAL TAXATION
Local taxation as decentralization
The principles of local taxation under the -=>6 Consititution simply means
D0ecentrali%ation. $t does not mean that local overnments are sovereins within the
state or Di*3eri%* in i*3erioJ.
IN GENERAL
T8o as3ects o4 local taxation
-. :evy of taxes, fees, chares and other impositions
.. Real property taxation
POWER TO LEV# TAXES' FEES' C$ARGES AND OT$ER IMPOSITIONS
POWER OF LOCAL TAXATION
"o8er o4 local taxation not inherent
2ach local overnment unit shall have the power to create its own sources of
revenues and to levy taxes fees and chares su"#ect to such uidelines are limitations
as the Conress may provide, consistent with the "asic policy of local autonomy. )uch
taxes, fees, and chares shall accrue exclusively to the local overnments. ')ection
4, Article N, Constitution(
The power of local taxation is not inherent and is conferred on local overnment units
"y the Constitution. This is reiterated in )ection -.= of the :ocal Eovernment Code of
-==-.
;ower is not plenary and a"solute as it is su"#ect to uidelines and limitations as may
"e provided "y Conress.
B.837 D& PAGCOR, A municipal corporation has no inherent riht to impose taxes.
The Lpo!er to tax must always yield to a leislative act which is superior for havin
"een passed "y the )tate itself which has the Linherent po!er to tax. :EL cannot
tax instrumentalities of the Kational Eovernment, in this case, ;AECHR.
Fees and char)es
170
Cees means a chare %xed "y law or ordinance for the reulation or inspection of a
"usiness or activity. ')ection -/-1i3, :ocal Eovernment Code(
Chares refer to pecuniary lia"ility, as rents or fees aainst persons or property.
')ection -/-13, :ocal Eovernment Code(
#%thority to )rant tax exe*3tion 3rivile)es
!ith the rant of the power of taxation, local overnment units have also "een iven
the power to rant tax exemptions correspondin to its taxin powers.
:ocal overnment units may, throuh ordinances duly approved, rant tax
exemptions, incentives or reliefs under such terms and conditions as they may deem
necessary.
7ithdra8al o4 tax exe*3tion 3rivile)es
Lnless otherwise provided in the :ocal Eovernment Code, tax exemptions or
incentives ranted to, or presently en#oyed "y all persons, whether natural or #uridical,
includin overnment&owned or controlled corporations, except local water districts,
cooperatives duly reistered under Repu"lic Act Ko. 5=/>, non&stock and non&pro%t
hospitals and educational institutions, are here"y withdrawn upon the efectivity of
the Code.
#%thority o4 L60s to adC%st rates o4 tax ordinances
:ocal overnment units shall have the authority to ad#ust the tax rates as prescri"ed
in the :ocal Eovernment Code not oftener than once every %ve 143 years, "ut in no
case shall such ad#ustment exceed -AB of the rates %xed under the Code.
>o%5le taxation
<ou"le taxation is not prohi"ited, except those "etween*
-. ;rovinces and municipalities,
.. @aranay and Cities, municipalities or provinces.
SCOPES AND EXERCISE OF LOCAL TAXING POWER
Local a%thority that shall exercise taxin) 3o8er
The power shall "e exercised "y the appropriate sanunian or the sanunian
panlalawian in the case of provinces, the sanunian panlunsod in the case of
cities, the sanunian "ayan in the case of municipalities or the sanunian
"aranay in the case of "aranays, throuh an appropriate ordinance. ')ection -/.,
:ocal Eovernment Code(
The exercise of the power to tax "y the local leislative assem"ly is su"#ect to the
veto power of the local chief executive.
-. Lltra ?ires
.. ;re#udicial to the pu"lic welfare
Iowever, the sanunian may override the veto "y a .G/ vote of all its mem"ers.
"roced%re 4or a33roval and e=ectivity o4 tax ordinances and reven%e *eas%res
-. 2nactment and approval "y sanunian.
The procedure for approval of local tax ordinances and revenue measures shall "e in
accordance with the provisions of the :ocal Eovernment Code. ')ection ->6, :ocal
Eovernment Code(
.. Mandatory pu"lic hearins
171
;u"lic hearins shall "e conducted for the purpose prior to the enactment thereof.
')ection ->6, :ocal Eovernment Code(
/. ;u"lication re8uirements
!ithin ten 1-A3 days after their approval, certi%ed true copies of all provincial, city and
municipal tax ordinances or revenue measures shall "e pu"lished in full for three 1/3
consecutive days in a newspaper of local pu"lication or, in the a"sence of newspapers of
local pu"lication, posted in at least two 1.3 conspicuous and pu"licly accessi"le places.
')ection ->>, :ocal Eovernment Code(
0. Curnishin of copies to local treasurer
Copies of all provincial, city and municipal tax ordinances or revenue measures shall
"e furnished to the respective local treasurers for pu"lic dissemination. ')ection ->=, :ocal
Eovernment Code(
"roced%re 4or 3rotest o4 tax ordinances
Any 8uestion on the constitutionality of tax ordinances or revenue measures may "e
raised on appeal within /A days from the efectivity thereof to the )ec. of Justice.
2#ec. A3D, (ocal 1overnent 4ode*.
After the lapse of /A days and declaratory relief Q "efore assessment, "efore payment
N75+1 Appeal from whereR The provision is not really clear "ut presuma"ly after oin
throuh the same process of appealin leality of ordinances, i.e. from municipal to
provincial sanunian "efore oin to the )ecretary of Justice. Htherwise, direct appeal to
the )ecretary may "e made.
The )ecretary of Justice shall render a decision within sixty 15A3 days from the date of
receipt of appeal. ')ection ->6, :ocal Eovernment Code(
)uch appeal shall not have the efect of suspendin the efectivity of the ordinance
and the accrual and payment of the tax, fee, or chare levied therein. ')ection ->6,
!ithin thirty 1/A3 days after receipt of the decision or the lapse of the 5A&day period
without the )ecretary of Justice actin upon the appeal, the arieved party may %le
appropriate proceedins with a court of competent #urisdiction. ')ection ->6, :ocal
Eovernment Code(
"rescri3tion 4or :lin) o4 revie8
@aranay ordinance Q %le petition for review to municipalGcity sanunian within -A
days from enactment.
Municipal or Component city ordinance Q %le with ;rovincial sanunian within / days
from approval.
Chartered CityG;rovincial sanunian Q %le with )ec. of Justice within /A days from
efectivity.
Review powers, of local treasurers and the )ec. of Cinance, on the validity of revenue
ordianances have "een a"roated "y the :ocal Eovernment Code.
Ho 3o8er o4 control 5y &ecretary o4 -%stice over L60s
)ection ->6 of the :ocal Eovernment Code, which authori7es the )ecretary of Justice
to review the constitutionally or leality of a tax ordinance Q and, if warranted, to
revoke it on either or "oth rounds Q is valid, and does not confer the power of control
over local overnment units in the )ecretary of Justice, as even if the latter can set
aside a tax ordinance he cannot su"stitute his own #udment for that of the local
overnment units. 'D-6//7, D& L6<, .4/ )CRA -/4(
F%nda*ental 3rinci3les )overnin) local taxation
-. Taxation shall "e uniform in each local overnment unit.
172
.. Taxes, fees, chares and other impositions shall "e e8uita"le and "ased as much as
possi"le on the taxpayer+s a"ility to pay.
/. They shall "e levied and collected only for pu"lic purposes.
0. They shall not "e un#ust, excessive, oppressive or con%scatory.
4. They shall not "e contrary to law, pu"lic policy, national economic policy, or in
restraint of trade.
5. The collection of local taxes, fees, chares, and other impositions shall, in no case, "e
let to any person. N75+1 This overrules the B.>.586,> -0/6,> 'B.>.586,> D&
R.<6-+= 6 )CRA /A5(
#siatic v. #liL3ala O The mere collection of market stall fees may "e let to a
private entity, the same not "ein taxes.
This is a dou"tful decision since )ec. -/A of the :EC covers not only the collection
of taxes "ut likewise all other impositions under the :EC.
6. The revenue collected under the local Eovernment Code shall inure solely to the
"ene%t of, and su"#ect to disposition "y, the local overnment unit levyin the tax,
fee, chare or other imposition unless speci%cally provided therein.
>. 2ach local overnment unit shall, as far as practica"le, evolve a proressive system
of taxation. ')ection -/A, :ocal Eovernment Code(
=. The interpretation of laws on the rant of taxin power to :EL+s shall "e li"erally
interpreted in favor of the :EL, @ut, dou"ts on the lia"ility of the taxpayer under a
valid tax ordinance is construed strictly aainst the :EL, except as reards to tax
exemptions, incentives or reliefs.
-A. The Kational Eovernment cannot deprive :EL+s of their taxin power as this power is
expressly ranted and mandated "y the Constitution. The laws may provide
limitations, "ut they cannot totally a"roate the taxin power of the :EL+s
--. Conress cannot enact local tax law, only uidelines and limitations.
Co**on li*itations on the taxin) 3o8ers o4 L60s
Lnless otherwise provided therein, the exercise of the taxin powers of provinces,
citites, municipalities, and "aranays shall not extend to the levy of the followin*
-. $ncome tax, except when levied on "anks and other %nancial institutions,
A 4B tax on ross receipts of rentals or lease of spaces in a privately
owned pu"lic market constitutes a valid Dlicense tax or feeJ for the
reulation of the "usiness rather than as D$ncome taxJ.
.. documentary stamp tax,
/. taxes or estates, inheritance, ifts, leacies and other ac8uisitions ortis causa,
except as otherwise provided herein,
0. Customs duties, reistration fees of vessels and wharfae on wharves, tonnae
dues, and all other kinds of customs fees, chares and due, except wharfae on
wharves constructed and maintained "y the :EL concerned,
4. Taxes, fees and chares and other impositions upon oods carried into or out of, or
passin throuh, the territorial #urisdictions of :ELs in the uise of chares for
wharfae, tolls for "rides or otherwise, or other taxes, fees or chares in any form
whatsoever upon such oods or merchandise,
5. Taxes, fees or chares on aricultural and a8uatic products when sold "y marinal
farmers or %shermen,
6. Taxes or "usiness enterprises certi%ed to "y the @oard of $nvestments as pioneer
or non&pioneer for a period of six 153 and four 103 years, respectively from the date
of reistration,
173
>. 2xcise taxes on articles enumerated in the K$RC, as amended, and taxes, fees or
chares on petroleum products,
=. ;ercentae or value&added tax on sales, "arters or exchanes or similar
transactions on oods or services except as otherwise provided herein,
-A. Taxes on the ross receipts of transportation contractors and persons enaed in
the transportation of passeners of freiht "y hire and common carriers "y air,
land or water, except as provided in this Code,
--. Taxes on premiums paid "y way of reinsurance or retrocession,
-.. Taxes, fees or chares for the reistration of motor vehicles and for the issuance of
all kinds of licenses or permits for the drivin thereof, except tricycles,
-/. Taxes, fees, or other chares on ;hilippine products actually exported, except as
otherwise provided herein,
-0. Taxes, fees or chares on Countryside and @aranay @usiness 2nterprises and
cooperatives duly reistered under Repu"lic Act Ko. 5>-A and Repu"lic Act Ko.
5=/>, otherwise known as the Cooperative Code of the ;hilippines,
-4. Taxes, fees or chares of any kind of the Kational Eovernment, its aencies and
instrumentalities, and local overnment units. ')ection -//, :ocal Eovernment
Code(
Co**on li*itations *ay 5e classi:ed into the 4ollo8in) cate)ories
-. Taxes which are levied "y the K$RC
.. Taxes, fees and chares which are imposed under the Tarif and Customs Code and
other custom laws
/. Taxes, fees and chares the imposition of which contravenes existin overnmental
policies or which are violative of the fundamental principles of taxation
0. Taxes, fees and chares imposed under special laws
&co3e o4 taxin) 3o8er o4 3rovinces
-. Tax on the transfer of real property ownership Q U or -B within 5A days
.. Tax on the "usiness of printin and pu"lication
/. Cranchise tax
A local franchise tax may only "e imposed on companies with leislative
franchises that do not have the D $n lieu of all taxesJ proviso.
0. Tax on sand, ravel and other 8uarry resources
4. ;rofessional tax Q ;/AA
;rofessional exclusively employed in the overnment shall "e exempt from the
payment of tax.
5. Amusement tax Q /AB of ross receipts
6. Annual %xed tax per delivery truck or van of manufacturers or producers and
wholesalers of, or dealers in certain products. ')ection -/0&-0-, :ocal Eovernment
Code(
&co3e o4 taxin) 3o8er o4 *%nici3alities
-. Taxes, fees and chares not otherwise levied "y provinces
.. Cees and chares on "usiness and occupation and practice of any profession or callin
/. Cees for sealin and licensin of weihts and measures
174
0. Cishery rentals, fees and chares ')ection -0.&-0=, :ocal overnment Code(
/%siness
@usiness means trade or commercial activity reularly enaed in as a means of
livelihood or with a view to pro%t.
A manufacturer or producer which sells its products throuh a "roker, is su"#ect to
excise tax 1"usiness tax3 in the city or municipality where the "roker conducts its
"usiness.
A "roker is an aent of the company, a dealer is not.
A city can validly tax the sales to customers outside the city as lon as the orders
were "ooked and paid for in the company+s "ranch oFce in the city.
&co3e o4 taxin) 3o8er o4 cities
-. The city may levy the taxes, fees and chares which the province or municipality may
impose. ')ection -4-, :ocal Eovernment Code(
N75+1 The rates of taxes that the city may levy may exceed the maximum rates allowed for
the province of municipality "y not more than %fty percent 14AB3 except the rates of
professional and amusement taxes.
&co3e o4 taxin) 3o8er o4 5aran)ays
-. Taxes on stores or retailers are %xed "usiness esta"lishments with ross sales or
receipts of the precedin calendar year of ;4A,AAA or less for "aranays in the cities
and ;/A,AAA of less for "aranays in municipalities
.. )ervice fees or chares for services rendered or use of "aranay&owned properties or
service facilities
/. @aranay clearance
0. Hther fees and chares ')ection -4., :ocal Eovernment Code(
<ther 4ees and char)es 5y 5aran)ays
The barangay ay levy reasonable fees and charges:
-. Hn commercial "reedin of %htin cocks, cock%hts and cockpits,
.. Hn places of recreation which chare admission fees, and
/. Hn "ill"oards, sin"oards, neon sins, and outdoor advertisements.
Co**on reven%e-raisin) 3o8ers o4 L60s
-. )ervice fees and chares
.. ;u"lic utility chares
/. Toll fees or chares ')ection -4/&-44, :ocal Eovernment Code(
COMMNIT# TAX
Co**%nity tax
The community tax, which replaced the residence tax is essentially a poll or capitation
tax. $t is of a %xed amount imposed upon certain inha"itants of the ;hilippines
Dwithout reard to their property or the occupation in which they may "e enaed.J
$t is imposed "oth on individuals and #uridical persons.
2ndivid%als lia5le to co**%nity tax
/very inhabitant of the )hilippines, A3 years of age or over:
175
-. who has "een reularly employed on a wae or salary "asis for at least /A
consecutive workin days durin any calendar year, or
.. who is enaed in any "usiness or occupation, or
/. who owns real property with an areate assessed value of ;-,AAA or more, or
0. who is re8uired "y law to %le an income tax return.
Annual community tax for individuals is ;4.AA and an annual additional tax of ;-.AA
for every ;-,AAA of income or from property wichi in no case shall exceed ;4,AAA.
')ection -46, :ocal Eovernment Code(
2nha5itant
Means any person, irrespective of his or her citi7enship or nationality, who dwells or
resides in the ;hilippines for a period exceedin three 1/3 months.
-%ridical 3ersons lia5le to co**%nity tax
2very corporation, no matter how created or orani7ed, whether domestic or resident
forein, enaed in or doin "usiness in the ;hilippines, shall pay an annual
community tax of ;4AA.
An annual additional ax of ;..AA shall "e imposed for every ;4,AAA worth of real
property in the ;hilippines owned "y it or for every ;4,AAA of ross receipts or
earnins received "y it form its "usiness in the ;hilippines in the precedin year, "ut
total amount must not exceed ;-A,AAA. ')ection -4>, :ocal Eovernment Code(
7ho are exe*3t 4ro* co**%nity tax9
-. <iplomatic and consular representatives
.. Transient visitors when their stay in the ;hilippines does not exceed three 1/3 months.
')ection -4=, :ocal Eovernment Code(
#ccr%al and 3ay*ent o4 co**%nity tax
Community tax shall accrue on the %rst day of January which shall "e paid not later
than the last day of Ce"ruary each year.
TAX REMEDIES AND ADMINISTRATIVE MATTERS IN LOCAL TAXATION
#ccr%al o4 taxes
Lnless otherwise provided in the Code, all local taxes, fees and chares shall accrue
on the %rst day of January of each year.
Kew taxes, fees or chares, or chares in the rates thereof, shall accrue on the %rst
day of the 8uarter of the next followin the efectivity of the ordinance imposin such
new levies or rates. ')ection -55, :ocal Eovernment Code(
Tax 3eriod and ti*e o4 3ay*ent
Calendar year unless otherwise provided
Taxes shall "e paid within the %rst twenty 1.A3 days of January or of each su"se8uent
8uarter, as the case may "e.
The sanunian concerned may, for a #usti%a"le reason or cause, extend the time for
payment of such taxes, fees, or chares without surchares or penalties, "ut only for
a period not exceedin six 153 months. ')ection -54 and -56, :ocal Eovernment
Code(
Local )overn*ent lien
:ocal taxes, fees, chares and other revenues constitute a lien, superior to all liens,
chares or encum"rances in favor of any person, enforcea"le "y appropriate
administrative or #udicial action, not only upon any property or rihts therein which
may"e su"#ect to the lien "ut also upon property used in "usiness, occupation or
callin, or exercise of privilee with respect to which the lien is imposed.
176
The lien is extinuished upon payment of the tax, fee or chare, includin the interest
and surchares. ')ection -6/, :ocal Eovernment Code(
Civil re*edies 4or collection
-. @y administrative action
a. <istraint of personal property
". :evy upon real property
.. @y #udicial action ')ection -60, :ocal Eovernment Code(
"eriod o4 assess*ent
:ocal taxes, fees, or chares shall "e assessed within %ve 143 years from the date they
"ecame due. ')ection -=01a3, :ocal Eovernment Code(
$n case of fraud or intent to evade the payment of taxes, fees, or chares, the same
may "e assessed within ten 1-A3 years from discovery of the fraud or intent to evade
payment. ')ection -=01"3, :ocal Eovernment Code(
"eriod o4 collection
:ocal taxes, fees, or chares may "e collected within %ve 143 years from the date of
assessment of administrative or #udicial action. ')ection -=0 ], :ocal Eovernment
Code(
&%s3ension o4 3eriod o4 assess*ent and collection
-. The treasurer is leally prevented from makin the assessment or collection.
.. The taxpayer re8uests for a reinvestiation and executes a waiver in writin "efore
expiration of the period within which to assess or collect.
/. The taxpayer is out of the country or otherwise cannot "e located. ')ection -=01d3,
PROCEDRE FOR PROTEST OF ASSESSMENT
-. Kotice of Assessment
!hen the local treasurer or his duly authori7ed representative %nds that correct taxes,
fees, or chares have not "een paid, he shall issue a notice of assessment statin the nature
of the tax, fee or chare, the amount of de%ciency, the surchare, interests and penalties.
')ection -=4, :ocal Eovernment Code(
.. !ritten protest
!ithin sixty 15A3 days from the receipts of the notice of assessment, the taxpayer may
%le a written protest with the local treasurer contestin the assessment, otherwise, the
assessment shall "ecome %nal and executory. ')ection -=4, :ocal Eovernment Code(
/. <ecision
The local treasurer shall decide the protest within sixty 15A3 days from the time of its
%lin. $f the treasurer %nds the protest to "e wholly or partly meritorious, he shall issue a
notice cancelin wholly or partially the assessment. Iowever, if the local treasurer %nds the
assessment to "e wholly or partly correct, he shall deny the protest wholly or partly with
notice to the taxpayer. ')ection -=4, :ocal Eovernment Code(
0. Appeal
The taxpayer shall have thirty 1/A3 days from the receipt of the denial of the protest
or from the lapse of the sixty&day period prescri"ed within which to appeal with the court of
competent #urisdiction, otherwise, the assessment "ecomes conclusive and unappeala"le.
Clai* 4or re4%nd or tax credit
177
Remedy after payment in cases where tax was erroneously or illeally collected.
Ko case or proceedin shall "e maintained in any court for the recovery of any tax,
fee, or chare erroneously or illeally collected until a written claim for refund or
credit has "een %led with local treasurer. ')ection -=5, :ocal Eovernment Code(
!ritten claim for refund or credit must "e %led with the treasurer within two 1.3 years
form the date of payment of the tax, fee or chare or from the date the taxpayer is
entitled to a refund or credit 1doctrine of supervenin cause therefore applies3.
N75+1 There is no provision overnin the procedure in case the claim for refund or credit is
denied or not acted upon "y the local treasurer. The same procedure for protest of
assessment may "e followed and, as such, the taxpayer may appeal with the court of
competent #urisdiction.
2nC%ction on the collection o4 local taxes
Lnlike in the K$RC, the :EC does not speci%cally prohi"it the issuance of in#unctions on
the collection of local taxes.
Iowever, in#unctions cannot "e issued on the "asis of the alleed unconstitutionality
of the tax ordinance. Lntil the tax ordinance is declared to "e unconstitutional, it is
presumed to "e valid and constitutional.
REAL PROPERT# TAXATION
IN GENERAL
'eal 3ro3erty tax and s3ecial levies
-. @asic real property tax
.. Additional levy on real property for the )pecial 2ducation Cund Q -B
/. Additional ad alore tax on the idle lands Q 4B
0. )pecial levy "y local overnment units.
IMPOSITION OF REAL PROPERT# TAX
'eal 3ro3erty tax
Real property tax has "een de%ned as La direct tax on the o!nership of lands and
buildings or other iproveents thereon not specially exepted and is payable
regardless or !hether the property is used or not, although the value ay vary in
accordance !ith such factor.
Real property tax Lis a fxed proportion of the assessed value of the property being
taxed and re'uires, therefore, the intervention of assessors.
Kote however that the )upreme Court decided that axin real property is on the "asis
of actual use, even if the user is not the owner of the property.
'eal 3ro3erty tax recei3ts
Real property tax receipts are not evidence of ownership, "ut merely evidence of
rihtful possession.
Characteristics o4 real 3ro3erty tax
-. $t is a direct tax on the ownership or use of real property.
.. it is an ad valore tax. ?alue is the tax "ase.
/. $t is proportionate "ecause the tax is calculated on the "asis of a certain percentae
of the value assessed.
178
0. $t creates a sinle, indivisi"le, o"liation.
4. $t attaches on the property 1lien3 and is enforcea"le only aainst property.
#d valore* tax
.d valore tax is a levy on real property on the "asis of a %xed proportion of the
value of the property. ')ection -==], :ocal Eovernment Code(
Hat%re and sco3e o4 3o8er to i*3ose realty tax
The taxin power of local overnments in real property taxation is a deleated power.
7ho has the 3o8er to i*3ose realty tax9
-. provinces
.. cities
/. municipalities within the Metro Manila area ')ection ./., :ocal Eovernment Code(
'ates o4 levy
A province or city or a municipality within the Metro Manila area shall %x a uniform
rate of "asic real property tax applica"le to their respective localities as follows*
-. $n the case of a province, at the rate not exceedin -B of the assessed value of
real property, and
.. $n the case of a city or a municipality within the Metro Manila area, at the rate not
exceedin .B of the assessed value of real property. ')ection .//, :ocal
Eovernment Code(
F%nda*ental 3rinci3les )overnin) real 3ro3erty taxation
-. Real property shall "e appraised at its current and fair market value
.. Real property shall "e classi%ed for assessment purposes on the "asis of its actual
use.
/. Real property shall "e assessed on the "asis of a uniform classi%cation within each
local overnment unit.
0. The appraisal, assessment, levy and collection of real property tax shall not "e let to
any private person.
4. The appraisal and assessment of real property shall "e e8uita"le. ')ection -=6, :ocal
Eovernment Code(
'eal 3ro3erties s%5Cect to tax
Real property tax is imposed on lands, "uildins, machineries and other
improvements.
The :ocal Eovernment Code contains no de%nition of Dreal propertyJ
2*3rove*ent
$t is a valua"le addition made to a property or an amelioration in its condition
amountin to more than a repair or replacement of parts involvin capital
expenditures and la"or which is intended to enhance its value, "eauty, or utility or to
adopt it for a new or further purposes. ')ection -==1m3, :ocal Eovernment Code(
Machinery
Machinery em"races machines, e8uipment, mechanical contrivances, instruments,
appliances or apparatus, which may or may not "e attached, permanently or
temporarily, to the real property. ')ection -==1o3, :ocal Eovernment Code(
"ro3erties exe*3t 4ro* real 3ro3erty taxes
179
-. Real property owned "y the Repu"lic of the ;hilippines or any of its political
su"divisions except when the "ene%cial use thereof has "een ranted for
consideration or otherwise to a taxa"le person.
.. Charita"le institutions, churches, parsonaes, or convents appurtenant thereto,
mos8ues, non&pro%t or reliious cemeteries, and all lands, "uildins, and
improvements actually, directly and exclusively used for reliious, charita"le, or
educational purposes.
/. All machineries and e8uipment that are actually, directly and exclusively use "y local
water utilities and overnment&owned or controlled corporations enaed in supply
and distri"ution of water andGor eneration and transmission of electric power.
0. All real property owned "y duly reistered cooperatives as provided for under Repu"lic
Act Ko. 5=/>.
4. Machinery and e8uipment used for pollution control and environmental protection.
')ection ./0, :ocal Eovernment Code(
"ro3erty o8ned 5y the 'e3%5lic o4 the "hili33ines and its 3olitical s%5divisions
MC2# v. Marcos ? MC$A, which is a overnment owned or controlled corporation,
mandated to control, manae and supervise the Mactan $nternational Airport, is not
exempt from real property tax. $t is a EHCC and not an instrumentality of the
overnment.
Hational >evelo3*ent Co. V. Ce5% City ? $t may therefore "e stated that tax
exemption of Dproperty owned "y the Repu"lic of the ;hilippinesJ refers to properties
owned "y the overnment and "y its aencies which do not have separate and
distinct personalities, as distinuished from EHCC+s which have separate and distinct
personalities.
$xe*3t )overn*ent 3ro3erty
The exemption from tax of property owned "y the overnment o"tains even as to
properties owned in a private, proprietary or patriamonial character. The law makes
no distinction "etween property held in overnment capacity and those possessed in
a proprietary capacity, ./oard o4 #ssess*ent #33eals o4 La)%na v CT#1
"roo4 o4 exe*3tions
Taxpayer claimin exemption must su"mit suFcient documentary evidence to the
local assessor within /A days from the date of the declaration of real property,
otherwise, it shall "e listed as taxa"le in the assessment roll.
APPRAISAL AND ASSESSMENT
#33raisal
Appraisal is the act or process of determinin the value of property as of a speci%c
date for a speci%c purpose, 2#ec. ABBFeG, (ocal 1overnent 4ode*
#33raisal o4 real 3ro3erty
All Real property, whether taxa"le or exempt, shall "e appraised at the current and
fair market value prevailin in the locality where such property is siutuated.
>eclaration o4 'eal 3ro3erty
-. <eclaration "y owner or administrator once every three years durin the period from
January - to June /A, 2#ec. 9E9, (ocal 1overnent 4ode*.
.. <eclaration of property "y assessor when taxpayer refuses or fails for any reason to
make declaration within the time prescri"ed, 2#ec. 9E5, (ocal 1overnent 4ode*.
/. <eclaration coverin ac8uired real property or improvements within 5A days after the
ac8uisition of such property or upon completion or occupancy of the improvement,
whichever comes earlier, 2#ec. 9E6, (ocal 1overnent 4ode*.
180
0. Kotice of transfer of real property ownership within 5A days from date of transfer,
2#ec. 9E3, (ocal 1overnent 4ode*.
4. Hther administrative re8uirements.
#ssess*ent 'oll
This is a listin of all real property, whether taxa"le or exempt, located within the
territorial #urisdiction of the local overnment unit concerned.
All provincial, city, or municipal assessors are re8uired to prepare and maintain in
every province and city an Assessment Roll.
Real property shall "e listed, valued, and assessed in the name of the owner or
administrator, or anyone havin leal interest in the property.
&ched%le o4 4air *arLet val%es
:ocal assessors shall prepare a schedule of fair market values for the diferent classes
of property situated in their respective :EL+s for enactment "y ordinance of the
sanunian concerned.
The schedule shall "e pu"lished in a newspaper of eneral circulation in the locality
or, in the a"sence thereof, postin in two conspicuous and pu"licly accessi"le places,
2#ec. 9A9, (ocal 1overnent 4ode*.
Assessment is the act or process of determinin the value of a property, or proportion
thereof, su"#ect to tax, includin the discoverin, listin, classi%cation, and appraisal
of properties, 2#ec. ABBFfG, (ocal 1overnent 4ode*.
#ssess*ent level
Assessment level is the percentae applied to the fair market value to determine the
taxation value of the property, 2#ec. ABBFgG, (ocal 1overnent 4ode*.
#ssess*ent val%e
Assessed value is the fair market value of the real property multiplied "y the
assessment level. $t is synonymous to taxa"le value. 2#ec. ABBFhG (ocal 1overnent
4ode*.
Fair MarLet Val%e
Cair market value is the price at which a property may "e sold "y a seller who is not
compelled to sell, and "ouht "y "uyer who is not compelled to "uy, 2#ec. ABB FlG
(ocal 1overnent 4ode*.
'eyes v. #l*anzo? @oth the income approach and the comparative sales approach
are valid methods of ascertainin proper tax. Iowever, in the case at "ar, the income
approach should have "een used due to the efect of the Rent Control :aw on the
lease of the involved properties. The use of the comparative sales approach would
lead to ine8uita"le results.
#ct%al %se as 5asis 4or assess*ent
Real property shall "e classi%ed, valued, and assessed on the "asis of its actual use
reardless of where located, whoever owns it, and whoever uses it, 2#ec. 9AD, (ocal
1overnent 4ode*.
#ct%al %se
Actual use refers to the purpose for which the property is principally or predominantly
utili7ed "y the person in possession thereof,2#ec. ABBFbG (ocal 1overnent 4ode*.
Classes o4 real 3ro3erty 4or assess*ent 3%r3oses
-. Residential
.. Aricultural
/. Commercial
0. $ndustrial
181
4. Mineral
5. Tim"erland
6. )pecial
'esidential land
:and principally devoted to ha"itation, 2#ec. ABBFuG (ocal 1overnent 4ode*.
#)ric%lt%ral land
:and devoted principally to the plantin of trees, raisin of crops, livestock and
poultry, dairyin, salt makin, inland %shin and similar a8uacultural activities, and
other aricultural activities, 2#ec. ABBFdG (ocal 1overnent 4ode*.
Co**ercial land
:and devoted principally for the o"#ect of pro%t and is not classi%ed as aricultural,
industrial, mineral, tim"er, or residential land, 2#ec. ABBFiG (ocal 1overnent 4ode*.
2nd%strial Land
:and devoted principally to industrial activity as a capital investment and is not
classi%ed as aricultural, commercial, tim"er, mineral or residential land, 2#ec. ABBFnG
Mineral land
:ands in which minerals, metallic, or non&metallic, exist in suFcient 8uantity or rade
to #ustify the necessary expenditures to extract and utili7e such materials, 2#ec.
ABBFpG (ocal 1overnent 4ode*.
&3ecial classes o4 real 3ro3erty
All lands, "uildins, and other improvements thereon actually, directly, and
exclusively used for hospitals, cultural or scienti%c purposes, and those owned and
used "y local water districts, and overnment&owned and controlled corporations
renderin essential pu"lic services in the supply and distri"ution of water andGor
eneration and transmission of electric power shall "e classi%ed as special,2#ec. 9AC,
#ssess*ent o4 3ro3erty s%5Cect to 5acL taxes
Real property declared for the %rst time shall "e assessed for taxes for the period
durin which it would have "een lia"le "ut in no case for more than -A years prior to
the date of initial assessment.
#ssess*ent o4 *achinery
The fair market value of a "rand new machinery is its ac8uisition cost.
$n other cases, its ad#usted value 1depreciation3.
#ssess*ent a33eals
A. Appeal to the :ocal @oard of Assessment Appeals
Any owner or person havin leal interest in the property who is not satis%ed
with the action of the local treasurer may, within 5A days form date of receipt of the
written notice of assessment, %le a petition under oath with the :ocal @oard of
Assessment Appeals, 2#ec. 99C (ocal 1overnent 4ode*.
The @AA shall decide the appeal within -.A days form the date of receipt of
such appeal, 2#ec. 99B, (ocal 1overnent 4ode*.
9. Appeal to the Central @oard of Assessment Appeals
Hwner of person havin leal interest may appeal decision of the :@AA to the
C@AA within /A days from receipt of the decision of the :@AA, 2#ec. 99B, (ocal
1overnent 4ode*.
6. <ecision of the C@AA may "e appealed, throuh a veri%ed petition for review to the
Court of Appeals within -4 days from receipt of the C@AA decision, 2Rule 56 Rules of
4ourt*.
5. Appeal to the )upreme Court
182
<ecision of the Court of Appeals may "e appealed, throuh a veri%ed petition for
review, to the )upreme Court within %fteen 1-43 days from receipt of decision of the CA.
'Rule 04, Rules of Court(
COLLECTION OF TAX
>ate o4 accr%al o4 tax and tax lien
The real estate tax for any year shall accrue on the %rst day of January and from that
date it shall constitute a lien on the property which shall "e superior to any other lien,
mortae or encum"rance of any kind whatsoever and shall "e extinuished only
upon the payment of the delin8uent tax. ')ection .05, :ocal Eovernment Code(
"ay*ent o4 real 3ro3erty tax in install*ents
The owner of the real property or the person havin leal interest therein may pay the
"asic real property tax and the additional tax for the special education fund thereon
without interest in four 103 e8ual installments, except the special levy, the payment of
which shall "e overned "y an ordinance of the sanunian concerned. ')ection .4A,
Tax disco%nt
$n case of payment in advance of the "asic real property tax and additional )2C tax,
sanunian may rant a discount in an amount not exceedin .AB of the annual tax
due. ')ection .4-, :ocal Eovernment Code(
"rescri3tive 3eriods o4 collection
The "asic real property tax and any other tax levied under the :ocal Eovernment
Code shall "e collected within %ve 143 years from the date they "ecome due.
$n case of fraud or intent to evade payment of the tax, such action may "e instituted
for the collection of the same within ten 1-A3 years from the discovery of such fraud or
intent to evade payment.
2nterr%3tion o4 the 3rescri3tive 3eriod 4or collection
-. The local treasurer is leally prevented from collectin the tax.
.. The owner of the property or the person havin leal interest therein re8uests for
reinvestiation and executes a waiver in writin "efore the expiration of the period
within which to collect.
/. The owner of the property or the person havin leal interest therein is out of the
country or otherwise cannot "e located.
'e*edies 4or collection
-. administrative action throuh levy
The remedy of levy can "e pursued "y puttin up for sale only the real property
su"#ect to tax. The personal lia"ility is on the owner of the real property at the time
the tax accrues.
.. #udicial action
A formal demand for the payment of the delin8uent tax is not re8uired for the
initiation of either remedy.
The collection of local taxes may "e enforced throuh either or "oth the a"ove
mentioned remedies, alternatively or simultaneously, and the use or non&use of either
remedy shall not "e a "ar to avail of the other remedy.
"roced%re 4or levy
183
-. Kotice of delin8uency& ;osted and pu"lished
.. !arrant of levy Q Mailed and served
/. Advertisement Q After /A days from service of !arrant of :evy
- ;ostin and ;u"lication
0. Auction sale
Hotes on levy on real 3ro3erty
Kotices and pu"lication, as well as the leal re8uirement for the sale are mandatory,
the failure of which can invalidate the sale.
An auction sale, even if preceded "y postin, pu"lication and advertisement, "ut
without actual notice to the delin8uent taxpayer, is void. The notice must "e iven to
the person who had therefore declared the property for tax purposes.
Redemption of one who is not entitled thereto is inefectual.
#ssess*ent a33eals
<iscussed a"ove
"roced%re 4or 3rotest o4 i*3osition o4 real 3ro3erty tax
-. ;ayment under protest
Ko protest shall "e entertained unless the taxpayer %rst pays the tax. ')ection
.4.1a3, :ocal Eovernment Code(
The protest in writin must "e %led with the local treasurer within thirty 1/A3 days
from payment of the tax. ')ection .4.1a3, :ocal Eovernment Code(
Treasurer must decide the protest within sixty 15A3 days from receipt thereof. ')ection
.4.1a3, :ocal Eovernment Code(
.. Appeal to the :ocal @oard of Assessment Appeals 1:@AA3
)ection .4.1d3 provides that L"n the event that the protest is denied or upon the lapse
of the sixty-day period prescribed in subparagraph FaG, the taxpayer ay avail of the
reedies as provided for in 4hapter 6, Title T!o, Boo, "" of this 4ode, which refers to the
procedure for assessment appeals.
Any owner or person havin leal interest in the property who is not satis%ed with the
action of the local treasurer may, within sixty 15A3 days from date to receipt of the written
notice of assessment, %le a petition under oath with the :ocal @oard of Assessment Appeals.
')ection ..5, :ocal Eovernment Code(
The :@AA shall decide the appeal with one hundred twenty 1-.A3 days from the date
of receipt of such appeal. ')ection ..=, :ocal Eovernment Code(
/. Appeal to the Central @oard of Assessment Appeals 1C@AA3
Hwner or person havin leal interest may appeal decision of the :@AA to the C@AA
within thirty 1/A3 days from receipt of the decision of the :@AA. ')ection ..=, :ocal
Eovernment Code(
0. Appeal to the Court of Appeals
<ecision of the C@AA may "e appealed, throuh a veri%ed petition for review, to the
Court of Appeals within %fteen 1-43 days from receipt of C@AA decision. 'Rule 0/, Rules of
Court(
4. Appeal to the )upreme Court
<ecision of the Court of Appeals may "e appealed, throuh a veri%ed petition for
review, to the )upreme Court within %fteen 1-43 days from receipt of decision of the CA.
'Rule 04, Rules of Court(
184
Tax re4%nd or credit
Taxpayer may %le tax refund or credit when assessment is illeal or erroneous and the
tax is accordinly reduced or ad#usted.
Cile a written claim for refund or credit for taxes and interests with local treasurer
within two 1.3 years from the date the taxpayer is entitled to such reduction or
ad#ustment.
The treasurer must decide the claim for refund or credit within 5A days from receipt
thereof.
$f denied, taxpayer has same remedies as protest. 1:@AA, C@AA, CA, )C3
ADDITIONAL LEVIES ON REAL PROPERT#
&3ecial levies a%thorized
-. Additional levy on real property for the special education fund or )2C ')ection ./4,
.. Additional ad valore tax on idle lands ')ection ./5, :ocal Eovernment Code(
/. )pecial levy "y local overnment units ')ection .0A, :ocal Eovernment Code(
#dditional levy on real 3ro3erty 4or the s3ecial ed%cation 4%nd
A province, city or a municipality within the Metro Manila area may levy and collect an
annual tax of one percent 1-B3 on the assessed value of real property which shall "e
in addition to the "asic real property tax.
The proceeds thereof shall exclusively accrue to the )pecial 2ducation Cund created
under Repu"lic Act KH. 4006.
#dditional ad valore* 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 exceedin %ve percent 14B3 of the assessed value of
the property which shall "e in addition to the "asic real property tax.
7hat are considered idle lands9
-. Cor aricultural lands
a. Hne hectare and one half 1-G.3 of which remain uncultivated or unimproved is
considered idle land.
". Iowever, aricultural land with at least 4A planted trees to a hectare or used
for ra7in purposes are not considered idle lands.
.. Kon&aricultural lands
a. !here land is more than -,AAA s8uare meters and one half 1-G.3 of which
remain unutili7ed or unimproved, it is considered idle land.
". The same is applica"le to residential lots in su"divisions which remain
unutili7ed and unimproved.
$xe*3tion 4ro* idle lands tax
2xemptions are iven due to*
A. force a&eure,
.. civil distur"ance,
/. natural calamity, or
0. any cause or circumstances which physically or leally prevents the owner or
person havin leal interest from improvin, utili7in or cultivatin the same.
185
&3ecial levy 5y local )overn*ent %nits
A province, city or municipality may impose a special levy on the lands compromised
within its territorial #urisdiction specially "ene%ted "y pu"lic works pro#ects or
improvements "y the :EL concerned.
The special levy shall not exceed 15AB3 of the actual cost of such pro#ects and
improvements, includin the costs of ac8uirin land and such other real property in
connection therewith.
$t shall not apply to lands exempt from "asic real property tax and the remainder of
the land, portions of which have "een donated to the :EL concerned for the
construction of such pro#ects or improvements.
Keed for pu"lic hearin and pu"lication "efore enactment of ordinance imposin
special levy.
)pecial levy accrue on the %rst day of the 8uarter next followin the efectivity of the
ordinance imposin the levy. ')ection .0A, :ocal Eovernment Code(
7ho *ay re*it tax9
-. ;resident Q pu"lic interest so re8uires
.. )anunian Q resolution
a. failure of crops
". su"stantial decrease in the price of products
c. calamity
TARIFF AND CSTOMS CODE
IN GENERAL
CSTOMS LAW Q does not refer only to the provisions of Tarif and Customs Code. $t also
includes other laws and reulations su"#ect to enforcement "y the @ureau of Customs.
<ther la8s s%5Cect to en4orce*ent 5y the /%rea% o4 C%sto*s?
-. K$RC Q )ec. -A6. $mportation of oods or articles su"#ect to ?AT. The ?AT must "e paid
"efore these oods are released from Customs Custody.
.. K$RC Q )ec. -/-. $mportation of Articles su"#ect to excise taxes. The payment of excise tax
must "e made "efore the oods are released from Customs custody.
186
/. Reulations that may "e issued "y the C@, the implementation of such reulation is vested
in the @ureau of Customs.
CSTOMS DTIES Q are duties which are chared upon commodities on their "ein
imported in or exported out of a country.
TARIFF Q means a "ook of rates, a ta"le or cataloue drawn usually in alpha"etical order
containin the names of several states that hold commerce toether.
&co3e o4 tari= and c%sto*s la8s
)ection /4-0 of the Tarif and Customs Code provides that tarif and customs laws
include not only the provisions of the Code itself and reulations pursuant thereto "ut
all other laws and reulations which are su"#ect to enforcement "y the @ureau of
Customs or otherwise within its #urisdiction.
2xtend not only to the provisions of the Tarif and Customs Code "ut to all other laws
as well as Central @ank Circulars, the enforcement of which is entrusted to the
@ureau of Customs.
>ivision o4 the Tari= and C%sto*s Code
@ook $ Q Tarif laws
@ook $$ Q Customs laws
C%sto*s d%ties
Customs duties are duties which are chared upon commodities on their "ein
imported in or exported out of a country
G.-36. D& E2+3056D+ S+3-+5.-F1 Customs duties, which are assessed at the
prescri"ed tarif rates, are very much like taxes, which are fre8uently imposed for
"oth revenue raisin and for reulatory purposes. This, it has "een held that
DCustoms dutiesJ is Dthe name iven to taxes on the importation and exportation of
commodities, the tarif or tax assessed upon merchandise imported from, or exported
to, a forein country.J
Flexi5le tari= cla%se AFlexi5le "o8er o4 the "residentB
S+3567, 28@2A' A-563/+ VI' C7,85650567,1 The Conress may, "y law, authori7e the
;resident to %x within speci%ed limits, and su"#ect to such limitations and restrictions
as it may impose, tarif rates, import and export 8uotas, tonnae and wharfae dues,
and other duties or imposts within the framework of the national development
proram of the Eovernment.
S+3567, 401' T.-6T .,B C0857<8 C7B+1 $n the interest of national economy,
eneral welfare andGor national security, the ;resident upon recommendation of the
Kational 2conomic and <evelopment Authority, is empowered*
-. To increase, reduce, or remove existin protective rates of import duty, provided
that the increase should not "e hiher that -AAB ad valore,
.. To esta"lish import 8uota or to "an imports or any commodity, and
/. To impose additional duty on all imports not exceedin -AB ad valore
ABB6567,./ ,75+81
-. An order issued "y the ;resident pursuant to the 9exi"le tarif clause shall take efect
thirty 1/A3 days after promulation, except in the imposition of additional duty not
exceedin ten percent 1-AB3 ad valore which shall take efect at the discretion of
the ;resident.
.. $n the case of imposition of additional duty, the investiation of the Tarif Commission
and recommendation of K2<A are needed.
ARTICLES SB*ECT TO CSTOMS DTIES
6oods 4or c%sto*s d%ty 3%r3oses
187
All articles, when imported from any forein country into the ;hilippines, shall "e
su"#ect to duty upon each importation, even thouh previously exported from the
;hilippines, except as otherwise speci%cally provided for in this Code or in other laws
')ection -AA, Tarif and Customs Code(
The Code also imposes export tarif and premium duty or certain articles.
!hether su"#ect to duty or not, all imported articles shall "e entered throuh a
custom house at the port of entry.
#rticles, )oods or *erchandise
Articles when used with reference to importation or exportation includes oods,
wares, and merchandise and in eneral anythin that may "e made the su"#ect of
importation or exportation.
B.856B. D& C0857<8 C7//+357-1 The Revised Administrative Code de%nes
merchandise, when used with reference to importation or exportation, to include
oods, wares and, in eneral, anythin that may "e made the su"#ect of importation
or exportation. Checks, money orders and dollar "ills properly fall within the concept
of merchandise as used in the Revised Administrative Code. The L.). dollar are
merchandise. Checks, as "ills of exchane, are neotia"le instruments and may "e
"ouht and sold like a commodity. Money orders, also considered as "ills of exchane
of limited neotia"ility, possess the same attri"utes as other neotia"le instruments.
Thus, they may also "e "ouht and sold like checks.
Ninds o4 )oodsT*erchandise
-. articles su"#ect to duty
.. prohi"ited importations
/. conditionally&free importations
#rticles s%5Cect to d%ty
As a eneral rule, all articles when imported from a forein country includin those
previously exported from the ;hilippines are su"#ect to duty unless otherwise
speci%cally provided in the Code.
"rohi5ited i*3ortations
-. <ynamite, ammunitions and other explosives, %rearms and weapons, except when
authori7ed "y law.
.. !ritten or printed articles containin any matter advocatin of incitin treason,
re"ellion or su"version aainst the ;hilippine Eovernment, or forci"le resistance to
any law of the ;hilippines.
/. !ritten or printed articles, paintins, or other representations of an o"scene or
immoral character.
0. Articles, instruments, drus and su"stances desined and intended to produce
unlawful a"ortion and printed materials promotin unlawful a"ortion.
4. Machines, apparatus or mechanical devices used in am"lin
5. :ottery and sweepstakes tickets except those authori7ed "y the ;hilippine
Eovernment
6. Articles made of precious metals "ut actual %neness of 8uality not indicated.
>. Any adulterated or mis"randed dru in violation of the Cood and <rus Act.
=. Mari#uana, opium poppies, or any other narcotic or synthetic drus declared ha"it&
formin, or preparation thereof, except when authori7ed "y the ;hilippine
Eovernment, and opium pipes and parts thereof.
-A. All other articles and parts thereof, the importation of which is prohi"ited "y the law or
rules and reulations issued "y competent authority.
188
Conditionally-4ree i*3ortations
Conditionally&free importations are articles which are exempt from import duties upon
compliance with the formalities prescri"ed in or with reulations promulated "y the
Commissioner of Customs with the approval of the )ecretary of Cinance.
$n%*erate several conditionally-4ree i*3ortations
-. A8uatic products cauht or athered "y %shin vessels of ;hilippine reistry
.. 28uipment for use in the salvae of vessels or aircraft, not availa"le locally, and cost
of repairs excludin the value of the article used, made in forein countries upon
vessels or aircraft documented, reistered or licensed in the ;hilippines.
/. Articles "rouht into the ;hilippines for repair, processin or reconditionin to "e re&
exported upon completion of the repair, processin or reconditionin.
0. Medals, "ades, cups, and other small articles "estowed as trophies or pri7es or those
received or accepted as honorary distinction.
4. ;ersonal and household efects "elonin to residents of the ;hilippines returnin
from a"road, includin #ewelry, precious stones and other articles of luxury, which
were formally declared and listed "efore departure.
Returnin residents should have stayed out of the country for at least 5
months.
HC!+s may "rin in used home appliances, limited to one of every kinds, once
a year, within 5A days from their return. Iowever, when the amount of the
articles have exceeded ;-A, AAA the excess shall "e su"#ect to tax.
5. ;ersonal and household efects and vehicles "elonin to forein consultants and
experts hired "y, andGor renderin service to, the overnment and their staf or
personal and families.
6. ;rofessional instruments and implements, tools of trade, occupation or employment,
wearin apparel, domestic animals, and personal and household efects "elonin to
persons comin to settle in the ;hilippines or Cilipinos andGor their families and
descendants who are now residents or citi7ens of other countries, such parties
hereinafter referred to as overseas Cilipinos, in 8uantities and of the class suita"le to
the profession, rank or position of the person importin them, for their own use and
not for "arter or sale, accompanyin such persons, or arrivin after within a
reasona"le time.
>. $mportation for the use of forein em"assies, leations, and other aencies of forein
overnments which accord the same privilee to the correspondin aencies of the
;hilippines in their countries.
=. $mported articles donated to, or for the account of, any duly reistered relief
orani7ation, not operated for pro%t, for free distri"ution amon the needy, upon
certi%cation "y the <)!< or <2C) as the case may "e.
-A. Animals 1except race horses3 and plants for scienti%c, experimental, propaation,
"otanical, "reedin, 7ooloical and national defense purposes.
N2H>& <F >0T2$&
Classi:cation o4 c%sto* d%ties
-. Hrdinary or reular customs duties
X $mposed and collected merely as a source of revenue.
.. )pecial customs duties
X $mposed and collected in addition to ordinary customs duties usually protect local
industries aainst forein competition.
Ninds o4 ordinary or re)%lar c%sto*s d%ties
-. Ad valorem
189
X The duty is "ased on the market value of the price of the imported article.
.. )peci%c
X The duty is "ased on the weiht or volume of the imported article.
/asis o4 d%tia5le val%e
The dutia"le value of an imported article su"#ect to an .d :alore rate of duty shall
"e the transaction value.
Repu"lic Act Ko. >->- mandated the chane of "asis of the dutia"le value from the
home consumption value to the transaction value "y January -, .AAA. @efore such
date, export value was used as the "asis for the determination of the dutia"le value
as a transitional device.
TRANSACTION VALE
Transaction value is the price actually paid or paya"le for the oods when sold for
export to the ;hilippines.
$t is ad#usted "y addin certain expenses to the extent that they are incurred "y the
"uyer "ut are not included in the price actually paid or paya"le for the imported
oods, i.e. commissions and "rokerae fees, the value of the materials, components,
parts and items incorporated in the imported oods, amount of royalties and license
fees, cost of transport, loadin, unloadin and handlin chares, and cost of
insurance.
EXPORT VALE
2xport value is that which, at the time of exportation, the same or identical, like or
similar article is freely ofered for sale in the principal export markets of the exportin
country for exportation to the ;hilippines, in the usual wholesale 8uantities and in the
ordinary course of trade 1excludin internal excise taxes to "e remitted or re"ated3.
!holesale price in principal export markets of the exportin country.
$OME CONSMPTION VALE
!holesale price of oods in market of exportin country.
"roced%re 4or deter*ination o4 d%tia5le val%e
-. <etermined "y the declared value of the imported oods "y the importer.
.. $f Commissioner of Customs has reason to dou"t the truth or accuracy of the
declaration or documents provided in support of the declared value of importation, he
may re8uire the importer to ive further explanation and su"mit additional
documents.
/. $f Commissioner still has reasona"le dou"t as to the accuracy of the declared value
after the explanation and additional documents are iven, he may apply two
alternative methods, to wit*
a. The dutia"le value shall "e the transaction value of identical oods sold for export
to the ;hilippines at or a"out the date of the exportation of the oods "ein
valued, or
". $f the dutia"le value cannot "e determined under the precedin method, it shall "e
the transaction value of similar oods sold for export to the ;hilippines at or a"out
the date of exportation of the oods "ein valued.
0. $f still not a"le to determine the dutia"le value*
a. The unit price at which the imported oods or identical or similar oods are sold
domestically, in the same condition as when imported, in the reatest areate
8uantity, to persons not related to the seller, at or a"out the time of the importation
of the oods "ein valued,
". The computed value, or
190
c. Any other reasona"le means consistent with EATT.
'eiteration o4 the se;%ence in deter*ination o4 val%e
Cirst Q transaction value
)econd Q Transaction value of identical oods
Third Q Transaction value of similar oods
Courth Q <eductive value
Cifth Q Computed value
)ixth Q other reasona"le means or fall"ack value
IDENTICAL GOODS
$dentical oods mean oods which are the same in all respects, includin physical
characteristic, 8uality and reputation.
Minor diferences in appearances shall not preclude oods otherwise conformin to
the de%nition from "ein rearded as identical.
)hould "e from the same country, and the same producer.
SIMILAR GOODS
)imilar oods mean oods which, althouh not alike in all respects, have like
characteristics and like component materials which ena"le them to perform the same
functions and to "e commercially interchanea"le.
'easona5le do%5t
Reasona"le dou"t refers to any condition that creates a pro"a"le cause to make the
Commissioner of Customs "elieve in the inaccuracy of the invoice value of the
imported oods, as re9ected "y the importer in his customs declaration, for valuation
purposes.
#uch condition ay include, but is not liited to, any of the follo!ing conditions:
-. $f the sale or price is su"#ect to some consideration for which a value cannot "e
determined with respect to the oods "ein valued, or
.. $f part of the proceeds of any su"se8uent resale, disposal or use of the oods "y the
"uyer will accrue directly or indirectly to the seller, unless an appropriate ad#ustment
can "e made, or
/. $f the "uyer and the seller are related to one another, and such relationship in9uenced
the price of the oods.
RELATED SELLERS AND B#ERS
-. HFcers or directors of one another+s "usinesses.
.. :eally reconi7ed partners in "usiness.
/. 2mployer and employee.
0. Any person who directly or indirectly owns, controls or holds 4 B or more of the
outstandin votin stock or shares of "oth seller and "uyer.
4. Hne of them directly or indirectly controls the other.
5. @oth of them are directly or indirectly controlled "y a third person.
6. Toether, they directly control a third person.
>. Mem"ers of the same family includin "rothers and sisters 1whether full or half&"lood3,
spouse, ancestors, and lineal descendants.
191
/asis 4or d%tia5le 8ei)ht 4or s3eci:c c%sto*s d%ties
-. Eross weiht
.. :eal weiht
/. Ket weiht
)INDS OF SPECIAL CSTOMS DTIES
-. <umpin duty
.. Countervailin duty
/. Markin duty
0. Retaliatory duty or discriminatory duty
DMPING DT#
<uty imposed on a speci%c kind or class of forein article which is "ein imported
into, or sold, or is likely to "e sold for export to or in the ;hilippines at a price less
than the fair value, the importation or sale of which miht in#ure or retard the
esta"lishment of an industry producin like oods in the ;hilippines, 2#ec. 6EA, Tari8
and 4ustos 4ods*
<umpin duty duty levied on imported oods where it appears that a speci%c kind or class
of forein article "ein imported into or sold is likely to "e sold in the ;hils. at a price less
than its fair value.
$mposed on speci%c kind or class of forein article which is "ein imported
into, or sold or is likely to "e sold for exportation to or in the ;hils. at a price
less than its fair value, the importation or sale of which is likely to in#ure an
industry imposin like oods in the ;hilippines.
The duty is e8ual to the diference "etween the actual purchase price and the
fair value of the articles in 8uestion in the country or exportation as
determined "y the )ec. of Cinance.
These are special duties imposed on imported articles. This ay be iposed sub&ect
to the 8. re'uisites:
-. There must "e a deli"erate and continuous sale of imported article in the ;hilippines as
price lower than the prices in the exportin country.
.. This must pre#udice or cause or likely to cause in#ury to our local industry.
S650.567,1 There are articles of forein oriin the prevailin price of which in the L) is
e8uivalent to ;-AA. These articles are sold or dumped in the ;hils. at lower than the
prevailin price in the L) "ecause they are salea"le in the L.).
)o, this will pre#udice our local industries. $n order to protect our local product or to
discourae people from "uyin this imported product, we should "e impose special duties in
addition to the reular duties. <umpin duties should "e imposed.
CONTERVAILING DT#
<uty imposed on articles, upon the production, manufacture or export of which any
"ounty or su"sidy is directly or indirectly ranted in the country of oriin andGor
exportation, and the exportation of which into the ;hilippines will likely in#ure an
industry in the ;hilippines or retard or considera"ly retard the esta"lishment of such
industry, 2#ec. 6E9, Tari8 and 4ustos 4ode*.
@ounty is the cash award paid to an exporter or manufacturer while su"sidy refers to
%scal incentives, not in the form of direct cash award, to encourae manufacturers, or
The duty is e8ual to the ascertained or estimated amount to the "ounty or su"sidy
Countervailin duty duty e8ual to the ascertained or estimated amount of the su"dsidy or
"ounty or su"vention ranted "y the forein country on the production, manufacture, or
exportation into the ;hils. of any article likely to in#ure an industry in the ;hils. or retard or
considera"ly retard the esta"lishment of such industry.
192
$mposed on articles, upon the production, manufacture or export of which any
"ounty or su"sidy is directly or indirectly, ranted in the country of oriin
andGexportation. Ko need to show proof that the imports cause in#uries to
domestic industries producin the same products. The duty is e8ual to the
ascertained or estimated amount of the "ounty or su"sidy iven.
S650.567,1 )ometimes imported products en#oys certain su"sidy from their overnment.
)o, they have an advantae. Hur local products for example, does not en#oy similar su"sidy.
!e should counter that advantae "y imposin countervailin duties. The purpose there is to
protect our local products aainst unfair competition.
This represents the inland excise tax on locally manufactured articles of the same kind
to of&set this advantae.
As reards dumpin duties, the extent of the special duty is the amount that
represents under&pricin.
As reards countervailin duties, the extent is the excise inland tax or the amount of
advantae en#oyed "y that imported article.
MAR)ING DT#
<uty imposed on imported articles or containers which have not "een property
marked in any oFcial lanuae of the ;hilippines as to indicate the name of the
country or oriin of the article. The purpose is to prevent the deception of consumers.
2#ec. 6E6, Tari8 and 4ustos 4ode*.
The rate is 4B ad valorem.
The articles shall "e deemed a"andoned upon failure to mark them within /A days
from notice.
Markin duty duty on ad valorem "asis imposed for improperly marked articles. The
re8uirement that forein importation must "e marked in any oFcial lanuae of the ;hils.,
the name of the country of oriin of the article.
The purpose is to prevent deception of consumers.
The articles must "e properly marked, otherwise a special duty of 4B of the
value shall "e imposed.
RETALIATOR# DT#
<uty imposed upon articles of a forein country which discriminates aainst ;hilippine
commerce in such a manner as to place it at a disadvantae compared with the
commerce of another forein country, 2#ec. 6E5, Tari8 and 4ustos 4ode*.
Retaliatory or <iscriminatory duty Q duty imposed on imported oods whenever it is
found as a fact that the country of oriin discriminates aainst the commerce of the
;hilippines in such manner as to place it at a disadvantae compared with the commerce of
any forein country.
The amount may "e increased in an amount not exceedin -AAB ad valore
when the ;resident %nds the pu"lic interest may "e served there"y.
This may "e imposed "y the ;resident of the ;hilippines when our oods are
discriminated aainst.
As reards dumpin, countervailin and markin duties, it is the )ec of
Cinance, upon recommendation of the Tarif Commission, who may impose
these duties.
Zuestion* !hat is the extent of the 9exi"le power of the ;resident of the ;hils. under the
TCCR
Answer* That includes the power to impose discriminatory duties. The ;resident upon
recommendation of the Tarif Commission may increase the tarif rates "y not more than 4x
or meanin 4AAx of the tarif rates. Ie may also decrease the tarif rates "y not less than
4AB.
Ie can only exercise these powers in the interest of the national economy, national
security and eneral welfare of the people.
193
DRAWBAC)S
A draw"ack is a device resorted to for ena"lin a commodity afected "y taxes to "e
exported and sold in forein markets upon the same terms as if it had not "een taxed
at all. $t may "e full or partial.
The return of ==B of customs paid on imported articles when they are re&exported
formin part of domestically produced articles.
The refund of ==B duty on imported fund when used for propulsion vessels enaed
in the forein or coastwise trade.
7hen dra85acLs allo8ed
<raw"acks are allowed on the followin commodities*
-. Cuel used on propulsion vessels,
.. ;etroleum oils and oils o"tained from "ituminous minerals, etc., eventually
used for eneration of electric power and manufacture of city as, and
/. Articles made of imported materials upon the exportation of articles
manufactured or produced in the ;hilippines su"#ect to certain conditions.
<ther c%sto*s 4ees, d%es, or char)es 3aya5le
-. Iar"or fees
.. !harfae dues
/. @erthin fees
0. )torae chares
4. Arrastre chares
5. Tonnae dues
6. Hther fees and chares
Kar5or 4ees
Iar"or fees are imposed on vessels enterin into or departin from a port of entry of
the ;hilippines.
7har4a)e d%es
!harfae dues are assessed aainst the caro of a vessel enaed in forein or
coastwise trade, "ased in the 8uantity weiht or measure received andGor dischared
"y such vessel.
/erthin) 4ees
@erthin fees are assessed aainst a vessel for moorin or "erthin at a pier, wharf,
or river at any port in the ;hilippines.
&tora)e char)es
)torae chares are assessed on articles for storae in customs premises, caro
sheds and warehouses.
#rrastre char)es
Arrastre chares are imposed on all imported and exported articles and "aae of
passeners for their handlin, receivin and custody.
Tonna)e d%es
194
Tonnae dues are paid "y the owner, aent, operator or master of a vessel enaed in
forein trade "ased on the net tonnae of the vessel or weiht of the articles
dischared or laden.
<ther 4ees and char)es
Chared and collected for services rendered and documents issued "y the @ureau of
Customs.
RE(IREMENTS OF IMPORTATION NDER T$E TARIFF AND CSTOMS CODE
Lia5ility o4 i*3orter o4 d%ties
The Code provides that all articles imported into the ;hilippines shall "e held to "e the
property of the person to whom the same are consined, and the holder of a "oll of
ladin duly endorsed "y the consinee therein named, or if consined to order "y the
consinor, shall "e deemed the consinee thereof. The underwriters of a"andoned
articles and the salvors of articles saved from a wreck at sea, alon a coast, or in any
area of the ;hilippines, may "e rearded as the consinees, 2#ec. A9E6, Tari8 and
4ustos 4ode*.
Lnless otherwise relieved "y laws or reulations, the lia"ility for duties, taxes, fees
and other chares attachin on importation constitutes a personal de"t due from the
importer to the overnment which can "e dischared only "y payment in full of said
duties and chares.
$t also constitutes a lien upon the articles imported which may "e enforced which such
articles are in custody or su"#ect to the control of the overnment.
GOVERNMENT IMPORTATIONS
All importations "y the overnment for its own use or that of its su"ordinate "ranches
or instrumentalities, or corporations, aencies or instrumentalities owned or controlled
"y the overnment shall "e su"#ect to the duties, taxes, and other chares provided in
the Tarif and Customs Code, 2#ec. A9EH Tari8 and 4ustos 4ode*.
7hen i*3ortation 5e)ins and 8hen dee*ed ter*inated
$mportation "eins when carryin vessel or aircraft enters the #urisdiction of the
;hilippines with an intent to unload.
$mportation terminates upon payment of the duties and other chares due upon the
articles, or secured to "e paid, at the port of entry and the leal permit for withdrawal
shall have "een ranted.
$n the case of articles that are free of duties, taxes and other chares, importation is
deemed terminated from the time they have leally left the #urisdiction of the
customs.
$ntry thro%)h c%sto*ho%se
All articles imported into the ;hilippines, whether su"#ect to duty or note, shall "e
entered throuh a customhouse at a port of entry. ')ection -.A-, Tarif and Customs
Code(
A Lport of entry means a domestic port open to "oth forein and coastwise trade,
includin Lairport of entry. ')ection /4-0, Tarif and Customs Code(
Car)o *ani4est
All caro, exported or imported, shall "e included in the caro manifest, except the
ship+s stores.
C7<<68867,+- D& D+/>.B7* The evident purpose of the provision re8uirin vessels
to declare the correct weiht of their caro is to cur" smulin due to
underdeclarations. Ience, imposin the maximum %ne on vessels which rossly fail
to comply with the o"liation to declare the correct weiht of their caro truly
promotes the spirit and purpose of the law, since imposin a minimum %ne would only
em"olden would "e smulers and foster nelience on the part of the master of the
vessel in checkin the true weiht of the caro.
195
2*3ort entry
A declaration to the @ureau of Customs showin the description, value, tarif
classi%cation and other particulars of the imported article to ena"le the customs
authorities to determine the correct customs duties and internal revenue taxes due on
the importation.
"erson a%thorized to *aLe an i*3ort entry
-. $mporter, "ein the holder of the "ill of ladin
.. A duly licensed customs "roker, actin under authority from the holder of a "ill of
ladin
/. A duly empowered aent or attorney in fact for each holder of a "ill of ladin
2*3ort entry :led 5y 3erson other than i*3orter
$f %led "y a party other than the importer, the importer himself is re8uired to declare
under oath and under penalties of falsi%cation or per#ury that the declarations and
statements contained in the entry are true and correct. )uch statements constitute
pria facie evidence of knowlede and consent of the importer.
"eriod 4or :lin) o4 i*3ort entry
!ithin thirty 1/A3 days from the date of dischare of the last packae from the vessel.
ABANDONMENT
A"andonment is the renunciation "y an importer of all his interests and property
rihts in the imported article.
$t may "e express or implied.
$x3ress a5andon*ent
!hen the owner, importer or consinee of the imported article expressly sini%es in
writin and under oath to the Collector of Customs his intention to a"andon his
shipment in favor of the overnment, within ten days after %lin of the import entry,
he shall "e relieved from payment of duties, taxes and other chares and expenses.
Article shall "e delivered "y the owner, importer or consinee at such place which the
Collector desinates, failure to comply shall make him lia"le for expenses that may "e
incurred in connection with the disposition thereof.
2*3lied a5andon*ent
-. !hen the owner, importer, consinee or interested party, after due notice, fails to %le
an entry within thirty 1/A3 days, which shall not "e extendi"le, from the date of
dischare of the last packae from the vessel or aircraft, HR
.. Iavin %led an entry for his shipment, the owner, importer or consinee, or other
interested party fails to claim his importation within %fteen 1-43 days, which shall not
"e extendi"le, from the date of postin of the notice to claim such importation.
$=ects o4 a5andon*ent
-. Hwner, importer, consinee or other interested party deemed to have renounced all of
his interests and property rihts over the articles.
.. A"andoned article shall "e ipso facto deemed the property of the overnment and
shall "e disposed of in accordance with the provisions of the Code.
/. $t does not relieve owner or importer from any criminal lia"ility which may arise from
any violation of law committed in connection with the importation of the a"andoned
article.
&*%))lin) or %nla84%l i*3ortation
Any person who shall fraudulently import or "rin into the ;hilippines, or assist in
doin so, any article, contrary to law, or shall receive, conceal, "uy, sell, or in any
196
manner facilitate the transportation, concealment, or sale of such article after
importation, knowin the same to have "een imported contrary to law, shall "e uilty
of smulin.
After importation, the act of facilitatin the transportation, concealment or sale of the
unlawfully imported article must "e with the knowlede that the article was
smuled. Iowever, upon trial, if the defendant is found to have "een in possession
of such article, this shall "e suFcient to authori7e the conviction unless the defendant
explains his possession to the satisfaction of the court.
Fra%d%lent 3ractices a)ainst c%sto*s reven%e %nder &ection 360(
-. 2ntry of imported or exported articles "y means of any false or fraudulent invoice
.. 2ntry of oods at less than the true weiht or measure.
/. Cilin of any false or fraudulent entry for the payment of draw"acks or refund of
duties.
Three *eanin)s o4 ter* DentryE
-. <ocuments %led at the Customs Iouse
.. )u"mission and acceptance of the documents
/. ;rocedure of passin the oods throuh the Customs Iouse
ADMINISTRATION
7ho is in char)e9
The oFces chared with the administration and enforcement of the law are the Tarif
Commission and the @ureau of Customs.
F%nctions o4 the Tari= Co**ission
The Commission shall investiate*
-. The administration of and the %scal and industrial efects of the country+s tarif
and customs laws,
.. The relations "etween the rates of duty on raw materials and %nished or partly
%nished oods,
/. The efects of ad valore and speci%c duties and of compound speci%c and ad
valore duties,
0. All 8uestions relative to the arranement of schedules and classi%cations of
articles under the tarif law,
4. The tarif relations "etween the ;hilippines and forein countries, commercial
treaties, etc.
5. The volume of importations compared with domestic production and
consumption,
6. Conditions, causes and efects relatin to competition of forein industries with
those of the ;hilippines,
>. $n eneral, to investiate the operation of customs and tarif laws and to su"mit
report of its investiations, and
=. The nature, composition, and classi%cation of articles for customs revenue and
other related purposes which shall "e furnished no K2<A, @oard of $nvestments,
Central @ank and the )ecretary of Cinance.
>%ties, 3o8ers and C%risdiction o4 the /%rea% o4 C%sto*s
197
-. The assessment and collection of the lawful revenues from imported articles and all
other dues, fees, chares, %nes and penalties accruin under the tarif and customs
laws.
.. The prevention and suppression of smulin and other frauds upon the customs.
/. The supervision and control over the entrance and clearance of vessels and aircraft
enaed in forein commerce.
0. The enforcement of tarif and customs laws and all other laws, rules and reulations
relatin to tarif and customs administration.
4. The supervision and control over the handlin of forein mails arrivin in the
;hilippines, for the purpose of the collection of the lawful duty on the dutia"le articles
thus imported and the prevention of smulin throuh the medium of such mails.
5. )upervision and control over all import and export caroes, landed or stored in piers,
airports, terminal facilities, includin container yards and freiht stations, for the
protection of overnment revenue.
6. 2xclusive oriinal #urisdiction over sei7ure and forfeiture cases under the tarif and
customs laws.
TAX REMEDIES
IN GENERAL
'e*edies availa5le to the )overn*ent
-. )ei7ure and forfeiture of oods and commodities
.. Judicial action aainst the taxpayer
T.2 R+<+B6+8 0,B+- 5?+ T.-6T .,B C0857<8 C7B+1
R+<+B6+8 G7D+-,<+,5 I<47-5+-
1-3 Administrative
or
extra&#udicial
1a3 2nforcement of tax lien
1"3 )ei7ure
1a3 Tax refund
1"3 A"andonement
1c3 ;rotest
1.3 Judicial 1a3 Cilin of civil action
1"3 Cilin of criminal action
if there is fraud and it
must "e serious
1a3 Appeal to CTA, CA, )C
1"3 Cilin of criminal
action aainst errin
Customs oFcials
Cases arisin) %nder the tari= and c%sto*s code
-. Customs protest cases or those where the importer 8uestions the leality of the
assessment and collection of customs duties and other fees or chares. The issue
involved in these cases enerally relates to the correctness of the appraisal andGor
classi%cation of imported oods.
.. )ei7ure and forfeiture cases or those where oods or merchandise are ordered sei7ed
"y customs authorities and made su"#ect to the penalty of forfeiture or %ne for
violation of the customs laws. Iere, the issue involved is the leality of the
importation of oods either "ecause the oods are in themselves prohi"ited
importations or their importation of efected contrary to law.
CSTOMS PROTEST CASES
"roced%re on c%sto*s 3rotest cases
-. Cirs of all, the Collector shall cause all articles enterin the #urisdiction of his district
and destined for importation throuh his port to "e entered at the customhouse. Ie
shall cause all such articles to "e appraised and classi%ed, and shall assess and
collect the duties, taxes, and other chares thereon, and shall hold possession of all
imported articles, upon which duties, taxes, and other chares have not "een paid or
198
secured to "e paid, disposin of the same accordin to law. ')ection -.A5, Tarif and
Customs Code(
.. The party adversely afected "y the rulin or decision of the Collector where"y lia"ility
for duties, taxes, fees or other chares are determined, may protest such rulin or
decision. ')ection ./A>, Tarif and Customs Code(
/. The protest, which must "e in writin, is %led with the Collector within %fteen 1-43
days. Ko protest shall "e considered unless payment of the amount due after %nal
li8uidation 1i.e. computation of the lia"ility3 has %rst "een made and the
correspondin docket fee actually paid.
0. 2very protest shall "e %led in accordance with rules and reulations promulated for
the purpose, and shall point out the particular decision or rulin of the Collector to
which exception is taken or o"#ection made, and shall indicate with reasona"le
precision the particular round or rounds upon which the protestin party "ases his
claim for relief. ')ection ./-A, Tarif and Customs Code(
4. The scope of a protest shall "e limited to the su"#ect matter of a sinle ad#ustment or
other independent transaction, "ut any num"er of issues may "e raised in a protest
with reference to the particular item or items constitutin the su"#ect matter of the
protest. )inle ad#ustment refers to the entire content of one li8uidation, includin all
duties, fees, surchares or %nes incident thereto. ')ection ./-A, Tarif and Customs
Code(
5. !hen a protest in form is presented, the Collector shall issue an order for hearin
within %fteen 1-43 days from receipt of the protest and hear the matter thus
presented. Lpon the termination of the hearin, the Collector shall render a decision
within thirty 1/A3 days, and if the protest is sustained in whole or in part, he shall
make the appropriate order, the entry re&li8uidated if necessary.
6. The person arieved "y the decision or action of the Collector in any matter
presented upon protest may within %fteen 1-43 days after noti%cation in writin "y the
Collector of his action or decision, ive written notice to the Collector and one copy
furnished to the Commissioner of his desire to have the matter reviewed "y the
Commissioner. Thereupon, the Collector shall forthwith transmit all records of the
proceedins to the Commissioner, who shall approve, modify, or reverse the action or
decision of the Collector and take such steps and make such orders as may "e
necessary to ive efect to his decision. ')ection ./-/, Tarif and Customs Code(
>. $f in any case involvin the assessment of duties, the Collector renders a decision
adverse to the Eovernment, such decision shall automatically "e elevated to, and
reviewed "y the Commissioner, and if the Collector+s decision would "e aFrmed "y
the Commissioner, such decision shall automatically "e elevated to, and "e %nally
reviewed "y, the )ecretary of Cinance. Iowever, if within thirty 1/A3 days form the
receipt of the record of the case "y the Commissioner or "y the )ecretary of Cinance,
as the case may "e, no decision is rendered "y either of them, the decision under
review shall "ecome %nal and executory. Any party arieved "y either the decision
of the Commissioner or the )ecretary of Cinance may appeal to the Court of Tax
Appeals within thirty 1/A3 days from receipt of a copy of such decision. ')ection ./-4,
Tarif and Customs Code(
$ncidentally, in case of appeals to the Court of Tax Appeals from the decisions of the
)ecretary of Cinance as a conse8uence of the automatic review "y the )ecretary of Cinance of
decisions emanatin form Customs, the thirty&day period of appeal under Repu"lic Act Ko.
--.4 will necessarily "e counted from the receipt of the decision of the )ecretary of Cinance.
PROCEDRE IN PROTEST
R+<+BF W?+-+ 57 G/+ %I880+8 C?63?
<.F :+ -.68+BO
P-+83-6456D+
P+-67B
1-3 Cile a protest C7//+357- 7;
C0857<8
1a3 ?alidity if the
assessment or
collection
1"3 ?alidity of
classi%cation of
articles
15 B.F8 from the
payment of
Customs duties
1.3 $f protest is
denied, A44+./
collector+s rulin
C0857<8
C7<<68867,+-
1CC3
Zuestions of fact or
Zuestion of law
!ithin 15 B.F8
from receipt of the
Collector+s rulin
199
1/3 $f CC aFrm
collector+s rulin,
A44+./
CTA
Zuestion of fact or
Zuestion of law
!ithin 30 B.F8
from receipt of the
decision of the CC.
103 $f CTA aFrm
collector+s rulin,
A44+./
CA
Zuestion of fact or
Zuestion of law
!ithin 15 B.F8
from receipt of CTA
decision
143 $f CA aFrm
CTA, A44+./ SC Zuestion of law
!ithin 15 B.F8
from receipt of CA
decision
#%to*atic revie8 and s%3ervisory a%thority o4 Co**issioner and C%sto*s and
&ecretary o4 Finance
$f in any case involvin the assessment of duties, the Collector renders a decision
adverse to the overnment, such decision shall automatically "e elevated to, and
reviewed, "y the Commissioner.
$f the Collector+s decision would "e aFrmed "y the Commissioner, such decision shall
"e automatically elevated to, and %nally reviewed, "y the )ecretary of Cinance.
Iowever, if within thirty 1/A3 days form receipt of the record of the case "y the
Commissioner or the )ecretary of Cinance, as the case may "e, no decision is rendered "y
either or them, the decision under review shall "ecome %nal and executory.
Any party arieved "y either the decision of the Commissioner or the )ecretary of
Cinance may appeal to the Court of Tax Appeals within thirty 1/A3 days from receipt of a copy
of such decision.
2xcept as provided a"ove, the supervisory authority of the )ecretary of Cinance over
the @ureau of Customs does not extend to the administrative review of the rulin of the
Commissioner in matters appealed to the Court of Tax Appeals.
Automatic review is intended to protect the interest of the overnment in the
collection of taxes and customs duties in sei7ure and protest cases which, without
such review, neither the Commissioner nor the )ecretary of Cinance would pro"a"ly
know a"out.
Automatic review as a procedural rule applies to "oth customs cases and sei7ure and
forfeiture cases incident to smulin or unlawful importation or exportation.
:ikewise, supervisory authority is exercised "y the Commissioner on sei7ure and
forfeiture cases while the case is still pendin in the HFce of the Collector of Customs
and "efore the decision of the Collector "ecomes %nal.
/%rden o4 3roo4 in 3rotest cases
$n protest cases, the protestant has the "urden of provin the correctness of his
contention for the issue is not whether the Collector was wron "ut whether the
importer is riht.
SEI9RE AND FORFEITRE CASES
Hat%re o4 seiz%re and 4or4eit%re 3roceedin)s
;roceedins in sei7ure cases are actions in re directed aainst the property sei7ed,
aainst the owner thereof.
Corfeiture proceedins are civil and are not criminal in nature.
;roof "eyond reasona"le dou"t is not re8uired to warrant forfeiture.
A customs sei7ure and forfeiture case is administrative and civil in nature and is
directed aainst the res or imported articles and entails a determination of the leality
of their importation. 'C7<<68867,+- 7; C0857<8 D& M.E.86.-, ER Ko. 6=/A6,
Auust .=, -=>=(
Corfeiture is in the nature of proceedins in re and is directed aainst the res. The
fact that the owner of the vessel had no actual knowlede that the vessel was illeally
used does not render the vessel immune from forfeiture. This is so "ecause forfeiture
action is aainst the vessel itself. 'V6+-,+=. D& C7<<68867,+-, .0 )CRA .=0(
200
>octrine o4 3ri*ary C%risdiction over seiz%re and 4or4eit%re cases
.'allos v. 6aLo >octrine 344 &C'# 1!,1
The prevailin doctrine is that the exclusive #urisdiction in sei7ure and forfeiture cases
vested in the Collector of Customs precludes a reular court from assumin
coni7ance of such matter.
$t is the settled rule that the @ureau of Customs ac8uires exclusive #urisdiction over
imported oods, for the purpose of enforcement of the customs laws, from the
moment the oods are actually in its possession or control, even if no warrant of
sei7ure or detention had previously "een issued "y the Collector of Customs in
connection with sei7ure and forfeiture proceedins.
-%risdiction o4 the /%rea% o4 C%sto*s
The @ureau of Customs has the riht of supervision and police authority over all seas
within the #urisdiction of the ;hilippines and over all coasts, ports, airports, har"ors,
"ays, rivers and inland waters whether navia"le from the sea or not. ')ection 5A/,
Tarif and Customs Code(
!hen a vessel "ecomes su"#ect to sei7ure "y reason of an act done in ;hilippine
waters in violation of the tarif and customs laws, a pursuit of such vessel "eun
within the #urisdictional waters may continue "eyond the maritime 7one, and the
vessel may "e sei7ed on the hih seas. ')ection 5A/, Tarif and Customs Code(
$mported articles which may "e su"#ect to sei7ure for violation of tarif and customs
laws may "e pursued in their transportation in the ;hilippines "y land, water, or air,
and such #urisdiction exerted over them at any place therein as may "e necessary for
the due enforcement of the law.
$n #saali v. Co**issioner '.6 )CRA /-.(, the )upreme Court held as valid the
interception and sei7ure of a vessel on the hih seas, sayin that the authority of a
nation within its territory is a"solute and exclusive. The power to secure itself form
in#ury may certainly "e exercised "eyond the limits of its territory.
"laces 8here searches and seiz%res *ay 5e cond%cted
-. Riht of police oFcer to enter enclosure without a warrant, except a dwellin house
.. )earch of dwellin house must "e with proper warrant
/. Riht to search vehicles or aircrafts and persons or articles conveyed therein
0. Riht to search vehicles, "easts and persons
4. )earch of persons arrivin from forein countries
'i)ht o4 3olice oMcer to enter enclos%re 8itho%t a 8arrant
Any person exercisin the police powers conferred under said Code may at any time
enter, pass throuh, or search any land or enclosure or any warehouse, store or other
"uildin, not "ein a dwellin house.
A warehouse, store or other "uildin or enclosure used for the keepin or storae of
articles does not "ecome a dwellin house within the meanin hereof "y reason of the
fact that a person employed as watchman lives in the place, nor will the fact that his
family stays therein with him alter the case.
&earch o4 d8ellin) ho%se
A dwellin house may "e entered and searched only upon warrant issued "y a #ude
of the court, upon sworn application showin pro"a"ly cause and particularly
descri"in the place to "e searched and person or thin to "e sei7ed.
'i)ht to search vessels or aircra4t and 3ersons or articles conveyed therein
$t shall "e lawful for any oFcial or person exercisin police authority under the Tarif
and Customs Code to o a"oard any vessel or aircraft within the limits of any
collection district, and to inspect, search and examine said vessel or aircraft and any
201
trunk, packae, "ox or envelope on "oard and to search any person on "oard the said
vessel or aircraft if under way, to use all necessary force to compel compliance.
$f it shall appear that any "reach or violation of the customs and tarif laws of the
;hilippines has "een committed, where"y or in conse8uence of which such vessels or
aircraft, or the article, or any part thereof, on "oard of or imported "y such vessels or
aircraft is lia"le to forfeiture to make sei7ure of the same or any part thereof.
The power of search hereina"ove iven shall extend to the removal of any false
"ottom, partition, "ulkhead or other o"struction, so far as may "e necessary to ena"le
the oFcer to discover whether any dutia"le of forfeiture articles may "e concealed
therein.
Ko proceedin herein shall ive rise to any claim for the damae there"y caused to
article or vessel or aircraft.
$t is not necessary that the vessel or aircraft is actually carryin contra"and.
$t is not also essential that the vessel or aircraft come from a forein country.
'i)ht to search vehicles, 5easts and 3ersons
$t shall also "e lawful for a person exercisin authority as aforesaid to open and
examine any "ox, trunk, envelope or other container, wherever found when he has
reasona"le cause to suspect the presence therein of dutia"le or prohi"ited article or
article introduced in the ;hilippines contrary to law, and likewise to stop, search and
examine any vehicle, "east of person reasona"ly suspected of holdin or conveyin
such articles as aforesaid.
&earch o4 3ersons arrivin) 4ro* 4orei)n co%ntries
All persons comin into the ;hilippines from forein countries shall "e lia"le to
detention and search "y the customs authorities under such reulations as may "e
prescri"ed relative thereto.
"roced%re )overnin) seiz%re and 4or4eit%re cases
-. !arrant for detention of property. @ond.
Lpon makin any sei7ure, the Collector shall issue a warrant for the detention of the
property, and if the owner or importer desires to secure the release of the property for
leitimate use, the Collector may surrender it upon the %lin of a suFcient "ond, in an
amount to "e %xed "y him, conditioned for the payment of the appraised value of the article
andGor any %ne, expenses and costs which may "e ad#uded in the case* ;rovided that
articles the importation of which is prohi"ited "y law shall not "e released under "ond.
.. Report sei7ure to Commissioner and Chairman, Commission on Audit
/. Koti%cation to owner or importer
0. Koti%cation to unknown owner
4. <escription, appraisal and classi%cation of sei7ed property
5. ;roceedins in case of property "elonin to unknown parties
6. )ettlement of case "y payment of %ne or redemption of forfeited property
)u"#ect to approval of the Commissioner, the district collector may, while the case is
still pendin, except when there is fraud, accept the settlement of any sei7ure case provided
that the owner, importer, exporter, or consinee or his aent shall ofer to pay to the
collector a %ne imposed "y him upon the property, or in case of forfeiture, the owner,
exporter, importer or consinee or his aent shall ofer to pay the domestic market value of
the sei7ed article. The Commissioner may accept the settlement of any sei7ure case on
appeal in the same manner.
)ettlement of any sei7ure case "y payment of the %ne or redemption of forfeited
property shall not "e allowed in any case where the importation is a"solutely prohi"ited or
where the release of the property would "e contrary to law.
>. <ecision or action "y collector in protests and sei7ure cases
202
=. Review "y Commissioner
The person arieved "y the decision or action of the Collector in any matter
presented upon protest or "y his action in any case of sei7ure may, within %fteen 1-43 days
after noti%cation in writin "y the Collector of his action or decision, ive written notice to the
Collector and one copy furnished to the Commissioner of his desire to have the matter
reviewed "y the Commissioner. Thereupon, the Collector shall forthwith transmit all the
records of the proceedins to the Commissioner, who shall approve, modify or reverse the
action or decision of the Collector and take such steps and make such orders as may "e
necessary to ive efect to his decision.
-A. Kotice of decision of Commissioner
<ecision of the Commissioner of Customs shall "e appealed to the Court of Tax
Appeals within thirty 1/A3 days after receipt of the decision. $n case of automatic reviews, the
decision of the )ecretary of Cinance shall "e appealed within the same period after receipt of
the decision of the )ecretary.
--. )upervisory authority of Commissioner and of )ecretary of Cinance in certain cases.
Automatic review "y the Commissioner and )ecretary on certain cases.
-.. Authority of Commissioner to make compromise
)u"#ect to the approval of the )ecretary of Cinance, the Commissioner of Customs
may compromise any case arisin under the Code or other laws or part of laws enforced "y
the @ureau of Customs involvin the imposition of %nes, surchares and forfeitures unless
otherwise speci%ed "y law.
"ro3erty not s%5Cect to 4or4eit%re
The forfeiture of the vehicle, vessel, or aircraft shall not "e efected if it is esta"lished
that the owner thereof or his aent in chare of the means of conveyance used as
aforesaid has no knowlede of or participation in the unlawful act.
Iowever, a pria facie presumption shall exist aainst the vessel, vehicle or aircraft
under any of the followin circumstances*
-. $f the conveyance has "een used for smulin at least twice "efore,
.. $f the owner is not in the "usiness for which the conveyance is enerally used,
and
/. $t the owner is not %nancially in a position to own such conveyance.
/%rden o4 3roo4 in seiz%re andTor 4or4eit%re
$n all proceedins taken for the sei7ure andGor forfeiture of any vessel, vehicle,
aircraft, "east or articles under the provisions of the tarif and customs laws, the
"urden of proof shall lie upon the claimant. ;rovided that pro"a"le cause shall "e %rst
shown for the institution of such proceedins and that sei7ure andGor forfeiture was
property made.
Co**issioner o4 C%sto*s v. Manila &tar Ferry 6'V L O 31!!6-!,
$t is not a defense that the owner of the vessel souh to "e forfeited had no actual
knowlede that his property was used illealy
&eiz%re o4 other articles
The Commissioner of Customs and Collector of Customs andGor any other customs
oFce, with the prior authori7ation in writin "y the Commissioner, may demand
evidence of payment of duties and taxes on forein articles openly ofered for sale or
kept in storae, an dif no such evidence can "e produced, such articles may "e sei7ed
and su"#ected to forfeiture proceedins.
;rovided that durin such proceedins, the person or entity for whom such articles
have "een sei7ed shall "e iven the opportunity to prove or show the source of such
articles and the payment of duties and taxes thereon.
'ede*3tion o4 4or4eited 3ro3erty
203
As a means of settlement, redemption of forfeited property is not availa"le when*
a. !hen there is fraud.
". !hen the importation is a"solutely prohi"ited
c. !hen the release of property would "e contrary to law.
$xtent o4 2*3orterIs lia5ility
The lia"ility of an importer is limited to the value of the imported merchandise
$n case of forfeiture of the sei7ed merchandise, the maximum civil penalty is the
forfeiture itself.
204

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TAXATION PRE-BAR REVIEWER 2004

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