TAXATION LAW

GENERAL PRINCIPLES
REAL PROPERTY AND LOCAL TAXATION
TARIFF AND CUSTOM LAWS
TAX ADMINISTRATION AND ENFORCEMENT
INCOME TAXATION
TRANSFER TAXES
VALUE ADDED TAXES
NIRC REMEDIES
COURT OF APPEALS

TABLE OF CONTENTS

General Principles.1
Local Taxation16
Real Property Taxation..31
Tariff and Custom Laws.39
Tax Administration and Enforcement...58
Income Taxation..68
Transfer Taxes133
Value Added Taxes148
NIRC Remedies..160
Court of Tax Appeals.187

General
Principles
POWER OF TAXATION
DEFENITION
Taxation is an inherent power of the sovereign
Exercised though the legislature to impose
burdens upon subjects and objects within its
jurisdiction for raising revenues to carry out the
legitimate objects of the government.
PURPOSES AND OBJECTIVES
1. Revenue to raise funds or property to
enable the state to promote the general
welfare and protection of its citizens.
2. Non-Revenue (PR2EP)
a. Promotion of general welfare taxation
may be used as an implement of police
power in order to promote the general
welfare of the people.
b. Regulation
c. Reduction of social inequity the
progressive system of taxation in the
Philippines
prevents
the
undue
concentration of wealth in the hands of
few individuals. Progressivity is based
on the principle that those who are able
to
pay more should shoulder the bigger
portion of the tax burden.
d. Encourage economic growth the grant
of incentives or exemptions encourage
investment.
e. Protectionism In case of foreign
importations, protective tariffs and
customs are imposed for the benefit of
local industries.
BASIS OF THE THEORY OF TAXATION
1. Necessity theory the existence of the
government is a necessity. It cannot continue
without a means to pay its expenses and
therefore has a right to compel all citizens
and property within its power to contribute.
2.

Benefits-Protection/ Reciprocity Theory

(Doctrine of Symbiotic relationship)
Every person who is able must contribute his
sharing in the burden of running the
government. The government for its part is
expected to respond in the form of tangible
and intangible benefits intended to improve
the lives of the people and enhance their
material and moral values. (CIR vs. Algue,
No. L-28896 Feb. 17, 1988)
CHARACTERISTICS OF A SOUND TAX
SYSTEM (FAT)

1.

2.
3.

Fiscal Adequacy sources of government

revenue must be sufficient to meet
government expenditures and other public
needs.
Administrative Feasibility tax laws must
be capable of being effectively enforced.
Theoretical Justice a sound tax system
must be based on the taxpayers ability to
pay (Ability to Pay Theory). Our laws
mandate that taxes must be reasonable, fair,
just, and conscionable. The constitution
provides that taxation must be uniform and
equitable and that State must evolve a
progressive system of taxation.
NATURE OF THE TAX POWER

I.

INHERENT
ATTRIBUTE
OF
SOVERIGNITY
1. Basis The Life-Blood theory taxes are
the lifeblood of the nation. Without
revenue raised from taxation, the
government will not survive, resulting in
detriment of society. Without taxes, the
government would be paralyzed for lack of
motive power to activate and operate it.
2. Manifestation:
a. Imposition even in the absence of
constitutional grant
b. States right to select objects and
subjects of taxation;
c. No injunction to enjoin collection of
taxes.

II.
1.

2.

LEGISLATIVE IN CHARACTER
Basis: Taxes are a grant of the people
who are taxed, and the grant must be
made by the immediate representatives
of the people. And where the people
have laid the power, there it must be
exercised. (Cooley)
Scope of Legislative Power (SM
PARKS)
a. Subjects of taxation (Persons,
property, occupation, excises or
privileges to be taxed, provided
they are
within
the
taxing
jurisdiction).
b. Amount or Rate of tax
c. Purposes for which taxes shall be
levied provided they are for public
purposes
d. Kind of tax to be collected
e. Apportionment of the tax (whether
the tax shall be of general

application of limited to a particular

locality, or partly general and partly
local)
Situs of taxation
Method of collection

f.
g.

Is the Power to Tax the Power to Destroy?

Power to tax INCLUDES the power to

destroy. Chief Justice Marshall in McCulloch
vs. Maryland, 4 Wheat, 316 4 L. ed. 579,
607 opined that the power to tax involves
the power to destroy. Taxation is a
destructive power which interferes with the
personal and property rights of the people
and takes from them a portion of their
property for the support of the government.

Power to tax NOT power to destroy. Justice

Holmes declared in Panhandle Oil Co. Vs.
Mississippi, 277 US 218 that the power to
tax is not the power to destroy while this
court sits.

Reconciliation of the two views;

The imposition of a valid tax could not
be judicially restrained merely because
it would prejudice taxpayers property.
An illegal tax could be judicially declared
invalid and should not work to prejudice
a taxpayers property.
Marshalls view refers to a valid tax
while the Holmes view refers to an
invalid tax.

According to Justice Isagani Cruz, the power

to tax includes the power to destroy if it is
used validly as an implement of the police
power in discouraging and in effect,
ultimately prohibiting certain things or
enterprises inimical to the public welfare, but
where the power to tax is used solely for the
purpose of raising revenues, the modern
view is that is cannot be allowed to
confiscate or destroy.
COMPARISON OF POWER OF TAXATION
WITH OTHER INHERENT POWERS
TAXATION
To
raise
revenue

No Limit

POLICE
POWER
PURPOSE
To
promote
public welfare
through
regulations

EMINENT
DOMAIN

To
facilitate
the taking of
private
property
for
public use
AMOUNT OF EXACTION
Limited to the No
exaction
cost
of but
private
regulation,
property
is
issuance
of taken be the
the license or State
for
surveillance
public purpose
BENEFITS RECEIVED

No special or No
direct A
direct
direct benefit benefit
is benefit results
is received by received;
a in the form of
the taxpayer; healthy
just
merely
economic
compensation
general
standard
of to the property
benefit
of society
is owner
protection
attained
NON-IMPAIRMENT OF CONTRACTS
Contracts may Contracts may Contracts may
not
be be impaired
be impaired
impaired
TRANSFER OF PROPERTY RIGHTS
Taxes
paid No
transfer Transfer
if
become part but
only effected
in
of public funds restraint in its favor of the
exercise
State
SCOPE
All
persons, All
persons, Only upon a
property and property,
particular
excises
rights
and property
privileges
TAXES
DEFINITION
Taxes are the enforced proportional contributions
form persons and property levied by the lamaking body of the State by virtue of its
sovereignty for the support of the government
and for public needs.
ESSENTIAL CHARACTERISTICS (SLEP4)
1. It is levied by the State which has jurisdiction
over the person or property
2. It is levied by the Law-making (legislative)
body of the state;
3. It is an Enforced contribution not dependent
on the will of the person taxed, not a contract
but a positive act of the government;
4. It is generally Payable in money;
5. It is Proportionate in character taxes must
be based on ability to pay in accordance with
the constitutional mandate to Congress to
evolve a progressive system of taxation;
6. It is levied on Persons and property;
7. It is levied for Public purpose/s.
REQUISITES OF A VALID TAX (JAPUL)
1. That either the person or property taxed by
within the Jurisdiction of the taxing authority;
2. That the Assessment and collection of
certain kinds of taxes guarantee against
injustice to individuals, especially be
providing notice and opportunity for hearing;
3. Should be for a Public purpose;
4. The rule of taxation shall be Uniform;
5. The tax must not impinge on the inherent
and Constitutional Limitations on the power
of taxation.

CLASSIFICATION OF TAXES
I.
1.

2.

3.

II.
1.

2.

As to subject matter
Personal, poll or capitation tax of a
fixed amount imposed upon persons
residing within a specified territory,
whether citizens or not, without regard
to their property, occupation or business
in which they may be engaged (ex.
Community tax).
Property tax imposed on property,
whether real or personal, in proportion
either to its value or some of their
reasonable rule of apportionment (ex.
Real estate tax).
Excise or Privilege charge imposed
upon the performance of an act, the
enjoyment of a privilege or engaging in
an occupation, profession or business
(ex. Donors tax).
As to who bears the burden
Direct tax which is exacted from the
very persons who are primarily liable to
pay them; the taxpayer cannot shift the
burden of its payment to another. The
liability for the payment of the tax
(incidence), as well as the impact (or
burden) of the tax, falls on the same
person (i.e. Income tax).
Indirect tax wherein the incidence or
liability for the payment falls on one
person but the burden can be shifted or
passed on to another (ex. VAT).
The Constitution does not prohibit the
imposition of indirect taxes like the VAT.
The Constitution has been interpreted to
mean simply that direct taxes are to be
preferred and as much as possible,
indirect taxed should be minimized
(Tolentino vs. Secretary of Finance G.R.
No. 115455 October 30, 1995).

III.
1.

2.

IV.
1.

As to purpose
General, fiscal or revenue tax
imposed for the general or ordinary
purposes of the Government, to raise
revenue for governmental needs. (ex.
Income tax)
Special or regulatory tax imposed for
a special purpose, to achieve some
social or economic ends irrespective of
whether revenue is actually raised or
not. (ex. Customs duties)
As to how amount is determined
Specific tax of a fixed amount
imposed by the head or number or by
some
standard
of
weight
or
measurement; it requires no valuation

2.

V.
1.
2.
VI.
1.
2.
3.

other than a listing or classification of

the objects to be taxed.
Ad Valorem (Value) tax of a fixed
portion of the value of the property with
respect to which the tax is assessed; it
requires the intervention of assessors or
appraisers to estimate the value of such
property before the amount due from
each taxpayer can be determined.
As to taxing authority
National levied by the National
Government
Local levied by the local government
As to rate
Progressive or graduated the tax
rate increases as the tax base or
bracket increases
Regressive the tax rate decreases as
the tax base increases
Proportionate tax rate is based on a
fixed percentage of the amount of the
property, receipts or other bases to be
taxed.

DISTINCTIONS
IMPOSITIONS
I.

OF

TAX

FROM

OTHER

Tax vs. Debt

TAXES

DEBT
BASIS
Based on law
Based on contract or
judgment
FAILURE TO PAY
Failure to pay tax No imprisonment for
(other than poll tax) non-payment of debt
may
result
in
imprisonment.
MODE OF PAYMENT
Generally payable in Payable in money,
money
property, or service
ASSIGNABILITY
Not assignable
Assignable
PAYMENT
Not
subject
to May be subject to
compensation or set- compensation or set-off
off
INTEREST
Tax does not draw Debt draws interest if
interest
unless stipulated or delayed
delinquent
AUTHORITY
Imposed by public Imposed by private
authority
individuals
II.

Tax vs. Toll

TAXES
Taxes are levied for the

TOLL
Tolls are compensation

support
of
the
government
The amount of tax is
determined by the
sovereign
May only be imposed
by the State

III.

for the use of anothers

property
The amount of the toll
is determined by the
cost of the property or
of the improvement
Imposed
by
the
government or private
individual

Tax vs. Special Assessment

SUBJECT
Taxes are levied on Levied on land
land,
persons,
property,
income,
business, etc.
LIABILITY
Personal liability of the Cannot be made a
taxpayer
personal liability of the
person assessed
BASIS
Based on necessity Based
solely
on
and
partially
on benefits
benefits
APPLICATION
General application
Special application only
as to a p0articular time
and place
Tax vs. License fee

TAXES
Based on the power of
taxation
Purpose is revenue
Amount is unlimited

LICENSE FEE
Based on police power

Purpose is regulation
Amount is limited to the
cost of :
1) Issuance of license
2) Inspection
and
surveillance
Normally paid the start Normally paid before
of business
the commencement of
business
Taxes,
being
the License fee may be
lifeblood of the State, with
or
without
cannot be surrendered consideration
except
for
lawful
consideration
Non-payment does not Non-payment
makes
make the business the business illegal.
illegal but may be
ground for criminal
prosecution
V.

Tax vs. Penalty

Intended to raised
revenue
May be imposed only
by the government

SPECIAL
ASSESSMENT

TAXES

IV.

TAXES
Enforced proportional
contributions
from
persons and property

VI.

PENALTY
Sanction imposed as a
punishment
for
violation of law or acts
deemed
injurious;
violation of tax laws
may give rise to
imposition of penalty
Designed to regulate
conduct
May be imposed by
the:
1) Government
2) Private individuals,
or entities.

Tax vs. Tariff

TAXES
All embracing term to
include various kinds of
enforced contributions
upon persons for the
attainment of public
purposes

TARIFF
A kind of tax imposed
on article which are
trade internationally

VII.

Tax vs. Compromise penalty

TAX
COMPROMISE
PENALTY
Basic imposition on Collected
as
a
persons, property, and compromise in cases
excises
involving violations of
the Tax Code, rules or
regulations
VIII.

Tax vs. Subsidy

TAX
SUBSIDY
Levied by the law- A legislative grant of
making body of the money in aid of a
State for the support of private
enterprise
the government and for deemed to promote the
public needs
public welfare.
IX.

Tax vs. Revenue

TAX
A source of revenue of
the government

REVENUE
A broad term that
includes not only taxes
but income from other
sources as well.

DOCTRINE OF EQUITABLE RECOUPMENT vs.

DOCTRINE OF SET-OFF
Doctrine of Equitable Recoupment Where
the refund of a tax illegally or erroneously
collected or overpaid by a taxpayer is barred by
prescription, a tax presently being assessed
against a taxpayer may be recouped or set-off

against the tax whose refund is no barred by

prescription.
This is a case where the taxpayer has a claim for
refund but he was not able to file a written claim
due to lapse of the prescription period within
which to make a refund is allowed. Under this
doctrine, the taxpayer is allowed to credit such
refund to his existing tax liability.
NOTE: Equitable recoupment is allowed only in
common law countries, not in the Philippines.

Requisites of a Taxpayers Suit

1.

2.

3.

Compensation or Set-Off Compensation shall

take place when two persons, in their own right,
are creditors and debtors of each other (Article
1278, Civil Code)
General Rule: No set-off is admissible against
the demands for taxes levied for general or local
governmental purposes. The reason on which the
general rule is based, is that taxes are not in the
nature of contracts between the parties but grow
out of duty to, and are positive acts of the
government to the making and enforcing of
which, the personal consent of the individual
taxpayer is not required. (Republic vs.
Mambulao, G.R. No. L-17725 February 28,
1962).
NOTE: Compensation was allowed in one
exceptional case. This was the ruling of the
Supreme Court in Domingo vs. Garlitos, G.R. No.
L-18849, June 19, 1963, where the Supreme
Court held that the doctrine of set-off may be
applied.
Reason: Compensation was recognized in this
case because both the claim of the Government
for inheritance tax and the claim of the estate for
services rendered have already become overdue
and demandable and fully liquidated. Further, an
amount for the claim of the estate had already
been appropriated by the Government
TAXPAYERS SUIT
A taxpayer has the right to file an action to
question the validity, or constitutionality, of a
statute or law.
The right is based on the fact that expenditure of
public funds by an officer for the purpose of
administering or implementing an invalid or
unconstitutional law is a misapplication o such
funds.
It is only when an act complained or directly
involves the illegal disbursement of public funds
derived from taxation that the taxpayers suit may
be allowed (Vitug and Acosta, Tax Law and
Jurisprudence)

The tax money is being extracted and spent

in violation of specific Constitutional
protections against abuses of legislative
power.
That public money is being deflected to any
improper purpose (Pascual vs. Secretary of
Public Works G.R. No. 10405 Dec. 29,
1960); and
That the petitioner seeks for restrain
respondents from wasting public funds
through the enforcement of an invalid or
unconstitutional law.

LIMITATIONS OF TAXATION
LIMITATIONS ON THE POWER OF TAXATION
I. Inherent Limitations they proceed form
the very nature of the taxing power itself. The
are otherwise known as elements or
characteristics of taxation. (S-P-I-N-E)
1. Territoriality or Situs
2. Public Purpose
3. International Comity
4. Non-delegability of the taxing power
5. Exemption of the Government
II.

Constitutional Limitations restrictions

imposed by the Constitution
1. General or indirect
2. Specific or direct

INHERENT LIMITATIONS
I.

Territoriality or Situs of Taxation

Situs of taxation is the place or authority that

has the right to impose and collect taxes (CIR vs.
Marubeni Corp. G.R. no. 137377 Dec. 18, 2001).
General Rule: A state may not tax property lying
outside its borders or lay an excise or privilege
tax upon the exercise or enjoyment of a right or
privilege derived from the laws of another state
and therein exercised or enjoyed (51 Am. Jur. 8788
Reasons for the rule:
1. Taxation is an act of sovereignty which could
only be exercised within a countrys territorial
limits.
2. This is the result of the concept that taxes
are paid for the protection and services
provided by the taxing authority which could
not be provided outside the territorial
boundaries of the taxing state.
Exceptions:

1.

2.

Where tax laws operate outside territorial

jurisdiction. Example: Taxation of residents
on their income from sources without the
Philippines.
Where tax laws do not operate within the
territorial jurisdiction of the state.
a. When exempted by treaty obligations;
b. When exempted by international comity.

Factors that Determine Situs: (K-PRICE)

1. Kind or classification of the tax being levied
2. Situs of the thing or Property taxed
3. Citizenship of the taxpayer
4. Residence of the taxpayer
5. Source of the income taxed
6. Situs of the Excise, privilege, business or
occupation being taxed

f.

II.

Situs of Subjects of Tax

1.

2.

Persons poll, capitation or community

taxes are based upon the residence of the
taxpayer, regardless of the source of income
or location of the property of the taxpayer
Property
a. Real property - Lex rei sitae or lex situs
(Where the property is located).
b. Tangible personal property where
the property is physically located
although the owner resides in another
jurisdiction (51 Am. Jur. 467).
c. Intangible personal property
i. General Rule: Mobilia sequuntur
personam (movables follow the
person). The situs is the domicile of
the owner
ii. Exceptions:
1. When
the
property
has
acquired a business situs in
another jurisdiction; or
2. When the law provides for the
situs of the subject of tax (for
example, see Section 104
NIRC)
d. Income Factors that determine the
situs of income tax: (see Section 23
NIRC)
i. Nationality or citizenship of the
taxpayer:
ii. Residence or domicile of the
taxpayer; and
iii. Source of the income
e. Excise or Privilege (I[pm the
performance of an act or the
engaging in an occupation) depends
upon the place where the act is
performed or occupation is engaged in
(not upon the domicile of the person
subject to the excise nor upon the
physical location of the property and in
connection with the act or occupation

taxed) (Allied Thread vs. City Mayor of

Manila G. R. No. 40296 Nov. 21, 1984)
Gratuitous Transfer the transmission
of property from a donor to a donee, or
from a decedent to his heirs may be
subject to taxation in the state where the
transferor is (was) a citizen or resident,
or where the property is located.
Publication Purpose

The legislature is without power to

appropriate public revenues for anything but
a public purpose.
It is the essential character of the direct
object of the expenditure which must
determine its validity. Incidental advantage to
the public or the State, which results from
the promotion of private interests does not
justify their aid by the use of public money
(Pascual vs. Secretary of Public Works et
al., No. L-10405 December 29, 1960)

Tests to Determine Public Purpose

1. Duty Test whether the thing to be
furthered by the appropriation of public
revenue is something which is the duty of the
State as a government to provide.
2. Promotion of General Welfare Test
whether the proceeds of the tax will directly
promote the welfare of the community in
equal measure.
III.

International Comity

Comity the respect accorded by nations to

each other because they are sovereign equals.
The property or income of a foreign state or
government may not be the subject of taxation by
another state.
Reasons for the rule:
1. In par parem non habet imperium, or as
between equals there is no sovereign
(Doctrine of Sovereign Equality).
2. The rule of international law that a foreign
government may not be sued without its
consent. Thus, it would be useless to impose
a tax which could not be collected.
3. The concept that when a foreign sovereign
enters the territorial jurisdiction of another, it
does not subject itself to the jurisdiction of
the other.
IV.

Non-Delegation of Taxing Power

General Rule: Delegata potestas non potest

delegari. (A delegated power cannot be further
delegated.) Since the power for taxation is a
power that is exercises by Congress as
delegates of the people, then as a general rule,

Congress could not re-delegated this delegated

power.

of essential government functions are exempt

from taxes.

Exceptions: (PATEE)
1. Delegation of Tariff powers by Congress to
the President under the flexible tariff clause.
[Section 28(2) Article VI of the Constitution]
2. Delegation of Emergency powers to the
President [Section 23(2) of Article VI of the
Constitution]
3. Delegation to the President to enter into
Executive agreements, and to ratify treaties
which may contain tax exemption provisions
subject to the concurrence by the Senate in
the ratification made by the President;
4. Delegation to the People at large;
5. Delegation to Administrative bodies (power
of subordinate legislation)

General Rule: Properties of the national

government as well as those of the local
government units are not subject to tax,
otherwise it will result in the absurd situation of
the government taking money from one pocket
and putting it in another (Cooley on Taxation,
Sec. 621, 4th Edition, as cited in Board of
Assessment Appeals of Laguna vs. CTA. G.R.
No. L-18125, may 31, 1963).

Stages/ Aspects of a System of Taxation

1. Tax legislation (levy) This refers to the
enactment of a law by Congress authorizing
the imposition of tax.
a. Determination of the subject of taxation
b. Determination of the purposes for which
taxes shall be levied;
c. Fixing the rate of taxation;
d. Rules of taxation in general
2. Tax administration This is the act of
administration and implementation of the tax
law by executive through its administrative
agencies.
a. Assessment
b. Collection
3. Payment This is the act of compliance by
the taxpayer, including such options,
schemes or remedies as may be legally
available to him.
If what is delegated is tax legislation, the
delegation is invalid; if what is delegated is tax
administration, the delegation is valid.
V.

Exemption of the Government

May the Government Tax Itself?

If the taxing authority is the local government unit
(LGU), the answer is NO. Republic Act No. 7160
expressly prohibits the LGUs from levying tax
form the National Government, its agencies and
instrumentalities and other LGUs. (See Basco vs.
PAGCOR, G.R. No. 91646, May 14, 1991)

Other reasons for the rule:

1. So that the functions of the government shall
not be unduly impeded (51 Am. Jur. 550-51)
2. To reduce the amount of money that has to
be handled by the government in the course
of its operations (Maceda vs. Macaraid GR.
No. 88291, June 8, 1963).
HOWEVER, the Constitution is silent on whether
Congress is prohibited from taxing the properties
of the agencies of the government. Therefore,
nothing can prevent Congress from decreeing
that even instrumentalities or agencies of the
government performing governmental functions
may be subject to tax. (MCIAA vs Marcos G.R.
No 120082 Sep. 11, 1996)
UNLESS OTHERWISE PROVIDED BY LAW, the
exemption applies only to government entities
through which the government immediately and
directly exercises its government powers.
(Infantry Post Exchange vs. Posadas G.R. No.
33403 Sept. 4, 1930)
CONSTITUTIONAL LIMITATIONS
I.

General
or
Limitations

Indirect

1.

Due Process
Constitution)

(Sec.

1, Art.

III,

1987

Any deprivation is with due process if it is

done:
a.

b.
On the other hand, if the taxing authority is the
National Government the answer is YES.
Pursuant to the provisions of the NIRC, the
National Government may levy taxes upon
government owned and controlled corporations,
agencies and instrumentalities (Sec. 27[C]).
However, under Section 32(B)(7)(b) of the NIRC,
income derived by the government from the
exercise of public utility and those in the exercise

Constitutional

Under the authority of a law that is valid

or under the Constitution itself, and that
it must be reasonable, fair and just
(Substantive Due Process); and
After compliance with
fair and
reasonable methods of procedure
prescribed by law, with notice of
hearing, or at least an opportunity to be
heard whenever necessary (Procedural
Due Process).

Due process in taxation REQUIRES:

a. Tax must be for a public purposes;
b. Imposed within territorial jurisdiction;

c.

No arbitrariness or oppression
assessment or collection.

in

Due process in taxation DOES NOT

REQUIRE:
a. Determination through judicial inquiry of
the property subject to tax or the amount
of tax to be imposed;
b. Notice and hearing as of amount of the
tax or the manner of apportionment.
2.

3.

Equal Protection Clause (Sec. 1, Art. III

1987 Constitution)

Equal protection neither requires equal

rates of taxation on different classes of
property, nor prohibits unequal taxation
so long as the inequality is not based
upon arbitrary classification. It merely
requires that all persons (or property, of
the same class) subjected to such
legislation shall be treated alike, under
like circumstances and conditions, both
in the privileges conferred and in the
liabilities imposed (Cooley, cited in
Sison, Jr. vs. Ancheta G.R. No. 59431
July 25, 1984).

The equal protection clause may be

violated in two ways:
a. When classification is made where
there should be non (i.e where
classification does not rest upon
substantial differences); and
b. When classification is called for
(Villegas vs. Hui Chiong Tsai Pai,
G.R. no. L-29646, November 10,
1978)
i.e.,
when
substantial
distinctions
exist
but
no
corresponding
classification
is
made on the basis thereof.

The power to select subjects of taxation

and apportion the public burden among
them includes the power to make
classifications. For the classification to
be valid, the following requisites must
concur:
a. It must be based on substantial
distinctions;
b. It must apply both to present and
future conditions;
c. It must be germane to the purposes
of the law; and
d. It must apply equally to all members
of the same class (Ormoc Sugar
Company vs. Treasurer, of Ormoc
G.R. No. 23794 February 17,
1968).
Freedom of the Press (Sec. 4, Art. III 1987
Constitution)

There is curtailment of press freedom

and freedom of thought and expression
if a tax is levied in order to suppress this
basic right and impose a prior restraint.

4.

(Tolentino vs. Secretary of Finance,

Supra)

However, if the fee imposed is not for

the exercise of a privilege but only for
the purpose of defraying part of the cost
of registration the Constitution is not
violated.
Religious Freedom (Sec. 5, Art. III, 1987
Constitution)

This provision contains two clauses: (1)

the non-establishment clause; and (2)
the free exercise clause. The latter is the
basis of tax exemptions granted to
religious institutions. The former covers
the prohibition to establish a national or
official religion since in that case, there
would be an appropriation form taxes
paid by the people.

A Municipal license tax on the sale of

bibles and religious articles by a nonstock, non-profit missionary organization
at minimal profit constitutes curtailment
of religious freedom and worship which
is guaranteed by the Constitution.
(American Bible Society vs. City of
Manila No. L-9637 April 30, 1957)

Income of such organizations from any

activity conducted for profit or from any
of their property, real or personal
regardless of the disposition made of
such income, is taxable.

5.

No taking of private property without just

compensation (Sec. 9, Art. III, 1987
Constitution)

6.

Non-impairment Clause

Reason for the rule: When the State

grants an exemption on the basis of a
contract, consideration is presumed to
be paid to the State, and the public is
supposed to receive the whole
equivalent therefrom.

The non-impairment clause applies to

the power of taxation but not to police
power and eminent domain.

NOTE: It applies only where one party is

the Government and the other party, a
private individual. (Sababan, Taxation
Law Reviewer 2008ed., p.13)

Examples:
a. When a tax exemption based on a
contract is revoked by a later taxing
stature (Cassanova vs. Hord G.R.
No. 3473, March 22, 1907);
b. When a taxpayer enters into a
compromise with the BIR; the
agreement cannot be impaired
without violating the Constitution.

10

c.

7.

8.

Application of the non-impairment

clause depends on how the
exemption was granted:
When the exemption is bilaterally
agreed upon between the government
and the taxpayer it cannot be
withdrawn without violating the nonimpairment clause.
When it is unilaterally granted by law
and the same is withdrawn by virtue of
another law no violation.
When the exemption is granted under a
franchise may be revoked because
under the Constitution, a franchise is
subject to amendment, alteration, or
repeal by Congress when the common
good so requires. (Article XII, Section
11, Constitution.)

Law-making Process

Bill should embrace only one subject

expressed in the title thereof;

Three readings on three separate days;

Printed copies in final form distributed

three days before passage
Presidential power to grant reprieves.
Commutations and pardons and remit
fines and forfeitures after conviction by
final judgment.

II.

Specific
or
Limitation

1.

Taxation shall be uniform and equitable

(Sec. 28[1], Art. VI 1987 Constitution)

Uniformity all taxable articles or

properties of the same class shall be
taxed at the same rate. (City of Baguio
vs. De Leon G.R. No. 24756 October
31, 1968);

Different articles or other subjects may

be taxed at different rates provided that
the rate is uniform on the same class
everywhere. (De Villata vs. Standley
G.R. No. 8154 December 20, 1915);

Equity

requires
that
the
apportionment of the tax should
consider the taxpayers ability to
shoulder the tax burden, usually
measured in terms of wealth, and, if
warranted on the basis of the benefits
he receives from the government.

Taxation may be uniform but inequitable

where the amount is excessive or
unreasonable.

2.

Direct

3.

Non-imprisonment for non-payment of

poll tax (Sec. 20, Art. III, 1987 Constitution)

Poll-Tax tax imposed on a per head

basis. The present poll tax is the
community tax.

One cannot be imprisoned for nonpayment of poll tax because payment

thereof is not mandatory.

While a person may not be imprisoned

for non-payment of poll tax, he may be
imprisoned for non-payment of other
kinds of taxes where the law so
expressly so provides.

4.

Origin of Revenue or Tariff Bills (Sec. 24,

Art. VI, 1987 Constitution)

It is not the law but the revenue bill

which is required by the Constitution to
originate exclusively in the House of
Representatives. A bill originating in the
House may undergo such extensive
changes in the Senate that the result
may be a rewriting of the whole.

Constitutional

Progressive System of Taxation (Sec.

28[1], Art. VI 1987 Constitution)

A Progressive System to Taxation

means that as the resources of the
taxpayer become higher, this tax rate
likewise increases. This is mandated by
Article VI, Section 28[1] of the
Constitution.
It is based on the ability to pay and in
implementation of the social justice
principle that the more affluent should
contribute more for the communitys
benefit, and is best exemplified by the
increase of income tax rate as net
taxable income increases.
The Constitution does not really prohibit
regressive taxes. What it simply
provides is that Congress shall evolve a
progressive system of taxation. This is a
mere directive upon Congress, not a
justiciable right. (Tolentino vs. Secretary
of Finance, G.R. No. 115455, August
25, 1994)
In case of VAT, it is an antithesis of
progressive taxation. Bu its very nature,
it is regressive. The principle of
progressive taxation has no relation with
the VAT System inasmuch as the VAT
paid by the consumer or business for
every goods bought or services enjoyed
is the same regardless of income.

The Constitution simply means that the

initiative for filing the bills must come
from the House, on the theory that,
elected as they are from the districts,
the members of the House can be
expected to be more sensitive to the
local needs and problems (Tolentino vs.
Secretary of Finance, Supra).

11

5.
6.

7.

Veto Power of the President (Sec. 27[2],

Art. VI 1987 Constitution)

Delegated authority of President to

impose tariff rates, import and export
quotas, tonnage and wharfage dues (Sec.
28, par. 2 Art. VI, 1987 Constitution)

Tax exemption of charitable institutions,

churches, parsonages, convents, all
lands, buildings and improvements
actually, directly or exclusively used.

Article VI, Section 28 [3], Constitution,

exempts religious and educational
institutions from real estate tax.

Test of Exemption: It is the use of the

property, and not ownership.

Nature of Use: The properties must be

actually, directly and exclusively used for
the purposes mentioned.

8.

Exclusive is defined as possessed

and enjoyed to the exclusion of others;
debarred
from
participation
or
enjoyment; and exclusively is defined,
in a manner to exclude; as enjoying a
privilege exclusively. If real property is
used for one or more commercial
purposes, it is not exclusively used for
the exempted purposes but is subject to
taxation. The words dominant use or
principal use cannot be substituted for
the words used exclusively without
doing violence to the Constitutions and
the law. Solely is synonymous with
exclusively. (Lung Center of the
Philippines vs. Quezon City, G.R. No.
144104, June 29, 2004)
Scope of Exemption: The exemption
is not limited to property actually
indispensable for religious, charitable or
educational purpose. It extends to
facilities which are incidental to or
reasonably
necessary
for
the
accomplishment of said purposes. (Abra
Valley College vs. Aquino G.R. No. L39086 June 15, 1988)

Voting Requirement of tax exemptions

Reason
for
rule:
To
prevent
indiscriminate grant of tax exemptions.

The phrase a majority of all the

members of the Congress means at
least plus 1 of all the members voting
separately.

In granting tax exemptions, an absolute

majority of the members of Congress is
required while in cases of withdrawal of

9.

such tax exemption a relative majority is

sufficient
Tax amnesties, condonation and refunds
are in the nature of tax exemptions,
such being the case, a law granting
them requires the vote of an absolute
majority.
A constitutional grant of exemption may
be self-executing or may require an act
of Congress for its operation. Where a
Constitutional provision granting an
exemption
is
self-executing,
the
legislature can neither add nor detract
from it. It may, however, prescribe a
procedure to determine whether a
claimant is entitled to the Constitutional
exemption.

No use of public money or property for

religious purposes (par. 3 Sec. 29, Art. VI,
1987 Constitution)

EXCEPT: If a priest is assigned to

armed
forces,
penal
institutions,
government orphanages or leprosarium.

10. Special Assessments (par. 3 Sec. 29,, Art.

VI 1987 Constitution

Money collected on tax levied for special

purpose to be used only for such
purpose, balance if any shall accrue to
the general fund.
11. Supreme Courts power to review
judgments or orders of lower courts (Sec.
5 [b] Art. VIII 1987 Constitution)

The Supreme Court can review

judgments or orders of lower courts in
all cases involving:
a. The legality of any tax, impost,
assessment, or toll;
b. The legality any penalty imposed in
relation to the above;
12. Grant of Authority to local government
units

Each local government unit shall have

the power to create its own sources of
revenues and to levy taxes, fees and
charges subject to such guidelines and
limitations as the Congress may
provide, consistent with the basic policy
of local autonomy. Such taxes, fees, and
charges shall accrue exclusively to the
local governments. (Sec. 5, Art. X, 1987
Constitution)
Local government units shall have a just
share, as determined by law, in the
national
taxes
which
shall
be
automatically released to them. (Sec. 6,
ibid.)

12

Local governments shall be entitled to

an equitable share in the proceeds of
the utilization and development of the
national wealth within their respective
areas, in the manner provided by law,
including sharing the same with the
inhabitants by way of direct benefits.
(Sec. 7, ibid)

13. Tax exemption granted to non-stock, nonprofit institutions

All revenues and assets of non-stock,

non-profit educational institutions used
actually, directly, and exclusively for
educational purposes shall be exempt
form taxes and duties. (Sec. 4[3], Art.
XIV 1987 Constitution)

NOTE: See Section 30 NIRC last

paragraph. Note that its provisions,
particularly the phrase regardless of
disposition made of such income is in
conflict with Article XIV, Section 4 [3]
Constitution.

Proprietary educational institutions,

including those cooperatively owned,
may likewise be entitled to such
exemptions subject to limitation:
a. provided by law
b. provisions for reinvestments

All grants, endowments, donations, or

contributions used actually, directly, and
exclusively for educational purposes
shall be exempt from tax. (Sec. 4[4],
Ibid.)

DOUBLE TAXATION
DEFINITION
Taxing the same person [same subject or object]
twice by the same jurisdiction over the same
thing (Victoria Milling vs. Mun. of Victoria, Negros
Occidental G.R. No. L-21183 Sept. 27, 1968).
According to the Supreme Court there is no
constitutional prohibition against double taxation
in the Philippines (Villanueva vs. City of Iloilo,
G.R. No. L-26521 December 28, 1968). It is
something not favored, but is nevertheless
permissible.
KINDS OF DOUBLE TAXATION
I.

Direct Duplicate Taxation/ Obnoxious

The objectionable kind or double taxation in
its prohibited sense. This violates the equal
protection clause of the Constitution and is
prohibited.

Elements:
1. The same property or subject matter is taxed
twice when it should be taxed only once;
2. Both taxes are levied of the same purpose;
3. Imposed by the same taxing authority;
a. Within the same jurisdiction.
b. During the same taxing period;
c. Covering the same kind or character of
tax (Villanueva vs. City of Iloilo, supra)
II.

Indirect duplicate Taxation The

permissible kind of double taxation, this
arises in the absence of one or more of the
above-mentioned elements of direct double
taxation.

INTERNATIONAL
TAXATION

JURIDICAL

DOUBLE

International Juridical Double Taxation the

imposition of comparable taxes in two or more
states on the same taxpayer in respect of the
same subject matter and for identical periods.
(Commissioner vs. SC Johnson and Sons, Inc.
G.R. No. 127105, June 25, 1999).

This double taxation usually takes place

when a person is a resident of the first
contracting State and derives income from,
or owns capital in the second contracting
State and both States impose taxes on such
income or capital. In order to eliminate
double taxation, a tax treaty is entered into
by the two contracting States.

The international juridical double taxation

only occurs when the State of residence of
the taxpayer imposes tax on the income of
said taxpayer from sources within an without
their State. There is no international juridical
double taxation if the citizens or nationals
are only taxed on their income form sources
within.

See Section 23 NIRC: Except for income

earned by resident citizens and domestic
corporations, only income from Philippine
sources is taxable by the government.
METHODS OF REDUCING THE RIORS OF
DOUBLE TAXATION (CD RET)
1. Tax Credits an amount subtracted from an
individuals or entitys tax liability to arrive at
the total tax liability.
2. Tax Deductions tax write-off or reduction
in the gross amount on which a tax is
calculated.
3. Reduction of the Philippine income tax
rate
Example: Tax Sparing Rule the dividend
earned by a non-resident foreign corporation
(NRFC) within the Philippine is reduced by
imposing a lower rate of 15% (in lieu of the
35%), on the condition that the country to

13

4.
5.

which the NRFC is domiciled shall allow a

credit against the tax due from the NRFC,
which taxes are deemed to have been paid
in the Phil. (Sec. 28 [B] [5] b) (CIR vs.
Procter & Gamble G.R. No. 66838
December 2, 1991)
Tax Exemptions a grant of immunity to
particular persons or corporations from the
obligation to pay taxes.
Tax Treaties Agreement between two
countries specifying what items of income
will be taxed by the authorities of the country
where the income is earned.

FORMS OF ESCAPE FROM TAXATION

6 FORMS
TAXATION:
I.

Methods resorted to by a tax treaty in order to

eliminate double taxation:
First Method: An exclusive right to tax is
conferred in one of the contracting states;
however, for other items of income or capital,
both states are given the right to tax although the
amount of tax that may be imposed by the state
of source is limited.
Second Method: The state of source is given a
full or limited right to tax together with the state of
residence. In this case, the treaty makes it
incumbent upon the state of residence to allow
relief in order to avoid double taxation.
There are 2 ways under the 2nd method:
1. The exemption method the income or
capital which is taxable in the state of source
or situs is exempted in the state of
residence, although in some instances it may
be taken i8nto account in determining the
rate of tax applicable to the taxpayers
remaining income or capital. (This may be
done using the tax deduction method which
allows foreign income taxes to be deducted
from gross income, in effect exempting the
payment from being further taxed.) the focus
here is on the income or capital itself.
2. The credit method although the income or
capital which is taxed in the state of source
is still taxable in the state of residence, the
tax paid in the former is credited against the
tax levied in the latter. (CIR v. S.C. Johnson
and Son G.R. No. 127105, June 25, 1999)
The focus is on the tax.
Most Favored Nation Clause in Tax Treaties
The purpose of the most favored nation clause is
to grant to the contracting party treatment not
less favorable than that which has been or may
be granted to the MOST FAVORED among
other countries. The most favored nation clause
id intended to establish the principle of equality of
international treatment by providing that the
citizens or subjects of the contracting nations
may enjoy the privileges accorded by either party
to those of the most favored nation.

OF

BASIC

ESCAPE

FROM

SHIFTING The transfer of the burden of

tax by the original payer or the one on whom
the tax was assessed (impact of
taxation/statutory taxpayer) or imposed to
another or someone else (incidence of
taxation).

Direct tax cannot be shifted a tax

cannot be shifted when it is purely
personal or when it has no relation to
any business dealings of the taxpayer.
(Schultz and Harris, American Public
Finance)

Impact of Taxation point on which tax

is originally imposed or the one on
whom the tax is formally assessed.

Incidence of taxation point on which

the tax burden finally rests or settles
down
Illustration: Value added tax. The seller
is required by law to pay tax, but the
burden is actually shifted or passed on
to the buyer.

Kinds of shifting
1. Forward shifting when the burden of tax is
transferred from a factor or production
through the factors of distribution until it
finally settles on the ultimate purchaser or
consumer.
2. Backward shifting when the burden is
transferred from the consumer through the
factors of distribution to the factors of
production
3. Onward shifting when the tax is shifted 2 or
more times either forward or backward
II.

TAX EVASION A term that connotes fraud

through the use of pretenses and forbidden
devices to lessen or defeat taxes. (Yutivo
Sons Hardware vs. CTA GRN L-13203,
January 28, 1961)
A scheme used outside of those lawful
means and when availed of, it usually
subject the taxpayer to further or additional
civil or criminal liabilities. (CIR vs. Estate of
Benigno Toda Jr., GR No. 78583, March 26,
1990.)

Factors of Tax Evasion (ESC)

1. The End to be achieved, i.e. payment of less
than that known by the taxpayer to be legally
due, or paying no tax when it is shown that
the tax is due.

14

2.
3.

An accompanying State of mind which is

described as being evil, in bad faith, willful,
or deliberate and not coincidental.
A Course of action which is unlawful.

Proof of tax evasion

1. Failure to declare for taxation purposes true
and actual income derived from business for
2 consecutive years. (Republic vs.
Gonzales, G.R. No. L-17962, April 30, 1965)
2. Substantial under-declaration of income in
the tax returns of the taxpayer for 4
consecutive years coupled with intentional
overstatement of deductions. (CIR vs.
Reyes, Nos. L-11534 and L-11558,
November 25, 1958)

Validity

Effect

TAX
AVOIDANCE
Legal and not
subject
to
criminal
penalty
Minimization
of taxes

TAX
EVASION
Illegal
and
subject
to
criminal
penalty
Almost always
results in the
absence of tax
payments

III. TAX AVOIDANCE The exploitation by the

taxpayer of legally permissible alternative tax
rates or methods of assessing taxable
property or income, in order to avoid or
reduce tax liability.

Tax avoidance is the tax saving device

within the means sanctioned by law.
This method should be used by the
taxpayer in good faith and at arms
length. (CIR vs. Estate of Benigno Toda
Jr., G.R. No. 30554, February 28, 1983)

A taxpayer has legal right to decrease

the amount of what would otherwise be
his taxes or altogether avoid them by
means which the law permits. (Delpher
Trades vs. IAC G.R. No. 69259, Jan. 26,
1988)

Example: Availing of all deductions

allowed by law or refraining from
engaging in activities subject to tax.
IV. CAPITALIZATION The reduction in the
price of the taxed object equal to the
capitalized value of future taxes which the
purchaser expects to be called upon to pay.
V.

TRANSFORMATION The manufacturer or

producer upon whom the tax has been
imposed, fearing the loss of his market if he
should add the tax to the price, pays the tax
and endeavors to recoup himself by

improving his process of production, thereby

producing his units at a lower cost.
VI. TAX EXEMPTION is the grant of immunity
to particular persons or corporations or to
persons or corporations of a particular class
from a tax which persons or corporations
generally within the same state or taxing
district are obliged to pay .(51 Am. Jur. 503)
Principle of Strictissimi Juris
Laws granting tax exemption are construed in
strictissimi juris against the taxpayer and liberally
in favor of the taxing power. Taxation is the rule
and exemption is the exception. The law does not
look with favor on tax exemptions and that he
who would seek to be thus privileged must justify
it by words too plain to be mistaken and too
categorical to be misinterpreted. (Sealand
Service vs. CA G.R. No. 57828 June 14, 1993)
Reason for the Application of Strictissimi
Juris
1. Lifeblood theory
2. To minimize differential treatment and foster
impartiality, fairness and equality of
treatment among taxpayers (Maceda vs.
Macaraig G.R. No. 88291, June 8, 1993).
3. Taxation is a high prerogative of sovereignty
whose relinquishment is never presumed
(Luzon Stevedoring vs. CA G.R. No. 58897,
Dec. 3, 1987)
Exceptions to the application of Strictissimi
Juris
1. When the statute granting exemption
provides for liberal construction thereof
2. In case of special taxes relating to special
cases and affecting only special classes of
persons
3. If exemptions refer to the public property
4. In cases of exemptions granted to religious,
charitable and educational institutions or
their property
5. In cases of exemptions in favor of the
government, its political subdivisions or
instrumentalities.
Revocation of Tax Exemptions
Since taxation is the rule and exemption is the
exception, the exemption may thus be withdrawn
at the pleasure of the taxing authority. (Mactan
Cebu Intl Airport Authority vs. Marcos, supra)
Restrictions on Revocation
1. Non-impairment clause where the
exemption was granted to private parties
based on material consideration of a mutual
nature, it then becomes contractual and is
covered by the non-impairment of the
Constitution.

15

2.

3.

Adherence to form if the tax exemption is

granted by the Constitution, its revocation
may be effected through constitutional
amendment only.
Where the tax exemption grant is in the form
of a special law and not by a general law
even if the terms of the general act are broad
enough to include the codes in the general
law unless there is manifest intent to repeal
or alter the special law. (Province of Misamis
Oriental vs. Cagayan Electric Power and
Light Co. Inc. GRN No. 45355, Jan. 12,
1990)

Nature of Tax Refunds

Tax refunds are in the nature of tax exemptions.
They are regarded as in derogation of sovereign
authority and to be construed strictissimi juris
against the person or entity claiming the
exemption. The burden of proof is upon him who
claims the exemption in his favor and he must be
able to justify his claim by the clearest grant of
organic or statute law (Commissioner of Internal
Revenue vs. Court of Appeals, G.R. No. 104151
March 10, 1995)
Nature of Tax Amnesty
1. General or intentional overlooking by the
State of its authority to impose penalties on
persons otherwise guilty of evasion or
violation of a revenue or tax law.
2. Partakes of an absolute forgiveness or
waiver of the government of its right to
collect.
3. To give tax evaders, who wish to relent and
are willing to reform a chance to do so.
Rules of Tax Amnesty
1. Tax amnesty
a. Like tax exemption, it is never favored
nor presumed
b. Construed strictly against the taxpayer
(must show complete compliance with
the law)
2. Government not estopped from questioning
the tax liability even if amnesty tax payments
were already received.
Reason:
Erroneous
application
and
enforcement of the law by public officers do
not block subsequent correct application of
the statute. The government is never
estopped by mistakes or errors of its agents.
Basis: Lifeblood Theory
3. Defense of tax amnesty, like insanity, is a
personal defense.
Reason: Relates to the circumstances of a
particular accused and not the character of
the acts charged in the information.

NATURE OF TAX LAWS

1. Not political in character;
2. Civil in nature, not subject to ex post facto
law prohibitions;
3. Not penal in character.
CONSTRUCTION OF TAX LAWS
1. Tax laws are prospective in operation
(subject to exceptions).
2. Legislative intention must be considered
Tax statues are to receive a reasonable
construction with a view to carrying out their
purpose and intent (51 Am. Jur. 361).
3. Where there is doubt In every case of
doubt, in tax statues imposing payment of
tax, laws are construed strictly against the
government and liberally in favor of the
taxpayer (Manila Railroad vs. Collector of
Customs G.R. No. 10214, Nov. 4, 1915).
Taxes, being burdens, are not to be
presumed beyond what the stature expressly
and clearly declares.
4. Where language is plain Rule of strict
construction against the government does
not apply where the language of the tax law
is plain and there is no doubt as to the
legislative intent (51 Am. Jur. 368). The
words employed are to be given their
ordinary meaning.
5. Where taxpayer claims exemption
Exemptions are construed strictly against the
one who asserts the claim of exemption.
Public purpose is always presumed.
6. Provisions of the taxing act are not to be
extended by implication.
7. Tax laws are special laws and prevail over
general laws.
APPLICATION OF TAX LAWS
General Rule: Tax laws are prospective in
operation.
Exception: While it is not favored, a statute may
nevertheless operate retroactively provided it is
expressly declared or is clearly the legislative
intent (Cebu Portland Cement vs. Coll. G.R. No.
18649, Feb. 27, 1965).
KINDS OF PROVISIONS OF TAX LAWS
1. Mandatory those provisions intended for
the security of the citizens or which are
designed to insure equality of taxation or
certainty as to the nature and amount of
each persons tax.
2. Directory those provisions designed
merely for the information or direction of
officers or to secure methodical and
systematic modes of proceedings.

TAX LAWS

16

Importance of Distinction
The omission to follow mandatory provisions
renders invalid the act or proceeding to which it
relates while the omission to follow directory
provisions does not involve such consequence.
SOURCES OF TAX LAWS
1. Constitution
2. Legislation or statutes, including presidential
decrees and executive orders on taxation
and tax ordinances, tax treaties and
conventions with foreign countries
3. Contemporaneous
Construction
by
Executive
or
Administrative
Officers,
including Revenue Regulations by the
Department of Finance and Administrative
issuances by the BIR or the BOC
4. Administrative rules and regulations, rulings
and opinions of tax officials particularly the
CIR, including opinions of the Secretary of
Justice.
5. Judicial Decisions decisions of the
Supreme Court applying or interpreting
existing tax laws are binding on all
subordinate courts and have the force and
effect of law. They form part of the legal
system of the Philippines (Art. 8 Civil Code).
They constitute evidence of what the law
means (People vs. Licera G.R. No. L-39990,
Jul 22, 1975).

17

Local Taxation
Taxation Law
GENERAL PRINCIPLES
LEGAL
FOUNDATION
OF
LOCAL
GOVERNEMNT UNITS POWER TO TAX
1. Sec. 5, Article X, 1987 Philippine
Constitution Each local government unit
shall have the power to create its own
sources of revenues and to levy taxes, fees,
and charges subject to such guidelines and
limitations as the Congress may provide,
consistent with the basic policy of local
autonomy. Such taxes, fees and charges
shall accrue exclusively to the local
governments
2. Sec. 129 of Republic Act No. 7160 (Local
Government Code) Each local government
unit shall exercise its power to create its own
sources of revenue and to levy taxes, fees,
and charges subject to the provisions herein,
consistent with the basic policy of local
autonomy. Such taxes, fees, and charges
shall accrue exclusively to the local
government units.
NOTE:

Congress
cannot
abolish
the
local
governments power to tax as it cannot
abrogate what is expressly granted by the
fundamental law. The only authority
conferred to Congress is to provide the
guidelines and limitations on the local
governments exercise o the power to tax.

The authority to tax of LGUs within the

Cordilleras) is not delegated by the
Constitution, but by the Organic Act creating
them.
SCOPE/ASPECTS OF LOCAL TAXATION
1. Local Government Taxation (Sections 128196, Local Government Code)
2. Real Property Taxation (Sections 197-283,
LGC)
Local Government
Real Property
Taxation
Taxation
Imposition of license System of levy on real
taxes, fees and other property imposed on a

impositions, including
community tax

country-wide basis but

authorizing, to a limited
extent
and
within
certain
parameters,
local governments to
vary the rates of
taxation
NATURE OF THE TAXING POWER OF LOCAL
GOVERNMENT UNIT
1. The taxing power of provinces, cities,
municipalities and barangays is not a mere
delegation by the legislative body but a direct
grant.
2. While a direct grant, the same is limited and
would be subject to such guidelines as
Congress
has
provided
such
as
progressivity, etc.
3. It may be exercised only by the local
legislatures, the sanggunian.
4. Its application is bounded by the
geographical limits of the local government
unit that imposes the tax. (Abelardo
Domondon, Bar reviewer in Taxation, pp
750-751)
LOCAL GOVERNMENT TAXATION
THE LOCAL GOVERNMENT UNIT HAS THE
POWER:
1. To create its own sources of revenue
2. To levy taxes, fees and charges
FUNDAMENTAL PRINCIPLES GOVERNING
LOCAL TAXATION (PIE CUP UP)
1. Shall be Uniform in each local sub-unit;
2. Shall be Equitable and based as much as
possible on the taxpayers ability to pay;
3. Levied for Public purposes;
4. Shall not be Unjust, excessive, oppressive,
or confiscatory;
5. Shall not be Contrary to law, public policy,
national economic policy, or in restraint of
trade;

18

6.
7.

8.

Collection of local taxes and other

impositions shall not be let to any Private
person;
The revenues collected under the Code shall
Inure solely to the benefit of, and subject to
disposition by the LGU levying the tax or
other imposition unless otherwise specifically
provided therein; and
Each LGU shall, as far as practicable, evolve
a Progressive system of taxation. (Sec. 130,
LGC)

LOCAL TAXING POWER AND AUTHORITY

Exercised by the Sanggunian of the LGU
concerned through an appropriate ordinance.
(Sec. 132, LGC)
LOCAL TAX ORDINANCE
Kinds of Local Tax Ordinances
1. Those imposing a fee or tax specifically
authorized by the local Government Code for
the local government units to impose.
2. Those imposing a fee or tax not specifically
enumerated under the LGC or taxed under
the provisions of the NIRC or other
applicable laws (See Sec. 186 LGC)
Requisites of a Valid Ordinance
1. Satisfy the requirements of procedural and
substantive due process;
2. Public hearing is required with quorum,
voting
and
approval
and/or
veto
requirements complied with (Sections 53-55.
LGC); and
3. Publication of ordinance within 10 days from
approval for 3 consecutive days in a
newspaper of general circulation and/or
posting in at least 2 conspicuous and
publicly accessible places.
SCOPE OF TAXING POWERS BY LGUS
PRINCIPLE
OF
PRE-EMPTION
EXCLUSIONARY DOCTRINE

OR

Where the National Government elects to tax a

particular area, it impliedly withholds from the
local government the delegated power to tax the
same field. This doctrine principally rests on the
intention of the Congress. Conversely, should the
Congress allow municipal corporations to cover
fields of taxation it already occupies then the
doctrine of pre-emption will NOT apply (Victorias
Milling Co., Inc. vs. Municipality of Victorias
Negros Occidental, G.R. No. L-21183, Sept. 27,
1986).
COMMON LIMITATIONS ON LOCAL TAXING
POWERS (SECTION 133. LGC)

Local government units cannot levy on the

following: (C2G2 DEEP2 BR2AIN)
1. Income tax. EXCEPTION: when levied on
banks and other financial institutions;
2. Documentary stamp tax;
3. Estate tax, inheritance, gifts, legacies and
other
acquisitions
mortis
causa
EXCEPTION: tax on transfer of real
property;
4. Customs duties, registration fees of vessels
and wharfage on wharves, tonnage dues
and all other kinds of customs fees charges
and dues EXCEPTION: wharfage on
wharves constructed and maintained by the
local government unit concerned;
5. Taxes, fees, charges and other impositions
upon Goods:
a. Carried into; or
b. Out of; or
c. Passing
through,
the
territorial
jurisdictions of local government units in
the guise of charges for wharfage, tolls
for bridges or otherwise.
6. Taxes, fees or charges on Agricultural and
aquatic products when sold by marginal
farmers or fishermen;
7. Taxes on Business enterprises
a. Certified by the Board of Investments as
pioneer or non-pioneer
b. For a period of 6 and 4 years,
respectively,
from
the
date
of
registration;
8. Excise taxes on articles enumerated under
the NIRC, as amended, and taxes, fees or
charges on petroleum products;
9. Percentage or value added tax (VAT) on
sales, barters or exchanges or similar
transactions
on
goods
or
services
EXCEPTION: when provided otherwise by
the Code;
10. Taxes on the Gross receipts of:
a. Transportation contractors
b. Persons engaged in the Transportation
of passengers freight by hire
c. Common carriers by air, land or water;
d. EXEPTION as provided in the Code;
11. Taxes on premiums paid by way of
Reinsurance or retrocession;
12. Taxes, fees or charges
a. For the Registration of motor vehicles;
and
b. For the issuance of all kinds of licenses
or permits for the driving thereof,
c. EXEPTION: tricycle;
13. Taxes, fees or other charges on Philippine
products actually exported, EXEPTION: as
otherwise provided in the Code;
14. Taxes, fees or charges on Countryside and
barangay
business
enterprises
and
Cooperatives duly registered under R.A.
6810 and R.A. 6938, (Cooperatives Code of
the Philippines); and

19

15. Taxes, fees or charges of any kind on the

National Government, its agencies and
instrumentalities, and local government unit.
NOTE: These apply to all LGUs and are actually
taxes or impositions which LGC excludes fro the
taxing power of local governments.

TAXATION POWERS OF THE LOCAL

GOVERNMENT UNITS
1. Common Revenue-Raising Powers of LGUs
2. Specific Power of LGU to Impose Taxes
3. Power to Levy Community Tax
4. Powers under Miscellaneous Provisions
I.

The common limitations may be classified as

follows:
1. Taxes which are levied under the NIRC
unless otherwise provided by the LGC
(Numbers 1, 2, 3, 8, 9, 10)
2. Taxes, fees, etc. which are imposed under
the Tariffs and Customs Code (Number 4)
3. Taxes, fees and charges where the
imposition of which contravenes existing
governmental policies or which are violative
of the fundamental principles of taxation
(Numbers 5, 6, 7, 11, 13, 14, 15)
4. Taxes, fees, and charges imposed under
special laws. (Number 12)

1.
2.

3.

II.
RESIDUAL TAXING POWER (Section 186,
LGC)
LGUs may exercise the power to levy taxes,
fees or charges on any base or subject.
Provided, the taxes, fees, and charges are:
1. not specifically enumerated in LGC
2. not taxed under the provisions of the NIRC,
as amended, and
3. not taxed under other applicable laws
Conditions in the exercise of residual taxing
powers:
1. That the taxes, fees, or charges shall not be
unjust, excessive, oppressive, confiscatory
or contrary to declared national policy;
2. That the ordinance levying such taxes, fees
or charges shall not be enacted without any
prior public hearing conducted for the
purpose.
Limitations of the Residual Power:
1. Constitutional limitations on taxing power;
2. Common limitations on the taxing power of
local government units as prescribed in
Section 133 of the Local Government Code;
3. Fundamental principles governing the
exercise of the taxing power by local
governments as prescribed under Section
130 of the LGC, particularly the requirement
that they must not be unjust, excessive,
oppressive, confiscatory, or contrary to
declared national policy (Section 186, LGC);
4. The requirement prescribed in Section 186
of the LGC, which directs that the ordinance
levying such residual taxes shall not be
enacted without any prior public hearing
conducted for the purpose;
5. The principle of pre-emption.

COMMON REVENUE-RAISING POWERS

Reasonable fees and charges for services
rendered (Sec. 153, LGC)
Public utility charges for the operation of
public utilities owned, operated and
maintained by LGUs within their jurisdiction.
(Sec. 154, LGC)
Toll fees or charges for the use of any public
road, pier of wharf, waterway, bridge, ferry or
telecommunication system funded and
constructed by the local government unit
concerned, subject to exceptions. (Sec. 155,
LGC)
SPECIFIC POWERS OF LGU TO IMPOSE
TAXES

PROVINCES
1.

TAX ON TRANSFER OF REAL PROPERTY

Transaction Taxed: sale, donation, barter, or any

other mode of transferring ownership or title of
property.
Tax Base: total consideration or fair market value
in case monetary consideration is not substantial.
Tax Rate: 50% of 1% (0.5%)
Exception: Transfer under the Comprehensive
Agrarian Reform Program (Sec. 135, LGC)
Person Liable to Ray: Seller, donor transferor,
executor, or administrator.
Time of Payment: within 60 days from the date of
the execution of the deed or from the date of the
decedents death
2.

TAX ON BUSINESS OF PRINTING AND

PUBLICATION

Transaction Taxes: Business of printing and

publication of books, cards, posters, etc.
Tax Rate:
a. Not more than 50% of 1%
b. In case of a newly started business, 1/20 of
1%
Tax Base:
a. Gross annual receipts for the preceding year
b. In case of a newly started business, capital
investment
Exception: printing of DepEd (CHED/TESDA)
prescribed texts or references.
3.

FRANCHISE TAX

20

NOTE: Congress defined franchise in the sense

of a secondary or special franchise. A franchise
tax is a tax on the privilege of transacting
business in the state and exercising corporate
and exercising corporate franchise granted by the
state. (National Power Corporation v. City
Cabanatuan, G.R. No. 149110, April 9, 2003)
Transaction Taxed: enjoyment of a franchise
Tax Rate:
a. Not more than 50% of 1%
b. In case of a newly started business, 1/20 of
1%
Tax Base:
a. Gross annual receipts for the preceding year
b. In case of a newly started business, capital
investment
4.

TAX ON SAND, GRAVEL AND OTHER

QUARRY RESOURCES EXTRATED FROM
PUBLIC LAND

Transaction Taxed: Ordinary stones, gravel,

sand, earth and other quarry resources as
defined under the national Internal Revenue
Code, extracted from public lands or from the
beds of seas, lakes, rivers, streams, creeks, and
other public waters within its territorial jurisdiction.
Tax Rate: Not more than 10%
Tax Base: fair market value in the locality per
cubic meter of the subject.
Who issues permit: Issued exclusively by the
provincial governor pursuant to the ordinance of
the Sanguniang Panlalawigan.
NOTE: The authority to impose taxes and fees for
extraction of sand and gravel belongs to the
province, and not to the municipality where they
are found. (Municipality of San Fernando La
Union vs. Sta. Romana, G.R. No. L-30159,
march 31, 198)
5.

PROFESSIONAL TAX

Transaction Taxed: Exercise or practice of

profession requiring government licensure
examination.
Tax Rate: Not to exceed P 300.00
Tax Base: Reasonable classification by the
sanggunian
Date of Payment: payable annually on or before
January 31 or before beginning the practice of
the profession
Place of Payment: Province where he practices
his profession or where the principal office is
located.
Exception: Professionals exclusively employed
in the government.
NOTE: Tax to be paid only once. Person who has
paid the corresponding professional tax shall be
entitled to practice his profession in any part of
the Philippines without being subjected to any

ther national or local tax, license, or fee for the

practice of such profession.
6.

AMUSEMENT TAX

Transaction Taxed: Ownership, lease or

operation of theaters, cinemas, concert halls,
circuses, boxing stadium and other place of
amusement.
Tax Rate: Not more than 30% of gross receipts
from admission fees.
Tax Base: Gross receipts from admission fees.
Exception: Operas, concerts, dramas, recitals,
painting and art exhibitions, flower shows,
musical programs, literary and oratorical
presentation EXCEPT pop, rock, or similar
concerts.
Places upon which provinces/cities cannot
impose amusement tax (because NIRC
already imposes amusement tax)
a. Cockpits
b. Cabarets
c. Night or day clubs
d. Boxing exhibitions
e. Professional basketball games
f. Jai-Alai
g. Racetracks (Sec. 125, NIRC)
7.

ANNUAL FIXED TAX FOR EVERY

DELIVERY
TRUCK
OR
VAN
OF
MANURACTURERS OR PRODUCERS,
WHOLESALERS OF, DEALERS, OR
RETAILERS IN, CERTAIN PRODUCTS

Transaction Taxed; Use by manufacturer,

producers, wholesalers, dealers, retailers, of
truck van, vehicle in the delivery or distribution of
distilled spirits, fermented liquors, softdrinks,
cigar and cigarettes and other products,
determined by the Sangguniang Panlalawigan to
sale outlets or consumers whether directly or
indirectly.
Tax Rate: Not exceed P 500.00
Tax Base: Every truck, van, or vehicle
Exemption: Exempt from tax on peddlers
imposed by municipalities.
MUNICIPALITIES
Scope: A municipality may levy on those taxes,
fees, and charges not otherwise levied by
provinces.
Tax on Business. A municipality may impose
taxes on the following businesses:
1.

On manufacturers, assemblers, re-packers,

processors, brewers, distillers, rectifiers, and
compounders of liquors, distilled spirits, and
wines or manufacturers of any article of
commerce of whatever kind;

21

2.

On wholesalers, distributors, or dealers in

any article of commerce of whatever kind;

Wholesale A sale where the purchaser buys or

imports the commodities for resale to persons
other than the end user regardless of the quantity
of the transaction.
Dealers One whose business is to buy and sell
merchandise, goods, and chattels as a merchant.
He stands immediately between the producer or
manufacturer and the consumer and depends for
his profit not upon the labor he bestows upon his
commodities but upon the skill and foresight with
which he watches the market
3.

On exporters, and on manufacturers, millers,

producers, wholesalers, distributors, dealers
or retailers of essential commodities;

Essential Commodities
a. Rice and corn;
b. Wheat or cassava flour, meat, dairy
products,
locally
manufactured,
processed or preserved food, sugar, salt
and other agricultural, marine and fresh
water products, whether in their original
state or not;
c. Cooking oil and cooking gas;
d. Laundry
soap,
detergents,
and
medicine;
e. Agricultural implements, equipment and
post harvest facilities, fertilizers,
pesticides, insecticides, herbicides and
other farm inputs;
f. Poultry feeds and other animal feeds;
g. School supplies; and
h. Cement
4.

On retailers;

Retail a sale where the purchaser buys the

commodity for his own consumption, irrespective
of the quantity of the commodity sold.
5.

On contractors
contractors;

and

other

independent

Contractor includes persons, natural or

juridical, not subject to professional tax under
Section 139 of this Code, whose activity consists
essentially of the sale of all kinds of services for a
fee, regardless of whether or not the performance
of the service calls for the exercise or use of the
physical or mental faculties of such contractor or
his employees.
6.

On banks and other financial institutions;

7.

On peddlers engaged in the sale of any

merchandise or article of commerce; or

Peddler any person who, either for himself or

on commission, travels from the place to place
and sells his goods or offers to sell and deliver
the same.
8.

On any business, not otherwise specified in

the preceding paragraphs, which the
Sanggunian concerned may deem proper to
tax.

Business Tax Distinguished from Income Tax

BUSINESS TAX
Business
taxes
imposed
in
the
exercise
of
police
power for regulatory
purposes are paid for
the privilege of carrying
on a business in the
year the tax was paid.
Paid at the beginning
of the year as a fee to
allow the business to
operate of the rest of
the year.
Pre-requisite to the
conduct of business

INCOME TAX
Income tax is a tax on
all yearly profits arising
from
property,
professions, trades or
offices, or as tax on a
persons
income,
emoluments,
profits,
and the like
Due on or before the
15th day of the 4th
month following the
close of the taxpayers
taxable year

Rates of Tax within the Metropolitan manila

Area
The municipalities in the Metro Manila may levy
taxes at rates which shall not exceed by 50% the
maximum rates prescribed in the Section 143,
LGC.
Payment of Business Taxes
1. The taxes shall be payable for every
separate or distinct establishment or place
where business subject to the tax is
conducted and one line of business does not
become exempt by being conducted with
some other business for which such tax has
been paid.
2. The tax on a business must be paid by the
person conducting the same.
3. In cases where a person conducts or
operates 2 or more of the businesses
mentioned in Section 143 of LGC:

Which are subject to the same rate of

tax, the tax shall be computed on the
combined total gross sales or receipts of
the said 2 or more related businesses.

Which are subject to different rates of

tax, the gross sales or receipts of each
business shall be separately reported
for the purpose of computing the tax due
from each business.
Situs of Municipal Taxation

22

1.
2.

3.

4.

With branch or sales office or warehouse

where such branch or sales outlet is
located.
Where there is no branch, sales office, or
warehouse municipality where the sale or
transaction is made. The sale shall be duly
recorded in the principal office and the taxes
due shall accrue and shall be paid to such
city or municipality.
Where there is a factory, project office,
plant, or plantation in pursuit of business

Thirty percent (30%) of all sales

recorded in the principal office taxable
by the city or municipality where the
principal office is located;

Seventy percent (70%) of all sales

recorded in the principal office taxable
by the city or municipality where the
factory, project office, plant, or plantation
is located;
This 70% shall be divided as follows:
a) 60% - city or municipality where the
factory is located;
b) 40% city or municipality where the
plantation is located.
Where there are two or more factories,
project offices, plants or plantations,
located indifferent localities the seventy
percent (70%) sales allocation mentioned
above shall be prorated among the localities
where the factories, project offices, plants,
and plantations are located in proportion to
their respective volumes of production during
the period for which the tax is due.

Retirement of Business

A business subject to tax shall, upon

termination thereof submit a sworn
statement of its gross sales or receipts for
the current year.

If the tax paid during the year be less than

the tax due on said gross sales or receipts of
the current year, the difference shall be paid
before the business is considered officially
retired.
Municipal Fees and Charges
1. The municipality may impose and collect
such reasonable fees and charges on
business and occupation except professional
taxes reserved for provinces (Section 147,
LGC).
2. Fees for Sealing and Licensing of Weights
and Measure (Section 148, LGC)
3. Fishery Rentals, Fees and Charges (Section
149, LGC)
CITIES
1. The city may levy the taxes, fees, and
charges which the province or municipality
may impose.

2.

The tax rates that the city may levy may

exceed the maximum rates allowed for the
province or municipality by not more than
50% except the rates of professional and
amusement taxes.

NOTE: Under the LGC, there are three types of

cities,
Component
Cities,
Independent
Component Cities and Highly Urbanized Cities
ICCs and HUCs are independent of the province
(Sections 451-452, LGC). This means that taxes,
fees and charges levied and collected by ICCs ad
HUCs accrue solely to them. (Sec. 151, LGC)
BARANGAYS
Barangays may levy the following taxes, fees,
and charges which shall accrue exclusively to
them:
I. TAXES
Subject: Stores or retailers with fixed business
establishments with the gross sales or receipts
for the preceding calendar year of P50,000 or
less (for barangays in the cities) and P30,000 or
less (for barangays in municipalities)
Tax Rate: not exceeding 1% of such gross sales
or receipts.
Tax Base: Gross sales or receipts
II. SERVICE FEES OR CHARGES
Subject: Service rendered in connection with the
regulation or use of barangay-owned properties
or service facilities such as palay, copra r tobacco
dryers.
Tax Rate: reasonable fees and charges.
III. BARANGAY CLEARANCE

This is a pre-requisite for the issuance of

license or permit to any activity. No city or
municipality may issue any license or permit
for any business or activity unless a
clearance is first obtained from the barangay
where such business or activity is located or
conducted.

For such clearance, the sangguniang

barangay may impose a reasonable fee.

The application for clearance shall be acted

upon within seven (7) working days from the
filing thereof. In the event that the clearance
is not issued within the said period, the city
or municipality may issue the said license or
permit.
IV. OTHER FEES AND CHARGES
Subjects:
a. Commercial breeding of fighting cocks,
cockfights and cockpits;
b. Places of recreation which charge admission
fees; and
c. Billboards, signboards, neon signs and
outdoor advertisements.
Tax Rate: reasonable fees and charges

23

NOTE:
General Rule: Revenues shall inure solely to the
benefit of the LGU levying the tax
Exceptions:
1. Tax on Sand, Gravel and other Quarry
Resources: 30% to the Province, 30% to the
Component City or Municipality, 40% to the
Barangay (Section 138, LGC)
2. Amusement Tax: shared equally by the
province and municipality (Section 140,
LGC)
3. Community Tax (in case the tax is collected
by Barangay Treasurers): 50% to the
municipality, 50% to the barangay (Section
164, LGC)
COMMUNITY TAX

Who
are
authorized
to levy?
Who
are
liable?
Who are the
individuals
liable?
(Section
157, LGC)

Who are the

juridical
persons
liable?
(Section
158, LGC)
Who
are
Exempted
from paying
the tax?
(Section
159, LGC)
What is the
Tax Rate for

Cities or municipalities (Section

156, LGC).
1.
2.
1.

Individuals
Juridical Persons
Every inhabitant of the
Philippines (regardless of
citizenship);
2. Under any of the following
circumstances:

18 years of age or over,

who has been regularly
employed on a wage or
salary basis for at least
thirty (30) consecutive
working days during any
calendar year; or

Who is engaged in
business or occupation;
or

Who owns real property

with
an
aggregate
assessed value of P1,000
or more; or

Who is required by law to

file an income tax return
Every corporation no matter how
created or organized, whether
domestic or resident foreign,
engaged in or doing business in
the Philippines
1.
2.

Diplomatic and Consular

Representatives;
Transient visitors when their
stay in the Philippines does
not exceed three (3) months

Individuals
(Section
157, LGC)
What is the
Tax Rate for
Juridical
Persons
(Section
158, LGC)

Place
of
Payment
(Section
160, LGC)
Time
of
Payment
(Section
161, LGC)
Penalty for
delinquenc
y (Section
161, LGC)

whether from business, exercise

of profession or from property
which in no case shall exceed
P5,000.
P500 but not exceeding P10,000
in accordance with the following
schedule:
1. Fore every P5,000.00 worth
of real property owned by it
during the preceding year
based on the valuation used
for the payment of the real
property tax P2.00.
2. For every P5,000.00 of gross
receipts or earnings derived
by it from its business in the
Philippines
during
the
preceding year P2.00
Residence of the individual, or in
the place where the principal
office of the juridical entity is
located
Accrues on the 1st day of January
of each year which shall be paid
not later than the last day of
February of each year.
An interest of 24% per annum
from the due date until it is paid
shall be added to the amount
due.

Community Tax Certificate

It is issued to every person or corporation upon
payment of the community tax. It may also be
issued to any person or corporation NOT subject
to the community tax upon payment of P1.00
(Section 162, LGC).
The presentation of the community tax certificate
shall not be required in connection with the
registration of a voter.
The city or municipal treasurer deputizes the
barangay treasurer to collect he community tax in
their respective jurisdictions (Section 164, LGC).
The proceeds of the community tax actually and
directly collected by the city or municipal
treasurer shall accrue entirely to the general fund
of the city or municipality concerned.
Proceeds of the community tax collected through
the barangay treasurers shall be apportioned as
follows:
1. 50% accrues to the general fund of the city
or municipality concerned; and
2. 50% accrues to the barangay where the tax
is collected.

P5.00 plus P1.00 for every

P1,000., income regardless of

24

2.

OTHER POWERS IN THE LGC

POWER TO PRESCRIBE PENALTIES FOR TAX
VIOLATIONS AND LIMITATIONS THEREON
(Section 516, LGC)

Limited as to the amount of imposable fine

as well as the length or period of
imprisonment;

The Sanggunian is authorized to prescribe

fines or other penalties for violations of tax
ordinances, but in no case shall fines be less
then P1,000 nor more than P5,000 nor shall
the imprisonment be less than one (1) month
nor more than six (6)months;

Such fine or other penalty shall be imposed

at the discretion of the court;

The Sangguniang Barangay may prescribe a

fine of not less than P100 nor more than
P1,000.00.
POWER TO ADJUST LOCAL TAX
(Section 197, LGC)

3.

Cooperatives duly registered under R.A. No.

6938, Non-stock and non-profit hospitals;
and
Educational institutions.

RATE

Adjustment of the tax rates as prescribed herein

should not be oftener than once every five (5)
years, and in no case shall such adjustment
exceed ten percent (10%) of the rates fixed under
the LGC.
POWER TO GRANT LOCAL TAX EXEMPTIONS
(Section 192, LGC)
Local government units may, through ordinances
duly approved, grant tax exemptions, incentives
or reliefs under such terms and conditions, as
they may deem necessary.
The power to grant tax exemptions, tax
incentives and tax relief shall not apply to
regulatory fees which are levied under the police
power of the LGU.
Tax Exemption Certificate
Tax exemptions shall be conferred through the
issuance of a non-transferable tax exemption
certificate (Art. 283, IRR of LGC)
Tax
Exemptions
Existing
Before
the
Effectivity of the LGC Has Been Abolished
(Section 193, LGC)
Unless otherwise provided by the LGC, tax
exemptions or incentives granted to, or presently
enjoyed by all persons whether natural or
juridical,
including
government-owned
or
controlled corporations are hereby withdrawn
upon the effectivity of the LGC.
EXCEPTIONS
The following are still exempted from local taxes.
1. Local water districts;

25

TABLE OF TAXING POWERS OF LOCAL GOVERNMENT UNITS

PROVINCES
TYPE OF TAX

TRANSACTION TAXED

TAX BASE

ON
OF

Sale, donation, barter, or

any other mode of
transferring ownership or
title of property.

50% of
(0.5%)

TAX ON BUSINESS
OF PRINTING AND
PUBLICATION

Business of printing and

publication of books,
cards, posters, etc.

Total
consideration or
fair market value
in case monetary
consideration is
not substantial.
1) gross annual
receipts for
the
preceding
year
2)

TAX
TRANSFER
PROPERTY

FRANCHISE TAX

TAX ON SAND,
GRAVEL
AND
OTHER QUARRY
RESOURCES
EXTRACTED
FROM
PUBLIC
LAND

PROFESSIONAL
TAX
AMUSEMENT TAX

Enjoyment of a franchise

Ordinary stones, gravel,

sand, earth and other
quarry resources as
defined
under
the
National
Internal
Revenue
Code,
extracted from public
lands or from the beds of
seas,
lakes,
rivers,
streams, creeks, and
other
public
waters
within
its
territorial
jurisdiction.
Exercise or practice of
profession
requiring
government
licensure
examination.
Ownership, lease or
operation of theaters,
cinemas, concert halls,
circuses, boxing stadium

TAX RATE

EXCEPTIONS

1%

Transfer under the

Comprehensive
Agrarian Reform
Program

1)

Not more
than 50%
of 1%

Printing of DepEd
(CHED/TESDA)
prescribed tests or
references.

capital
investment
in case of a
newly
started
business
1) gross annual
receipts for
the
preceding
year
2) Capital
investment
in case of a
newly
started
business
Fair market value
in the locality per
cubic meter of
the subject

2)

In case of
a
newly
started
business,
1/20 of 1%

1)

Not more
than 50%
of 1%

2)

In case of
a
newly
started
business,
1/20 of 1%

3)

Not more
than 10%

Reasonable
classification by
the sanggunian

4)

No
to
exceed
P3oo.oo

Gross
receipts
from admission
fees.

Not more than

30% of gross
receipts from
admission

Professionals
exclusively
employed in the
government
Operas, concerts,
dramas, recitals,
painting and art
exhibitions, flower

26

and other places

amusement.

ANNUAL
FIXED
TAX FRO EVERY
DELIVERY TRUCK
OR
VAN
OF
MANUFACTURERS
OR PRODUCERS,
WHOLESALERS
OF, DEALERS, OR
RETAILERS
IN,
CERTAIN
PRODUCTS

of

Use by manufacturer,
producers, wholesalers,
dealers, retailers, of
truck, fan, vehicle in the
delivery or distribution of
distilled
spirits,
fermented
liquors,
softdrinks, cigar and
cigarettes and other
products, determined by
the
Sangguniang
Panlalawigan, to sale
outlets or consumers,
whether
directly
or
indirectly.

Every truck, van,

or vehicle

Not
exceed
P500.00

shows,
musical
programs, literary
and
oratorical
presentation
except pop, rock,
or similar concerts.
Exempt from tax
on
peddlers
imposed
by
municipalities.

MUNICIPALITIES
PERSONS/ENTITIES TAXABLE

TAX BASE AND TAX RATE

TAX ON BUSINESS
Manufacturers, assemblers, repackers, processors,
This is a graduated annual fixed tax, the rate of
brewers, distillers, rectifiers, and compounders of
which is based on the taxpayers gross sales or
liquors, distilled spirits and wines or manufacturers
receipts for the preceding calendar year.
of any article of commerce of whatever kind or
However, when the gross sales or receipts
nature (Sec. 143 [a], LGC)
amount to P6,500.00 or more for the preceding
calendar year, the tax ceases to b a fixed tax. A
percentage tax of 37.5% of 1% is imposed
instead.
Wholesalers, distributors or dealers in any article of
Also a graduated annual fixed tax, the rate of
commerce of whatever kind or nature (Sec. 143 [b],
which is based on the gross sales or receipts for
LGC).
the preceding calendar year.

Where the gross sales or receipts, however,

amount to P2, 000,000 or more, the tax
becomes a percentage tax levied at a rate not
exceeding 50% of 1%.
Exporters and manufacturers, millers, producers, At a rate not exceeding one-half of the rates for
wholesalers, distributors, dealers or retailers of the sales of articles mentioned in paragraphs (a), (b),
following essential commodities (Sec. 143 [c], LGC)
and (d) of Sec. 143 of LGC.
Retailers (Sec. 143 [d], LGC)
The tax or retailers is not a graduated annual fixed
tax but an annual percentage tax imposed at the
following rates:
a) On gross sales or receipts for the preceding
calendar year not exceeding P400,000 2%; and
b) On sales or receipts exceeding P400,000 1%
Contractors and other independent contractors (Sec.
Also a graduated annual fixed tax based on the
143 [e], LGC)
gross receipts for the preceding calendar year.

However, when the gross receipts amount to

2,000,000 or more, the contractors tax
becomes a percentage tax. The tax rate is 50%
of 1%
Banks and other financial institutions (Sec. 143 [f], The tax is 50% of 1% on their gross receipts of the
LGC)
preceding calendar year derived from interests,
commissions and discounts from lending activities,
income from financial leasing, dividends, rentals on

27

property and profit from exchange or sale of

property, insurance premium.
Peddlers engaged in the sale of any merchandise or At a rate not exceeding fifty pesos (P50) per peddler
article of commerce. (Sec. 143 [g], LGC).
annually.
On any business not otherwise specified above
Provided that on any business subject to excise,
(Sec. 143[h], LGC
value-added or percentage tax under the
National Internal Revenue Code, the rate of the
tax shall not exceed 2% of gross sales or
receipts of the preceding calendar year.

The Sanggunian concerned may impose a

schedule of graduated tax rates but in no case
to exceed the rates prescribed in Sec. 143 of
LGC.
MUNICIPAL NON-REVENUE FEES & CHARGES
Municipalities may impose & collect reasonable fees & charges on business & occupation and, except in
case of professional tax, (w/c only provinces & cities may levy) on the practice of any profession or calling
commensurate with the cost of regulation, inspection & licensing before any person may engage in such
business/occupation/practice of such profession or calling. (Sec. 147, LGC)
BARANGAY
SOURCES OF REVENUE
BARANGAY TAXES
On stores or retailers
establishments.

with

fixed

TAX BASE AND TAX RATE; FEES AND CHARGES

business

SERVICE FEES OR CHARGES

BARANGAY CLEARANCE
OTHER FEES AND CHARGES
a) On commercial breeding of fighting cocks,
cockfights and cockpits
b) On places of recreation which charge
admission fees
c) On billboards, signboards, neon signs and
outdoor advertisements

With the gross sales or receipts for the preceding

calendar year of P50,000 or less (for barangays in
the cities) and P30,000 or less (for barangay and
municipalities) at a rate not exceeding 1% of such
gross sales or receipts.
Such reasonable fees or charges for services
rendered in connection with the regulation or the use
of barangay-owned properties or service facilities
such as palay, copra, or tobacco dryers
Such reasonable fee as the Sanggunian Barangay
may impose
The barangay may levy reasonable fees and
charges

CITIES
Cities may levy the taxes, fees, and charges which the province or the municipality may impose. There is no
pre-emption on this score on the part of the provinces and municipalities (Sec. 151, LGC)

28

and charges, including related surcharges

and interest. (last sentence, Sec. 173 LGC)

OUTLINE OF THE REMEDIES

REMEDIES OF THE LGU
I.

II.

Civil Remedies of the LGUs to Effect

Collection of Taxes
1. Local Governments Lien;
2. Civil Remedies;
a. By administrative action
i. Distant
ii. Levy
b. Compromise
c. Judicial Action
Judicial Remedies
1. Court Action
2. Declaratory Relief
3. Injunction

REMEDIES OF THE TAXPAYER

I.

II.

Administrative
1. Before Assessment
a. Question the Constitutionality
b. Declaratory Relief
2. After Assessment
a. Protest
b. Claim for Refund or Tax Credit
c. Redemption
Judicial
1. Court Action
2. Declaratory Relief
3. Injunction

Please refer to Table of Comparison of

Remedies
TAX REMEDIES OF THE LOCAL
GOVERNMENT UNITS
CIVIL REMEDIES OF THE LGUS TO EFFECT
COLLECTION OF TAXES

1.

Local Governments Lien Local taxes,

fees, charges and other revenues constitute
a lien, superior to all liens, charges or
encumbrances in favor of any person,
enforceable
by
any
appropriate
administrative or judicial action (Section 173,
LGC).
How local government lien extinguished?
The lien may only be extinguished upon full
payment of the delinquent local taxes, fees,

2.

Civil remedies (Section 174, LGC)

a.

By administrative action through

distraint of personal property and by
levy upon real property
i) Distraint any personal property
belonging to the taxpayer or subject
to the lien (Section 175, LGC)
Delinquency
Assessment [within 5/10 years from
when the taxes, fees or charges (TFC)
became due
(Section 194, LGC)]
Issuance of a certificate showing the
fact of delinquency (serves as a warrant;
within 5/10 years from assessment)
Seizure or confiscation of assets
(sufficient quantity to satisfy the liability)
Accounting of distrained goods
Publication/Posting of the notice of sale
Sale at Public Auction
Report of the proceedings to the Local
Chief Executive
Disposition of the proceeds of the sale
by application of such proceeds to the
delinquency and expenses of sale
Return of balance to the owner
NOTE: At any time prior to the
consummation of the sale, the taxpayer
may pay the proper charges (Section
175 (d), LGC)

29

Should the property distrained be not

disposed of within 120 days, the same
shall be considered as sold to the LGU
(Section 175 (e), LGC)
Unlike the NIRC, the Local Tax Code
does not contain any specific provision
prohibiting courts from enjoining the
collection of local taxes. Such statutory
lapse or intent may have allowed
preliminary injunction where local taxes
are involved. But it cannot negate the
procedural rules and requirements
under Rule 58 of the Rules of Courts
(Valley Trading Co. vs. CFI of Isabela,
GR No. 49529, march 31, 1989)
ii)

Disposition of the proceeds of the sale

by application of such proceeds to the
delinquency and expenses of sale
Return to the taxpayer of any excess in
the proceeds of the sale
Execution of the final deed to the
purchaser, after lapse of the 1 year
redemption period (in case there is
failure to redeem)
NOTE: At any time before the date fixed
for the sale, the taxpayer may stay the
proceedings by paying the proper
charges.

Levy any real property belonging

to the delinquent taxpayer (Section
176 180, LGC)

In case there is no bidder for the real

property tax and other costs, the local
treasurer shall purchase the property in
behalf of the LGU (Section 181, LGC).

Delinquency

The remedies of distraint and levy may

be repeated if necessary until the full
amount due including all expenses is
collected.

Assessment [within 5/10 years from

when the taxes, fees or charges
became due
(Section 194, LGC)]

1.

2.

Properties Exempt from Distraint and

Levy (Sec. 185, LGC):
1) tools and implements necessarily
used by the delinquent taxpayer in
his trade or employment;
2) one (10 horse, cow, carabao, or
other beast of burden, such as the
delinquent taxpayer may select,
and necessarily used by him in his
ordinary occupation;
3) his necessary clothing, and that of
all his family;
4) household furniture and utensils for
housekeeping and used for that
purpose by the delinquent taxpayer,
such as he may select of a value
not exceeding P10,000.00;
5) provisions, including crops, actually
provided for individual or family use
sufficient for four (4) months;
6) the professional libraries of doctors,
engineers, lawyers and judges;
7) one fishing boat and net, not
exceeding the total value of
P10,000.00, by the lawful use of
which a fisherman earns his
livelihood; and
8) Any material or article forming part
of a house or improvement of any
real property.

Preparation of a certificate
(operates with force of a legal
execution throughout the
Philippines); and
Written Notice to a) Assessor,
b) Registrar of Deeds and c)
taxpayer

Levy of real property (before,

simultaneous or after distraint of
personal property; within 5 years from
assessment)
Advertisement for sale or auction of the
property levied for 30 days (Posting and
Publication)
Sale
Report of the sale to the Sanggunian
Deliver to the purchaser of the
certificated of sale
b.

Authority to Compromise

30

The Sanggunian concerned may

authorize the city or municipal treasurer
to settle an offense not involving the
commission of fraud before a case
therefore filed in court, upon the
payment of a compromise penalty of not
less than Two hundred pesos. (Sec. 148
(b) in relation to Sec. 151, LGC)
c.

2)

By judicial action
The local government unit concerned
may enforce the collection of delinquent
taxes, fees, charges or other revenues
by civil action in any court of competent
jurisdiction within 5 years from the date
taxes, fees or charges become due.
(Sec. 138 in relation to Sec. 194, LGC)

NOTE: The local government files an

ordinary suit for the collection of sum of
money before the Municipal Trial Court,
Regional Trial Court or Court of Appeals
Division depending upon the jurisdictional
amount
COURT
Original

Original

Appellate

Original
Appellate

Appellate

Jurisdiction
JURISDICTIONAL AMOUNT
MTC
If principal amount of taxes, fees
exclusive of charges and
penalties does not exceed
P300,000 or P400,000 in Metro
Manila.
RTC
If principal amount of taxes, fees
exclusive of charges and
penalties exceeds P300,000 or
P400,000 in Metro Manila
PROVIDED: The amount is less
P1Million.
The Regional Trial Court shall
exercise appellate jurisdiction
over all cases decided by the
metropolitan
Trial
Courts,
Municipal Trial Courts and
Municipal Circuit Trial Courts in
their
respective
territorial
jurisdiction.
CTA DIVISION
If principal amount of taxes, fees
exclusive of charges and
penalties is P1 Million or above.
Over
appeals
from
the
judgments, resolutions or orders
of the Regional Trial Courts in
tax collection cases originally
decided by them in their
respective jurisdiction;
CTA EN BANC
1) Decisions or resolutions on
motion for reconsideration

or new trial of the Court in

Divisions in the exercise of
its
exclusive
appellate
jurisdiction over local taxes
decided by the RTC in the
exercise of their original
jurisdiction;
Over petitions for review of
the judgments, resolutions
or orders of the Regional
trial Court in the exercise of
their appellate jurisdiction
over tax collection cases
originally decided by the
Metropolitan Trial Courts,
Municipal Trial Courts and
Municipal
Circuit
Trial
Courts in their respective
territorial jurisdiction.

TAX REMEDIES OF THE TAXPAYER

I.

ADMINISTRATIVE
1.

Before Assessment:
a. Question the Constitutionality or
Legality of tax ordinances or
revenue measures on appeal:
i. Within 30 days from effectivity
thereof to Secretary of Justice
ii. Decision must be rendered
within 60 days by the Secretary
of Justice from the date of the
receipt of the appeal;
iii. Taxpayer
must
file
an
appropriate action within 30
days from the receipt of the
decision of the Secretary of
Justice or lapse or the 60-day
period to decide;
iv. Such appeal shall not have the
effect of suspending the
effectivity of the ordinance and
accrual and payment of the tax
(Sec. 187, LGC).
b.

2.

Declaratory
applicable.

relief

whenever

After assessment:
a. Protest
IF THERE IS A PROTEST: within 60
days from receipt of notice of
assessment file a written protest with
the local treasurer (Sec. 195, LGC).
Payment under protest is not necessary.
Protest

31

b.
Local Treasurer (10days to decide)
If the local treasurer
finds the protest
meritorious in whole or
in part, he shall issue a
notice canceling wholly
or partly, the
assessment.

If not meritorious in
whole he shall deny
the protest, wholly or
partly with notice ot the
taxpayer.

Taxpayer shall have 30

days from receipt of
the denial of the
protest OR from the
lapse of 60 day period
prescribed within which
to appeal with the court
of competent
jurisdiction; otherwise,
the assessment
becomes conclusive
and unappealable

2.
3.

PRESCRIPTIVE PERIODS FOR THE

ASSESSMENT AND COLLECTION OF LOCAL
TAXES
PRESCRIPTIVE PERIODS FOR ASSESSMENT
1.
2.

IF NO PROTEST: the assessment shall

become final and executory.
b.

Claim for Refund or Tax Credit

(Section 196, LGC)
i. Must file a written claim for
refund or credit of tax, fee or
charge erroneously or illegally
collected
ii. Within 2 years from payment or
date entitled to such refund or
credit
iii. Otherwise,
no
case
or
proceeding shall be maintained
in any court.

NOTE: Unlike in internal revenue taxes,

the supervening cause applies in local
taxation because the period for the filing
of claims for refund or credit of local
taxes is counted not necessarily from
the date of payment but from the date
the taxpayer is entitled to a refund or
credit
c. Right of redemption 1 year form
the date of sale or from the date of
forfeiture (Section 179, LGC).
II.

within 30 days from receipt when

protest of assessment is denied
(Section 195, LGC);
c. if no action is taken by the treasurer
in refund cases and the two-year
period is about to lapse (Section
195, LGC)
d. if remedies available does not
provide plain, speedy and adequate
remedy.
Action for declaratory relief
Injunction if irreparable damage
would be caused to the taxpayer and no
adequate remedy is available.

Local taxes, fees, or charges five (5) years

from the date they became due. (Section
194, LGC).
when there if fraud or intent to evade the
payment of taxes, fees or charges ten (10)
years from discovery of the fraud or intent to
evade the payment (Section 194, LGC).

PRESCRIPTIVE PERIOD OF COLLECTION

Local taxes, fees, or charges may be collected
within five (5) years from the date of assessment
by administrative or judicial action. No such
action shall be instituted after the expiration of
such period (Section 194, LGC).
GROUNDS FOR THE SUSPENSION OF THE
RUNNING OF TE PRESCRIPTIVE PERIODS
(PRO)
1. The treasurer is legally Prevented from the
assessment or collection of the tax;
2.

The taxpayer requests for a Reinvestigation

and executes a waiver in writing before the
expiration of the period within which to
assess or collect; and

3.

The taxpayer is Out of the country of

otherwise cannot be located (Sec. 194,
LGC).

JUDICIAL REMEDIES
1.

Court Action
a. within 30 days after receipt of
decision or lapse of 60 days of
Secretary of Justices inaction
(Section 187, LGC);

32

Real Property
Taxation
GENERAL PRINCIPLES
REAL PROPERTY TAXES Direct taxes
imposed on the privilege to use real property
such as land, building, machinery, and other
improvements unless specifically exempted.
(Province of Nueva Ecija vs. Imperial Mining Co.,
Inc. G.R. No. 59463, November 19, 1982)
NOTE: In Villanueva, et al. vs. City of Iloilo L26521, December 28, 1968, defined real property
tax as a direct tax on ownership of lands,
buildings or other improvements thereon not
specifically exempted and is payable whether the
property is used or not, although the value may
vary in accordance with such factor. However,
the definition was taken from the former
Assessment Law (Commonwealth Act No. 470)
where the basis of real property taxation was
ownership or interest tantamount to ownership.
It was held in the case of Province of Nueva
Ecija vs. Imperial Mining Co., Inc. G.R. No.
59463, November 19, 1982 that PD No. 464, the
Real Property Tax Code, changed the basis of
real property taxation adopting the policy of
taxing real property on the basis of actual use,
even if the user is not the owner.
The present law on real property taxation (R.A.
7160, Local Government Code) adopts actual
use of real property as basis of assessment (Sec.
199[b]).
NATURE OF REAL PROPERTY TAXES (DIAL
UP)
1. Direct tax whose burden could not be shifted
by the one who pays to other persons
2. Indivisible single obligation
3. Ad valorem tax based on the assessed value
of the property.
4. Local tax.
5. Imposed on the Use and not on the
ownership

6.

Progressive in character depending to a

certain extent on the use and value of the
property.

FUNDAMENTAL PRINCIPLES GOVERNING

REAL PROPERTY TAXATION (SECTION 198,
LGC) P-A-U-C-E)
1.
2.
3.
4.
5.

Real property shall be appraised at its

Current and fair market value;
Real property shall be classified for
assessment purposes on the basis of Actual
use;
Real property shall be assessed on the basis
of Uniform classification within each LGU;
The appraisal, assessment, levy and
collection of real property tax shall not be let
to any Private person; and
the appraisal and assessment of real
property shall be Equitable.

NOTE: Real Property shall be classified, valued

and assessed on the basis of its actual use
regardless of where located, whoever owns it and
whoever uses it (Section 217, LGC)
ACTUAL USE refers to the purpose for which
the property is principally or predominantly
utilized by the person in possession thereof.
Unpaid realty taxes attach to the property and are
chargeable against the person who had actual or
beneficial use and possession ot it regardless of
whether or not he is the owner. To impose the
real property tax on the subsequent owner which
was neither the owner nor the beneficial user of
the property during the designated periods would
not only be contrary to law but also unjust (Estate
of Lim vs. City of Manila, G.R. No. 90639, Feb.
21, 1990).
ADMINSTRATION OF REAL PROPERTY TAX
LGUs Responsible
1. Provinces
2. Cities

33

3.

Municipalities in Metro Manila Area

Extent of their Powers

They do not only have the power to levy real
estate taxes BUT they may also fix real estate tax
rates. It should be noted that the power to fix real
estate tax rates does not extend to municipalities,
when the only local bodies authorized to fix tax
rates were the provincial board in the case of
province, and the municipal board or city council
in the case of a municipality or city.
NOTE: No public hearing shall be required before
the enactment of a local tax ordinance levying the
basic real property tax.

the owner thereof and tax on each such

condominium shall constitute a lien solely
thereof. (Section 25, R.A. No. 776, Condominium
Act)
TYPES OF REAL PROPERTY TAX
1.
2.

Basic Real Property Tax

Special Levies

I.

BASIC REAL PROPERTY TAX

PROPERTY SUBJECT TO REAL PROPERTY

TAX
1.
2.
3.
4.

LGU
1.

Province

2.

City

3.

Municipality
within Metro
Manila

II.

SPECIAL LEVIES

machinery

1.

Movable equipments to be immobilized in

contemplation of the law must first be
essential and principal elements of an
industry or works without which such
industry or works would be unable to
function or carry on the industrial purpose for
which it was established. (Mindanao Bus
Co. v City Assessor G.R. No. L-17870, Sept.
29, 1962)

2.

Special Education Fund (SEF) 1%

additional real estate tax to finance the
special education fund (Sec. 236, LGC);
Additional Ad Valorem on Idle Lands not
exceeding 5% of the assessed value of the
property (Sec. 236, LGC)
For Public Works on lands specially
benefited by public works, projects or
improvements
funded
by
the
local
government unit.
a. Special levy shall not exceed 60% of the
actual cost of such projects and
improvements including the costs of
acquiring land and such other real
property in connection therewith.
b. Does not apply to lands exempt from the
basic real property tax and the
remainder of the land has been donated
to the local government unit concerned
for the construction of said projects
(Section 240, LGC)
Imposed by other Laws.

Socialized Housing Tax (RA 7279

March 24, 1992) LGUs are authorized to
impose an additional one half percent
(0.5%) on the assessed value of all
lands in urban areas in excess of FiftyThousand pesos except those lands
which are exempted form the coverage
of RA 7279.

land
building
machinery
other improvements

REAL PROPERTY subject to the definition

given by Art. 415 of the Civil Code
MACHINERY (Section 199[o], LGC)
1. Realty by Destination
essential to the business.

3.

It is a familiar phenomenon to see things

classed as real property for purposes of
taxation which on general principle might be
considered personal property (Standard Oil
Co. of New York vs. Jamarillo, G.R. No.
20898)
2.

RATE OF BASIC REAL

PROPERTY TAX
Not exceeding 1% of
assessed value
Not exceeding 2% of
assessed value
Not exceeding 2% of
assessed value. (Section
233, LGC)

Realty by Incorporation
permanently attached.

machinery

IMPROVEMENT (Section 199 [m], LGC)

Requisites for Taxability:
1. Must enhance the value of the property.
2. Must be separately assessable.
3. Can be treated independently from the main
property.
NOTE: Whenever real property has been divided
into condominium, each condominium owned
shall be separately assessed, for purposes of
real property taxation and other tax purposes to

4.

WHAT ARE CONSIDERED AS IDLE LANDS

(Section 237, LGC)

34

1.

2.

Agricultural lands
a. More than 1 hectare if more than of
which
remain
uncultivated
or
unimproved by the owner of the property
or person having legal interest therein.
b. Not Idle Lands:
i. Agricultural lands planted to
permanent or perennial crops with
at least 50 trees to a hectare;
ii. Lands actually used for grazing
purposes shall likewise not be
considered idle lands;

3.
4.
5.
6.
7.

Non-Agricultural Lands

More than 1,000 sq.m. in area if more

than of which remain unutilized or
unimproved by the owner of the property
or person having legal interest therein.

Land, buildings, and improvements, actually,

directly, and exclusively used for the following
purposes:
1. Hospitals;
2. Cultural and scientific purposes;
3. Owned and used by local water districts;
4. Owned and used by GOCCs rendering
essential public services in the supply and
distribution of water and/or generation or
transmission of electric power.

Reason for Imposing Ad Valorem Taxes on

Idle Lands: To penalize property owners who do
not use their property productively, and to
encourage utilization of land resources in order to
contribute to national development.
Lands Not Considered Idle
1. Agricultural lands planted with permanent or
perennial crops with at least 50 trees to a
hectare.
2. Land actually used for grazing purposes
Idle Lands Exempt from Tax (Section 238,
LGC)
By reason of:
1. force majeure;
2. civil disturbance;
3. natural calamity, or
4. Any cause which physically or legally
prevents the owner of the property or person
having legal interest therein from improving,
utilizing or cultivating the same.
ORDINANCE IMPOSING SPECIAL LEVY FOR
PUBLIC WORKS
1. The Ordinance shall
a. describe the nature, extent, and location
of the project;
b. state estimated cost;
c. specify
metes
and
bounds
by
monuments and lines.
2. It must state the number of annual
installments, not less than 5 years nor more
than 10 years.
3. Notice to the owners and public hearing.
(Sec. 242, LGC)
4. Owner can appeal to the LBAA and CBAA.
CLASSIFICATION OF LANDS FOR PURPOSES
OF ASSESSMENT (Section 215, LGC) (CARMITS)
1. Commercial
2. Agricultural

Residential
Mineral
Industrial
Timberland
Special *
Classification of lands is made by the
respective Sanggunian in accordance with
zoning ordinances; and
It is based on actual use.

* special Classes of Real Property (Section

216, LGC)

TAX EXEMPTIONS/ CONDONATIONS/

REDUCTIONS
1.

Exemptions from Real Property Tax

(Section 234, LGC)
a. Real property owned by the Republic of
the Philippines or any of its political
subdivisions except when the beneficial
use thereof has been granted for
consideration or otherwise to a taxable
person;
b.

Charitable
institutions,
churches,
parsonages or convents appurtenant
thereto mosques, non-profit or religious
cemeteries, and all lands, buildings, and
improvements actually directly and
exclusively used for religious charitable
or educational institutions

c.

All machineries and equipment that are

actually, directly and exclusively used by
local water utilities and governmentowned or controlled corporations
engaged in the supply and distribution of
water
and/or
generation
and
transmission of electric power;

d.

All real property owned by duly

registered cooperatives as provided
under R.A. no. 6938: and

e.

Machinery and equipment used for

pollution control and environment
protection.
NOTE: Except as herein provided, any
exemption from payment of real

35

property tax previously granted to. Or

presently enjoyed by, all persons,
whether natural or juridical, including all
government-owned
or
controlled
corporations, are hereby withdrawn
upon the effectivity of the LGC.
2.

3.

Lands exempt from the additional ad

valorem tax on idle lands (Section 238,
LGC);
Condonation or Reduction of Real
Property Tax and Interest
a. By
the
Sanggunian
upon
recommendation of the Local Disaster
Coordinating Council
i.
In case of a general failure of crops
or
ii.
Substantial decrease in the price of
agricultural or agri-based products,
or
iii.
Calamity in the province, city, or
municipality, (Section 276, LGC).
b. By the President of the Philippines
When public interest so requires.

Proof of Tax Exemption

Every person by or for whom real property is
declared who shall claim the exemption shall file
with the provincial, city or municipal assessor
within 30days from date of declaration of real
property sufficient documentary evidence in
support of such claim (i.e., corporate charters,
title of ownership, articles of incorporation,
contracts, affidavits, etc) (Section 206. LGC)

b.

What: sworn statement containing the

fair market value and description of the
property.

2.

Taxes shall be computed on the basis of

applicable schedule of values in force during the
corresponding period.
STEP 2: LISTING OF REAL PROPERTY IN THE
ASSESSMENT ROLLS (Sections 205-207, LGC)
1.

STEP 1: DECLARATION OF REAL PROPERTY

Declaration by Owner or Administrator
(Sec. 202-203, LGC)
When: once every 3 years during the period
from January 1 to June 30 commencing with
the calendar year 1992
What: file a sworn declaration with the
assessor of the (1) true value of their
property which shall be the current and fair
market value of the property as determined
by the declarant whether previously declared
or not; (2) taxable or exempt; (3) with
description of the property.
a. For newly acquired property:
When: must file with the assessor within
60 days from date of transfer
What: sworn statement containing the
fair market value and description of the
property.

Declaration by Provincial / City /

Municipal Assessor (Section 204, LGC)
When: only when the person under Sec. 202
of the LGC refuses or fails to make a
declaration within the prescribed time.

No oath by the assessor is required.

If Property is Declared for the First Time

(Section 222, LGC)
If declared for the first time, real property shall be
assessed for back taxes for not more than 10
years prior to the date of initial assessment.

PROCEDURE IN THE ADMINISTRATION OF

REAL PROPERTY TAX

1.

For improvement on property

When: must file within 60 days upon
completion or occupation (whichever
comes earlier)

2.

Listing of all Real Property whether taxable

or exempt within the jurisdiction of LGU
a. In General it shall be listed valued and
assessed in the name of the owner,
administrator or anyone having legal
interest in the property
b. Undivided Real Property in the name
of the estate or heirs or devisees
c. Corporation,
partnership,
and
association same as individuals
d. Owned by Republic of the Philippines, ts
instrumentalities, political subdivision,
beneficial use is transferred to a taxable
person in the name of the possessor
All declarations shall be kept and filed under
a uniform classification system to be
established by the provincial, city or
municipal assessor.

STEP 3: APPRAISAL AND VALUATION OF

REAL PROPERTY (Sections 212-214, 219,
224-225, LGC)
Determination of Fair Market Value (FMV)
1. For land
a. Assessor of the province/city or
municipality may summon the owners of
the properties to be affected and may
take
depositions
concerning
the
property, its ownership amount, nature
and value (Section 213, LGC)
b. Assessor prepares a schedule of FMV
for different classes of properties.

36

c.

2.

The schedule of FMV is published in a

newspaper of general circulation in the
province, city or municipality concerned
or in the absence thereof, shall be
posted in the provincial capitol, city or
municipal hall and in two other
conspicuous public places therein
(Section 212, LGC)
d. General revision of property assessment
is made (Section 219, LGC)
e. Sanggunian enacts a real property tax
ordinance.
For machinery
a. For Brand new machinery: FMV is the
acquisition cost
b. In all other cases:

FMV=

REM. ECO LIFE

*or Reproduction Cost

NOTE:

2.
III. Interest for
Late
Payment
(Section
255, LGC)
IV. For
Advance
Payment
V. For
Prompt
Payment

All assessments or reassessments made

after the first day of January of any year shall
take effect o the first day of January of the
succeeding
year,
provided
that
reassessments made due to abnormal
causes shall take effect at the beginning of
the quarter next following the reassessment
(Section 221, LGC).
When real property is assessed for the first
time or when an existing assessment is
increased or decreased, the provincial, city
or, municipal assessor shall within thirty days
give written notice of such new or revised
assessment to the person in whose name
the property is declared (Section 223, LGC).

Procedure
1. Take the schedule of FMV
2. Assessed Value = FMV x Assessment level
3. Tax = Assessed value x Tax rate
Assessed Level the percentage applied to the
FMV to determine taxable value of real property
STEP 5: PAYMENT AND COLLECTION OF TAX
Accrual of
Tax

II.

Time and
Manner of
Payment
(Section

Two percent (2%) for each

month on unpaid amount until
the delinquent amount is paid
Provided in no case shall the
total interest exceed thirty-six
(36) months
Discount not exceeding 20%
of annual tax (Section 251,
LGC)
Discount not exceeding 10%,
of annual tax due (Art. 342,
IRR)

Collection of Tax (Section 247, LGC)

The collection of the real property tax with
interest thereon and related expenses, and the
enforcement of the remedies provided by the
LGC or any applicable laws, shall be the
responsibility of the city or municipal treasurer
concerned.
The city or municipal treasurer may deputized the
barangay treasurer to collect all taxes on real
property located I the barangay; provided, the
barangay treasurer is properly bonded.
REAL PROPERTY TAX REMEDIES UNDER
THE LGC
1.
2.

STEP 4: DETERMINE ASSESSED VALUE/

TAXABLE VALUE

I.

December 30)
special levy governed
by ordinance

X REPLACEMENT COST*

ESTIMATED ECO LIFE

250 LGC)

January of every year and

such will constitute as a
superior lien (Section 246,
LGC).
1. basic real property tax in
4 equal installments (on
or before March 31/ June
30 / September 30 /

LGUs Tax Remedies

a. Administrative
b. Judicial
Taxpayers Remedies
a. Administrative
b. Judicial

Please refer to Table of Comparison of

Remedies
TAX REMEDIES OF THE LOCAL
GOVERNEMNT TO EFFECT COLLECTION OF
TAXES
I.

ADMINISTRATIVE

1.

Lien superior to all liens, charges or

encumbrances and is enforceable by
administrative or judicial action. It is
extinguished only upon payment of tax and
other expenses. (Section 257, LGC)

2.

Levy of the real property subject to the tax

(Sections 258-262, LGC).

37

Delinquency
Issuance of Warrant by the LGU
Treasurer (on or before or
simultaneously with the institution of civil
action for collection of delinquent tax]
And
Written Notice:
1. Assessor
2. Register of Deeds

Advertise Sale or Auction

(Within 30 days after service of
warrant by posting and publication)

1.

Protest
a. Any owner or person having legal
interest in the property who is not
satisfied with the action of the
assessor in the assessment of his
property; or
b. Any owner of real property affected
by a special levy or any person
having legal interest therein
May PROTEST the assessment by
filing an appeal to the Local Board of
Assessment Appeals within 60 days
from receipt of notice of the
assessment.
Procedures for Protest
(Sections 252, LGC)
Pay the Tax under Protest*

Sale
Report of the sale to the Sanggunian
(within 30days after sale)
Preparation of Certificate of Sale
Issuance of Final Deed to Purchaser
(upon failure of the delinquent taxpayer
to redeem the property within 1 year
from the date of sale)
NOTE:

The proceeds of the sale in excess of the

delinquent tax, the interest due thereon and
the expenses of sale shall be remitted to the
owner of real property or person having legal
interest

In case there is no bidder for the real

property advertised or if the highest bid is for
an amount insufficient to pay the real
property tax and other costs, the local
treasurer shall purchase the property in
behalf of the LGU (Section 263, LGC).

3.

Distraint (Section 254, LGC) with notice of

delinquency posted and published. Notice
shall state that personal property may be
distrained to effect payment.

II.

JUDICIAL
Civil Action (Section 266, LGC) filed by the
local treasurer within 5 or 10 years as
provided for in Section 270 of the LGC.
TAX REMEDIES OF THE TAXPAYER

I.

ADMINISTRATIVE

File written protest with Local Treasurer

(within 30 days from payment of tax)
Treasurer decides (sithin 60 days from
receipt of protest)
If Approved (the amount shall be
refunded of applied as tax credit)
If denied, Appeal to the LBAA (in case of
denial OR inaction of the treasurer after
the lapse of 60 days)
Appeal with the CBAA (within 30 days
from receipt of adverse decision by
LBAA)
*Section 252 of the LGC requires that
the taxpayer first pays the tax. This is
referred to as payment under protest.
The protest may only be filed within 30
days from the payment of the tax.
Thereafter, the words paid under
protest shall be annotated on the tax
receipt.
NOTE: The protest contemplated in
Section 252 of the LGC is needed when
where there is a question as to the
reasonableness
of
the
amount
assessed, not where the question raised
is on the very authority and power of the
assessor to impose the assessment and
of the treasurer to collect the tax (Ty v.
Trampe G.R. 117577, December 1,
1995)
2. Claim for Refund or Credit
when an assessment is found to be

38

illegal or erroneous and the tax is

accordingly reduced or adjusted
(Section 253, LGC).
Taxpayer files a written claim for refund
or credit with the treasurer (within two
years from the date the taxpayer is
entitled to such reduction or adjustment)

Provincial or city treasurer should

decide the claim within 60 days from
receipt of the claim
In case of denial, appeal to the LBAA
within 30 days as in protest case
3.

II.

Redemption of Real Property

(Section 261, LGC)
a. Within 1 year from the date of
the sale, the owner of the
delinquent real property, or
person having legal interest or
his representative, shall have
the right to redeem the
property upon payment to the
local treasurer of the following:
i.
Amount of the delinquent
tax
ii.
Interest thereon
iii.
Expense of sale from date
of delinquency to date of
sale
iv.
Interest of not more that
2% per month on the
purchase price from the
date of sale to date of
redemption.
b. A certificate of redemption shall
be issued, and the certificate of
sale issued to the purchaser
shall be invalidated.

PRESCRIPTION OF COLLECTION OF TAXES

(Section 270, LGC)
1. Basic real property tax and any other tax
levied under the title on Real Property
Taxation five (5) years from the date they
became due (Section 270, LGC).
2. When there is fraud or intent to evade the
payment of taxes ten (10) years from
discovery of the fraud or intent to evade the
payment.
Grounds for the Suspension of the Running
of the Prescriptive Periods
(Section 270, LGC) (PRO)
1. The local treasurer is legally Prevented from
collecting the tax;
2. The owner of the property or the person
having legal interest therein requests for a
Reinvestigation and executes a waiver in
writing before the expiration of the period
within which to collect; and
3. The owner of the property or the person
having legal interest therein is Out of the
country or otherwise cannot be located.

JUDICIAL
1.

2.

Court Action
a. Appeal to the Court of Tax Appeals
En Banc within 15 days from receipt
in case of adverse decision by the
CBAA.
b. Appeal by certiorari with the
Supreme Court within 15 days from
notice in case of adverse decision
by the CTA.
Suit assailing the validity of the tax sale
(Section 267 LGC)
Deposit of amount for which the real
property was sold together with interest
is required.

39

TABLE OF COMPARISON
LOCAL TAXATION vs. REAL PROPERTY TAXATION
COMPARISON
LOCAL TAXATION
REAL PROPERTY TAXATION
LGUs authorized to levy the Provinces, Cities, Municipalities and Provinces, Cities and Municipalities
taxes
Barangays
in Metro Manila Area
Power or Authority to grant Expressly provided (Section 192, Gen. Rule: No power to grant tax
tax exemptions
LGC)
exemptions
Exceptions: (see Section 234, LGC)
Date of Accrual
Unless otherwise provided in the On the 1st day of January
LGC, all local taxes, fees or charges
shall accrue on the 1st day of January
or each year; however, new taxes,
fees or charges or changes in the
rates thereof, shall accrue on the 1 st
day of the quarter next following the
effectivity of the ordinance imposing
such new levies or rates (Section
166, LGC)
Manner of Payment
Maybe paid in quarterly installments
Four equal installments
Time of Payment
Within first 20 days of January or of 1st on or before the 31st of March
each subsequent quarter as the case 2nd on or before 30th of June
maybe
3rd on or before 30th of September
4th on or before 31st of December
Exception: special levy
Prescriptive
period
of Within 5 years from the date they Within 5 years from the date they
assessment
become due
become due
Prescriptive
period
of Within 5years from the date of Within 5 years from the date they
collection
assessment by administrative or become due; within 10 years from
judicial action; within 10 years from the discovery of fraud or intent to
the discovery of fraud or intent to evade payment
evade payment
Remedies
Governments Remedies:
Governments Remedies:
1) Governments lien
1) Governments lien
2) Civil Remedies:
2) Civil Remedies:
a) administrative action
3) Administrative action
i) distraint
a) judicial action
ii) levy
b) levy
b) judicial action
c) purchase by local treasurer
d) collection through judicial
action
Taxpayers Remedies:
1) Questioning the Constitutionality
of the ordinance before the
Secretary of Justice
2) Protest against the assessment
3) Claims for refund or tax credit
NOTE: payment under protest is not
necessary

Taxpayers Remedies
1) Questioning the Constitutionality
of the Local Tax Ordinance
before the Secretary of Justice
2) Protest against the assessment
a) LBAA
b) CBAA
3) claims for refund or tax credit
NOTE: payment under protest is
necessary

40

Tariff and Customs

Code
vs. Commissioner of Customs, et al., L24011, October 24, 1970)

GENERAL PRINCIPLES
TARIFF AND CUSTOM LAWS INCLUDE:
1. Provisions of the Tariff and Customs Code of
the Philippines (TCCP or PD No. 1464, as
amended) and regulations issued pursuant
thereto; and
2. Other laws and regulations subject to the
enforcement by the Bureau of Customs or
otherwise within its jurisdiction (Section
3514, TCCP)
TARIFF means taxes. It may also refer to a list
of articles liable to duties. (Bouvier)
CUSTOM DUTIES taxes on the importation or
exportation of commodities.
These are duties which are charged upon
commodities on their being imported into or
exported out of a country (1 Cooley 73).
NOTE: Customs and tariffs are synonymous with
one another. They both refer to the taxes
imposed on imported or exported wares, articles,
or merchandise.
CONCEPT OF ARTICLES FOR CUSTOMS
DUTY PURPOSES

All articles when imported from a foreign

country into the Philippines shall be subject
to duty upon each importation even though
previously exported from the Philippines,
except as otherwise specifically provided for
in the Code or other laws. (Sec. 100, TCCP)
Articles when used in reference to
importation or exportation includes goods,
wares, merchandise and in general anything
that may be made subject of importation or
exportation. (Section 3574, TCCP)
Merchandise, when used with reference to
importations or exportations, includes goods,
wares, and, in general, anything that may be
the subject of importation or exportation.
U.S. dollars, having ceased to be legal
tender in the Philippines, fall within the
meaning of the term merchandise. (Bastida

THE BUREAU OF CUSTOMS

Chief Officials
1. Customs Commissioner
2. Five (5) Deputy Commissioners
a. Internal Administration
b. Revenue Collection Monitoring Group
c. Assessment
and
Operations
Coordination Group
d. Intelligence and Enforcement Group
e. Management Information System and
Technology Group
3. Fourteen (14) District Collectors
Functions (SAVE JIM)
1. Assessment and collection of revenues from
imported articles and all other impositions
under the tariff and customs laws;
2. Control Smuggling and related frauds;
3. Supervision and control over the entrance
and clearance of Vessels and aircraft
engaged in foreign commerce;
4. Enforcement of TCCP and related laws;
5. Supervision and control over the handling of
foreign Mails arriving in the Philippines;
6. Supervise and control all Import and export
cargoes for the protection of government
revenue; and
7. Exclusive original Jurisdiction over seizure
and forfeiture cases under the tariff and
customs laws.
Jurisdiction of Collector of Customs
I.
1.
2.
3.
4.

Over imported Articles (Sec 1206, TCCP)

Cause all articles for importation to be
entered in the custom house.
Cause all such articles to be appraised and
classified;
Assess and collect the duties, taxes and
other charges thereon; and
hold possession of all imported articles until
the duties, taxes and other charges are paid
thereon.

41

II.

Over Prohibited Importations to exercise

jurisdiction with respect thereto as will
prevent importation or otherwise secure
compliance with all legal requirements.
NOTE: The exclusive jurisdiction of the
Collector of Customs cannot be interfered
with by regular courts even upon the
allegation of ownership (Commissioner of
Customs vs. Court of Appeals, G.R. No.
111202-05 January 31, 2006)
Territorial Jurisdiction

I.

II.

The Bureau of Customs shall have the right

of supervision and police authority over:
All seas within the jurisdiction of the
Philippines
1. CUSTOMS ZONE 12 nautical miles of
territorial sea from the baseline;
2. EXCLUSIVE ECONOMIC ZONE 200
nautical miles from the baseline;
All coast, ports, airports, harbors, bays,
rivers and inland waters whether navigable
or not from the sea. (Par. 1 Sec. 603, TCCP)

ECOZONE a place specifically designated for

the location of certain industries or business that
enjoys tax exemption privilege. It is also known
as a Special Economic Zone.

An ecozone while geographically within the

Philippines is deemed a separate customs
territory and is regarded in law as foreign
soil.

Sales by suppliers from outside the borders

of the ecozone are deemed exports and are
treated as export sales.

Conversely, if the sales are made to persons

or entities outside the ecozone but within the
Philippines, such sales are considered as
importations by the buyers and subject to
import duties.
Doctrine of Hot Pursuit
This doctrine gives the customs officials the
power to continue the seizure of a vessel or
imported articles, when there is violation of the
Philippine tariff and customs laws, even beyond
the jurisdictional limits.
1. When a vessel becomes subject to seizure
by reason of an act done in Philippine waters
in violation of tariff and custom laws, a
pursuit of such vessel which began within
the jurisdictional waters may continue
beyond the maritime zone and the vessel
may be seized on high seas;
2. Imported articles which may be the subject
of seizure for violation of tariff and custom
laws may be pursued in their transportation
in the Philippines by land, water or air and
such jurisdiction extend over them at any

place therein as may be necessary for the

due enforcement of the law.
THE TARIFF COMMISSION (TC)
Functions:
I. Investigate Powers Section 505, TCCP
1. the administration of and the fiscal and
industrial effects of the tariff and customs
laws of this country now in force or which
may hereafter be enacted;
2. the relations between the rates of duty on
raw materials and the finished or partly
finished products;
3. the effects of ad valorem and specific duties
and of compound specific and ad valorem
duties;
4. all questions relative to the arrangement of
schedules and classification of articles in the
several schedules of the tariff law;
5. the tariff relations between the Philippines
and foreign countries, commercial treaties,
preferential provisions, economic alliances,
the effect of export bounties and preferential
transportation rates;
6. the volume of importations, compared with
domestic production and consumption;
7. conditions, causes, and effects relating to
competition of foreign industries with those
of the Philippines, including dumping and
cost of production; and
8. in general, to investigate the operation of
customs and tariff laws, including their
relation to the national revenues, their effect
upon the industries and labor of the country
and to submit reports of its investigation as
provided.
II.

Administrative
Assistance
to
the
President and Congress (Sec. 506, TCCP)
1. ascertain conversion costs and costs of
production in the principal growing
producing or manufacturing centers of
the Phil;
2. ascertain conversion costs and costs of
production in the principal growing
producing or manufacturing centers of
foreign countries of articles imported
into the Phil.;
3. select and describe representative
articles into the Phil. Similar to or
comparable with those locally produced;
4. ascertain import costs of such
representative articles so selected;
5. ascertain the growers, producers or
manufacturers selling prices in the
principal
growing,
producing
or
manufacturing centers of the Phil;
6. ascertain all other facts which will show
the difference in or which affect
competition between, articles of the Phil.

42

7.

8.

And those imported in the principal

markets of the Phil.;
ascertain conversion costs and costs of
production including effects of tariff
modifications or import restrictions on
prices in the principal growing,
producing or manufacturing centers of
the Phil. ;
submit annual reports of these to the
President; copy furnished to NEDA,
BSP, DOF and BOI.

III.

KINDS OF ARTICLES
I.

Articles subject to duty all articles when

imported from a foreign country including
those previously exported from the
Philippines are subject to duty unless
otherwise specifically provided for in the
Tariff and Customs Code.

II.
1.

Prohibited Importations
Absolutely prohibited such as: weapons of
war; gambling devices; narcotics or
prohibited drugs; immoral, obscene or
insidious articles; and those prohibited under
special laws Section 102, TCCP
a. Weapons of war
b. Insidious or seditions written or printed
articles in any form;
c. Obscene or immoral articles;
d. Articles used for producing unlawful
abortion;
e. Gambling devices;
f. Lottery and sweepstakes tickets except
those authorized by the Philippine
Government, advertisements thereof,
and lists of drawlings therein;
g. Any article manufactured in whole or in
part of gold, silver or other precious
metals or alloys thereof, the stamps,
brands or marks or which do not
indicate the actual fineness of quality of
said metals or alloys;
h. Any adulterated or misbranded articles
of food or drug in violation of the
provisions of the Food and Drugs Act;
i.
Narcotics and prohibited rugs;
j.
Opium pipes and parts thereof, or
whatever material;
k. All other articles and parts thereof, the
importation of which prohibited by law or
rules and regulations issued by
competent authority;
Qualifiedly prohibited where such
conditions as to warrant a lawful importation
do not exist, the legal effects of the
importation of qualifiedly prohibited articles
are the same as those of absolutely
prohibited articles (Auyong Hian vs. CTA,
G.R. No. L-28782, September 12, 1974).

2.

Conditionally-Free Importations (See

Sec. 105, TCCP)
1. The
President
may
upon
recommendation of the Secretary of
Finance,
suspend,
disallow,
or
completely withdraw, I whole or in part,
any of the conditionally-free importation
under Section 105, TCCP.
2. Those granted to government agencies,
GOCCs with agreements with foreign
countries;
a. Those
given
to
international
institutions entitled to exemption by
agreement or special laws; and
b. Those that may be granted by the
President
upon
NEDAs
recommendation.
c. Returning residents for purposes of
conditionally free importation of
personal and household effects:
i. Nationals (Filipino)
ii. Who have stayed in the foreign
country
iii. For a period of at least six(6)
months.
d. Kinds
of
conditionally
free
importations of personal and
household effects of returning
residents:
i. Personal
and
household
effects, including luxury items
brought out of the Philippines
and returned;
ii. Personal
and
household
effects, except luxury items
purchased
abroad
and
imported to the Philippines;
iii. The purchase abroad of
consumables, livelihood, tools
personal and household effects
by Overseas Filipino Workers
(OCW) and Balikbayan;
iv. The purchase abroad of
consumables, livelihood tools
personal and household effects
by Overseas Filipino Workers
(OCW) and Balikbayans at
Philippine duty free shops; and
v. Personal and household effects
of members of Philippine
diplomatic missions including
civil or military attaches
KINDS OF TARIFF OR CUSTOM DUTIES

I.

Regular Tariff
1. Ad valorem computed base on value
2. Specific computed based on unit of
measure;
3. Alternating Duties alternates between
ad valorem and specific;

43

4.
II.

Compound Duties alternates between

ad valorem and specific;
Special Custom Duties those which are
imposed and collected in addition to the
ordinary customs duties usually to protect
local industries against foreign competition.
1. Anti-dumping duties
2. Countervailing Duties
3. Marking Duties
4. Discriminatory Duties

SPECIAL CUSTOM DUTIES

I.

Anti-Dumping Duties

Definition: special duty imposed on the

importation of a product or commodity or articles
of commerce into the Philippines at less than its
normal value when destined for domestic
consumption in the exporting country which
importation is causing or threatening to cause
material injury of a domestic industry, or
materially retards the establishment of a
domestic industry producing like product.
Amount of Anti-dumping Duty the difference
between the export price and the normal value of
such product, commodity or article. [AntiDumping Duty Normal Value Export Price]
Imposing Authorities
1. Secretary of Trade and Industry nonagricultural products;
2. Secretary of Agriculture agricultural
product
3. The decision of whether or not to impose
anti-dumping duty is the prerogative of the
Tariff Commission
II.

Countervailing Duties

Definition: Additional custom duties imposed

whenever any product, commodity or article of
commerce is granted directly or indirectly by the
government in the country of origin or
exportation, any kind or form of specific subsidy
upon the production, manufacture or exportation
of such product, commodity or article, and the
importation product, commodity or article, and the
importation of such subsidized product,
commodity or article has caused or threatens to
cause material injury to a domestic industry or
has materially retarded the growth or prevents
the establishment of a domestic industry.
Kinds of Specific Subsidy
1. Bounty cash award paid to an exporter
or manufacturer;
2. Subsidy Financial incentives not in the
form of direct or cash award to
encourage manufacturers or exporters;

3.

Subvention Any assistance other than

a bounty or subsidy given by the
government for the manufacture and/or
exportation of an article.

Amount of Duty equivalent to the bounty,

subsidy or subvention.
Imposing Authority
1. Secretary of Trade and Industry nonagricultural products;
2. Secretary of Agriculture agricultural
product
3. The decision of whether or not to impose
anti-dumping duty is the prerogative of the
Tariff Commission
III. Marking Duties
Definition: Additional customs duties imposed on
foreign articles (or its container if the article itself
cannot be marked) not marked in any official
language of the Philippines in a conspicuous
place as legibly, indelibly and permanently in
such manner as to indicate to an ultimate
purchaser in the Philippines the name of country
of origin.
Amount of Duty: 5% ad valorem of the articles.
Imposing Authority: Commissioner of Customs
Exceptions to Marking Duty (I 20 C3UP2)
1. The article is Incapable of being marked
2. The article cannot be market prior to
importation to the Philippines without
injury;
3. The article cannot be marked prior to
importation to the Philippines except at
an expense economically. Prohibitive of
it importation;
4. The marking of the Container of such
article with reasonably indicate the
origin of such article;
5. The article is of a Crude substance.
6. Such article is for the Use of the
importer and not intended for sale in its
imported or other form;
7. Such article is to be Processed in the
Philippines by the importer or for his
own account and not for the purpose of
concealing the origin of such article;
8. The ultimate purchaser by the Character
of the article necessarily know the
country of origin of such article;
9. Such article was produced more than 20
years prior to its importation into the
Philippines;
10. Such article cannot be marked After
importation except at an expense
economically prohibitive and the failure
to mark the article before importation

44

was not due to any purpose of the

importer, producer, seller, or shipper to
avoid compliance.
IV. Discriminatory Duties
Definition: New or additional customs duty
imposed upon articles wholly or in part the growth
or product of, or imported in a vessel of, any
foreign country whenever he shall find as a fact
that such country:
1. Imposes, directly or indirectly, upon any
Philippine product unreasonable charge,
exaction, regulation, or limitation which is
not equally enforced upon like articles of
other foreign countries.
2. Discriminates in fact against the commerce
of the Philippines, as to place the Philippines
at a disadvantage compared with the
commerce of any foreign country.
Amount of Duty: Not exceeding 100% ad
valorem. However, if after the imposition of
discriminatory duties, the country maintained or
increased its discrimination against commerce
with the Philippines, the President may exclude
the product of that country from importation into
the Philippines.
NOTE: Articles imported in violation of this
provision shall be forfeited in favor of the
Government.
IMPOSING AUTHORITY: The President through
a proclamation.
See Annex for Table of Comparison
FLEXIBLE TARIFF CLAUSE (Sec. 401, TCCP)
Basis: The Congress may, by law, authorize the
President to fix within specified limits, and subject
to such limitations and restrictions as it may
impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or
imposts within the framework of the national
development program of the Government. (Sec.
28[2], Art. VI, Constitution)
Under the Flexible Tariff Clause, the President is
empowered to:
1. Increase, reduce, or remove existing
protective rates of import duties including the
necessary changes in the classification. The
increase in the rate cannot exceed 100% ad
valorem;
2. To establish import quota or ban import of
any commodity;
3. To impose additional duty on all imports, not
exceeding 10% ad valorem whenever
necessary.

Requisites for the Exercise of the Power

1. Must be in the interest of national economy,
general welfare, and national security;
2. Recommendation of NEDA
a. Before
submission
of
the
recommendation of NEDA, the Tariff
Commission
shall
conduct
an
investigation;
b. Public hearing shall be held wherein
interest parties shall be afforded
reasonable opportunity to be present,
produce evidence, and be heard.
c. The report of the Commission shall be
submitted to NEDA within 30 days after
the termination of the public hearing.
NOTE: The foregoing are not required
in the imposition of 10% ad valorem.
3. Effectivity
a. For an increase, reduction, or removal
of existing protective rates and the
imposition of import quotas or ban, any
order shall take effect 30 days after
promulgation;
b. Imposition of additional duty not
exceeding 10% ad valorem at the
discretion of the President.
METHODS OF DETERMINING DUTIABLE
VALUE
METHOD ONE:
TRANSACTION VALUE: The dutiable value of
an imported article subject to an ad valorem rate
of duty shall be the transaction value, which shall
be the price actually paid or payable for the
goods when sold for export to the Philippines
plus other costs incurred by the buyer but not
included in the price.
METHOD TWO:
TRANSACTION
VALUE
OF
IDENTICAL
GOODS. The dutiable value shall be the
transaction value of identical goods sold for
export to the Philippines and exported at or about
the same time as the goods being valued.
IDENTICAL GOODS goods which are the
same in all respects, including physical
characteristics, quality and reputation. Minor
differences in appearances shall not preclude
goods otherwise conforming to the definition from
being regarded as identical.
METHOD THREE:
TRANSACTION VALUE OF SIMILAR GOODS
Where the dutiable value cannot be determined
under the preceding method, the dutiable value
shall be the transaction value of similar goods
sold for export to the Philippines and exported at
or about the same time as the goods being
valued.

45

SIMILAR GOODS goods which, although not

alike in all respects, have like characteristics and
like component materials which enable them to
perform the same functions and to be
commercially interchangeable. The quality of the
goods, their reputation and the existence of a
trademark shall be among the factors to be
considered in determining whether goods are
similar.
METHOD FOUR:
DEDUCTIVE VALUE The dutiable value of the
imported goods under this method shall be the
deductive value which shall be based on the unit
price at which the imported goods or identical or
similar imported goods are sold in the
Philippines, in the same condition as when
imported, in the greatest aggregate quantity, at or
about the time of the importation of the goods
being valued, to persons not related to the
persons from whom they buy such goods, subject
to deductions:
1. Either the commissions usually paid or
agreed to be paid or the additions usually
made for profit and general expenses in
connection with sales;
2. The usual costs of transport and insurance
and associated costs;
3. The costs and charges;
4. Customs duties and other national taxes.
METHOD FIVE:
COMPUTED VALUE The dutiable value under
this method shall be the computed value which
shall be the sum of:
1. The cost or the value of materials and
fabrication or other processing employed in
producing the imported goods;
2. The amount for profit and general expenses
equal to that usually reflected in the sale of
goods of the same class or kind as the
goods being valued which are made by
producers in the country of exportation for
export to the Philippines;
3. The freight, insurance fees and other
transportation expenses for the importation
of the goods;
4. Any assist, if its value is not included under
paragraph(1) hereof; and
5. The cost of containers and packing, if their
values are not included under paragraph (1)
hereof.
NOTE: At the request of the importer, the order of
application of methods four and five may be
reversed. However, if the Commissioner of
Customs deems that he will experience real
difficulties in determining the dutiable value using
method five, he may refuse such request.
METHOD SIX:

FALLBACK VALUE If the dutiable value

cannot be determined under the preceding
methods described above, it shall be determined
by using other reasonable means and on the
basis of data available in the Philippines.
IMPORTATION IN GENERAL
BRIEF SUMMARY OF IMPORTED CARGO
CLEARANCE PROCEDURE
1. Preparation of Import Entry and Entry
Lodgment or Filing of Import Entry
2. Physical examination if required
3. Preparation of Discrepancy Report if any
4. Protest on Civil Matters
5. Payment of the computed duties and taxes
and release of imported goods
6. Customs Compliance Audit / Post-Audit
7. Finality of Liquidation
ENTRY AT CUSTOM HOUSE
All articles imported into the Philippines, whether
subject to tax or not shall be entered into a
customhouse at a port of entry.
Entry at Customhouse means.
1. The documents filed at the customhouse ;
2. The submission or acceptance of the
documents;
3. The procedure of passing goods through the
customhouse.
PORT OF ENTRY domestic port open to
foreign and coastwise trade. The term includes
principal ports of entry and sub-ports of entry. A
principal port of entry is the chief port of entry of
the collection district wherein it is situate and is
the permanent station of the Collector of such
port. Sub-ports of entry are under the
administrative jurisdiction of the Collector of the
principal port of entry of the district. Whenever
the term port of entry is used, it shall include
airport of entry.
NOTE: Entry of goods other than the port of entry
would be considered as smuggling
WHEN IMPORTATION BEGINS AND DEEMED
TERMINATED
1. Importation begins when the carrying vessel
or aircraft enters the jurisdiction of the
Philippines with the intention to unload
therein.

Intent being a state of mind can be

inferred from facts and circumstances.

Violations of Tariff and Custom Laws are

considered as indicative of the intent
which constitutes the commencement of
an importation.
2. Importation is deemed terminated upon
payment of duties, taxes, and other charges

46

due upon the articles or secured to be paid

at a port of entry AND the legal permit for
withdrawal shall have been granted, or in
case said articles are free of duties, taxes
and other charges, until they have legally left
the jurisdiction of the customs.

The payment of duties must be in full.

(Papa vs. Mago, G.R. No. L-27360,
February 28, 1968)

NOTE: Tariff and custom laws are applied only

after importation has begun but before it is
terminated. Thus, the jurisdiction of the Bureau of
Customs attaches only after importation has
begun and retains jurisdiction up to the time that
importation is deemed terminated.
IMPORT ENTRY REQUIRED
All imported articles except those importations for
the official use of foreign embassies, legations,
and other agencies of foreign governments, shall
be subject to formal or informal entry.
Import Entry a declaration to the BOC showing
particulars of the imported article that will enable
the customs authorities to determine the correct
duties. An importer is required to file an import
entry.
It
must
be
accomplished
from
disembarking of last cargo from vessel.
PERSONS AUTHORIZED TO MAKE IMPORT
ENTRY
1. The importer, being the holder of the bill of
lading;
2. A duly licensed customs broker acting under
authority from a holder of the bill or by a
person duly empowered to act as agent or
attorney-in-fact for each holder;
3. A party other than the importer, provided said
importer shall himself be required to declare
under oath and under the penalties of
falsification or perjury that the declarations
and statements contained in the entry are
true and correct. (Sec. 1301, TCCP, as
amended by R.A. 7651)
Who should sign an import or export entry?
Import and export entry declarations shall be
signed only by a customs broker under oath
based on the covering documents submitted by
the importers. (Last sentence, Sec. 27. R.A. no.
9280, the Customs Brokers Act of 2004)
NOTE: If the entry is filed by a party other than
the importer, the importer shall be required to
declare under oath that the declarations and
statements contained in the entry are true and
correct.
Such statements under oath shall constitute
prima facie evidence of knowledge and consent

of the importer of violations against the provisions

of the tariff and custom laws when the
importation is found to be unlawful.
PERIOD TO FILE IMPORT ENTRY
Imported articles must be entered in the
customhouse at the port of entry within 30 days
which shall not be extendible, from the date of
the discharge of the last package from the vessel
or aircraft.
Discharge of the last package the completion
of unloading of the shipment from the carrier at
the port of final destination.
LIABILITY OF IMPORTER FOR DUTIES
1. It constitutes a PERSONAL DEBT due from
the importer to the government which can be
discharged only by payment in full of all
duties, taxes, fees and other charges legally
accruing.
2. It constitutes a LIEN upon the articles
imported which may be enforced while such
article are in custody or subject to the control
of government.
WHO ARE CONSIDERED THE OWNER OF
IMPORTED ARTICLES
1. Consignee
2. Holder of the bill of lading duly endorsed by
the consignee named therein.
3. Holder of the bill of lading, if consigned to
order endorsed by the consignor
4. The underwriters of abandoned articles;
5. Salvors.
EXEMPTIONS FROM CUSTOM DUTIES
General Rule No exemptions from customs
duties.
Exceptions:
1. Conditionally-free importation;
2. Those granted to government-owned and
controlled
corporations
with
existing
contracts, commitments, agreements or
obligations (requiring such exemptions)with
foreign countries;
3. International institutions, associations or
organizations entitled to exemption pursuant
to agreements or special laws;
4. Those that may be granted by the President
of the Philippines upon recommendation of
the NEDA in the interest of national
economic development.
Exemption of the Government from Custom
Duties
General Rule: All importations by the
government for its own use or that of its
subordinate branches or instrumentalities or

47

owned or controlled by the government, shall be

subject to the duties, taxes, fees and other
charges provided for in the Tariff and Custom
Code. (Sec. 1205, TCCP)
Exceptions:
1. If expressly exempted under a special law;
2. Conditionally free importations;
3. Those granted to government agencies,
instrumentalities or government-owned and
controlled
corporations
with
existing
contracts, commitments, agreements or
obligations (requiring such exemptions) with
foreign countries.
DISPOSITION OF IMPORTED ARTICLES
REMAINING ON VESSEL AFTER TIME FOR
UNLOADING
Imported articles may be unloaded by customs
authorities and stored at the vessels expense if:
1. Imported articles remain on the vessel after
the expiration of period of discharge;
2. The imported articles are not reported for
transshipment to another port.
Exceptions: Unless prevented by
beyond the vessels control such as:
1. port congestion;
2. strikes;
3. riots or civil commotions;
4. failure of vessel gear;
5. bad weather;
6. similar causes

causes

The articles so stored shall be entered within 30

days from the discharge of the last package and
shall be claimed within 15 days from the date of
the posting of notice.
ABANDONMENT
Abandonment the renunciation by an importer
of all his interests and property rights in imported
articles.
Kinds of Abandonment
1. Express Abandonment When the owner,
importer, or consignee of the imported
article, expressly signifies in writing and
under oath to the Collector of Customs his
intention to abandon the shipment in favor
off the government.
2. Implied Abandonment
a. When the importer or consignee after
due notice fails to file an entry within 30
days, which shall not be extendible from
the date of the discharge of the last
package form the vessel or aircraft.
b. Having filed an entry for his shipment,
the owner, importer, consignee or other
interested party fails to claim his
importation within 15 days, which shall

not likewise be extendible from the date

of posting the notice to claim such
importation.
Effects of Abandonment
1. The owner, importer, consignee or other
interested party shall be deemed to have
renounced all his interest and property rights
over the imported article.
2. An abandoned article shall ipso facto be
deemed the property of the government and
shall be disposed of in accordance with the
provision of TCCP;
3. It does not relieve the owner from any
criminal liability which may arise from any
violation of law committed in connection with
the importation of the abandoned article.
NOTE: No right to reclaim in impliedly abandoned
articles. Abandons articles are sold at customs
auctions.
LIQUIDATION OF DUTIES

The liquidation shall be made on the face of

the entry showing the particulars thereof if
the Collector shall approve the returns of the
appraiser and report of the weighted gauge
or quantity.
The liquidation shall be initiated by the
liquidating clerk approved by the chief
liquidator and recorded in the record of
liquidations
A daily record of all entries liquidated shall
be posted in the public corridor of the
customhouse stating the name of the vessel
or aircraft, the port from which she arrived,
the date of her arrival, the name of the
importer, and the serial number and date of
the entry. A daily record must also be kept by
the Collector of all additional duties, taxes
and other charges found upon liquidation,
and notice shall promptly be sent to the
interested parties. (Section 1601, TCCP)

Tentative Liquidation
If future action is required to determine the exact
amount due, the liquidation shall be tentative as
to item or items affected, the entry shall be
stamped Tentative Liquidation. The item shall
be subject to future and final readjustment and
settlement.
Prescriptive Period for Re-adjustment of
Appraisal, Classification, or Return (Sec. 1407
TCCP as amended by RA 9135)
General Rule: The appraisal, classification or
return as finally passed upon and approved or
modified by the Collector shall not be altered or
modified in any manner.

48

2.
Exceptions:
1. Manifest clerical errors made in an invoice or
entry, error in return of weight., measure and
gauge, when duly certified to by the surveyor
or examining official (when there are such
officials at the port), and errors in the
distribution of charges on invoices not
involving any question of law and certified to
by the examining official, may be corrected in
the computation of duties, if such errors be
discovered before the payment of duties, or,
if discovered within one year after the final
liquidation, upon written request and notice
of error from the importer, or upon statement
of error certified by the Collector. (Sec. 1707,
TCCP)
2. Within fifteen days after such payment upon
request for reappraisal and/or reclassification
addressed to the Commissioner by the
Collector,
if
the
appraisal
and/or
classification is deemed to be low.
3. Upon request for reappraisal and/or
reclassification, in the form of a timely
protest addressed to the Collector by the
interested party if the latter should be
dissatisfied with the appraisal or return.
4. Upon demand by the Commissioner of
Customs after the completion of compliance
audit pursuant to the provisions of this Code.
Finality of Liquidation
General
Rule:
Taxes
imprescriptible.

are

generally

Exception: Statutes may provide otherwise.

A liquidation shall be final and conclusive upon all
parties after the expiration of three (3) years form
the date of the final payment of duties, in the
absence of:
1. Fraud;
2. Protest; or
3. Compliance audit pursuant to the provisions
of this Code. (Sec. 1603, TCCP)
EXCEPT: in case of tentative liquidation
ABATEMENTS AND REFUNDS
General Rule: No abatement of duties shall be
made on account of damage incurred or
deterioration suffered during the voyage of
importation and duties will be assessed on the
actual quantity imported.
Exceptions:
1. If the package appearing on the manifest or
bill of lading is missing if it is shown by
satisfactory proof to the Collector that the
package in question have not been imported
into the Philippines;

3.

If upon opening the package a deficiency

exist provided the shortage occurred before
the arrival of the article in the Philippines.
A Collector may abate or refund the amount
of duties accruing or paid, and may likewise
make a corresponding allowance or credit on
the entry bond, or other document, upon
satisfactory proof of the injury, destruction, or
loss by theft, fire or other causes of any
article as follows: While within the limits of
port of entry prior to unlading under custom
supervision
a. While within the limits of any port of
entry prior to unlading under customs
supervision;
b. While remaining in customs custody
after unlading.
c. While in transit under bond from the port
of entry to any port in the Philippines.
d. While release under bond, export,
except in case of loss by theft;
e. The animal which is the subject of
importation dies or suffers injury before
arrival or in customs custody provided
the carcass of any deed animal
remaining on board or in customs
custody be removed in the manner
required by the Collector and at the
expense of the importer.

Claim for Refund

1. Must be in writing
2. Forwarded to the Collector
3. The Collector shall verify the same.
4. If the Collector finds that the claim for refund
is correct and in accordance with law, he
shall certify the same to the Commissioner
5. The Commissioner shall cause the same to
be paid if found correct
CUSTOMS
AUDIT

COMPLIANCE AUDIT

/ POST-

Requirement to Keep Records (Section 3514)

All importers are required to keep all the

records of their importations and book of
accounts, business and computer systems,
and all customs commercial data including
payment records at their principal place of
business for a period of three years from the
date of importation.

Brokers are required to make copies of the

abovementioned records at their principal
place of business and for a period of three
years from the date of importation.

After the three-year period, the liquidation

becomes final except in cases of tentative
liquidation.
Compliance Audit or Examination of Records
(Sec 3515, TCCP)

49

Time and Place of Audit: During office hours at

the premises or place where the records are
kept.
Extent of the Powers of the Customs Officer
in Compliance Audit:
1. A duly authorized custom officer shall have
full and free access to all books, records,
and documents necessary or relevant for the
purpose of collecting the proper duties and
taxes.
2. The authorized customs officer may make
copies or take extracts of the record. A copy
of any such document certified by or on
behalf of the importer or broker is admissible
in evidence in all courts as if it were the
original.
NOTE:
An authorized officer s not entitled to enter the
premises without written evidence of the fact that
h/she is an authorized officer.

3.

PENALTY: Punishable by a fine-equivalent to not

less than five (5) times but not more than eight
(8) years.
TAX REMEDIES OF THE GOVERNEMNT
I.

ADMINISTRATIVE REMEDIES
1. Tax Lien (Sec. 1204, TCCP)

Attaches on the goods, regardless

of ownership, while still in the
custody
or
control
of
the
Government.

Availed of when the importation is

neither prohibited nor improperly
made.
2. Administrative Fines and Forfeitures

Applied when the importation is

unlawful or involves articles which
are prohibited from being imported,
including the carrying vessel.

May be exercised even where the

articles are not or no longer in
Customs custody UNLESS the
importation is merely attempted in
which case it may be effected only
while the goods are still within the
Customs jurisdiction or in the hands
of a person who is aware thereof
(Secs. 2531 and 2530, TCCP)

Under Sec. 2530 (a) of the TCCP, in

order to warrant forfeiture, it is not
necessary that the vessel or aircraft
must itself carry the contraband.
The complementary if collateral use
of the Cessna plane for smuggling
operation is sufficient for it to be
deemed to have been used in
smuggling.
(Llamado
vs.
Commissioner of Customs, G.R.
No. L-28809, may 16, 1983)
3. Reduction of customs duties /
compromise subject to approval of
Sec. Of Finance (Secs. 709 and 2316
TCCP)
4. Seizure, Search, Arrest (Secs. 2205,
2210 and 2211, TCCP)

II.

JUDICIAL REMEDIES

Effects of Denial of Access to Records:

1. The Bureau of Customs may invoke the aid
of the proper regional trial court with whose
jurisdiction the matter falls. The court may
punish refusal of access to the records as
CONTEMPT.
2. Criminal sanctions imposed by the TCCP
3. Administrative sanctions that the Bureau of
customs may impose against contumacious
importers including the authority to hold
delivery or release of their imported articles.
4. Denial of the importer or broker full and free
access to records shall create a
presumption of inaccuracy in the
transaction value declared for their
imported goods and constitute grounds for
the Bureau of Customs to conduct a reassessment of such goods.
Failure to Pay Correct Duties and Taxes on
Imported Goods (Sec. 3611, TCCP)
NOTE: After being subjected to post-entry audit
and examination, any person who is found to
have incurred deficiencies in duties and taxes
paid for imported goods, shall be penalized
according to the three (3) degrees of culpability.
Three Degrees of Culpability
1. Negligence When the deficiency results
from an offenders failure, through an act or
acts of omission or commission, to exercise
reasonable care and competence to ensure
that statement made is correct.
PENALTY: punishable by a fine equivalent to
not less than one-half (1/2) but not more
than two (2) times the revenue loss.
2. Gross Negligence When a deficiency
results from an act or acts of omission or

commission done with actual knowledge or

wanton disregard for the relevant facts and
with indifference to or disregard for the
offenders obligation under the statute.
PENALTY: punishable by a fine equivalent to
not less than two and a half (2 ) but not
more than four (4) times the revenue loss.
Fraud When the material false statement
or act in connection with the transaction was
committed or omitted knowingly, voluntarily
and intentionally, as established by clear and
convincing evidence.

50

This remedy is normally availed of when the

tax lien is lost by the release of the goods.
1. Civil Action (Sec. 1204, TCCP)
2. Criminal Action
TAX REMEDIES OF THE TAXPAYER
I.

ADMINISTRATIVE REMEDIES

2.

1.

Protest cases where the legality or

correctness of assessment or appraisal is
questioned by the importer.
a. Any importer or interested party if
dissatisfied with published value within
15 days fro date of publication, or within
15 days from the date the importer is
entitled to refund if payment is rendered
erroneous or illegal by events occurring
after the payment.
b. No protest shall be considered unless
payment of the assessed customs dues
has first been made. (Section 2308,
TCCP)

3.

NOTE: No protest is necessary in

seizure cases.
2.

3.

Refund
a. A written claim for refund may be
submitted by the importer in abatement
cases
on
missing
packages,
deficiencies in the contents of packages
or shortages before arrival of the goods
in the Philippines, articles lost or
destroyed after such arrival, dead or
injured animals, and for manifest clerical
errors; and
b. Drawback cases where the goods are
re-exported (Secs. 1701-1708 TCCP).
Settlement of any seizure by payment of fine
or redemption
NOTE: But this shall not be allowed in any
case where importation is absolutely
prohibited, or the release would be contrary
to law, or when there is an actual and
intentional fraud (Sec. 2307, TCCP).

4.

Appeal
NOTE: Within 15 days to the Commissioner
after notice of decision by the Collector of
Customs (Sec. 2313, TCCP)

II.

JUDICIAL

1.

Appeal

Within 30 days from receipt of decision

of the Commissioner or Secretary of

Finance to the division of the CTA (Sec.

2403 TCCP, Sec. 7 of RA 1125, as
amended by Sec. 9 of RA 9282)

Since Sec. 11 of RA 1125 as amended

by RA 9282 empowers the Tax Court to
issue injunctions, it would appear that
an importer may appeal without first
paying the duties, such as in seizure but
NOT in protest cases.
Action to question the legality of seizure
Abandonment (Sec. 1801, TCCP)
a. Express Abandonment (Sec. 1801,
TCCP)
b. Implied Abandonment
i.
Failure to file an import entry within
30-days from the discharge of
goods; or
ii.
Having filed an entry fails to claim
within 15 days but it shall not be so
effective until so declared by the
collector (Sec. 1801, as amended
by RA 7651).
TWO KINDS OF PROCEEDINGS IN THE
BUREAU OF CUSTOMS

CUSTOMS PROTEST CASES

Definition: These are cases which questions the
legality or correctness of assessed custom
duties.
NOTE: Before filing a protest, there must first be
a payment under protest.
When Customs Protest Applicable
The customs protest is required to be filed only in
case the liability of the taxpayer for duties, taxes,
fees and other charges is determined and the
taxpayer disputes said liability otherwise, the
action of the collector shall be final and
conclusive against him EXCEPT as to matters
collectible for manifest error in:
1. Invoice entry;
2. Errors in return of weight; and
3. Measure and gauge (Sec. 2309 in relation to
Sec. 1707, TCCP)
When Customs Protest NOT Required
Where there is no dispute, but the claim for
refund arises by reason of the happening of
supervening events such as when the raw
material imported is utilized in the production of
finished products subsequently exported and a
duty drawback is claimed.
Requirements for Making a Protest
1. Must be in writing;

51

2.
3.
4.
5.

6.

Must point out the particular decision or

ruling of the Collector of Customs to which
exception is taken or objection made;
Must state the grounds relied upon for relief;
Must be limited to the subject matter of a
single adjustment;
Must be filed when the amount claimed is
paid or within 30 days after the payment; and
Protestant must furnish samples of goods
under protestant when required (Section
2310, TCCP).

Reasons for the Automatic Review by the

Secretary of Finance of Decisions Adverse to
the Government:
1. To protect the interest of the Government;
2. A favorable decision will not be appealed by
the taxpayer and certainly a Collector will not
appeal his own decision; and
3. Lifeblood Theory.
Please refer to Annex for flowchart
SEIZURE AND FORFEITURE CASES
Special Surveillance
Customs service shall exercise surveillance over
the coast, beginning when a vessel or aircraft
enters Philippine territory and concluding when
the article imported therein has been legally
passed through custom house.
Purpose: To prevent smuggling and to secure
collection of legal duties taxes and other charges
Right of Customs Officers to Effect Seizure
and Arrest (Sec. 2205, TCCP)
1. May seize any vessel, aircraft, cargo, article,
animal or other movable property when the
same is subject to forfeiture or liable for any
time as imposed under tariff and customs
laws, rules and regulations.
2. May exercise such powers only in conformity
with the laws and provisions of the TCCP.
Persons having Police Authority to Enforce
the Tariff and Customs Laws and Effect
Searches and Seizures, and Arrests (SEC.
2203, TCCP)
1. Officials of the BOC, district collectors, police
officers, agents, inspectors, and guests of
the BOC;
2. Officers of the Phil. Navy and other members
of the AFP and national law enforcement
agencies
when
authorized
by
the
Commissioner of Customs;
3. Officials of the BIR in all cases falling within
the regular performance of their duties, when
the payment of internal taxes are involved;
4. Officers generally empowered by law to
effect arrests and execute processes of

courts, when acting under the direction of the

Collector.
Places Where Searches and Seizures may be
Conducted
1. Enclosures;
2. Dwelling house (there must be a search
warrant issued by a judge);
3. A warehouse, store or other building or
enclosure used for the keeping of storage of
articles does not become a dwelling house
merely by reason of the fact that a person
employed as watchman lives in the place,
nor will the fact that his family stays there
with him after the case (Section 2208,
TCCP)
4. Vessels or aircrafts and persons or articles
conveyed therein ;
5. Vehicles, beasts and persons; and
6. Persons arriving from foreign countries.
Property Seized from Dwelling Place by Virtue
of a judicial Warrant is in Custodia Legis

Case law has it that the court which issued

the search warrant acquires jurisdiction over
items seized under the said warrant (Tenorio
vs. CA, GR 110604, October 10. 2003)

Only the court that issued the warrant may

order the release or disposition thereof. The
jurisdiction, custody and control of the court
over the items seized cannot be interfered
with even by the Bureau of Customs via
warrant of seizure and detention issued by
the Collector of Customs.

The Collector of Customs has exclusive

original jurisdiction over seizure and
detention proceedings and that the regular
courts cannot interfere with nor deprive him
of such jurisdiction. However, the exclusive
original jurisdiction of the Collector on the
said goods pertains only to the goods seized
pursuant to the authority under the TCCP
Implications on the Doctrine of Concurrent
Jurisdiction
1. The authority first taking cognizance of the
case excludes all others.
2. The RTC and BOC do not have concurrent
jurisdiction over seizure and forfeiture
proceedings. BOC has primary jurisdiction.
3. However, the principle of exclusion apply:
a. In criminal cases, the jurisdiction is with
the courts. BOC excluded.
b. Forfeiture is with BOC
Doctrine of Primary Jurisdiction in Seizure
and Forfeiture

Where there is competence or jurisdiction

vested upon administrative body to act upon
a matter, no resort to courts may be made

52

before such administrative body shall have

acted upon the matter.
Judicial process is suspended pending
referral of such issues to an administrative
body.
The question of seizure and forfeiture is for
the Collector of Customs to determine in the
first instance and then the Commissioner of
Customs. This is a field where the doctrine of
primary jurisdiction controls. Thereafter
appeal may be taken to CTA. The RTC is
denied of competence to act on the matter.
The Collector of Customs when sitting in
forfeiture proceedings, constitutes a tribunal
upon which the law confers jurisdiction to
hear and determine all questions touching
forfeiture and further disposition of the
subject matter.
The Bureau of Customs acquires exclusive
jurisdiction over imported goods, for the
purposes of enforcement of the custom laws,
from the moment the goods are actually in
the possession or control, even if no warrant
of seizure or detention had previously been
issued by the Collector of Customs in
connection with seizure and forfeiture
proceeding.

Reasons for Exclusive Jurisdiction upon the

Collector of Customs
1. No
unnecessary
hindrance
on
the
governments drive to prevent smuggling and
other frauds upon the Customs;
2. Render effective and efficient the collection
of import and export duties due the State;
3. Doctrine of Primary Jurisdiction;
4. Specific mandate of Sec. 602 (g) of the
TCCP shall exercise exclusive original
jurisdiction over seizure and forfeiture cases
under the tariff and custom laws.
Nature of Forfeiture Proceedings:
It is administrative and civil in nature and is
directed against the thin itself. These are actions
in re. The issue is limited to whether the imported
goods should be forfeited and disposed of in
accordance with law for violation of the Tariff and
Customs Code.
NOTE: Since it is not criminal in nature, proof
beyond reasonable doubt is not required in order
to justify the forfeiture of the goods.
Thus, it is of no defense that the owner of the
vessel sought to be forfeited had no actual
knowledge that his property was used illegally.
The absence or lack of actual knowledge of such
use is a defense personal to the owner himself,
which cannot in nay way absolve the vessel from
the liability of forfeiture. (Commissioner of
Customs vs. Manila Star Ferry, Inc. G.R. Nos.
3177-78, October 21, 1993)

When Forfeiture can be Effected

1. Forfeiture shall be effected only when and
while the article is in the custody or within
the jurisdiction of the customs authority;
2. In the hands or subtle to the control of
importer original owner, consignee, agent or
other person effecting the importation entry
or exportation;
3. In the hands or subject to the control of
some person who shall receive, conceal,
buy, sell or transport or aid in such acts, with
knowledge.
Acquittal in Criminal Charge not res judicata
in Seizure or Forfeiture Proceedings
1. Criminal proceedings are actions in
personam while seizure of forfeiture
proceedings are action in rem:
2. Customs compromise does not extinguish
criminal liability (People vs. Desiderio, GR
No. L-20805, November 29, 1965).
NOTE: At any time prior to the sale, the
delinquent
importer
may
settle
his
obligations with the Bureau of Customs, in
which case he aforesaid articles may be
delivered
upon
payment
of
the
corresponding duties and taxes and
compliance with all other legal requirements
(Sec. 1508, TCCP)
Requirements for Customs Forfeiture
1. The wrongful making by the owner, importer,
exporter or consignee of any declaration or
affidavit, or the wrongful making or delivery
by the same persons of any invoice, letter or
paper all touching on the importation or
exportation of merchandise;
2. That such declaration, affidavit, invoice, letter
or paper is false. (Farolan, Jr. vs. Court of
Tax Appeals, G.R. No. 42204, January 21,
1993), and
3. An intention on the part of the
importer/exporter to evade the payment of
the duties due.
Forfeiture of Common Carriers
Generally, common carriers are not subject to
forfeiture. If the owner has knowledge of its use
in smuggling and was a consenting party, it may
be forfeited.
NOTE: A common carrier is converted into a
private carrier in cases of demise charter, at least
in so far as the particular voyage covering the
charter party is concerned. (Planters Products,
Inc. vs. CA. G.R. No. 101503, September 15,
1993)
Prima Facie Presumption of Knowledge by
the Owner of the Common Carrier

53

1.
2.
3.

If the conveyance was used for smuggling at

least twice before;
If the owner is not I the business for which
the conveyance is generally used;
If the owner is financially not in a position to
own such conveyance.

Goods in Customs Custody Beyond reach of

Attachment
Goods in the customs custody pending payment
of customs duties are beyond the reach of
attachment. As long as the importation has not
been terminated, the imported goods remain
under the jurisdiction of the Bureau of Customs
(Viduya vs. Berdiago, G.R. No. L-29218, October
29, 1976)
Settlement of Forfeiture Cases
General Rule: Settlement of cases by payment
of fine or redemption of forfeited property is
allowed.
Exceptions:
1. The importation is absolutely prohibited; or
2. The surrender of the property to the person
offering to redeem would be contrary to law;
or
3. When there is fraud (Sec. 2307, TCCP).
NOTES:

There must be actual and not constructive

fraud. Misdeclarations in the manifest and
rider cannot be imputed against the
consignee where it was not the one that
prepared them. (Transglobe International,
Inc. vs. CA, G.R. No. 126634, January 25,
1999)
Customs compromise does not extinguish
criminal liability. (People vs. Desiderio, GR
No. L-20805, November 29, 1965

Is a Manifest Required only for Imported Goods?

NO. Articles subject to seizure do not have to be
imported goods. Manifests are also required for
articles found on vessels or aircraft engaged in
coastwise trade (Rigor vs. Rosales, G.R. No. L33756, October 23, 1982).
Unmanifested cargo is subject to forfeiture
Whether the act of smuggling is established or
not under the principle of res ipsa loquitur. It is
enough that the cargo was unmanifested and that
there was no showing that payment of duties
thereon had been made for it to be subject to
forfeiture.
Burden of Proof in Seizure and Forfeiture
Proceedings.
It is on the claimant provided that:

1.

2.

The PROBABLE CAUSE shall be first shown

for the institution of such proceedings and
That seizure circumstances and in the
manner described in the TCCP (Sec. 2535,
TCCP; Acting Commissioner of Customs vs.
CA, GR no. L-62636, April 27, 1984)
SMUGGLING

ELEMENTS OF SMUGGLING
1. That the merchandise must have been
fraudulently or knowingly imported contrary
to law;
2. That the defendant, if he is not the importer
himself, must have received, concealed,
bought, sold or in any manner facilitated the
transportation, concealment or sale of the
merchandise;
3. That the defendant must be shown to have
knowledge that the merchandise had been
illegally imported. If the defendant, however
is shown to have had possession of the
illegally imported merchandise, without
satisfactory explanation, such possession
shall be sufficient to authorize conviction;
4. The person must know that the goods have
been imported contrary to law.
5. The person must know that the goods have
been imported contrary to law.
PERSONS LIABLE FOR SMUGGLING
1. An act of any person who shall:
a. Fraudulently import any article contrary
to law, or
b. Assist in so doing, or
c. Receive, conceal, buy, sell, facilitate,
transport, conceal or sell such article
knowing its illegal importation (Sec.
3601, TCCP)
d. Export articles in a manner contrary to
law. (Sec. 3514, TCCP)
2. The Philippines is divided into various ports
of entry entry other than port of entry, will
be SMUGGLING.
What are Contrabands? (smuggled articles)
They are articles of prohibited importations or
exportations. (Section 3514, TCCP) The term
may also refer to articles imported or exported in
violation of tariff and customs laws.
Evidence for Conviction in Smuggling Cases
Mere possession of the article in question
UNLESS defendant could explain that his
possession is lawful to the satisfaction of the
court. (Sec. 3601, TCCP)
Payment of the tax due after apprehension is not
a valid defense. (Rodriguez vs. Court of Appeals,
supra).

54

Things Subject to Confiscation in Smuggling

Cases
Anything that was used for smuggling is subject
to confiscation, like the vessel, plane, etc.
(Llamado vs. Commissioner of Customs, G.R.
No. L-28809, May 16, 1983).
Exception: common carriers that are
privately chartered cannot be confiscated.

not

Fraudulent practices Considered as Criminal

Offenses against Customs Revenue Laws
1. Unlawful importation;
2. Entry of imported or exported article by
means of any false or fraudulent practices,
invoice, declaration, affidavit, or other
documents;
3. Entry of goods at less than their true weights
or measures or upon a classification as to
quality or value;
4. Payment of less than the amount due;
5. Filing any false of fraudulent claim for the
payment of drawback or refund of duties
upon the exportation of merchandise; or
6. Filing any affidavit, certificate or other
document to secure to him or others the
payment of any drawback, allowance or
refund of duties on the exportation of
merchandise greater than that legally due
thereon (Sec. 3602, TCCP).
TYPES OF VALUATION FRAUDS
I.

Undervaluations
1. Reducing amount of custom duty where
the goods are subject to ad valorem,
mixed rate of duty;
2. Evading the filing of formal entry;
3. Circumventing quota restrictions.

II.

Overvaluation
1. Forestalling
the
imposition
of
countervailing or anti-dumping duties;
2. Reducing the customs duties where the
classification and rate of duty are
dependent upon value;
3. Reducing the internal revenue tax base
(such as income tax) where the cost of
the imported article is allowed as
deduction from gross income.

III. False
invoice
description
through
reporting lower qualities in the invoice
not identifying branded items as such:
IV. False country of origin
1. Avoiding quota restrictions imposed on
goods coming from the true country of
origin;
2. Escaping
the
imposition
of
countervailing or anti-dumping duties;

3.

Taking advantage of special trade

arrangements offering zero tariff rates;
CSP (General System or Preference);
FTA (Free Trade Agreements); MFN
(Most Favored Nation).

Visitorial Power of the Bureau of Customs

(CMO 10-2006)
It is the power of BOC to demand evidence of
payments of customs duties for imported
products openly offered for sale or kept in
storage, failure to do so shall result in its seizure
and forfeiture proceedings shall commence.
Who may Exercise the Power:
1. The Commissioner of Customs;
2. The Collector of Customs; and
3. Any other Customs Officers with prior
authorization issued by the Commissioner of
Customs
Places Where it may be Exercised:
1. In any place where foreign articles are
openly offered for sale; or
2. In any place where foreign articles are kept
in storage but a valid search warrant is
needed in case of dwelling house. Section
2536, TCCP as implemented by CMO 102006
Manner of Exercise of Visitorial Power
1. Issuance of a Letter of Authorization signed
by the Commissioner himself.
NOTE: The LOA is not required if the
Commissioner of Customs himself exercises
the visitorial power.
2. The Visiting Officer shall enter the premises
where the smuggled goods are suspected to
be stored in the presence of:
a. The lawful occupant; or
b. Any person in possession of the
premises; or
c. In their absence any two witnesses who
are residents of the same locality; or
d. Barangay officials;
e. Any representative from the building or
other responsible officers.
3. Inventory Taking If the owner, occupant,
or person in possession of th premises
cannot show evidence of payment of duties,
the Visiting Officer shall conduct an inventory
of the foreign articles. An inventory receipt
shall be issued by the Visiting Officer
4. The owner of the goods or his representative
shall execute a Certification as to the
conduct of the inventory of the goods and to
show proof of ownership of the same.
5. The Inventory Report shall be forwarded to
the Collector of Customs through the Law
Division for the issuance of Warrant of
Seizure and Detention (WSD).

55

6.

For goods where WSD is not issued on

account of voluntary offer by the owner to
pay the duties, the visiting officer shall
compute the dutiable value of the goods and
assess the duties and taxes payable
thereon.

Informers Reward to Persons in Instrumental

in the Discover and Seizure of Smuggled
Goods
In order to eradicate smuggling, a cash reward
equivalent to ten (10%) of the fair market value of
the smuggled and confiscated goods or One
million pesos per case, whichever is lower, shall
be given to persons instrumental in the discovery
and seizure of such smuggled goods. (Section
282, (B), NIRC of 1997)
NOTE: Public officials, incumbent or retired, who
acquired the information in the course of the
performance of their duties during the
incumbency, are prohibited from claiming the
informers reward.
Doctrines Related to Tariff and Customs
Code
1. In Mison vs. Natividad, the Supreme Court
has held that the exclusive jurisdiction of the
Collector of Customs cannot be interfered
with by regular courts even upon the
allegation of ownership (Commissioner of
Customs vs. Court of Appeals G.R. No.
11202-05, January 31, 2006).
2. A person arriving in the Philippines with
baggage containing dutiable articles is
bound to declare the same in all respects.
Adequate reporting of dutiable merchandise
being brought into the country is absolutely
necessary for the enforcement of customs
laws and failure to comply with those
requisites is as condemnable as failure to
pay customs fees (Jardeleza vs. People
G.R. No. 165265, February 6, 2006)
3. An administrative penalty imposed on the
person arriving in the Philippines with
undeclared dutiable articles is separate from
and independent of criminal liability for
smuggling under Section 3601 of the Tariff
and Customs Code and for violation of other
provisions in the Tariff and Customs Code;
4. Section 3601 of the Tariff and Customs Code
is a penal provision it was designed to
supplement the existing provisions of the
Tariff and Customs Code against the means
leading up to smuggling which might render
it beneficial by a substantive and criminal
statement separately providing for the
punishment of smuggling. Smuggling is
committed by any person who (1)
fraudulently imports or brings into Philippines
any article contrary to law (2) assists in so
doing any article contrary to law; or (3)

5.

6.

receives, conceals, buys or sells or in any

manner
facilitates
the
transportation,
concealment or sale of such goods after
importation, knowing the same to have been
imported contrary to law;
The phrase contrary to law in Section 3601
qualifies the phrases imports or brings into
the Philippines and assists in doing and not
the word article The word law includes
regulations having the force and effect of
law, meaning substantive ore legislative type
rules of agency, organization, procedures or
positions.
The Bureau of Customs exercises exclusive
jurisdiction over seized and forfeited cars it
is tasked to enforce tariff and supervise and
control customs law and all other laws, rules
and regulations relating to the tariff and
customs administration, and to supervise
and control all import and export cargoes,
loaded or stored in piers, terminal facilities,
including container yards and freight
stations, for the protection of government
revenues (Asian Terminals vs. BautistaRicafort G.R. No. 166901, October 27,
2006).

56

COMPARISON OF SPECIAL DUTIES

NATURE

PURPOSE
AMOUNT/ RATE

IMPOSING
AUTHORITY

JUDICIAL
REVIEW

ANTI-DUMPING
Imposed
on
imported
goods
that are sold below
its normal value

COUNTERVAILING
Imposed on goods
enjoying a subsidy
in the exporting
country

MARKING
Imposed
on
imported
goods
that
are
not
properly marked

To protect local
industries
from
undue competition
Difference
between
the
normal price and
export price
Secretary of Trade
and
Industry,
Secretary
of
Agriculture, (Tariff
and Commission)
Any
interested
party
who
is
adversely affected
by a final ruling
imposing an antidumping duty may
file with the Court
of Tax Appeals, a
petition for the
review within thirty
(30) days from his
receipt of notice of
the
assailed
decision. But such
appeal shall not
stop or suspend
the imposition of
the duty.

To protect local
industries
from
undue competition
Amount of subsidy

To
prevent
possible
deceptions
5% ad valorem of
the goods

Secretary of Trade
and
Industry,
Secretary
of
Agriculture
(Tariff
and Commission)
Any interested party
who is adversely
affected
by
the
department order of
the Secretary on
the imposition of the
countervailing duty
may file with the
Court
of
Tax
Appeals a petition
for review of such
order within thirty
(30) days from his
receipt of notice
thereof: But such
appeal shall not
stop or suspend the
imposition of the
duty

Commissioner
Customs

NONE

of

DISCRIMINATORY
Imposed
upon
goods coming from
countries
that
discriminate
against Philippines
products.
To
protect
the
national interest
Not
exceeding
100% ad valorem
President

NONE

57

PROCEDURE IN CUSTOM PROTESTS

Entry at the customhouse appraisal, classification, assessment and payment
Payment in protest
Filing of protest within 15 days after payment and payment of docket fees
When a protest in proper form in a case where protest is required, Collector shall re-examine the matter presented. The
period to decide shall be 30 days.
IF THE DECISION OF COLLECTOR IS ADVERSE

IF COLLECTOR SUSTAINS PROTEST

The adverse party must file a NOTICE OF APPEAL with

the Collector copy furnished the Commissioner Period to
appeal: 15 days from notification

If the Collector renders a decision adverse to the

government (importers protest is granted), such decision
together with the entire records of the case shall be
automatically be elevated to the Commissioner of Customs
for automatic review within 5 days from the promulgation
thereof.

The Collector shall transmit all the records of the

proceeding to the Commissioner
N.B. No appeal shall be heard if filed beyond the period
IF THE DECISION OF
THE COMMISIONER IS
ADVERSE TO THE
PARTY

IF THE DECISION OF
THE COMMISSIONER
ADVERSE TO THE
GOVERNMENT

The person aggrieved by

the decision has 30 days
from receipt of the
decision to appeal to the
CTA

Automatic appeal to the

Secretary of Finance

AUTOMATIC REVIEW BY THE COMMISSIONER

The Commissioner shall render a decision within 30 days
from receipt of the records of the case from the collector
and shall notify the appellant or aggrieved party.
IF THE DECISION OF
THE COMMISIONER
REVERSE THE
DECISION OF THE
COLLECTOR
The person aggrieved
by the decision has 30
days from receipt of
the decision to appeal
to the CTA

IF THE DECISION OF THE

COMMISSIONER IS
ADVERSE TO THE
GOVERNMENT
No decision was rendered
with 30 days or the
Commissioner affirms the
decision of the Collector,
automatic review by the
Secretary of Finance
AUTOMATIC REVIEW BY
THE SECRETARY OF
FINANCE
The records of the
proceedings shall be
forwarded to the office of the
Secretary of Finance within 6
days from promulgation of the
decision
PERIOD TO DECIDE 80 days
IF
DECISION
OF COMM.
REVERSED

IF
DECISION
OF COMM
AFFIRMED

Aggrieved
party may
appeal such
decision to
the CTA via
PETITION
FOR

Final and
Executory

58

REVIEW

ADMINISTRATIVE AND JUDICIAL PROCEDURES

RELATIVE TO CUSTOMS SEIZURES AND FORFEITURES
Determination of probable cause and issuance of warrant
Actual seizure of the articles
Listing of description, appraisal and classification of seized property
Report of seizure to the Commissioner of Customs and the Chairman of the Commission on Audit
Issuance by the Collector of a warrant of detention
Notification to owner or importer
Formal hearing
District Collector renders his decision
If the decision is adverse to the protestant

If the decision is adverse to the government

Appeal with the Commissioner within 15 days from notice

Automatic Review by the Commissioner

If decision is adverse to
the protestant

If decision is adverse to the

government

*Appeal with the Court

of Tax Appeals
Division within 30 days
from notice

Automatic review by the

Secretary of Finance

If the CTA division

grants or denies wholly
or partially the protest,
file a motion for
reconsideration within
15 days from receipt of

If decision is
adverse to
the
Government
Decision
shall be

If the
decision
is
adverse
to the
protestant

If decision is adverse to
the protestant

If decision is adverse to the

government

*Appeal with the Court of

Tax Appeals Division
within 30 days from
notice

Automatic Review by the

Secretary of Finance

If the CTA division grants

or denies wholly or
partially the protest, file a
motion for
reconsideration within 15

If decision is
adverse to
the
Government

If the
decision is
adverse to
the
protestant

59

the decision
If the MR is granted or
denied, wholly or
partially, adverse party
shall file an appeal with
the CTA en banc within
15 days from receipt of
the decision

final and
executory

Appeal
with the
CTA
Division
within 30
days from
notice.*

Appeal by certiorari with

the SC within 15 days
from notice

days from receipt of the

decision
If the MR is granted or
denied wholly or partially,
adverse party shall file an
Appeal with the CTA en
banc within 15 days from
receipt of the decision

Decision
shall be
final and
executory

Appeal with
the CTA
Division
within 30
days from
notice.

Appeal by certiorari with

the SC within 15 days
from notice

Tax Administration and

Enforcement
Taxation Law

BUREAU OF INTERNAL REVENUE

BIR ORGANIZATIONAL STRUCTURE (Sec. 3,
NIRC)
I.

National Office its function is confined to

the general direction, guidance and control
of the entire operations of internal revenue
service, national policy formulation and
program planning for efficient and effective
implementation of internal revenue law and
regulations.
The BIR is headed by the Commissioner of
Internal Revenue and six (6) Deputy
Commissioners, each of whom heads the
following:
1. Operations Group
2. Legal and Inspection Group
3. Resource ad Management Group
4. Information Systems Group
5. Prosecution Group
6. Special Concerns Group
NOTE:
The
two
more
Deputy
Commissioners were appointed in 2003 as
head of the Prosecution Group and the
Special Concerns Group.

II.

Field Service The BIR operates under a

decentralized system primarily charged with
the operational activities of the Bureau .
1. Regional Officer (RO) for effective
administration
and
control,
the
Philippines has been divided into
Regional offices which directly execute
and implement the national policies and
programs prescribed by the National
Office for the enforcement of internal
revenue laws. Each office is headed by
a Regional Director.
Powers and duties of Regional
Director
a. Implements laws, policies, plans,
programs, rules and regulations,
including the assessment and
collection of all internal revenue
taxes, charges, and fees;

60

b.
c.
d.
e.
f.

Issues letters of authority for the

examination of taxpayers within the
region;
Provides economical, efficient and
effective service to the people in the
area;
Coordinates with local government
units in the area;
Exercises control and supervision
over the officers and employees
within the region;
Performs such other functions as
may be provided by law and may
be delegated by the Commissioner.

Revenue District Officer (RDO) under the

ROs and headed by the revenue district
officers who are under the direct control and
supervision of the Regional Director. These
offices implement programs, methods and
procedures necessary for efficient, effective,
and economical assessment and collection
of internal revenue taxes in the revenue
district.
Composition of RDOs
a. Field men and examiners performing
assessment work;
b. Collection agents and clerks performing
collection work.
Duties of Revenue District Officers and
other Internal Revenue Officers
a. Ensure that all laws, rules, and
regulations affecting national internal
revenue are faithfully executed and
complied with, and to aid in the
prevention, detection and punishment of
frauds or delinquencies in connection
therewith;
b. Examine the efficiency of all officers and
employees of the BIR under his
supervision and to report in writing to
the Commissioner through the Regional
Director,
any
neglect
of
duty,
incompetency,
delinquency,
of
malfeasance in office of any internal
revenue officer of which he may obtain
knowledge with a statement of all the
facts and any evidence sustaining each
case.
Authority of Revenue District Officers
a. Examine
taxpayers
within
the
jurisdiction of the district in order to
collect the correct amount of tax;
b. Recommend the assessment of any
deficiency tax due in the same manner
that the said acts could have been
performed by the Revenue Regional
Director himself. (Sec. 13, NIRC)

AGENTS IN THE COLLECTION OF TAXES

(Sec. 12, NIRC)
1. Commissioner of Customs and his
subordinates with respect to the collection of
VAT and excise tax on imported goods;
2. Heads of appropriate government office and
his subordinates with respect to the
collection of energy tax;
3. Authorized agent banks, with respect to the
receipt of payments of internal revenue taxes
authorized to be made through banks
POWERS AND DUTIES OF BIR (Sec. 2, NIRC)
1. To assess and collect national internal taxes,
fees, and charges;
2. To enforce all forfeitures, penalties and fines
connected with the assessment and
collection of taxes, fees, and charges;
3. To execute judgment in all cases decided in
its favour by the CTA and the ordinary courts;
and
4. To effect and administer the supervisory and
policy power conferred upon it by the Tax
Code and other special laws.
POWERS OF THE COMMISSIONER OF
INTERNAL REVENUE

1.
2.
3.
4.

I.

Power to interpret tax laws (Sec. 4, NIRC);

Power to decide tax cases (Sec. 4, NIRC);
Power to obtain information, and to
summon/examine and take testimony of
persons (Sec. 5,NIRC);
Power to make assessment and prescribe
additional requirement for tax administration
and enforcement. (Sec. 6, NIRC)
POWER TO INTERPRET TAX LAWS
The power to interpret the provisions of the
National Internal Revenue Code shall be
under the exclusive and original jurisdiction
of the Secretary of Finance. (Sec. 4, Par. 1,
NIRC)

II.

POWER TO DECIDE TAX CASES

The Commissioner has the power to decide
the following:
1. Disputed assessments;
2. Refunds of internal revenue taxes, fees,
or other charges;
3. Penalties imposed in relation thereto; or
4. other matters arising under the NIRC or
other laws administered by the BIR
NOTE: The foregoing are subject to the
exclusive appellate jurisdiction of the Court
of Tax Appeals.

61

III. POWER TO OBTAIN INFORMATION, AND

TO SUMMON/EXAMINE AND
TAKE
TESTIMONY OF PERSONS

4.

To Examine any book, paper, record, or

other data which may be relevant or
material to such inquiry:

Purposes of the power:

1. To ascertain the correctness of any
return;
2. To make a return when non has been
made;
3. To determine the liability of any person
for any internal revenue tax;
4. To collect from any person liability for
any internal revenue tax;
5. To evaluate tax compliance.

5.

To Summon the:
a. Person liable for tax; or
b. Person required to file a return; or
c. Officer or employee of such person;
or
d. Any person having possession,
custody or care of books of
accounts and other accounting
records containing entries relating
the business of the person liable for
tax; or
e. Any other person

Extent of the Power under Section 5

(CITES)
1.

2.

To cause revenue officers and

employees to make a Canvass from
time to time of the revenue district or
region and inquire after and concerning.
a. All person who may be liable to pay
internal revenue taxes; and
b. All persons owning or having the
care, management or possession of
any object with respect to which a
tax is imposed.

Extent of the Power under Section 6:

1.

To obtain, on a regular basis,

Information from:
a. Any person other than the person
whose internal revenue tax liability
is subject to audit or investigation;
or
b. From any office or officer of the
national and local governments,
government
agencies
and
instrumentalities including BSP and
GOCC
Such information includes (but not
limited to) the following:
i.
cost and volume production;
ii.
receipts or sales and gross
incomes of taxpayers;
iii.
the name addresses and financial
statements
of
corporations,
mutual
fund
companies,
insurance companies, regional
operating
headquarters
of
multinational companies, joint
accounts,
associations,
joint
ventures
or
consortia
or
registered partnerships and their
members.

3.

IV. POWER OF THE COMMISSIONER TO

MAKE ASSESSMENTS

To take the Testimony of the person

concerned, under oath as may be
relevant or material to the inquiry.

Examination
of
returns
and
determination tax due
After a return has been filed, the
Commissioner or his duly authorized
representative may authorize the
examination of the taxpayer and the
assessment of the correct amount of
taxes.
The tax or any deficiency so assessed
shall be paid upon notice and demand
from the Commissioner or his duly
authorized representative.
Withdrawal of Return, Statement, or
Declaration
General Rule: Any return, statement, or
declaration filed in any office authorized
to receive the same shall not be
withdrawn.
Exception: A return, statement or
declaration may be modified, changed,
or amended provided that:
a. it is done within 3 years from filing
of the return; and
b. No notice of audit or investigation of
such return has been served upon
the taxpayer.

2.

Authority to make assessments

based on the Best Evidence
Obtainable
The Commissioner may use the Best
Evidence Obtainable to assess the
proper deficiency tax in the following
cases:

62

a.

b.

When a report required by lse as a

basis of assessment has not been
filed within the time fixed by laws,
rules and regulations; or
There is reason to believe that the
report is false, incomplete or
erroneous.

a.
b.
c.
d.

NOTE: By using the best evidence

obtainable, the Commissioner may
make or amend the return from his own
knowledge. The assessment made by
the Commissioner is prima facie
presumed correct. The burden of proof
to show the incorrectness or inaccuracy
of such assessment of its details lies
with the taxpayer contrary to the usual
presumption of good faith and
innocence.
3.

Authority to conduct inventorytaking, surveillance and to prescribe

Presumptive
Gross
Sales
and
Receipts

Effect of termination of tax period:

The tax shall be due and payable
immediately and shall be subject to all
the penalties prescribed unless it is paid
within the time fixed in the demand
made by the Commissioner.
5.

If there is reason to believe that the

taxpayer is not declaring his correct
income, sales or receipts for internal
revenue
tax
purposes,
the
Commissioner may:
a. Order inventory-taking of goods of
any taxpayer as basis of his internal
revenue tax liabilities;
b. Place the business operations of
any person, natural or juridical,
under observation or surveillance;
Presumptive Gross Sales or Receipts
When (1) a person fails to issue
receipts or invoice or (2) there is reason
to believe that the book of accounts or
other records do not correctly reflect the
declarations made or to be made in a
return required to be filed under the
provision of the Tax Code, the
Commissioner, after taking into account
the sales, receipts, income or other
taxable base of other persons engaged
in similar businesses under similar
situations or circumstances or after
considering other relevant information,
may prescribe a minimum amount of
such gross receipts, sales and taxable
base, and such amount so prescribed
shall be prima facie correct for the
purposes of determining the internal
revenue tax liabilities of such person.
4.

The taxpayer is retiring from

business subject to tax;
The taxpayer is intending to leave
the Philippines;
The taxpayer is intending to remove
his property therefrom or to hide or
conceal his property;
The taxpayer is performing an act
tending to obstruct the proceedings
for collection of the tax for past or
current quarter or year or to render
the same totally or partly ineffective.

Authority to prescribe real property

values
The Commissioner is authorized to
divide the Philippines into different
zones or areas and upon consultation
with competent appraisers from the
private and public sectors, determine
the fair market value of real properties
located in each zone or area.
For purposes of computing any internal
revenue tax, the value of the property
shall be (whichever is higher):
a. Fair market value as determined by
the Commissioner (referred to as
the zonal value); or
b. Fair market value as shown in
schedule of values for the
Provincial and City Assessors (FMV
per tax declaration)

6.

Authority to inquire into bank

deposits
General Rule: The Commissioner
cannot inquire into the bank deposits of
the taxpayer.
Exceptions:
a. A decedent to determine his gross
estate;
b. Any taxpayer who has filed an
application to compromise his tax
liability by reason of his financial
incapacity to pay his taxes. He must
execute a waiver in writing which
shall constitute as authority of the
Commissioner to inquire into the
bank deposits of the taxpayer.

Authority to terminate taxable period

7.
When is tax period terminated?

Authority to accredit and register tax

agents

63

Criteria for accreditation of

agents
a. Professional competence;
b. Integrity;
c. Moral fitness

tax
Any person arrested shall be brought before a
court, there to be dealt with by law. (Sec. 15,
NIRC)

Persons qualified to be tax agents

a. Individuals;
b. General professional partnerships
and their representatives.
8.

Authority to prescribe additional

procedural
and
documentary
requirements.
The Commissioner may prescribe the
manner of compliance with any
documentary or procedural requirement
in connection with the submission or
preparation of financial statements
accompanying the tax return.

ASSIGNMENT OF INTERNAL REVENUE

OFFICERS
1. Those involved in excise tax functions
The Commissioner shall assign internal
revenue officers involved in excises tax
functions to establishments or places where
articles subject to excise tax are kept.
Limitation of Assignment: An internal
revenue
officer
assigned
to
such
establishment shall in no case stay in his
assignment for more than 2 years.
2.

AUTHORITY OF THE COMMISSIONER TO

DELEGATE POWER
General Rule: The Commissioner may delegate
the powers vested in him to any subordinate
official with the rank equivalent of division chief
or higher.
Exceptions (the following cannot be
delegated):
1. Power to recommend the promulgation of
rules or regulations by the Secretary of
Finance;
2. Power to issue ruling of first impressions or
to reverse, revoke, modify any existing ruling
of the Bureau.
3. Power to compromise or abate any tax
liability.
Exceptions to the exception
a. Assessments issued by the regional
offices involving basic deficiency taxes
of P500,000.00 or less; and
b. Minor criminal violations discovered b
regional and district officials, may be
compromised by the REGIONAL
EVALUATION BOARD
4. Power to assign or re-assign internal
revenue officers to establishments where
articles subject to excise tax are produced or
kept.
AUTHORITY
SEIZURES

TO

MAKE

ARRESTS

Limitations of the Assignment:

a. Internal revenue officers assigned to
perform assessment or collection
function shall not remain in the same
assignment for more than 3 years;
b. Assignment of internal revenue officers
or employees to special duties shall not
exceed 1 year.
SOURCES OF INTERNAL REVENUE (Sec. 21,
NIRC)
1.
2.
3.
4.

AND
5.

The Commissioner, the Deputy Commissioners,

the Revenue Regional Directors, the Revenue
District Officers, and other internal revenue
officers shall have the authority to make arrest
and seizures for the violation of the penal law,
rules or regulation administered by the Bureau of
Internal Revenue.

Assignment to other special duties

The Secretary of Finance through the
recommendation of the Commissioner,
assign or re-assign internal revenue officers
and employees of the Bureau of Internal
Revenue without change in their official rank
and salary, to special duties connected with
the
enforcement and administration of
revenue laws as the exigencies of the
service may require.

6.

Income Tax a tax on the yearly profits

arising from property, profession, trades, and
offices.
Estate Tax a tax levied upon the transfer of
the net estate of a decedent to his heirs.
(Sec. 84)
Donors Tax an excise tax imposed on the
transfer of property by way of gift inter vivos.
Valued Added Tax an indirect tax which is
imposed on the increase in the worth, merit
or importance of goods, properties, or
services, and not on the total value of the
goods or services being sold or rendered.
Percentage Tax a tax imposed on a fixed
ration between the gross sales or receipt and
the burden imposed upon the taxpayer.
Excise Tax a tax imposed upon the
performance of an act, the enjoyment of a
privilege or the engaging in an occupation. It
may refer to a tax upon property for the
privilege to enjoy the same.

64

7.

8.

Documentary Stamp Tax An excise upon

the privilege, opportunity or facility offered at
exchanges for transaction of the business. It
is an excise upon facilities used in the
transaction of the business
Such other taxes as are or hereafter may be
imposed or collected by the BIR.
COMPLIANCE REQUIREMENTS

I.

KEEPING OF BOOK ACCOUNTS AND

RECORDS
1. Taxpayers with gross quarterly sales,
earnings, receipts or output of P50,000
or less simplified form of bookkeeping
records duly authorized by the Secretary
of Finance
2. Taxpayers with gross quarterly sales,
earnings, receipts or output exceeding
P50,000 but not more than P150,000
journal and ledger or their equivalent
3. Taxpayers with gross quarterly sales,
earnings, receipts or output exceeding
P150,000 book of accounts examined
and audited by an independent certified
public accountant and their income tax
return shall be accompanied by:
a. Certified balance sheets
b. Profit and loss statements
c. List of income-producing properties
and other relevant data

of accounts to the Commissioner or any of

deputies for examination within 10 days from the
date of retirement or within such period of time,
after which the books of accounts shall be
returned.
Books of accounts and other pertinent records of
tax exempt organizations or grantees of tax
incentives shall be subject to examination by the
Bureau of Internal Revenue for purposes of
ascertaining compliance with conditions under
which they have been granted tax exemptions or
tax incentives, and their tax liability, if any.
II.

ADMINISTRATIVE PROVISIONS
Registration Requirements
Every person subject to any internal revenue
tax shall register once with the RDO:
1. Within 10 days from date of
employment;
2. On or before the commencement of
business; or
3. Before payment of the tax due; or
4. Upon filing of a return, statement, or
declaration as required in the NIRC.
NOTE: A person maintaining a head office,
branch or facility shall register with the
Revenue District Offices having jurisdiction
over the head office, branch or facility.

Preservation and Examination of Book of

Accounts
All books of accounts shall be preserved for a
period of three(3) years beginning from the last
entry in each book.

A facility may include but not be limited to

sales outlets, places of production,
warehouses or storage places.

General Rule: The book of accounts shall be

subject to examination and inspection only one
every taxable year.

Any person required to make, render, or file

a return, statement, or other document shall
be supplied with or assigned a taxpayers
identification number.

Exceptions:
1. Fraud,
irregularity, or
mistakes,
as
determined by the Commissioner;
2. The taxpayer requests reinvestigation;
3. Verification of compliance with withholding
tax laws and regulations;
4. Verification of capital gains tax liabilities
5. In the exercise of the Commissioners power
under Section 5[B] to obtain information from
other persons, in which case, another or
separate examination may be made.
Places of Inspection:
1. Taxpayers office or place of business; or
2. In the office of the Bureau of Internal
Revenue
NOTE: All corporations, partnerships or persons
that retire from business shall submit their books

Taxpayers Identification Number

Only one identification number shall be given

a person required to have one. Any person
who shall secure more than one
identification number shall be criminally
liable.
Issuance of Receipts
Commercial Invoices

or

Sales

or

General Rule: All persons subject to an

internal revenue tax shall, for each sale and
transfer of merchandise or for services
rendered issue duly registered receipts or
sales or commercial invoices showing:
1. date of transaction
2. quantity
3. unit cost

65

4.

description of the merchandise or the

nature of service.

to a specific request for ruling filed by the

taxpayer with the Bureau. The term also
includes reversal, modification or revocation
of any existing ruling.

Exception: No receipt need be issued for

sale or transfer of merchandise or for
services valued below P25.00.

What is required to make a BIR ruling of

first impression a valid one?
a. Must not be against the law
b. It must be issued only by the
Commissioner of Internal Revenue
(Philippine Bank of Communications vs.
CIR, G.R. No. 112024, January 28,
1999)

The original receipts shall be issued to the

purchaser customer or client at the time of
the transaction;
The duplicate shall be kept and preserved by
the issuer in his place of business for a
period of three years from the close of
taxable year.

2.

Rulings with Established Precedents

reiteration of previous rulings, opinions and
interpretations of the Commissioner, as
delegated to a duly authorized internal
revenue officer in response to specific
request for ruling filed by a taxpayer with the
BIR.

3.

Revenue Memorandum Order

4.

Revenue Bulletin (RB)

5.

Revenue Travel Assignment Orders (RTAO)

6.

Revenue Special Orders (RSO)

7.

Revenue Memorandum Circulars (RMC)

8.

Revenue Memorandum Orders (RMO)

9.

Revenue
(RAMO)

Printing of Receipts
All persons who are engaged in business
shall secure fro the Bureau of Internal
Revenue an authority --- receipts or sales or
commercial invoices before a printer can
print the same.
The receipts must be;
a. serially numbers:
b. Include the name, business style of the
Taxpayer;
c. Include the Taxpayers Identification
Number:
d. Include the business address of the
person or entity to use the same.
All persons who print receipt or sales or
commercial invoices shall maintain a
logbook/register of taxpayers who availed of
their printing services. The logbook or
register
shall
contain
the
following
information:
a. Name and TIN of persons or entities for
whom the receipts or sales or
commercial invoices were printed;
b. Number of booklets, number of sets per
booklet, number of copies per set and
the serial numbers of the receipts or
invoices in each booklet.
III. RULES AND REGULATIONS
The Secretary of Finance may promulgate, upon
recommendation of the Commissioner, all needful
rules and regulations for the effective
enforcement of the Tax Code. [Sec. 244, NIRC]
KINDS OF BIR INTERPRETATIVE RULINGS
[RAO NO. 01-03]
1.

Rulings of First Impressions refers to

rulings, opinions, and interpretation of the
Commissioner with respect to the tax code
and other tax laws without established
precedent and which are issued in response

10. Revenue
(RDAO)

Audit

Memorandum

Delegation

Authority

Orders
Orders

11. Revenue Administrative Orders (RAO)

Requisites for the Validity of Administrative
Rule
1. Consistent and in harmony with the law;
2. Reasonable
3. Useful and necessary
4. Published in the Official Gazette
The issuance of a revenue regulation authorized
by stature has the force and effect of law.
The Secretary of Finance has the power to affirm,
reverse, modify or set aside the issuances and
rulings of the BIR concerning the implementation
and application of the provisions of the National
Internal Revenue Code.
Non-Retroactivity of Rulings
General Rule: Any revocation, modification, or
reversal of any of the rules or regulations or any

66

of the rulings or circulars promulgated by the

Commissioner shall not be given retroactive
application if the revocation, modification or
reversal will be prejudicial to taxpayers.
Exceptions
1. Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by the Bureau of
Internal Revenue;
2. Where the facts subsequently gathered by
the BIR are materially different from the facts
on which the ruling was based;
3. Where the taxpayer acted in bad faith.
STATUTORY OFFENSES AND PENALTIES
ADDITIONS TO THE TAX
Civil Penalties

Civil penalties and interest in addition to all

taxes fees, and charges, are imposed under
the NIRC. The amount so added to the tax is
collected at the same time, in the same
manner and as part of the tax.

Tax
laws
imposing
penalties
for
delinquencies are intended to hasten tax
payments by punishing evasion or neglect of
duty in respect thereof.

The penalty and interest are not penal in

nature but compensatory for the concomitant
use of the funds by the taxpayer beyond the
date when he is supposed to have paid them
to the government.
When are Civil Penalties imposed?
25% penalty shall be imposed in the following:
1. Failure to file any return and pay the tax due
thereon as required under the provisions of
the Code or regulations on the date
prescribed;
2. Filing a return with an internal revenue officer
other than those with whom the return is
required to be filled; or
3. Failure to pay the deficiency within the time
prescribed for its payment in the notice of
assessment; or
4. Failure to pay the full or part of the amount of
tax shown on any return required to be filed
under the provision of the Code or rules and
regulations, or the full amount of tax due for
which no return is required to be filed on or
before the date prescribed for its payment.
50% penalty in case of the following:
1. Willful neglect to file a return within the
period prescribed;
2. False or fraudulent return.

NOTE: Substantial under declaration of taxable

sales, receipts, or income in an amount
exceeding 30% of that declared per return.
Substantial Under declaration failure to
report sales, receipts, or income in an amount
exceeding 30% of that declared per return.
Substantial Overstatement of Deductions
claim of deductions in an amount exceeding 30%
of actual deductions.
Interest
In General: There shall be assessed and
collected on any unpaid amount of tax, interest at
the rate twenty percent (20%) per annum from
the date prescribed for payment until the amount
is fully paid.
Deficiency Interest Any deficiency in the tax
due shall be subject to 20% per annum
deficiency interest. (Interest is assessed on the
deficiency, not the whole tax due).
Delinquency Interest In case of failure to pay:
1. The amount of tax due on any return
required to be filed; or
2. The amount of tax due for which no return is
required; or
3. A deficiency tax or surcharge or interest
thereon on the due date appearing on the
notice and demand of the Commissioner,
there shall be assessed and collected on the
unpaid amount, interest at the rate of 20%
per annum until the amount is fully paid,
which interest shall form part of the tax.
Interest on Extended Payments If any person
is qualified and elects to pay in installment but
fails to pay the tax or any installment on or before
the date prescribed, there shall be assessed and
collected interest at the rate of 20% per annum
on the tax or deficiency tax or part thereof unpaid
from the date of notice and demand until it is
paid.
Failure to file certain Information Return
General Rule: Failure to file an information
return, statement or list, or keep record, or supply
any information required on the date prescribed
therefore, the taxpayer shall be liable to pay one
thousand pesos for each such failure. The
aggregate amount for all such failures during the
calendar year shall not exceed twenty-five
thousand pesos (P25,000).
Exception: Failure is due to reasonable cause
and not to willful neglect
CRIMES,
OTHER
FORFEITURES

OFFENSES

AND

67

General Provisions
1. A person convicted of a crime penalized by
the NIRC shall be subject to the penalties
imposed by the Code in addition to the
payment of taxes. The payment of the tax
due after apprehension shall not constitute a
valid defense in any prosecution for violation
of any provision of the Code or in any action
for the forfeiture of untaxed articles.
2. Any person who willfully aids or abets in the
commission of the crime of another shall be
liable in the same manner as the principal.
3. If the offender is not a citizen of the
Philippines he shall be deported
immediately after serving sentence without
further proceedings for deportation.
4. If the offender is a public officer or employee:
a. Maximum penalty shall be imposed;
b. Dismissal from public office;
c. Perpetually disqualified from holding any
public office, to vote, and to participate
in any election
5. If the offender is a certified public accountant
his certificate as a certified public
accountant shall, upon conviction, be
automatically revoked or cancelled.
6. In case of associations, partnerships or
corporation, the penalty imposed on the
partner, branch manager, treasurer, officer
in-charge and employees responsible for the
violation.
Penal Liability of Corporations

The penalties shall be imposed upon the

responsible corporate officers, partners, or
employees

The Corporation, association or general copartnership shall be punished by a fine of not

less than fifty thousand pesos (P50,000) but
not more than one hundred thousand pesos
(P100,000).
OTHER PENAL PROVISIONS
Penalty for Second or Subsequent Offenses
Maximum penalty prescribed for the offense.
What is the penalty to be imposed if there is
no specific penalty provided by law?
Any person who violates any provision of this
Code or any rule or regulation promulgated by
the Department of Finance, for which no specific
penalty is provided by law, shall, upon conviction
for each act of omission, be punished by a fine of
not more than One thousand pesos (P1,000A) or
suffer imprisonment of not more than six (6)
month, or both. [Sec. 275]
Subsidiary Penalty

The subsidiary penalty shall be imposed if

the person convicted for violation of any of

the provisions of this Code has no property

with which to meet the fine imposed upon
him by the court, or is unable to pay such
fine.
Subsidiary personal liability rate of one (1)
day for each Eight pesos and fifty centavos
(P8.50) subject to the rules established in
Article 39 of the Revised Penal Code.

Prescriptive Period
The prescriptive period for violation of the
provisions of the Tax Code is 5 years
commencing from the day of the commission of
the violation of the law, and if the same be not
known at the time, from the discovery thereof and
the institution of judicial proceedings for its
investigation and punishment.
When is the prescriptive period for violation
of NIRC reckoned?
The five-year prescriptive period for violation of
any provision of the Tax Code provided for under
Section 354 (now Section 281) thereof should be
reckoned from the date of the final notice and
demand for payment of the deficiency taxes that
the cause of action on the part of the BIR
accrued. This is because prior to the receipt of
the letter-assessment, no violation has yet been
committed by the taxpayers. (Dizon, Q &A in
Taxation citing Lim, Sr. vs. Court of Appeals, G.R.
Nos. 48134-37, October 18, 1990)
Is judicial proceeding necessary before the
running of prescription begins?
There must be a judicial proceeding for the
investigation and punishment of the tax offense
before the five (5) year limiting period begins to
run. As Section 354 stands in the stature book
(and to this day it has remained unchanged) it
would indeed seem that the tax cases are
practically imprescriptible for as long as the
period from the discovery and institution of
judicial proceedings for its investigation and
punishment, up to the filing of the information in
court does not exceed fie (5) years. (Ibid.)
Interruption of Prescriptive Period
1. When proceedings are instituted against the
guilty persons and shall begin to run again if
the proceedings are dismissed for reasons
not constituting jeopardy;
2. When the offender is absent from the
Philippines.
Informers Reward
1.

For violations
Revenue Code

of

the

National

Internal

Amount of Reward: Ten percent (10%) of the

revenues surcharges or fees recovered
and/or fine or penalty imposed and collected

68

of One Million Pesos (1,000,000) per case,

whichever is lower.

2.

The same amount of reward shall also be

given to an informer where the offender has
offered to compromise the violation of law
committed by him and his offer has been
accepted by the Commissioner and collected
from the offender.

Fore Discovery and Seizure of Smuggled

Goods
Amount of Reward: Cash reward equivalent
of 10% of the fair market value of the
smuggled and confiscated goods or One
million pesos per case, whichever is lower,
shall be given to persons instrumental in the
discovery and seizure of such smuggled
goods.

Requisites:
a. Person gives a definite and sworn
information;
b. Such information is not yet in the
possession of the BIR;
c. Such information leads to the discovery
of frauds upon the internal revenue laws
or violations of any of the provisions
thereof.
d. There must be recovery of revenues,
surcharges and fees.
e. The information is given by a persons
not disqualified to receive the reward.

NOTE: Cash rewards of informers shall be

subject to income tax collected as a final
withholding at the rate of 10%.
All public officials, whether incumbent or
retired, who acquired the information in the
course of the performance of their duties
during their incumbency, are prohibited from
claiming informers reward.

Persons Disqualified:
a. Internal revenue official or employee
b. Other public official or employee
c. Within the sixth degree of consanguinity

Income Taxation
Taxation Law
DEFINITION AND PRINCIPLES
2.
INCOME it is a flow of service rendered by
capital by the payment of money from it or any
benefit rendered by a fund of capital in relation to
such fund through a period of time (Madrigal vs.
Rafferty, G.R. No. 12287, August 8, 1918).
An income is an amount of money coming to a
person or corporation within as specified time,
whether as payment for services, interest or profit
from investment. Unless otherwise specified,
income means cash or its equivalent (Conwi vs.
Commissioner, G.R. No. 48532 August 31, 1992)
Income includes earnings, lawfully or unlawfully
acquired, without
consensual recognition,
express or implied, of an obligation to repay and
without restriction as to their disposition (James
vs. U.S. 366 U.S. 213)
Nature of Philippine Income Tax
1. Direct tax tax burden is borne by the
income tax recipient upon whom the tax is
imposed

3.
4.
5.

Progressive tax tax rate increases as the

tax base increases
Comprehensive system adopts the
citizenship principle, the residence principle,
and the source principle.
Semi-schedular or semi-global
American in origin.

Tests in determining income

1. Flow of Wealth Test determining whether
any gain was derived form the transaction.
2. Realization Test no taxable income until
there is a separation from capital of
something of exchangeable value, thereby
supplying the realization or transmutation
which would result in the receipt of income.
3. Claim of Right Doctrine a taxable gain is
conditioned upon the presence of a claim of
right to the alleged gain and the absence of
a definite unconditional obligation to return or
repay.
Principle of Constructive Receipt of
Income Income which is credited to the
account of or set apart for a taxpayer and

69

4.

5.

which may be drawn upon by him at any

time is subject to tax for the year during
which so credited or set apart, although not
then actually reduced to possession.
Economic-Benefit Principle Test any
economic benefit to the employee that
increases his net worth, whatever may have
been the mode by which it is effected, is
taxable.
Severance Test Theory income is
recognized when there is separation of
something which is of exchangeable value
(Eisner vs. Macomber, 252 US189)

2.
3.

4.

Capital vs. Income (Madrigal vs. Rafferty, supra)

INCOME
All wealth other than as
a mere return of
capital.
Flow of Wealth
Service of wealth
Income is subject to
tax

CAPITAL
Fund
or
property,
existing at an instant of
time, which can be
used
in
producing
goods or services
Fund or property
Wealth
Return of capital is not
subject to tax

Requisites for taxability of Income

1. there must be a gain or profit;
2. The gain must be realized or received;
3. The gain must not be excluded by law or
treaty from taxation
Types of Taxable Income
1. Compensation Income income derived
from the rendering of services under an
employer-employee relationship.
2. Professional Income fees derived from
engaging in an endeavor requiring special
training as professional as a means of
livelihood, which includes, but is not limited
to, the fees of CPSs, doctors, lawyers,
engineers and the like.
3. Business Income gains or profits derived
from
rendering
services,
selling
merchandise,
manufacturing
products,
farming
and
long-term
construction
contracts.
4. Passive Income income in which the
taxpayer merely waits for the amount to
come in, which includes, but is not limited to,
interest income, royalty income, dividend
income, winnings and prizes.
5. Capital Gain gain from dealings in capital
assets
General Principles of Income Taxation (Sec.
23, NIRC)
1. A citizen of the Philippines, residing
therein in taxable on all income derived from
sources within and without the Philippines.

5.
6.

A non-resident citizen is taxable only on

income derived from sources within the
Philippines.
An individual citizen of the Philippines who is
working and deriving income from abroad as
an Overseas Filipino Worker is taxable
only on income from sources within the
Philippines: Provided that a seaman who is a
citizen of the Philippines and receives
compensation abroad as a member o the
complement of a vessel engaged exclusively
in international trade shall be treated as an
overseas contract worker.
An alien individual whether a resident or
not of the Philippines is taxable only on
income derived from sources within the
Philippines.
A domestic corporation is taxable on all
income derived from sources within and
without the Philippines.
A foreign corporation whether engaged or
not in trade or business in the Philippines is
taxable only on income derived from sources
within the Philippines.

Criteria in Imposing Philippine Income Tax

1. Citizenship Principle A citizen taxpayer is
subject to income tax: (a) on his worldwide
income, if he resides in the Philippines; or (b)
only on his income from sources within the
Philippines, if he qualifies as non-resident
citizen.
2. Residence Principle resident alien is
liable to pay income tax on his income from
sources within the Philippines but exempt
from tax on his income from sources outside
the Philippines.
3. Source Principle a non-resident alien is
subject to Philippine income tax because he
derives income from sources within the
Philippines such as dividend, interest, rent,
or royalty.
Classification of Sources of Income (Sec. 42,
NIRC)
1. Income from sources within the Philippines;
2. Income from sources without the Philippines;
3. Income from sources partly within and partly
without the Philippines.
Factors in determining the source of income
1. Interests residence of the debtor
2. Dividends residence of the corporation
paying the dividend
3. Services Place of performance of the
service
4. Rentals and royalties location of property
or interest in such property
5. Sale of real property Location of the
property
6. Sale of personal property country in
which it is sold

70

a.
Exception: The sale of shares of stock in a
domestic corporation shall be treated as
derived entirely from sources within the
Philippines regardless of where said shares
are sold.

b.

c.

CLASSIFICATION OF TAXPAYERS
TAXPAYER means any person subject to tax
imposed by this Title.
I.

II.

Individual
1. Citizen
a. resident citizen (RC)
b. non resident citizen (NRC)
2. Aliens
a. Resident aliens (RA)
b. Non-resident aliens (NRA)
i. Engaged in trade or business
within the Phils. (NRA-ETB)
ii. Not engaged in trade or
business within the Philippines
(NRA-NETB)
iii. Alien individual employed by
Regional or Area Headquarters
and
Regional
Operating
Headquarters of Multinational
Companies
iv. Alien individual employed by
offshore banking units
v. Alien individual employed by
petroleum service contractor
and subcontractor

d.

Overseas Filipino Worker (OFW) is an

individual who is physically present
abroad most of the time durng the
taxable year and taxable only on income
derived from sources within the
Philippines (Sec. 23 (B) (C)].
Seaman is considered as an OFW
provided the following requirements are
met:
i. receives compensation for services
rendered abroad as a member of
the complement of a vessel; and
ii. such vessel is engaged exclusively
in international trade.

Corporations
1. Domestic (DC)
2. Foreign
a. resident foreign corporation (RFC)
b. non-resident foreign corporation
(NRFC)

III. Estates
IV. Trusts
V. Partnerships
1. General Professional Partnership
2. General Co-Partnership
I.

INDIVIDUALS

1.

Resident Citizen (RC) citizen of the

Philippines residing therein is taxable on all
income derived from sources within and
without the Philippines.

2.

Non-Resident Citizen (NRC) taxed on

income derived from sources within the
Philippines which includes a Filipino citizen:

who establishes to the satisfaction of the

Commissioner the fact of his physical
presence abroad with a definite intention
to reside therein;
who leaves the Philippines during the
taxable year to reside abroad, either as
an immigrant or for employment on a
permanent basis;
who works and derives income from
abroad and whose employment thereat
requires him to be physically present
abroad most of the time during the
taxable year;
NOTE: The phrase most of the time
means at least 183 (365 + 2) days. His
presence abroad however, need not be
continuous. (Mamalateo, Philippine
Income Taxation p. 27)
who is previously considered as a nonresident and who arrives in the
Philippines at anytime during the taxable
year to reside thereat permanently shall
be considered non-resident for the
taxable year in which he arrives in the
Philippines with respect to his income
derived from sources abroad until the
date of his arrival [Sec. 22 (E), NIRC]

NOTE: The taxpayer shall submit proof

to the Commissioner to show his
intention of leaving the Philippines to
reside permanently abroad or to return
to and reside in the Philippines as the
case may be.
3.

Resident Alien (RA) an individual whose

residence is within the Philippines and who
is not a citizen thereof is taxable only on
income derived from sources within the
Philippines [Sec. 22 (F), NIRC].

one who comes to the Philippines for a

definite purpose which in its nature
would require an extended stay, and
makes his home temporarily in the
country becomes a resident alien.

71

4.

Length of stay is indicative of intention

(alien who shall have stayed in the
Philippines for more than one year by
the end of the calendar year is a
resident alien)

Non-Resident Alien Engaged in trade or

Business (NRA-ETB) an individual whose
residence is not within the Philippines and
who is not a citizen thereof but doing
business therein is taxable only on income
from sources within (Sec. 22 (G), NIRC).

4.

The term trade or business includes the

performance of the functions of a public
office (Sec. 22 [S], NIRC) but excludes
performance of services by the taxpayer
as an employee (Sec. 22 [CC]).
A NRA who shall come to the
Philippines and stay for an aggregate
period of more than 180 days during any
calendar year shall be deemed a nonresident alien doing business in the
Philippines
Section
22(G)
notwithstanding [See 25(A)(1), NIRC]

5.

Non Resident Alien (Not Engaged in trade

or Business (NRA-NETB) an individual
whose residence is without the Philippines
and who is not a citizen and not doing
business therein is liable for income derived
from sources within the Philippines.

6.

Special Classes of Individual Employees

Alien individuals employed by:
a. Regional headquarters and regional
operating headquarters of multinational
companies in the Philippines;
b. Offshore banking units established in
the Philippines;
c. Foreign service contractor or subcontractor engaged in petroleum
operations in the Philippines.

II.

CORPORATIONS

1.

Domestic Corporation (DC) a corporation

created or organized in the Philippines or
under its laws and is liable for income from
sources within and without. [Sec. 22(C),
NIRC]
Resident Foreign Corporations (RFC) a
corporation
which is not domestic and
engaged in trade or business in the
Philippines is liable for income from sources
within.
In order that a foreign corporation may be
regarded as doing business within a State,
there must be continuity of conduct and
intention to establish a continuous business,
such as the appointment of a local agent,

2.

3.

and not one of a temporary character (CIR

vs. British Overseas Airways Corporation,
G.R. No. L-65773-74 April 30, 1987.)
Non-Resident
Foreign
Corporation
(NRFC) a corporation which is domestic
and not engaged in trade or business in the
Philippines is liable for income from sources
within [Sec. 22(I), NIRC]
Special Types of Corporations
a. Proprietary educational institutions and
non-profit hospitals;
b. Domestic depositary bank (foreign
currency deposit units);
c. Resident international carriers;
d. Offshore banking units;
e. Regional or Area Headquarters and
Regional Operating Headquarters of
multinational companies;
f. Non-resident
cinematographic
film
owners, lessors or distributors;
g. Non-resident owners or lessors of
vessels
chartered
by
Philippine
nationals;
h. Non-resident
lessors
of
aircraft,
machinery and other equipment

Corporation includes
1. Partnerships, no matter how created or
organized;
2. Joint-stock companies;
3. Joint accounts (cuentas en participacion)
4. Associations;
5. Insurance companies [Sec. 22(B), NIRC]\
Corporation Excludes
1. General professional partnerships;
2. Joint venture or consortium formed for the
purpose of undertaking construction projects
or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an
operating or consortium agreement under a
service contract with the Government.
Corporations Exempt from Income Tax
1. Those enumerated under Sec 30.

Exempt corporations are subject to

income tax on their income from any of
their properties, real or personal, or from
any other activities conducted for profit,
regardless of the disposition made of
such income. They are only exempt for
income realized as such.
2.

With respect to GOCCs:

General Rule: these corporations are
taxable as any other corporation.
Exceptions:
a. Government Service Insurance System;
b. Social Security System;
c. Philippine Health Insurance Corporation;
d. Philippine Charity Sweepstakes Office.

72

3.

NOTE: PAGCR is now subject to tax under

R.A. No. 9337.
Regional or Area Headquarters under Sec.
22 (DD) they are exempted because they
do not earn or derive income from the
Philippines
NOTE: Regional Operating Headquarters
under Sec. 22 (EE) shall pay a tax of 10% of
their taxable income.

III. ESTATES AND TRUSTS

ESTATE refers to the mass of properties left by
a deceased person.

Summary
Distribution in the current year out
of the corpus of the estate
Distribution in current year out of
income in the previous year
Distribution in current year out of
income of the current year
Retention by the estate of the
income of the current year
2.

TAXPAYER
NONE
NONE
HEIR
ESTATE

Termination of Judicial Settlement (where

the heirs still do NOT divide the property)

Rules on Taxability of Estate

When a person who owns property dies the
following taxes are payable under the provisions
of the income tax law:
1. Income tax for individuals under Sec. 24 and
25 to cover the period beginning January to
the time of death);
2. Estate income tax under Sec. 60 if the estate
is under administration or judicial settlement.

If the heirs contribute to the estate money,

property, or industry with intention to divide
the profits between/among them, an
unregistered partnership is created and the
estate becomes liable for the payment of
corporate income tax (Evangelista vs.
Collector, G.R. No. L-9996, October 15,
1957; Oa vs. Commissioner, G.R. No L19342, May 25, 1972).

For Estates under Judicial Settlement

If the heirs, without contributing money,

property or industry to impose the estate,
simply
divide
the
fruits
thereof
between/among themselves, a co-ownership
is created, and individual income tax is
imposed on the income received by each of
the heirs, payable in their separate and
individual
capacity
(Pascual
vs.
Commissioner, GR No. L-78133, October
18, 1988; Obillos vs. Commissioner, GR No.
L- 68118, October 29, 1985).

1.

During the pendency of the Settlement

General Rule: subject to income tax in the
same manner as individuals.
Exceptions:
a. entitlement to personal exemption is
limited only to P20,000;
NOTE:
1st View Republic Act No. 9504
amended the Tax Code increasing the
basic personal exemption amounting to
Fifty thousand pesos (P50,000) for each
individual taxpayer. Estates and trusts
are considered in the Tax Code as
individual taxpayers and therefore the
exemption allowed to them should also
be increased from P20,000 to 50,000.
2nd View Tax exemptions are strictly
construed. Section 62 of NIRC explicitly
provides that the exemption allowed to
estates and trusts is P20,000.
b. No additional exemption is allowed;
c. Distribution to the heirs during the
taxable year of estate income is
deductible from the taxable income of
the estate (distributed income shall form
part of the respective heirs taxable
income)
Where no such distribution to the heirs
is made during the taxable year when
the income is earned, and such income
is subjected to income tax payment by
the estate, the subsequent distribution
thereof is no longer taxable on the part
of the recipient.

For
Estates
NOT
under
Judicial
Settlement
Pending
the
extrajudicial
settlement, either of the following situations
may arise, the effect would be the same as
termination of judicial settlement where heirs
still do not divide the property as provided
above.
TRUSTS a right to the property, whether real or
personal, held by one person for the benefit of
another.
When Trusts Taxable:
1. trust income is to be accumulated;
2. trust income is to be distributed currently by
the fiduciary to the beneficiaries;
3. income collected by a guardian on an infant
which is to be held or distributed as the court
may direct;
4. trust in which the fiduciary may, at his
discretion, either distribute or accumulate the
income.
Rules on Taxability of the Income of a Trust

73

General Rules:
1. if income is distributed to beneficiaries, the
beneficiaries shall file and pay the tax;
2. if income is to be accumulated or held for
future distribution, the trustee or beneficiary
shall file and pay the tax
Exceptions
1. in a revocable trust the income of the trust
will be returned by the grantor;
2. in a trust where the income is held for the
benefit of the grantor the income of the trust
becomes income to the grantor;
3. in at rust administered in a foreign country,
the income of the trust undiminished by any
amount distributed to the beneficiaries shall
be taxed to the trustee.
Irrevocable Trusts irrevocable both as to
corpus and as to income.

Trust itself, through the trustee or fiduciary, is

liable for the payment of income tax.

Taxed exactly in the same ways as estates

under judicial settlement and its status as an
individual is that of the trustor.

It is entitled to the minimum personal

exemption (now P50,000) and distribution of
trust income during the taxable year to the
beneficiaries is deductible from the trusts
taxable income.

Tax exemption is likewise to be enjoyed by the

income of the pension trust; otherwise, taxation
of those earnings would result in a diminution of
accumulated income and reduce whatever the
trust beneficiaries would receive out of the trust
fund (Commissioner vs. Court of Appeals, Court
of Tax Appeals and GCL Retirement Plans, GR
No. 95022, March 23, 1992).
Any amount actually distributed to any employee
or distributee shall be taxable to him in the year
in which so distributed to the extent that is
exceeds the amount contributed by such
employee or distributee.
Table of Comparison Between
Estates and Taxable Trusts
TAXABLE ESTATE
The taxable income
shall be determined in
the same way as that
of individuals, but with
a special deduction for
any amount of income
paid,
credited
or
distributed to the heirs.

Revocable Trusts the trustor, not the trust

itself, is subject to the payment of income tax on
the trust income.
Summary
INCOME IS
For the benefit of the
grantor
Retained by the trust
Distributed
to
beneficiary

TAXPAYER
GRANTOR
FIDUCIARY
BENEFICIARY

Employees Trust is Exempted PROVIDED:

1. employees trust must be part of a pension,
stock bonus or profit sharing plan of the
employer for the benefit of some or all of his
employees;
2. contributions are made to the trust by such
employer, or such employees, or both;
3. such contributions are made for the purpose
of distributing to such employees both the
earnings and principal of the fund
accumulated by the trust; and
4. the trust instrument makes it impossible for
any part of the trust corpus or income to be
used for or diverted to, purposes other than
the exclusive benefit or such employees
(Sec. 60B, NIRC).

The
exemption
is
20,000
The income tax rates
for individuals apply.
There is a creditable
withholding tax on the
heir of 15%.
The income tax return
shall be filed if the
gross
income
is
P20,000 or more and
the tax paid by the
executor
or
administrator.

Taxable

TAXABLE TRUST
The taxable income
shall be determined in
the same way as that
of individuals, but with

A
special
deduction for any
amount of income
paid, credited or
distributed to the
heirs.

A
special
deduction for any
amount of the
income applied for
the benefit of the
grantor.
The
exemption
is
20,000
The income tax rates
for individuals apply.
There is a creditable
withholding tax on the
heir of 15%
The income tax return
shall be filed if the
gross
income
is
P20,000 or more and
the tax paid by the
executor
or
administrator.

IV. PARTNERSHIP
Kinds of Partnership under the NIRC
1. General Professional Partnerships (GPP)
formed by a persons for the sole purpose of
exercising a common profession and no part
of the income of which is derived from
engaging in any trade or business. (Sec. 22
(B), NIRC].
2. Taxable OR Business Partnership:

74

3.

All other partnerships no matter how

created or organized;
b. Includes unregistered joint ventures and
business partnerships

However, joint ventures are not taxable

as corporations when:
i. undertaking construction projects;
ii. engaged in petroleum, coal and
other energy operation under a
service
contract
with
the
government.
General
Co-Partnerships
(GCP)

partnerships, which are by law assimilated to

be within the context of and so legally
contemplated as corporations.

a.

Partnership itself is subject to corporate

taxation while individual partners are
considered stockholder and, therefore,
profits distributed to them by the partnership
are taxable as dividends
The taxable income for a taxable year, after
deducting the corporate income tax imposed
therein, shall be deemed to have been
actually or constructively received by the
partners in the same taxable year and shall
be taxed to them in their individual capacity
whether actually distributed or not [Sec. 73
(D), NIRC].
Liability of a Partnership
1. General Professional Partnership not
subject to income tax, but are required to file
returns of their income for the purpose of
furnishing information as to the share of
each partner in the net gain or profit which
each partner shall include in his individual
return.

Partnership acts as withholding agent;

Net income (income for distribution)

shall be computed and taxed like that of
a corporation which is required to file a
quarterly corporate income tax return
and annual return due on or before April
15 of each year.
2. Taxable or Business Partnership income
tax is computed and taxed like that of a
corporation which is required to file a
quarterly corporate income tax return and
annual return due on or before April 15 of the
following year.
Liability of a Partner
1.

Share of a Partner in GPP

If net income, it shall form part of the

gross income of each partner based on
his agreed ratio subject to 10%
creditable withholding tax.

2.

If net loss, it may be taken by the

individual partner in his return of
income.
Payments made to a partner for
services rendered shall be considered
as ordinary business income subject to
Sec. 24A (Effective January 1, 1982)

Share of a Partner in Taxable or Business

Partnership

IF net income, it shall be treated as

dividend shall be subject to a final tax as
follows:
a. RC, NRC, RA 10%
b. NRA-ETB 20%
c. NRA-NETB 25%

If net loss, it may be taken by the

individual partner in his return of
income;

Payments made to a partner for

services rendered shall be considered
as compensation income subject to Sec.
24 (A).

CO-OWNERSHIP
There is co-ownership when:
1. two or more heirs inherit an undivided
property from a decedent;
2. a donor makes a gift of an undivided
property in favor of two or more donees.
It is NOT taxable when the activities are limited
merely to the preservation of the co-owned
property BUT co-owners are liable for income tax
in their separate and individual capacities
It is taxable when the income of the co-ownership
is invested by the co-owners in business creating
a partnership.
TAX ON INDIVIDUALS
TAXABLE INCOME pertinent items of gross
income specified in the NIRC, less deduction
and/or personal and additional exemption, if any.
Income Subject to Graduated Rates
On the taxable income, OTHER than passive
income and capital gains which are subject to
final tax, derived for each taxable year by:
1. Resident citizen (RC) from all sources within
and without;
2. Non-resident citizen (NRC) including OCW
from all sources within;
3. Resident alien (RA) from all sources within;
4. Non-Resident alien engaged in trade or
business (NRA-ETB) from sources within;
(Sec. 24[A], NIRC)

75

NOTE: NRA-NETB is the only individual taxpayer

not subject to the graduated rates. All income
(except capital gains) received by a NRA- NETB
from sources within are considered as gross
income subject to 25% final tax and no
deductions are allowed.

Final Tax Rate:

RC, NRC, RA, NRA-ETB 20%
NRA-NETB 25%
Exceptions:
a. If the depositor has an employee
trust fund or accredited retirement
plan, such interest income, yield or
other monetary benefit is exempt
from the final withholding tax;
b. Under P.D. 27 on land reform, the
landowner is exempt from income
tax on the interest on the price of
the land which the tenant-purchaser
pays him.

Tax Formula
Gross Compensation Income
Less:
Personal Exemptions
Premium Payments on Health and/or
Hospitalization Insurance (if qualified)
Net Compensation Income
Add:
Net business income or
Net professional income*
Other income
Taxable Income subject to graduated rates

2.

*Net Business Income or Net Professional

Income

Final Tax Rates:

RC, RA 7.5%
NRC, NRA-ETB, NRA-NETB - EXEMPT

Gross Business / Professional Income

Less:
Itemized deductions or optional
Standard deduction (OSD)
Net business / Professional Income

Exception: If the loan is granted by a

foreign government, or an international
or
regional
financing
institution
established by governments, the interest
income of the lender shall not be subject
to the final withholding tax.

Income subject to Graduated Rates:

1. Compensation income;
2. Business and professional income;
3. Capital gains not subject to final tax;
4. Passive income not subject to final tax;
5. Other income.

3.

Graduated Tax Table Top marginal rate shall

be 32% effective January 1, 2000.
INCOME
OVER
10,000
30,000
70,000
140,000
250,000
500,000

BUT
LESS
THAN
10,000
30,000
70,000
140,000
250,000
500,000

TAX
RATE
5%
10%
15%
20%
25%
30%
32%

PLUS

OF
EXCESS
OVER

500
2,500
8,500
22,500
50,000
125,000

10,000
30,000
70,000
140,000
250,000
500,000

CONSOLIDATED
RULES
ON
INCOME SUBJECT TO FINAL TAX
I.

From long-term deposit or investment in

the form of savings, common or
individual trust funds, deposit substitutes
investment management accounts and
other
investments
evidenced
by
certificates in such form prescribed by
the BSP.
Final Tax Rate:
RC, NRC, RA, NRA-ETB
Held for 5 years or more exempt
4 years to less than 5 years 5%
3 years to less than 4 years 12%
Less than 3 years 20%
NRA-NETB 25%

PASSIVE

Interest Income
1.

From a depository bank under the

expanded foreign currency deposit
system (FCDS)

II.

Royalties
1.

From any currency bank deposit and

yield or any other monetary benefit from
deposit substitutes and from trust funds
and similar arrangements.
Deposit substitute shall mean an
alternative form of obtaining funds from
the public (20 or more lenders) other
than deposits

From books, literary works and musical

compositions
Final Tax Rates:
RC, NRC, RA, NRA-ETB 10%
NRA-NETB 25%

2.

Other royalties
franchises)

(e.g.

patents

and

76

fund companies and regional operating

headquarters
of
multinational
companies.

Final Tax Rates:

RC, NRC, RA, NRA-ETB 20%
NRA-NETB 25%
III. Prizes and Winnings

2.

Share in the distributable net income

after tax of a taxable or business
partnership.

3.

Share in the net income after tax of an

association, a join account, or a joint
venture or consortium taxable as a
corporation of which he is a member or
co-venturer.

Prizes results of efforts

Winnings Products of chance or luck
NOTE: In case of doubt, a game is deemed
to be one of chance
Prices EXCEEDING P10,000

Final Tax Rates:

RC, NRC, RA 10%
NRA-ETB 20%
NRA-NETB 25%

Final Tax RateS:

RC, NRC, RA, NRA-ETB 20%
NRA-NETB 25%
Exception: PCSO and lotto winnings are
NOT subject to final tax

4.

NOTE: Prizes amounting to P10,000 or less,

although exempt from final tax, is subject to
the graduated rates.

NOTE: The receipt of stock dividends is NOT

taxable.
Stock dividends, strictly speaking, represent
capital and do not constitute income to its
recipient. So that the mere issuance thereof
is not subject to income tax as they are
nothing but enrichment through increase in
value vs. capital investment.

IV. Dividends
Dividends distributions made by a
corporation to its shareholders out of its
earnings or profits and payable to its
shareholders, whether in money or in other
property.

Exceptions (When stock dividends

taxable):
a. These shares are later redeemed for
consideration by the corporation or
otherwise conveyed by the stockholder
to the extent of such consideration;
b. The recipient is other than the
shareholder;
c. A change in the shareholders equity
results by virtue of the stock dividend
issuance. (Vitug and Acosta, pp. 99
102)

Where a corporation distributes all of its

assets in complete liquidation or dissolution,
the gain realized or loss sustained by the
stockholders whether individual or corporate,
is a taxable income or deductible loss, as the
case may be. (Section 73(A) NIRC)
The reckoning point is the time of declaration
and NOT the time of payment of dividends
as it is taxable whether actually or
constructively received.

Proceeds from redemption of shares is:

a. NOT TAXABLE, if its source is the
original capital subscription or initial
capital investment as it is considered not
as an income but a mere return of
capital;
b. TAXABLE, if from other than initial
capital investment as the proceeds of
redemption is additional wealth.

Dividends declared are considered to have

been made from the recently accumulated
profits. The previously accumulated profits
not declared as dividends may be subjected
to improperly accumulated earnings tax if
accumulation was done to evade taxation.
Tax on income is different from tax on the
dividends; therefore, there is no double
taxation (Afisco Insurance Corporation vs.
Court of Appeals G.R. No. 112375, Jan. 25,
1999)
1.

Cash and/ or property dividends from a

domestic corporation or from a joint
stock company, insurance or mutual

Cash and/or property dividends from a

foreign corporation.

V.

Cinematographic Film and Similar Works

Final Tax Rates:
RC, NRC, RA 5-32% (graduated rates)
NRA-ETB, NRA-NETB - 25% (final tax)

77

CAPITAL GAINS

3.

NOTE: Please see rules on Capital Gains and

Losses below.

4.

SPECIAL
CLASSES
EMPLOYEES

OF

INDIVIDUAL

Special Classes of Individual Employees

1.

2.

Individual whether Filipino or alien employed

by:
a. Regional or area headquarters and
regional operating headquarters of
multinational
companies
in
the
Philippines.
b. Offshore banking units established in
the Philippines;
c. Foreign Service contractor or subcontractor engaged in petroleum
operations in the Philippines.
Multinational Company a foreign firm or
entity engaged in international trade with
affiliates or subsidiaries or branch offices in
the Asia-Pacific Region and other foreign
markets.

Tax Rate: 15%

Tax Base: Gross income received as salaries,
wages, annuities, compensation, remuneration
and other emoluments, such as honoraria and
allowances.
The same tax treatment shall apply to Filipinos
employed and occupying the same positions as
those of aliens employed by these multinational
companies, offshore banking units and petroleum
service contractors and subcontractors.
For other sources within the Philippines, income
shall be subject to pertinent income tax
(graduated tax rates, final tax on passive income,
capital gains depending whether a citizen or an
alien), as the case may be.
CONSOLIDATED RULES ON CAPITAL GAINS
AND LOSSES
ORDINARY ASSETS
1. Stock in trade of the taxpayer or other
properties of a kind which would properly be
included in the inventory of the taxpayer
(examples: supplies on hand, merchandise
inventory)
2. Property held by the taxpayer primarily for
sale to customers in the ordinary course of
business (examples: subdivision lots by a
real estate developer, groceries by a retail
store)

Personal property used in trade or business

subject to depreciation (examples: delivery
truck, store and office equipment)
Real property used in trade or business
(examples: warehouse, factory, office
building)

Treatment of ORDINARY Gains and Losses

1. ordinary gains are included in the gross
income
2. ordinary losses are deductible from gross
income
CAPITAL ASSETS include all property held by
the taxpayer whether or not connected in trade or
business but not including those enumerated
above as ordinary assets.
Capital Asset OR Ordinary Asset?
1. a taxpayer originally registered as engaged
in real estate business shall continue to
consider its realties for sale as ordinary
assets NOTWITHSTANDING the fact that is
subsequently failed to operate its business:
2. real property used by an exempt corporation
in its exempt business shall NOT be
considered used for business purposes and
shall be considered as capital asset;
3. real property not used in trade or business
shall be treated as capital asset;
4. a taxpayer changing business from real
estate to non-real estate shall NOT result in
the reclassification of property held by it from
ordinary asset to capital asset;
5. abandoned and idle properties of taxpayer
engaged or previously engaged in real
estate business shall continue to be treated
as ordinary asset;
6. involuntary transfer has no effect on the
classification of such real property in the
hands of the involuntary seller;
7. property purchased for future use in the
business, although this purpose is later
thwarted
by
circumstances
beyond
taxpayers control does not lose its character
as ordinary asset.
THEREFORE, it can be said that once an
ordinary asset always an ordinary asset.
NOTE: Properties classified as ordinary assets
for being used in business by taxpayer engaged
in business other than real estate business are
automatically converted into capital assets upon
showing that the same have not been used in
business for more than two (2) years prior to the
consummation of the taxable
transactions
involving said properties.

78

Treatment of CAPITAL Gains and Losses

1. Capital gains derived from sale of stocks of a
domestic corporation are subject to capital
gains tax.
2. A capital gain derived from sale of real
property in the Philippines is subject to
capital gains tax but NO loss is recognized
because gain is presumed.
3. For other capital assets, the rules on capital
gains and losses apply in the determination
of the amount to be included in gross income
and NOT subject to capital gains tax.

1.
2.
3.

4.
NOTE: The rules on capital gains and losses
shall apply only if the transaction on capital asset
is either a sale or exchanges.
Kinds of Capital Assets
1. Shares of stocks of a Domestic Corporation
2. Real property in the Philippines not failing
under the enumeration of ordinary assets
3. Other capital assets
NOTE: Not all capital gains are subject to capital
gains tax. Capital gains under number 1 and 2
above are subject to capital gains tax while
number 3 above is included in the gross income
subject to graduated rates for individuals and
normal corporate income tax for corporations.

I.

CAPITAL GAINS AND LOSSES

SALE OF SHARES OF STOCK OF A
DOMESTIC CORPORATION (Subject to
capital gains tax)

Coverage: it involves the sale of shares of stock

of a domestic corporation which is not listed and
not traded in the stock exchange by a non dealer
in securities.
What is controlling is whether or not the shares of
stock are traded in the local stock exchange and
not where the actual sale happened (Del Rosario
vs. Commissioner, CTA Case No. 4796,
December 1, 1994).
If the stock is traded in the stock exchange, it is
NOT subject to capital gains tax BUT to stock
transaction tax of % of 1% on its gross selling
price.
If the sale is made by a dealer in securities, the
resulting gain or loss is considered as ordinary
subject to graduated rates (5-32%) for individuals
and normal corporate income tax (30%) for
corporations.
Tax Base: Net Capital Gains on a per transaction
basis (the higher of the gross selling price or
consideration less cost or adjusted basis).
Basis of the Selling Price (BIR Ruling 146-98):

The selling price (SP) shall be the fair market

value (FMV) of the shares of stock
transferred or exchanged;
If traded though local stock exchange FMV
is the actual SP;
If not traded but listed in one or more stock
exchanges FMV is the highest closing
price when shares were sold, transferred or
exchanged OR when no sale is made, the
FMV shall be the highest selling price on the
day nearest to the day of sale, transfer or
exchange;
If not listed FMV shall be the book value
nearest the valuation date

Tax Rates:
1. 5% for the first P100,000;
2. 10% for the amount in excess of P100,000;
Persons Liable:
1. Individuals citizen or alien (RC, NRC, RA,
NRA-ETB, NRA-NETB);
2. Corporation domestic or foreign (DC, RFC,
NRFC);
3. Other taxpayers such as estate, trust, trust
funds and pension among others.
Important Features:
1. No capital loss carry-over for capital losses
sustained during the year (Not listed and
traded in a local stock exchange) shall be
allowed but capital losses may be deducted
on the same taxable year only.
2. The entire amount of capital gain and capital
loss (not listed and traded in a local stock
exchange) shall be considered without taking
into account the holding period irrespective
of the type/kind of taxpayer.
3. Non-deductibility of losses on wash sales
and short sales.
4. Gains from sale of shares of stock in a
foreign corporation are NOT subject to
capital gains tax but to graduated rates
either as capital gain or ordinary income
depending on the nature of the trade or
business of the taxpayer.

II.

CAPITAL GAINS AND LOSSES SALE

OR OTHER DISPOSITION OF REAL
PROPERTY (subject to capital gains tax)

Coverage: It involves the sale or other

disposition of real property classified as capital
asset located in the Philippines by a non-dealer
in real estate.
If the sale is made by a dealer in securities or if
the real property is an ordinary asset, the
resulting gain or loss is considered as ordinary
subject to graduated rates (5-32% ) for
individuals and normal corporate income tax
(30%) for corporations.

79

Tax Base: The higher between:

1. The gross selling price; and
2. Prescribed zonal value of real properties as
determined by the Commissioner OR the fair
market value as shown in the schedule of
valued of the Provincial and City assessors
whichever is higher.
Gain or loss is immaterial, there being a
conclusive presumption of gain.
Tax Rate: 6%
NOTE:

The taxpayer has the option to treat the

capital gain as subject to 6% capital gains
tax or to the graduated rates (5-32%) IF the
buyer of real property classified as capital
asset is the government or any of its political
subdivisions or agencies, or GOCC.

In case of sale of real property which is

subject to the right of redemption such as
extrajudicial foreclosure sale of capital
assets initiated by banks, finance and
insurance companies, the final tax is due
upon the expiration of the redemption period.
Persons Liable:
1. Individuals citizen or alien (RC, NRC, RA,
NRA-ETB, NRA-NETB)
2. Corporation domestic and resident foreign
(DC, RFC)
3. Other taxpayers such as estate and trust
NOTE: Regarding the transactions affected by
the 6% capital gains tax, the NIRC speaks of real
property with respect to individual taxpayers,
estate and trust BUT only speaks of land and
building with respect to domestic and resident
foreign corporation.
Exemption of Sale of the Principal Residence
by an Individual
Principal Residence refer to the dwelling
house, including the land on which it is situated,
where the individual and members of his family
reside, and whenever absent, the said individual
intends to return. Actual occupancy is not
considered interrupted or abandoned by reason
of temporary absence due to travel or studies or
work abroad or such other similar circumstances
(RR No. 14-00; November 20, 2000).
General Rule: The address shown in the ITR is
conclusively presumed as the principal residence
Exception: if not required to file a return,
certification from Barangay Chairman or Building
Administrator (for condominium units) shall
suffice.

Requisites:
1. Sale or disposition of the old actual principal
residence;
2. By a citizens or resident aliens;
3. Proceeds of which is utilized in acquiring or
constructing a new principal residence within
18 calendar months from date of sale or
disposition;
4. Notify the Commissioner within 30 days from
the date of sale or disposition through a
prescribed return of his intention to avail the
tax exemption;
5. Can be availed of only once every ten (10)
years.
6. The historical cost or adjusted basis of his
old principal residence shall be carried over
to the cost basis of his new principal
residence;
7. If there is no full utilization, the portion of the
gains presumed to have been realized shall
be subject to capital gains tax; and
8. The 6% capital gains tax due shall be
deposited with an authorized agent bank
subject to release upon certification by the
RDO that the proceeds of the sale have
been utilized.
NOTE:

If the taxpayer constructed a new residence

and then sold his old house, the transaction
does not fall under the exemption because
the law is clear that the proceeds should be
used in acquiring and constructing a new
principal residence. Therefore, the old
residence should first be sold before
acquiring or constructing the new residence
and not vice-versa (Dizon A & A in Taxation)

If the land is leased, only the dwelling house

can be treated as principal residence.

If the principal residence is co-owned, the

exemption applies only to the extent of his
proportionate share.
Alien may acquire
REAL PROPERTIES
in the Philippines under the following
instances:
1. Alien who is a legal or compulsory heir may
acquire land though succession;
2. Aliens may have acquired real properties
before adoption of the 1935 constitution;
3. Aliens may acquire condominium units
subject to 60-40% limit;
4. Former natural born Filipino citizens may
acquire real properties under BP. 185 and
R.A. 8179
III.

CAPITAL GAINS AND LOSSES

OTHER CAPITAL ASSETS (NOT subject to
capital gains tax)

80

Coverage: it involves sale or exchange or one

considered as equivalent to a sale or exchange
of property classified as capital asset except:
1. Shares of a domestic corporation;
2. Real property in the Philippines held as
capital asset.
The sale or exchange of property must be
consummated not jus perfected.

Exception: if a domestic bank or trust company,

a substantial part of whose business is the
receipt of deposits, sells and any bond,
debenture, note or certificate or other evidence of
indebtedness issued by any corporation
(including one issued by a government or
political subdivision), any loss shall NOT be
included in determining the applicability of the
limitation.

Tax Formula:

III. NET CAPITAL LOSS CARRY-OVER

For sale of property

Selling price (in terms of money)
Less: Cost
GAIN OR LOSS

If any taxpayer, other than a corporation, sustains

in any taxable year a net capital loss, such loss
(in an amount not in excess of the net income for
such year) shall be treated in the succeeding
taxable year as a loss from the sale or exchange
of a capital asset held for not more than twelve
(12) months.

For exchange of property

FMV of the property received in exchange
Less: Cost
GAIN OR LOSS
The property received in exchange must have a
market value and essentially different from the
property disposed of.

NOTE: The rule on net capital loss carry-over for

the next succeeding year applies only to
individuals.
NO
carry-over
allowed
for
corporations.

Tax Treatment and Rate: net capital gains are

included in the gross income subject to
graduated rates (5-32%) for individuals and
normal corporate income tax (30%) for
corporations.

The following are considered as sale or

exchange of capital assets:
1. Retirement of bonds;
2. Short sales of property;
3. Failure to exercise privilege or option to buy
or sell property;
4. Securities becoming worthless;
5. Distribution in liquidation of corporations; and
6. Readjustment of interest in a general
professional partnership.

RULES ON CAPITAL GAINS AND LOSSES

RULES ON EXCHANGE OF PROPERTY

I.

General Rule: upon the sale or exchange of

property, the entire gain or loss as the case may
be, shall be recognized [Sec. 40 (C)1]

Tax Base: Net Capital Gains (excess of the gins

from sales/exchanges of capital assets over the
gains rom such sales/exchanges)

HOLDING PERIOD

The percentages of gain or loss to be taken into

account shall be the following:

Exceptions:
100% - if the capital assets has been held for
12 months or less; and
50% - if the capital asset has been held for
more than 12 months.
NOTE: The holding period applies only to
individuals. If the taxpayer is a corporation,
capital gains and losses are recognized to the
extent of 100%.
II.

NON DEDUCTIVILITY OF NET CAPITAL

LOSS

General Rule: capital losses are allowed only to

the extent of capital gains; hence, the net capital
loss is NOT deductible

No gain or loss is recognized in:

1. Exchange of property solely in kind in
pursuance of corporate mergers and
consolidations
2. Exchange by a person of his property for
stocks in a corporation as a result of which
said person, alone or together with others
not exceeding four (4) persons gains control
of said corporation.
Control ownership of stocks in a
corporation amounting to at least 51% of the
total voting power of all classes of stocks
entitled to vote.
Gain is recognized but loss is NOT in:
(IWARN)
1. Transactions between Related taxpayers
(Sec. 36)

81

2.
3.
4.
5.

Illegal transactions (Sec. 96 R.R. 2)

Wash sales by non-dealers of securities and
when not subject to the stock transfer tax.
Sales and exchanges that are not Arms
length.
Exchanges of property, Not solely in kind, in
pursuance of corporate mergers and
consolidation.

Exchange solely in kind in legitimate mergers

and consolidation includes:
1. Between the corporations which are parties
to the merger or consolidation (property for
stocks);
2. Between a stockholder of a corporation party
to a merger or consolidation and the other
party corporation (stock for stock);
3. Between a security holder of a corporation
party to a merger or consolidation and the
other party corporation (securities for
securities).

Tax base: Net Taxable Income

Net Income Tax Formula
Gross Sales
Less:
Sales Returns
Sales Allowances
Sales Discounts
NET SALES
Less:
Cost of Goods Sold
GROSS INCOME FROM SALES
Add:
Incidental income / other income
NORMAL TAX GROSS INCOME
Less:
Allowable deductions
NET TAXABLE INCOME
Multiplied by: Applicable tax rate
INCOME TAX PAYABLE
II.

CAPITAL GAINS TAX

Corporations Liable: DC, RFC, NRFC

Merger or consolidation means the ordinary
merger or consolidation, OR the acquisition by
one corporation or all or substantially all the
properties of another corporation solely for stock
undertaken for a bona fide business purpose and
not solely for the purpose of escaping the burden
of taxation
Bona fide purpose each and every step of the
transaction shall be considered and the whole
transaction or series of transaction shall be
treated as a single unit.

TAX ON CORPORATIONS
OUTLINE
OF
CORPORATIONS

THE

TAXES

ON

I. Normal Income Tax

II. Capital Gains Tax
III. Final Tax on Passive Income
IV. Minimum Corporate Income Tax
V. Gross Income
VI. Improperly Accumulated Earnings Tax (IATE)
VII. Branch Profit Remittance Tax
VIII. Final Tax on (other) Gross Income From
Sources Within the Philippines
I.

NORMAL CORPORATION INCOME TAX

(NCIT)

Corporations Liable: DC and RFC

Tax Rates:

30%, effective Jan. 1, 2009

35%, November 1, 2005 (Revenue

Memorandum Circular 16-2006)

32%, Prior to November 1, 2006

Same rules as those imposed on individuals

There is no provision for capital gains tax on sale
or disposition of real properties for NRFC
because NRFC cannot own real properties in the
Philippines.
III. FINAL TAX ON PASSIVE INCOME
Corporations Liable: DC. RFC, NRFC
Same rules as those imposed on individuals
RULES
on
inter-corporate
Dividends
Received by a RFC:
1. dividends received from a domestic
corporation - exempt
2. dividends
received
from
a
foreign
corporation:
a. if from sources within (30% tax)
b. if from sources without exempt
RULES on Inter-corporate Dividends from a
Domestic Corporation received by a NRFC
General Rule: It subject to final tax of 15%, as
long as the country in which the NRFC is
domiciled allows a tax credit for taxes deemed
paid in the Philippines equivalent to 20% (now
15%) or does not impose tax on dividends.
Exception: It is subject to final tax of 35% (now
30%) IF the country within which the NRFC is
domiciled does NOT allow a tax credit.
Rationale: For the purpose of encouraging
foreign investors to conduct business in the
country.

82

Tax Sparing Rule The 20% (now 15%)

represents the difference between the regular
income tax of 35% (now 30%) on corporations
and the 15% tax on dividends. It is the amount of
tax forgone by the Philippine government in favor
of the non-resident corporation.
IV. MINIMUM
(MCIT)

CORPORATE

INCOME

TAX

Corporations Liable: DC and RFC

Tax Rate: 2%
Tax Base: Gross income EXCEPT income
exempt from income tax and income subject
to final withholding tax
Conditions:
1. IF taxable income is zero or negative; or
2. IF MCIT is greater than NCIT due
Limitations:
1. MCIT does NOT apply if the DC or RFC
is not subject to NCIT;
2. For DC whose operations are partly
covered by the NCIT and partly covered
under a special income tax system, the
MCIT shall apply on operations covered
by the NCIT;
3. For RFC, only the gross income from
sources within the Philippines shall be
considered.
MCIT FORMULA
Gross Sales
Less:
Sales Returns
Sales Allowances
Sales Discounts
NET SALES
Less:
Cost of Goods Sold
MCIT GROSS INCOME
Multiplied by:
2%
MCIT PAYABLE
Cost of Goods Sold include all business
expenses directly incurred to produce the
merchandise and bring them to their present
location such as direct labor, direct materials, and
overhead expenses.
Gross Income include all items of gross
income enumerated under Section 32(A) of the
Tax Code, as amended, except income exempt
from income tax and income subject to final
withholding tax described (RR. No. 12-2007).
When does MCIT commence?
MCIT is imposed beginning the fourth taxable
year in which such corporation commenced its

business operations, which is the year when the

corporation registers with the BIR and NOT when
the corporation started commercial operation.
Rules on Carry Forward of the Excess MCIT:
1. The excess of MCIT over the NCIT can be
carried forward on an annual and quarterly
basis;
2. It can be credited against the NCIT due in
the next 3 immediately succeeding taxable
years;
3. Any excess not credited in the next 3 years
shall be forfeited;
4. Carry forward (annually or quarterly) is
possible only if NCIT is greater than MCIT;
5. The maximum amount that can be credited
is up to the amount of the NCIT.
Imposition of MCIT may be suspended if
substantial losses are sustained due to any of
the following (Memorandum No. 6-2002).
1. prolonged labor dispute losses arising
from a strike by the employees for more than
6 months within a taxable period causing
temporary shutdown of business operations
2. force majeure cause due to an irresistible
force as by Act of God like lightning,
earthquake, storm, flood and the like; also
include armed conflicts like war and
insurgency.
3. Legitimate business reverses include
substantial losses sustained due to fire,
robbery, theft, or embezzlement, or for other
economic reasons as determined by the
Secretary of Finance
Entitles EXEMPT from MCIT:
1. Domestic proprietary educational institutions;
2. Domestic non-profit hospital;
3. Domestic depository banks under the
expanded foreign currency deposit system;
4. Resident foreign international carrier;
5. resident foreign offshore banking units;
6. Resident
foreign
regional
operating
headquarters; and
7. Firms enjoying special income tax rate under
the PEZA law, Bases Conversion Act and
those
enjoying
income
tax
holiday
incentives.
The entities enumerated above are exempt from
MCIT because they are not subject to NCIT
NOTE: MCIT shall likewise apply to the quarterly
corporate income tax but the final comparison
between the NCIT due and the MCIT shall be
made at the end of the taxable year taking into
consideration quarterly tax payment made (RR
No. 12-2007).
V.

GROSS INCOME TAX

83

Corporations Liable : DC and RFC

Tax Rate: 15% optional rate beginning
January 1, 2000
Tax Base: Gross Income
Available only to firms whose ration of cost of
sales to gross sales or receipts from all
sources does not exceed 55%.
It is irrevocable for 3 consecutive years
during which the corporation is qualified
under the scheme.
Authorized
by
the
President
upon
recommendation by the Secretary of Finance
NOTE: No authority has been given by the
President

1.
2.
3.
4.

Conditions Precedent to Grant of

Presidents Authority:
tax effort ration = 20% of GNP
income tax collection/total revenues = 40%
VAT tax effort = 4% of GNP
consolidated
public
sector
financial
position/GNP = 0.9%

VI. IMPROPERLY ACCUMULATED EARNINGS

TAX (IAET)
Corporations Liable: DC
Improperly Accumulated Earnings profits of
a corporation that are permitted to accumulate
instead of being distributed to its shareholders for
the purpose of avoiding the income tax with
respect to its shareholders or the shareholders of
another corporation.
Tax Rate: 10%
Tax Base: Improperly Accumulated Taxable
Income (in addition to other taxes).
Rationale:
If
profits
were
distributed,
shareholders would be liable to income tax
thereon, whereas if there is no distribution, they
would incur no tax in respect to the undistributed
earnings and profits of the corporation. Thus, a
tax is being imposed:
1. As penalty for the improper accumulation of
its earnings, and
2. As a form of deterrent to the avoidance of
tax upon shareholders who are supposed to
pay dividends tax.
Coverage: Imposed on improperly accumulated
taxable income earned starting January 1, 1998
of domestic corporations and closely-held
corporations.

Closely-held corporations at least 50% in

value of the outstanding capital stock or at least
50% of the total combined voting power of all
classes of stock entitled to vote is owned directly
classes of stock entitled to vote is owned directly
or indirectly by or for not more than 20
individuals.
Corporations Exempted from IAET
1. Publicly held corporations (Sec. 29)
2. Banks and other non-banks financial
intermediaries (Sec. 29);
3. Insurance companies (Sec. 29);
4. Taxable partnerships [deemed to have
actually or constructively received the
taxable income under (Sec. 73(D)]
5. General professional partnerships (exempt;
taxable against the partners);
6. Non-taxable joint ventures;
7. Enterprises duly registered with the
Philippines Economic Zone Authority (PEZA)
under R.A. 7916 and enterprises registered
pursuant to the Bases Conversion and
Development Act of 1992 under R.A. 7227
as well as other enterprises duly registered
under special economic zone declared by
law which enjoy payment of special tax rate
on their registered operations or activities in
lieu of other taxes, national or local; and
8. Foreign corporations [RR No. 02-2001]
Evidence of purpose to avoid income tax:
1. Being a mere holding or investment
company is a prima facie evidence of a
purpose to avoid the tax upon its
shareholders as indicated by the following:
a. Investment of substantial earnings and
profits of the corporation in unrelated
business or in stock or securities of
unrelated business;
b. Investment in bonds and other long-term
securities;
c. Accumulation of earnings in excess of
100% of paid-up capital, not otherwise
intended for the reasonable needs of the
business.
2. Accumulation of profits beyond the
reasonable needs of the business UNLESS
the
contrary
is
proven
by
clear
preponderance of evidence.
Immediacy Test the reasonable needs of the
business are the immediate and reasonably
anticipated needs supported by a direct
correlation of anticipated needs to such
accumulation to such accumulation of profits.
What constitutes reasonable needs of the
business? (PLACES)
1. Accumulation of earnings up to 100% of the
Paid-up capital;

84

2.

Earnings reserved for definite corporate

Expansion approved by the Board of
Directors or equivalent body;
Reserved for building, plants or equipment
Acquisition as approved by the Board of
Directors or equivalent body;
Reserved for Compliance with any loan
covenant or pre-existing obligation;
Earnings required by Law or applicable
regulations to be retained;
In case of Subsidiaries of foreign
corporations
in
the
Philippines,
all
undistributed earnings intended or reserved
for investments within the Philippines.

Tax Base: Total profit applied or earmarked for

remittance without any deduction for the tax
component thereof.

The controlling intention of the taxpayer is that

which is manifested at the time of accumulation,
not subsequently declared intentions, which are
merely the product of afterthought. A speculative
and indefinite purpose will not suffice.

Single Entity Concept

As a general rule, the head office of a foreign
corporation is the same juridical entity as its
branch in the Philippines.

3.
4.
5.
6.

Definiteness of plan/s coupled with action/s taken

towards its consummation is essential.
IAET FORMULA
Taxable Income for the current year
Add:
Income exempt from tax
Income excluded from gross income
Income subject to final tax
Amount of NOLCO deducted
TOTAL
Less:
Income tax paid/payable for the taxable
year
Dividends actually or constructively paid
Amount reserved for the reasonable
needs of the business
IMPROPERLY
ACCUMULATED
TAXALE
INCOME
Multiplied by: IATE (10%)
IMPROPERLY ACCUMULATED EARNINGS TAX
(IATE)
Limitation:
The profit that has been subjected to IAET shall
no longer be subjected to IAET in later years
even if not declared as dividend. However, profits
which have been subjected to IAET, when
declared as dividends, shall be subject to tax on
dividends except in those instances where the
recipient is not subject thereto.
VII. BRANCH PROFIT REMITTANCE TAX
Corporation Liable :RFC
It covers any profit actually or constructively
remitted by a branch to its head office.
Tax Rate: 15%

Exception: Those activities which are registered

with the Philippine Economic Zone Authority
(PEZA)
Rationale: To equalize the tax burden on foreign
corporations maintaining or one hand, local
branch offices and organizing, on the other hand,
a subsidiary domestic corporation (Bank of
America N.T and S.A. vs. Court of Appeals et. al.,
G.R. No. 103106 July 21, 1994).

But when the heal office of a foreign corporation

independently and directly invested in a domestic
corporation without the funds passing through the
Philippine branch, the taxpayer with respect to
the tax on dividend income would be the nonresident foreign corporation itself and the
dividend income shall be subject to the tax
similarly imposed on non-resident foreign
corporation
(Marubeni
Corporation
vs.
Commissioner, 177 SCRA 500
Income Treated a Branch Profit
Interests, dividends, rents, royalties, including
remuneration for technical services, salaries,
wages premiums, annuities, emoluments or other
fixed or determinable annual, periodic or casual
gains, profits, income and capital gains received
by a foreign corporation during each taxable year
from all sources within the Philippines shall not
be treated as branch profits UNLESS the same
are effectively connected with the conduct of its
trade or business in the Philippines.
VIII. FINAL TAX ON (Other) GROSS INCOME
FROM
SOURCES
WITHIN
THE
PHILIPPINES
Corporation Liable: NRFC
Rationale: a NRFC is not subject no NCIT on its
taxable income but instead subject to final tax on
gross income
Tax Rates:
30%, effective January 1, 2009
35%, effective July 1, 2005
32%, Prior to July 1, 2005
Tax Base: gross income received from all
sources within the Philippines, such as interests,
dividends, rents, royalties, salaries, premiums
(except reinsurance premiums), annuities,

85

emoluments or other fixed or determinable

annual, periodic or casual gains, profits and
income, and capital gains EXCEPT capital gains
resulting from the sale of shares of stock of a
domestic corporation not listed and traded
through a local stock exchange, held as a capital
asset.

Tax Rate:
General Rule: Exempt from all taxes except
net income from such transactions that may
be specified by the Secretary of Finance
upon recommendation by the Monetary
Board to be subject to the regular income tax
payable by banks.

GOVERNMENT OWNED AND CONTROLLED

CORPORATIONS (GOCC)

Exceptions: Final tax of 10%

interest
income from foreign currency loans granted
by such depository banks under said
expanded system to residents other than
offshore units in the Philippines or other
depository banks under the expanded
system.

General Rule: The rules governing domestic

corporations engaged in a similar business,
industry, or activity shall apply.
Exceptions:
1. Government Service Insurance System
(GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation
(PHIC)
4. Philippine Charity Sweepstakes Office
(PCSO)

SPECIAL
RESIDENT
CORPORATIONS
1.

FOREIGN

International Carriers
Tax Rate: 2.5%

SPECIAL DOMESTIC CORPORATIONS

Tax Base: Gross Philippine Billings

1.

International Air Carrier foreign airline

corporation doing business in the Philippines
having been granted landing rights n any
Philippine port to perform international air
transportation services/activities or flight
operations anywhere in the world (Sec. 2
R.R. No. 15-2002).

Proprietary Educational Institutions and

non-profit Hospitals
Tax Rates
General Rule : 10%
Exceptions: 30% IF the gross income from
unrelated trade, business or other activity
exceeds 50% of the total gross income
derived from all sources.
Tax Base: net income EXCEPT on income
subject to capital gains tax and passive
income subject to final tax within and without
the Philippines.
Unrelated trade, business or other
activity undertakings that are NOT
substantially related to the exercise or
performance by such educational institution
or hospital of its primary purpose or function.
Proprietary educational institution any
private school maintained and administered
by private individuals or groups with an
issued permit to operate from the
Department of Education (DepEd), or the
Commission on Higher Education (CHED),
or the Technical Education and Skills
Development Authority (TESDA).

2.

Depositary Banks (Foreign Currency

Deposit (Units) [Sec. 27 (D) (3) as amended
by R.A. 9294( 2004)]

Gross Philippine Billings (for international air

carrier) includes:
a. Gross revenue derived from carriage of
persons, excess baggage, cargo and
mail originating from the Philippines in a
continuous and uninterrupted flight,
irrespective of the place of sale or issue
and the place of payment of the ticket or
passage document.
b. Gross revenue from tickets revalidated,
exchanged and/or indorsed to another
international airline form part of the
Gross Philippine Billings if the
passenger boards a plane in a port or
point in the Philippines
c. For a flight which originates from the
Philippines, but transshipment of
passenger takes place at any port
outside the Philippines on another
airline, only the aliquot portion of the
cost of the ticket corresponding to the
leg flown from the Philippines to the
point of transshipment shall form part of
Gross Philippine Billings.
A foreign airline company selling tickets in
the Philippines through their local agents
shall be considered as RFC engaged in

86

trade or business in the country. The

absence of flight operations within the
Philippine territory cannot alter the fact that
the income received was derived from
activities within the Philippines. The test of
taxability is the source, and the source is that
activity which produced the income (Air
Canada vs. CIR CTA Case No. 6572,
December 22, 2004).

4.

Offshore Banking Units authorized by the

BSP [Sec. 28, (A) (4) as amended by RA
9294 (2004)]

Regional or Area Headquarters (RHQ)

an office whose purpose is to act as an
administrative branch of a multinational
company engaged in international trade
which principally serves as a supervision,
communications and coordination center for
its subsidiaries, branches or affiliates in the
Asia-Pacific Regional an other foreign
markets and which does not derive income
in the Philippines
5.

Regional Operating Headquarters

Multinational Companies

of

Tax Rate

Tax Rate: 10%

General Rule: Exempt from all taxes, except

net income from such transactions as may
be specified by the Secretary of Finance,
upon recommendation of the Monetary
Board to be subject to the regular income tax
payable by banks.

Tax Base: Taxable income from within the

Philippines
Regional Operating Headquarters (ROHQ)
foreign business entity which is allowed to
derive income in the Philippines by
performing qualifying services to its affiliates,
subsidiaries or branches in the Philippines,
in the Asia-Pacific Region and in other
foreign markets and may engage in the
following activities:

Exception: It is subject to final tax of 10% on

interest income derived from foreign
currency loans granted to residents other
than offshore banking units or local
commercial banks, including local branches
of foreign banks that may be authorized by
the BSP to transact business with offshore
banking units.

3.

of

Tax Rate: Exempt from all kinds of local

taxes, fees, or charges imposed by a local
government unit except real property tax on
land improvements and equipment.

Gross
Philippine
Billings
(for
international shipping) gross revenue
whether for passenger, cargo or mail
originating from the Philippines up to final
destination, regardless of the place of sale or
payments of the passage or freight
documents.

2.

Regional or Area Headquarters

Multinational Companies

a.
b.
c.
d.
e.
f.
g.
h.

Resident Depository Bank (FCDU) [Sec.

28 (D) (7) (b) as amended by RA 9294
(2004)]
Tax Rate:
General Rule: Exempt from all taxes, except
net income from such transactions as may
be specified by the Secretary of Finance,
upon recommendation of the Monetary
Board to be subject to the regular income tax
payable by banks
Exception: It is subject to final tax of 10% on
interest income derived from foreign
currency loans granted by such depository
banks under said expanded system to
residents other than offshore units in the
Philippines or other depository banks under
the expanded system.

i.
j.
k.

general administration and planning;

business planning and coordination;
sourcing and procurement of raw
materials and components;
corporate finance advisory services;
marketing control and sale promotion;
training and personnel management;
logistic services;
research and development services and
product development;
technical support and maintenance;
data processing and communications;
and
business development.

SPECIAL
NON-RESIDENT
CORPORATION
1.

FOREIGN

Non-resident Cinematographic Film Owners,

Lessors or Distributors
Tax Rate: 25%
Tax Base: Gross income from all sources
within the Philippines

87

2.

Non-resident Owner or Lessor of Vessels

Chartered by Philippine nationals
Tax Rate: 4.5%
Tax Base: Gross rentals, lease or charter
fees from leases or charters to Filipino
citizens or corporations, as approved by the
Maritime Authority.

3.

Non-resident Owner or Lessor of Aircraft and

other equipment.
Tax Rate: 7.5%
Tax Base: Gross rentals or fee

EXEMPT CORPORATIONS
1. Labor,
agricultural
or
horticulatural
organization not organized principally for
profit;
2. Mutual savings bank not having a capital
stock represented by shares and cooperative
bank without capital stock organized and
operated for mutual purposes and without
profit;
3. A beneficiary society, order or association,
operating for the exclusive benefit of the
members such as a fraternal organization
operating under the lodge system, or a
mutual aid association or a non-stock
corporation
organized
by
employees
providing for the payment for life, sickness,
accident, or other benefits exclusively to the
members of such society, order or
association, or non-stock corporation or their
dependents;
4. Cemetery company owned and operated
exclusively for the benefit of its members;
5. Non-stock corporations or association
organized and operated exclusively for
religious, charitable, scientific, athletic or
cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset
shall belong to or inure to the benefit of any
member, organizer, officer or any specific
person;
6. Business league, chamber of commerce, or
board of trade, not organized for profit and
no part of the net income of which inures to
the benefit of any private stockholder or
individual;
7. Civic league or organization not organized
for profit but operated exclusively for the
promotion of social welfare;
8. A non-stock and non-profit educational
institution;
9. Government educational institution;
10. Farmers or other mutual typhoon or fire
insurance company, mutual ditch or irrigation
company, or like organization of a purely
local character, the income of which consists
solely of assessments, dues or fees

collected from members for the sole purpose

of meeting its expenses; and
11. Farmers, fruit growers or like association
organized and operated as a sales agent for
the purpose of marketing the products of its
member and turning back to them the
proceeds of sales, less the necessary selling
expenses on the basis of the quantity of
produce finished by them.
NOTE: Exempt corporations are subject to
income tax on their income from any of their
properties, real or personal or from any of their
activities conducted for profit, regardless of the
disposition made of such income [CIR vs. Court
of Appeals. G.R. No. 124043. Oct. 14, 1998].
GROSS INCOME
Gross Income all income derived from
whatever source (except those excluded or
exempted by law), including but not limited to the
following (Sec. 32, NIRC): (CART-DRIP-GPP)
1. Compensation;
2. Annuities;
3. Rents;
4. Gross income from profession, trade or
business;
5. Dividends;
6. Royalties;
7. Interest;
8. Prizes and winnings;
9. Gains from dealings in property;
10. Pensions; and
11. Partners share in the net income of the
general professional partnership
NOTE: Gross Income under Sec. 32 is different
from the limited meaning of Gross Income for
purposes of Gross Income Tax, which means
Gross Sales less Sales Returns, Discounts, and
Allowances and Cost of Goods. Sold.
ITEMS OF INCLUSION
I.

COMPENSATION

All
remunerations
for
services
performed by an employee for his
employer under an employer-employee
relationship
UNLESS
specifically
excluded by the Code.
Included ONLY when the taxpayer is
subject to Net Income Tax.

Requisites:
1. personal services actually rendered;
2. payment made for such services; and
3. payment was reasonable
II.

ANNUITIES

88

1.

Refer to annuity policies sold by

insurance companies, which provide
installment payments for life, or for a
guaranteed fixed period of time
whichever is longer.
The portion representing return of
premium is not taxable while that portion
that represents interest is taxable.
Failure to comply with the requirements
of a tax-exempt annuity makes it taxable
and included in the gross income.

III. RENTS

Amount or compensation paid for the

use or enjoyment of a thing or a right
and implies a fixed sum or property
amounting to a fixed sum to be paid at a
stated time for the use of the property.

SCOPE: all amount or property received

form lease contract, whether used in
business or not.

Prepaid or advance rental is taxable

income to the lessor in the year
received, if so received under a claim or
right and without restriction as to its use,
and regardless of method of accounting
employed.

Security deposit applied to the rental of

the terminal month or period of contract
must be recognized as income at the
time it is applied

If security deposit is to ensure contract

compliance, it is not income to the
lessor UNTIL the lessee violates any
provision of the contract.

Method of reporting the value of

permanent improvements introduced by
the lessee:
1. outright method recognized as
income to lessor at the time when
such buildings improvements are
completed at fair market value
2. spread-out method the lessor
spread over the life (or remaining
period) of the lease, the estimated
depreciated value of such buildings
or improvements at the termination
of the lease and report as income
for each year of the lease, an
aliquot part thereof.

Rents EXCLUDED from gross income:

1. Those paid to non-resident owner
or lessor of vessels chartered by
Philippine nationals 4.5% of gross
rentals.
2. Those paid to non-resident owner
or lessor of aircraft, machineries
and other equipment 7.5% of
gross rentals or fees

Items considered as rental income.

2.

agreed amount per month or per

year
obligations of lessor to third parties
which the lessee undertakes to pay
as further consideration of the
lease, such as;
a. real estate taxex on leased
premises paid by the lessee
b. insurance premiums paid by
lessee on policy covering
leased property
c. dividends paid by lessee to
stockholders
of
lessorcorporation, in lieu o rent.
d. Interest paid by lessee to
holder of bonds issued by
lessor-corporation, instead of
rent.

IV. GROSS INCOME FROM PROFESSION,

TRADE, OR BUSINESS

Business is any activity that entails

time and effort of an individual or group
of individuals for purposes of livelihood
or profit.

Business income refers to income

derived from merchandising, mining,
manufacturing, and farming operations.

Professional income refers to the fees

received by a professional from the
practice of his profession, provided that
there
is
no
employer-employee
relationship between him and his clients.
V.

DIVIDENDS

It means any distribution made by a

corporation to its stockholders, whether
in money, property, or stocks, out of its
earnings and profits

Only dividend issued by a foreign

corporation to an individual taxpayer
(citizen or alien) is included in the
computation of gross income since
those issued by a domestic corporation
are subject to final tax

Stock Dividends
General Rule: not taxable as there is a
mere transfer of surplus to capital
account
Exceptions:
1. when there is redemption or
cancellation essentially equivalent
to
distribution
of
taxable
dividends(Sec. 73 [B], 1997 NIRC);
and
2. it gives the shareholder an interest
different from that which his former
stock represented.

89

When a corporation distributes all of its assets in

complete liquidation or dissolution, the gain
realized or loss sustained by the stockholder,
whether individual or corporation, is taxable
income or deductible loss, not a dividend income
as it is considered a sale or exchange of property
between the corporation and the stockholder.
SUMMARY RULES ON DIVIDENDS (CASH,
PROPERTY, SCRIP)
TAXPAYER

RC
NRC

DIVIDEND PAID
BY A
DOMESTIC
CORPORATION
10%
10%

RA

10%

NRA-ETB

20%

DC
RFC

NRFC

EXEMPT
EXEMPT

15%- w/ tax
sparing
30% - w/o tax
sparing

DIVIDEND PAID
BY A FOREIGN
CORPORATION
5% - 32% (33%)
Source within
5-32% (33%)
Source without
EXEMPT
Note:
Section
42(A) NIRC in
correlation with
Section
23
NIRC.
Source within
5-32% (33%)
Source without
EXEMPT
Note:
Section
42(A) NIRC in
correlation with
Section
23
NIRC.
Source within
5-32% (33%)
Source without
EXEMPT
Note:
Section
42(A) NIRC in
correlation with
Section
23
NIRC.
30%
Source within
5-32% (33%)
Source without
EXEMPT
Note:
Section
42(A) NIRC in
correlation with
Section
23
NIRC.
Source within
30%
Source without
EXEMPT
Note:
Section
42(A) NIRC in
correlation with
Section
23
NIRC.

VI. ROYALTIES

It is the payment for the use and

exhaustion of property such as earnings
from copyrights, patents, trademarks,
formula and natural resources under
lease.

Included in the gross income IF derived

from sources outside the Philippines
because those from sources within are
subject to final withholding tax

If the recipient of the royalty paid by a

DC is either a NRA-NETB or NRFC, a
lower tax rate may be allowed under an
existing treaty
VII. INTERESTS

Amount of compensation paid for the

use of money, goods, or credit or
forbearance from such use.
INCOME
PAPYMENT
Interest from any
currency
deposit,
yield or any other
monetary
benefit
from
deposit
substitutes and from
trust
funds
and
similar
arrangements
derived
from
Philippine sources

TAX
RATE
20%

Interest from long

term
deposit
or
investment in the
form of savings,
common
or
individual
trust
funds, substitutes,
investment
management
accounts and other
investments
evidenced
by
certificates in such
form prescribed by
BSP.
Interest
Income
from FCDU deposits
Interest from foreign
currency
loans
granted by FCDUs
to residents other
than OBUs banks or
other
depositary
under the expanded
system

5% - 4less than
5 years
12% - 3
to
less
than
4
years
20%
-less
than
3
years

RC,
NRC,
RA, NRA-ETB

7.5%

DC, RFC, RC,

NRC, RA
RC, RA, DC,
RFC

10%

PAYEE
DC, RFC, RC,
NRC,
RA,
NRA-ETB

90

Interest from foreign

currency
loans
granted by OBUs to
residents other than
OBUs
or
local
commercial banks,
including branches
of foreign banks that
may be authorized
by BSP to transact
business with OBUs
Interest income on
foreign
loans
contracted on or
after August 1, 1986

10%

20%

NRFC

Any interest income

from
transactions
with
depositary
banks under FCDs

EXEMPT

NRC,
NRFC

X.

NRA,

VIII. PRIZES AND WINNINGS

Refers to amount of money in cash or in

kind received by chance or through luck
and are generally taxable except if
specifically
mentioned
under
the
exclusions from the computation of
gross income under Sec. 32 (B)

Prizes derived from sources within not

exceeding 10,000 is included in the
gross income; if over 10,000, it is
subject to final tax on passive income

Winning from sources within is subject6

to final tax on passive income EXCEPT
PCSO and lotto winnings that are tax
exempt

Prizes and winnings from sources

without is included in the gross income]
SUMMARY
WINNINGS

TAXPAYER

RC, NRC,
RA, NRAETB

RULES

2.
3.

RC, RA, DC,

RFC

FOR

PRIZES

AND

PRIZES AND
WINNINGS
AMOUNTING
TO 10,000
OR LESS

PCSO
AND
LOTTO
WINNINGS

ALL
OTHER
PRIZES
AND
WINNINGS
MORE
THAN
10,000

5-32%

EXEMPT

20%

IX. GAINS FROM DEALINGS IN PROPERTY

CONSIDERED AS ORDINARY ASSET

Includes all income derived from the

disposition of property (real, personal or
mixed) for:
1. money, in case of sale;

property, in case of exchange; or

combination of both sale and
exchange, which results in gain
because of the difference between
the taxpayers investments of what
he disposed of and the amount or
value of what he received.

PENSIONS

Refer to amount of money received in

lump sum or on staggered basis in
consideration of services rendered given
after an individual reaches the age of
retirement.

Taxable to the extent of the amount

received except if there is a BIR
approved pension plan.

XI. PARTNERS DISTRIBUTIVE SHARE IN

THE NET INCOME OF GPP

GPP is not taxable as an entity but the

partners share in the net income of
GPP is included in the gross income.

Share of a partner in the distributable

net income after tax of a business
partnership is subject to final income tax
and is NOT included in the gross
income.

Sale of Goodwill. Gain or loss form a

sale of good will results only when the
business or part of it, to which the
goodwill attaches is sold, in which case
the gain or loss will be determined by
comparing the sales price with the cost
or other basis of assets, including
goodwill.
TAX RATES AND BASE
Tax Base: The grossed up monetary value
(GMV) of the fringe benefit
GMV of Fringe Benefits Represents:
1. The whole amount of income realized by the
employee which includes the net amount of
money or net monetary value of property
which has been received; plus
2. The amount of fringe benefit tax thereon
otherwise due from the employee but paid by
the employer for and in behalf of the
employee.
3. GMV of the fringe benefit shall be
determined by the grossed-up divisor. The
grossed-up divisor is the difference between
100% and the applicable rates.
Tax Rates
YEAR
1998
1999

GROSSED UP
DIVISOR
66%
67%

RATE
34%
33%

91

2000
onwards

68%

EMPLOYEE
Citizen, RA, NRAETB
NRA-NETB
Individuals employed
by RHQ or RAHQ;
OBU; Foreign service
contractor or foreign
service subcontractor
engaged in petroleum
operations in the
Philippines

2.

32%

GROSSED
UP DIVISOR

General
Rule:
fixed
and
variable
transportation, representation and other
allowances are subject to FBT

RATE

75%

32% FBT
(2000
onwards)
25% FBT

85%

15% FBT

68%

Expense Account

Exception: if incurred or reasonably

expected to be incurred by employee in the
performance of his duties, subject to the
following conditions:
a) ordinary and necessary in the pursuit of
employers business and paid or
incurred by employee;
b) liquidate or substantiated by receipts or
other adequate documentation.
3.

Motor Vehicle of any kind

4.

Household Expense

BASIC RULES
1.

2.
3.

Expenses for employees which are borne by

the employer for household personnel, such
as salaries of household help, personal
driver of the employee, or other similar
personal expenses (like payment for
homeowners association dues, garbage
dues, etc) shall be taxable as fringe benefits.

Fringe benefit given to a rank and file

employee (whether under a collective
bargaining agreement or not) is not subject
to FBT (fringe benefit tax).
NOTE: Fringe benefits given to a rank-andfile employee are treated as part of his
compensation income subject to income tax
and withholding tax on compensation.
Fringe benefit given to a supervisory or
managerial employee is subject to the FBT.
De minimis benefit , whether given to rank
and file employee or to supervisory or
managerial employee is not subject to FBT

5.

If the employer lends money to his employee

free of interest or a rate lower than 12%,
such interest foregone by the employer or
the difference o the interest assumed by the
employee and the rate of 12% shall be
treated as taxable fringe benefit.

DEDUCTION FOR EMPLOYER

1.

2.

If fringe benefit is given to rank-and-file

employee OR to a managerial/supervisory
employee, BUT is NOT subject to FBT, the
deduction for the employer is the monetary
value of the fringe benefit.
If fringe benefit is given to managerial or
supervisory employee and is subject to FBT,
the deduction for the employer is the
grossed-up monetary value (GMV) of the
fringe benefit.

FRINGE BENEFITS SUBJECT TO FRINGE

BENEFIT TAX (FBT)
1.

Housing
General Rule: the value to the employee of
quarters and meals given by the employer
shall be subject to FBT
Exception: if living quarter/meals
furnished to an employee for
convenience of the employer

are
the

Interest on loan at less than market rate

to the extent of the difference between
the market rate and actual rate granted

The rule shall apply to installment payments

or loans with interest rate lower than 12%
starting January 1, 1998.
6.

Membership fee, dues, and other

expenses borne by the employer for the
employee in social and athletic clubs and
similar organizations

7.

Expenses for Foreign Travel

General
Rule:
fixed
and
variable
transportation, representation and other
allowances are subject to FBT.
Exception: if incurred or reasonably
expected to be incurred by employee in the
performance of his duties, subject to the
following conditions:
a) ordinary and necessary in the pursuit of
employers business and paid or
incurred by employee:

92

b)

liquidated or substantiated by receipts or

other adequate documentation.

8.

Holiday and Vacation Expenses

9.

Educational Assistance to the employee

or his dependents

c.

d.

General Rule: taxable fringe benefit

Exceptions:
a. education/study is directly connected
with employers trade or business;
b. with a written contract that employee
shall remain employed with the
employer for a period of time mutually
agreed upon by the parties; or
c. the assistance was provided through a
competitive
scheme
under
the
scholarship program of the company
employer.
10. Insurance Premium
General Rule: the cost of life or health
insurance and other non-life insurance
premiums borne by the employer are taxable
fringe benefit.
Exception:
a. cost of premiums borne by the employer
for the group insurance of employees;
b. contributions of the employer for the
benefit of employee to the SSS, GSIS,
and similar contributions arising from
provisions of any existing law.
STOCK OPTIONS ARE SUBJECT TO FRINGE
BENEFIT The basis is the difference between
the fair market value and the exercise price at the
time of exercise.
FRINGE BENEFITS NOT SUBJECT TO FBT
1. Fringe benefits not considered as gross
income:
a. If it is required or necessary to the
business of the employer; or
b. If it is for the convenience or advantage
of the employer.
2. Fringe Benefit that is not taxable under Sec.
32(B) Exclusions from Gross Income
3. Fringe Benefits not taxable under Sec. 33
Fringe Benefit Tax:
a. Fringe benefits which are authorized
and exempted under special laws such
as the 13th month pay and other benefits
with the ceiling of P30,000;
b. Contributions of the employer for the
benefit of the employee to retirement,
insurance and hospitalization benefit
plans;

Benefits given to the rank and file

employees, whether granted under a
collective bargaining agreement or not;
and
De minimis benefits benefits which are
relatively small in value offered by the
employer as a means of promoting
goodwill contentment, and efficiency of
employees.

MANAGERIAL/
RANDK AND FILE
SUPERVISORY
EMPLOYEES
EMPLOYEES
Compensation/ Salaries / Wages
Subject to Income Tax
Subject to Income Tax
Fringe Benefits
Subject
to
fringe Forms
part
of
benefit tax (FBT)
compensation
therefore subject to
income tax;
Subject to exceptions
De Minimis Benefits
Income
but
not Income
but
not
compensation, hence compensation
hence
not taxable
not taxable
DE MINIMIS BENEFITS NOT SUBJECT TO FBT
(R.R. NO. 8-2000 and 10-2000):
1. Monetized unused vacation leave credits of
PRIVATE employees not exceeding (10)
days during the year and the monetized
value of leave credits paid to government
officials and employees;
General Rule: Paid vacation leave and sick
leave are subject to FBT
Exception:
Monetized value of unutilized VL credits of
10 days or less are NOT subject to FBT.
However, monetization of sick leave credits
even if not exceeding 10 days are subject to
TAX.
2. Medical cash allowance to dependents of
employees not exceeding P750.00 per
employee per semester or P125 per month;
3. Rice subsidy of P1,500 or one (1) sack of
50kg rice per month amounting to not more
than P1,500;
4. Uniform and clothing allowance not
exceeding P1,000 per annum;
5. Actual yearly medical benefits not exceeding
P10,000 per annum;
6. Laundry allowance not exceeding P300 per
month;
7. Employees achievement awards e.g. for
length of service or safety achievement,
which must be in the form of a tangible
personal property other than cash or gift
certificate, with an annual monetary value of
not exceeding P10,000 received by the
employee under an established written plan

93

which does not discriminate in favor of paid

employees;
8. Gifts given during Christmas and major
anniversary celebrations not exceeding
P5,000 per employee per annum;
9. Flowers, fruits, books or similar items given
to employees under special circumstances;
10. Daily meal allowance for overtime work not
exceeding 25% of the basic minimum wage.
If De Minimis Benefit EXCEEDS the ceiling
prescribed
1. If the excess is within the P30,000 limit
under Sec. 32(b)(7)(e) [13th Month Pay and
Other Benefits] of the NIRC the excess is
NOT taxable
2. If excess is beyond the P30,000 limit
taxable
NOTE: Representation and Transportation
Allowance (RATA) and Personnel Economic
Relief Allowance (PERA) are not subject to
Income Tax and Withholding Tax. Additional
Compensation Allowance (ACA) is part of other
benefits under Sec. 32(b)(7)(e) of the Tax Code
of 1997 which are excluded from gross
compensation income provided the total amount
of such benefits does not exceed P 30,000. it is
also not subject to withholding tax pending its
formal integration into basic pay.
PERSONAL & ADDITIONAL EXEMPTIONS
DEDUCTIONS AVAILABLE TO INDIVIDUALS
1. Business Expenses and Expenses from
Practice of Profession deductible only
from
gross
business
income
and
professional income, respectively but NOT
from compensation income. The expenses to
be deducted may either be itemized
deductions OR the optional standard
deductions.
2. Special Deduction for Actual Premium
Payments
for
Health
and/or
Hospitalization Insurance taken by an
individual taxpayer provided that the
following requisites are met: [Sec. 34(M),
NIRC]
a. Insurance must have actually been
taken;
b. The taxpayers family gross income
does not exceed P250,000 in a taxable
year.
c. The amount deductible should only be
limited to P2,400 per family or P200 per
month.
d. In case of a married taxpayer, this can
only be claimed by the spouse claiming
the additional exemption
3. Personal Exemptions fixed and arbitrary
amounts intended to substitute for personal

and living expenses. They are roughly the

equivalent of the taxpayers minimum
subsistence and those of his dependents
(Madrigal vs. Rafferty, supra)
KINDS OF PERSONAL EXEMPTIONS
1.

Basic Personal Exemptions [Sec. 35 (A)]

There shall be allowed a basic personal
exemption of P50,000 for each individual
taxpayer. (Republic Act No. 9504)
Prior to the effectivity of Republic Act No.
9504 last July 6, 2008, the following
schedules apply:
P20,000 Single individual or married
individual,
judicially
decreed
legally
separated without qualified independent
children
P25,000 Head of the family or married
individual judicially decreed legally separated
with qualified dependent children.
P32,000
individual.

for

each

legally

married

Head of the Family is an unmarried or

legally separated person with one or both
parents, or one or more brothers or sisters,
or one or more legitimate, recognized natural
or legally adopted children living with and
dependent upon the taxpayer for their chief
support (more than one-half of the
requirements for support)
NOTE:

Prior to RA 9504, being a benefactor of

a senior citizen qualifies an individual as
head of the family. However, with the
amendments of RA 9504, this becomes
insignificant because all compensation
income taxpayers, without distinction,
are entitled to personal exemption of
P50,000.

In the case of Agripino C. Baybay, Sr.,

vs. Commissioner of Internal Revenue
(CTA Case No. 5280), the Court of Tax
Appeals held that the law (Republic Act
No 7432) provides that the senior
citizens shall be treated as dependents
as provided in the NIRC. However, in
BIR Ruling [DA-359-04], the BIR opined
that since the case did not reach the
Supreme Court, the case therefore did
not have the force and effect of a low
under the doctrine of stare decisis
ordained in Article 8 of the Civil Code.
The CTA decision, according to the BIR,

94

must only be applied pro hac vice (for

this occasion
2.

Additional Exemptions [Sec. 32(b)]

There shall be allowed an additional
exemption of P25,000 for each dependent
child not exceeding four (4).
Prior to the effectivity of RA 9504, the
additional exemption allowed for each
dependent child is only P8,000.
Who is Dependent Child?
A legitimate, illegitimate, or legally adopted
child, chiefly dependent upon and living ith
the taxpayer, IF such dependent is not more
than 21 years old, unmarried and not
gainfully employed, OR if such dependent
regardless of age, is incapable of selfsupport because of mental or physical
defect.
Who will claim the additional exemption?
The husband shall be the proper claimant
EXCEPT when the husband is unemployed,
working abroad, or explicitly waived his right
in the withholding exemption certificate for
ALL dependents.
In case of legally separates spouses, it shall
be claimed only be the spouse having
custody.

SUMMARY OF ALLOWANCE OF PERSONAL

EXEMPTIONS
Individual
Taxpayer
RC
NRC
RA
NRA-EYB
NRA-NETB

Basic
Personal
exemptions
Allowed
Allowed
Allowed
Allowed
(reciprocity)
Not Allowed

Additional
Exemptions
Allowed
Allowed
Allowed
Not Allowed
Not Allowed

Since the effectivity of R.A. No. 9504 is on

July 6, 2008, the following schedule shall be
applied for the year 2008:

Single
Head
of
the Family
Married
Per
dependent

Jan. 1Jul 5,
2008
10,000
12,500

Jul. 6-Dec
31, 2008
25,000
25,000

16,000
25,000
Additional Exemption
4,000
12,500

TOTAL
35,000
37,500
41,000
16,500

RULE ON CHANGE OF STATUS

1. If the taxpayer should marry or should have
additional dependents during the taxable
year, he may claim the corresponding
exemptions in FULL for such year.
2. If the taxpayer should die during the taxable
year, his estate may claim the corresponding
exemptions as if he died at the close of such
year
3. If the spouse or any dependent should die or
any dependent should marry or become
twenty-one years old during the year, or
should become gainfully employed, the
taxpayer may claim the exemptions as if the
spouse or depended died or as if such
dependent married, became twenty one
years old or became gainfully employed at
the close of such year.
4. For any other event and for which there are
no specific rules applicable from the abovementioned, the status of the taxpayer at the
end of the year shall determine his
exemptions (strictly construed against the
taxpayer).
A SENIOR CITIZEN is:
1. any resident citizen of the Philippines
2. at least sixty (60) years old, including those
who have retired from both government
offices and private enterprises, and
3. has an income of not more than Sixty
thousand pesos (P60,000) per annum
subject to the review of the National
Economic Development Authority (NEDA)
every three years.
SENIOR CITIZENS DISCOUNT (R.A. 9257)
1. Availment of establishments of 20% sales
discounts as deduction from gross income
2. Only portion of gross sales exclusively used,
cosumed or enjoyed by the senior citizen
shall be eligible for the deductible sales
discounts.
3. Gross selling price and sales discount must
be separately indicated in the official receipt
or sales invoice
4. Only the actual amount of the discount
granted or a sales discount not exceeding
20% of the gross selling price can be
deducted from the gross income, net of
value added tax, if applicable, for income
tax purposes, and from gross sales or gross
receipts of the business enterprise
concerned, for VAT or other percentage tax
purposes.
5. The discount can only be allowed as
deduction from gross income for same
taxable year that the discount is granted
based on the net cost of the goods sold or
services rendered (Section 4 of R.A. 9257)

95

6.
7.

The business establishment giving the sales

discounts to qualified senior citizen
Only selected establishments mentioned in
R.R. No. 4-2006 may claim the said discount
granted as deduction from gross income

Requisites:
1. Employment shall have to continue for a
period of at least 6 months.
2. Annual taxable income of the senior citizen
does not exceed the poverty level as may be
determined by the NEDA thru the NSCB.
Senior Citizen to submit sworn certification
that his annual taxable income does not
exceed poverty level.
3. In addition, expenses otherwise deductible
may be allowed as a deduction only if the tax
required to be deducted and withheld
therefrom has been paid to the BIR
DOCTRINES
1. The term cost in Section 4(A) of RA 7432
refers to the amount of the 20% discount
extended by private establishments to senior
citizens in their purchase of medicines.
[Bicolandia Drug Corporation (Formerly
Elmas Drug) Corp. vs. CIR, G.R. No.
142299, June 22, 2006]
2. There is a difference between the treatment
of the 20% discount considered as tax credit
under the Old Senior Citizens Act and Tax
Deduction under the Expanded Senior
Citizens Act. (Carlos Superdrug Corp vs.
DSWD, DOF, and DOJ G.R. No. 166494
June 29, 2007)
DEDUCTIONS FROM GROSS INCOME
WHAT ARE DEDUCTIONS?
Items or amounts which the law allows to be
deducted from gross income in order to arrive at
the taxable income.
BASIC PRINCIPLES
1. The taxpayer seeking a deduction must point
to some specific provisions of the statute
authorizing the deduction.
2. He must be able to prove that he is entitled
to the deduction authorized or allowed.
(Atlas Consolidated Mining and Devt Corp.
vs. Commissioner, G.R. No. L-26911,
January 21, 1981)
3. Any amount paid or payable which is
otherwise deductible from, or taken into
account in computing gross income or for
which depreciation or amortization may be
allowed, shall be allowed as deduction only if
it is shown that the tax required to be
deducted and withheld therefrom has been
paid to the BIR [Sec. 34(K), NIRC]

4.

Deductions for income tax purposes partake

of the nature of tax exemptions, hence, if tax
exemptions are to be strictly construed, then
it follows that deductions must also be strictly
construed.

Summary Rules on Claimable Deductions

For Individuals
1. with gross compensation income from
employer employee relationship ONLY:
a. personal and additional exemptions;
b. premium payments on health and/or
hospitalization insurance
2. with gross income from business or practice
of profession:
a. optional standard deduction (OSD) OR
itemized deductions
b. premium payments on health and/or
hospitalization insurance
c. personal and additional exemptions
For Corporations
1. Optional Standard Deduction OR
2. Itemized Deductions
Exclusions
Exemption

vs.

Deductions

EXCLUSION

DEDUCTION

Refer to flow
of wealth not
treated
as
part of gross
income
because
exempted by
the
Constitution,
statute, or do
not
come
within
the
definition
of
income
Generally
a
receipt which
is
excluded
from taxable
income

Refer to the
amounts which
the law allows
to
be
subtracted from
gross income in
order to arrive
at net income

Something
earned
or
received
by
the taxpayer
which do not
form part of
gross income

Is not a receipt
but is generally
an expenditure
which
is
permitted to be
subtracted from
income
to
determine the
amount subject
to tax.
Something
spent or paid in
earning gross
income

vs.

Personal

PERSONAL
EXEMPTION
Are arbitrary
amounts
allowed
by
law to an
individual
taxpayer,
theoretically
to provide for
personal and
living
expenses

It
is
an
immunity or
privilege,
a
freedom
of
charge
or
burden
to
which other
are
subjected.
Theoretical
provision of
law for the
personal and
living
expenses of
the

96

individual.
Kinds of Deduction
1. Optional Standard Deductions (OSD)
2. Special Deductions
3. Itemized Deductions
Taxpayers Who CANNOT Avail of Deductions
from Gross Income whether OSD or Itemized
Deductions:
1. RC, NRC, and RA whose income is purely
compensation income (except for premium
payments on health and/or hospitalization
insurance);
2. NRANETB since their income from sources
within is subject to final tax of 25%;
3. NRFC since their gross income from sources
within is subject to final tax of 30%
OPTIONAL STANDARD
34[L])

DEDUCTION

(Sec.

Deduction, in lieu of the itemized deductions, is

merely a privilege that may be enjoyed by certain
taxpayers.
Rules:
1. Rate does not exceed 40%
a. An individual subject to tax under
Section 24, other than a non-resident
alien, may elect a standard deduction in
an amount not exceeding forty percent
(40%) of his gross sales or gross
receipts;
b. In the case of a corporation subject to
tax under section 27(A) and 28(A)(1), it
may elect a standard deduction in an
amount not exceeding forty percent
(40%) of his gross income as defined in
Section 32, NIRC. (RA 9504)
2. OSD is available only to RC, NRC, RA, DC,
and RFC;
3. unless the taxpayer signifies in his return his
intention to elect OSD he is considered as
having availed of the itemized deductions.
4. Such election, when made by the qualified
taxpayer is irrevocable for the year in which
made; however, he can change to itemized
deductions in succeeding years.
5. A taxpayer may choose the OSD in his
quarterly return, and then choose itemized
deductions in his annual return;
6. OSD is not available against compensation
income arising out of an employer-employee
relationship;
7. Proof of actual expenses is not required, but
the taxpayer should keep records pertaining
to his gross income.
SPECIAL DEDUCTIONS

Private proprietary educational institutions

[Sec. 34 (A) (2)] in addition to the expenses
allowed as deduction, it has the option to treat
the amount utilized for the acquisition of
depreciable assets for expansion of school
facilities as:
1. outright expense (the entire amount is
deducted from gross income0; OR
2. capital asset and deduct only from the gross
income an amount equivalent to its
depreciation for the year.
Insurance companies (Sec 37) can deduct the
following:
1. net additions required by law to be made
within the year to reserve funds; and
2. sums other than dividends paid within the
year on policy and annuity contracts.
Estates and trusts (Sec. 61): can deduct the
following:
1. amount of income paid, credited or
distributed to the heirs/beneficiaries; and
2. amount applied for the benefit of the grantor.
ITEMIZED DEDUCTIONS (BIRD2CLEP2T)
1. Ordinary and necessary Expenses;
2. Interests;
3. Taxes;
4. Losses;
5. Bad debts;
6. Depreciation of property;
7. Depletion of oil and gas wells and mines;
8. Charitable and other contributions;
9. Research and development;
10. Pension trust contributions of employees;
and
11. Premium payments on health and/or
hospitalization insurance. (This is the only
deduction which a compensation income
earner may claim as a deduction.)
KINDS OF ITEMIZED DEDUCTIONS
I.

Ordinary and Necessary Trade, Business,

and Professional Expenses.
Requisites for Deductibility:
1. It must be ordinary and necessary
Necessary Expense appropriate and
helpful in the development of taxpayers
business and are intended to minimize
losses or to increase profits. These are
the day-to-day expenses.
Ordinary Expense normal or usual in
relation to the taxpayers business and
the surrounding circumstances.
NOTE:
If the expenses are
EXTRAORDINARY, the expenditures
shall
be
capitalized
for
which
depreciation allowance may be claimed.

97

2.
3.
4.

5.

6.
7.

It must be paid or incurred within the

taxable year;
It must be reasonable (not lavish,
extravagant or excessive under the
circumstances)
Must be paid in connection with the
conduct of trade or business, or the
exercise of profession by the
taxpayer, or attributable to the
development, management , or
operation of the trade business or
profession.
It must be substantiated with
adequate proofs;
Lack of receipts excused the lack of
supporting vouchers, receipts and other
documentary proof, however, may be
excused under Sec. 337 (now Sec. 235)
of the Tax Code. This provision requires
the preservation of the books of
accounts and other accounting records
for a period of three(3) years from the
date of last entry (Basilan Estates vs.
Commissioner G.R. No. L-22492
September 5, 1907).
Cohan Rule Principle if there is
showing that expenses have been
incurred but the exact amount thereof
cannot be ascertained due to the
absence of documentary evidence, it is
the duty of the BIR to make an estimate
deduction that may be allowed in
computing the taxpayers taxable
income bearing heavily against the
taxpayer whose inexactitude is of his
own making.
NOTE: The Cohan Rule is subject to the
50-50 limit on the claim of deductions.
It is subject to withholding taxes,
have been properly withheld and
remitted on time to the BIR;
Not contrary to law, public policy or
morals.
While illegal income will form part of
income of the taxpayer, expenses which
constitute bribe, kickback and other
similar payment, being against law and
public policy are not deductible form
gross income [Sec. 34(A)(1)(c)].
NOTE: Interestingly, although the
payment of illegal bribes or kickbacks
are non-deductible expenses, expenses
incurred in an illegal activity are
generally deductible if they are ordinary,
necessary and reasonable (CIR vs.
Sullivan, et al., AFTR 2d 1158)

Kinds of Business Expenses

1.

Compensation for Personal Services

Requisites for Deductibility:

a.
b.
c.

personal
services
actually
rendered;
compensation paid is for such
services rendered.;
must be reasonable (if same
amount will be paid for similar
services by similar enterprise under
similar circumstance)

It includes
a. salaries,
wages,
commissions,
professional fees, vacation-leave
pay, retirement pay and other
compensation;
b. bonuses are deductible expenses
IF paid in good faith as additional
compensation for services rendered
AND subjected to withholding tax
c. pensions and compensation for
injuries, if not compensated for by
insurance or otherwise; and
d. grossed-up monetary value (GMV)
of fringe benefit provided for, as
long as the final tax imposed has
been paid.
Test for Deductibility of Bonus
a. payment made in good faith;
b. character
of
the
taxpayers
business;
c. volume and amount of its net
earnings;
d. its locality;]
e. type and extent of the services
rendered;
f. salary policy of the corporation;
g. size of the particular business;
h. employees
qualification
and
contributions to the business
venture, and
i.
general economic conditions (CM
Hoskins & Co. v. CIR 30 SCRA 434
1969).
2.

Traveling Expenses
Requisites for Deductibility:
a. incurred or paid while away from
home;
b. in the pursuit of trade or business.
NOTE:

The term away from home means

away from the location of the
employees principal place of
employment regardless of where
the family residence is maintained
like business trips.

It includes transportation, meals

and lodging. (Sec. 65, 66, RR No.
2)

98

3.

b.

Transportation expenses from main

office to branch or from branch to
main office deductible.
Transportation expenses from office
to home; home to office not
deductible
If company car is utilized both for
business or personal use
proportion to the use.

c.
d.

Rental Expenses
Requisites of Deductibility:
a. made as a condition to the
continued use or possession of
property;
b. taxpayer has not taken or is not
taking title to the property or has no
equity other than that of a lessee,
user or possessor;
c. property must be used in trade or
business; and
d. subjected to withholding tax of 5%
otherwise it shall be disallowed as a
deduction.

It shall not exceed

a. for taxpayers engaged in sale of
goods/properties 0.50% of net
sales
b. for taxpayers engaged in sale of
services 1% of net revenues
c. for taxpayers engaged in both sale
of goods/ properties and services
net sales or net revenues / total net
sales and net revenues x EAR
expenses.
It includes
a. representation expenses;
b. depreciation or rental expenses
relating to entertainment facilities.

It includes
a. aliquot part of the amount used to
acquire leasehold over the number
of years the lease will run.
b. Taxes and other obligations of the
lessor paid by the lessee
c. Annual depreciation of the cost of
leasehold improvements introduced
by the lessee over the remaining
term of the lease, OR over the life
of the improvements, whichever
period is shorter.

It includes
e. expenses treated as compensation
or fringe benefits;
f. expenses for charitable or fund
raising events;
g. expenses for bona fide business
meeting of stockholders, partners or
directors;
h. expenses
for
attending
or
sponsoring an employee to a
business league or professional
organization meeting;
i.
expenses for events organized for
promotion,
marketing
and
advertising
including
concerts,
conferences, seminars, workshops,
conventions and other similar
events; and
j.
other expenses of similar nature.

NOTE: It is NOT the cost of the

leasehold improvements but only its
annual depreciation that is considered
as rental expense.
Amounts paid for the right of
occupancy or goodwill do not qualify
as rental expense being in the nature of
capital advance to secure the lease of
the premise which is similar to a
purchased goodwill.
4.

Entertainment,
Amusement
Recreation (EAR) Expenses

and

Requisites of Deductibility:
a. Directly
connected
to
the
development management and
operation of the trade, business, or
profession of the taxpayer; OR
directly related to or in furtherance
of the conduct of trade, business, or
profession;

Reasonable and not contrary to

laws, morals and public policy or
public order;
Does not constitute as a bribe,
kickback or other similar payments;
and
Substantiated with sufficient proof
indicating the amount of expense,
date and place of expense, purpose
of
expense,
professional
or
business relationship of expense,
and name of person or company
entertained with contact details.

5.

Cost of Materials and Supplies

Deductible only to the amount actually
consumed or used in operation during
the year.

6.

Repair Expenses
Minor or ordinary repairs deductible
from gross income because it keeps the
assets in its ordinary working condition

99

9.
Major or extraordinary repairs are not
deductible since major repairs tent to
prolong the life of the asset (these are
capitalized or added to the cost of the
asset subjected to repair)
7.

Miscellaneous Expenses
It includes
1. amortization of organization costs
over the life of the corporation;
2. cost of defending a civil suit
affecting
the
business
IRRESPECTIVE of the success of
the defense. (Judgment or other
binding adjudication, on account of
damages for patent infringement,
personal injuries, or other causes,
are deductible when the claim is
adjudicated and paid.)

II. Interest
Interest is the compensation for the use or
forbearance or detention of money, regardless of
the name it is called or denominated. It includes
the amount paid for the borrowers use of money
during the term of the loan as well as for his
detention of money after the due date for its
repayment (R.R. 13-2000).
Requisites for Deductibility
1. There must be an indebtedness;
There must be a bona fide debtor-creditor
relationship based on a valid and
enforceable obligation wherein the debtor is
under unconditional obligation to repay the
creditor. (Philex Mining Corporation vs.
Commissioner, CTA Case No. 5200, August
21, 1998).
2. The indebtedness must be that of the
taxpayer;
3. The interest must be legally due
If there exists no obligation or where the
obligation is unenforceable, interest paid
thereon is not deductible. (Collector vs.
Prieto, G.R. no. L-13912, September
30,1960)
4. The interest must be stipulated in writing;
5. The interest expense must have been paid
or incurred during the taxable year;
6. The indebtedness must be connected with
the taxpayers trade, business or exercise of
profession.
7. The interest arrangement must not be
between related taxpayers as provided
under Sec. 36(B) of the NIRC;
8. The interest is not expressly disallowed by
law to be deducted from gross income of the
taxpayer.

The amount of interest deducted from gross

income does not exceed the limit set forth in
the law.

Rules on Deductibility of Interest Expense

General Rule: The entire amount shall be
allowed as a deduction from the taxpayers gross
income.
Limitation: The amount of deductible interest
shall be reduced by the following rates of the
interest income earned which had been
subjected to final withholding tax.
Nov. 1, 2005 to Dec. 31, 2008 42%
Effective Jan. 1, 2009 33%
Aim of the limitation: To discourage tax
arbitrage wherein back-to-back loan is used to
take advantage of the lower rate of tax on interest
income and a higher rate of tax on interest
expense deduction.
Optional Treatment of Interest Expense
At the option of the taxpayer, interest incurred to
acquire property used in trade or business or
exercise of a profession may be allowed as:
1. interest expense deductible to gross income;
OR
2. treated as capital expenditure wherein the
amount of interest is added to the cost of the
property
Deductible Interest Expense
1. interest on taxes, such as those paid for
deficiency or delinquency, since taxes are
considered indebtedness (provided that the
tax is a deductible tax, except in the case of
income tax). However, fines, penalties, and
surcharges on account of taxes are not
deductible.
NOTE: Interest incurred or paid on all unpaid
business-related taxes shall be fully
deductible from gross income and shall not
be subject to the limitation on deduction.
2. Interest paid by a corporation on scrip
dividends.
3. interest on deposits paid by authorized
banks of the BSP to depositors, if it is shown
that the tax on such interest was withheld.
4. interest paid by a corporate taxpayer who is
liable on a mortgage upon real property
where the said corporation is the legal or
equitable owner, even though it is not directly
liable for the indebtedness.
Non-Deductible Interest Expense
1. if an individual reporting income on cash
basis incurs an indebtedness on which an
interest is paid in advance through discount

100

2.
3.
4.

5.
6.

or otherwise, the interest may only be

deductible [Sec. 34 (B)2a]:
a. in the year the indebtedness is paid
b. f the indebtedness is payable in periodic
amortization, the amortized amount of
interest paid during the year shall be
allowed as deduction in such taxable
year.
if the indebtedness is incurred t finance
petroleum operations.
interest on preferred stock, which in reality is
a dividend
interest calculated for cost keeping on
account of capital or surplus invested in
business which does not represent charges
arising under interest bearing obligations
interest paid when there is no stipulation for
the payment thereof
interest paid on indebtedness between
related taxpayers

Who are related taxpayers?

1. Between members of the family; Family
includes only the brothers, sisters (whether
by the whole of half blood), spouse,
ancestors, and lineal descendants of the
taxpayer.
2. Between an individual and a corporation
more than 50% in value of the outstanding
stock of which is owned, directly or indirectly,
by or for such individual;
3. Between two corporations more than 50% in
value of the outstanding stock or each o
which is owned, directly or indirectly, by or
for the same individual, if either one of such
corporations, with respect to the taxable year
of the corporation preceding the date of the
sale of exchange was a personal holding
company or a foreign personal holding
company;
4. Between the grantor and a fiduciary of any
trust;
5. Between the fiduciary of a trust and the
fiduciary of another trust if the same person
is a grantor with respect to each trust;
6. Between a fiduciary or a trust and a
beneficiary of such trust.
The fact that the President of one corporation is
the Chairman of the Board of another does not
mean that he has controlling ownership of such
corporations (Oranbo Realty Corp. vs. CIR, CTA
Case No. 5222, April 7, 1997)
Arms length Interest rate rate of interest
which was charged or would have been charged
at the time the indebtedness arose in
independent transaction with or between
unrelated parties under similar circumstances.
REVENUE MEMORANDUM ORDER NO. 63-69
DETERMINATION OF TAXABLE INCOME OF

INTERCOMPANY LOANS OR ADVANCES,

APPLYING SECTION 50 OF THE NIRC

The BIR adopted the arms length bargaining

standard as the ultimate test for determining
the correct gross income and deductions
between two or more enterprises under
common control.

Coverage:
1. loans or advances of money or other
consideration (whether or not evidence
by a written instrument);
2. Indebtedness arising in the ordinary
course of business out of sales, leases,
or the rendition of services by or
between members of the group, or any
other similar extension;
3. This DOES NOT APPLY to alleged
indebtedness which was in fact a
contribution of capital or a distribution by
a corporation with respect to its shares.

Applying arms length principle to section

50 Sec. 50 empowers the Commissioner to
rectify abnormalities and distortions in
income brought about by common control
through
the
adoption
of
standards
considered fair, reasonable or at arms
length.

Determination of taxable income on InterCompany loans or advances

1. In general The Commissioner can
make appropriate allocations to reflect
an arms length rate when one member
of a group of controlled entities makes a
load or advances directly or indirectly, or
otherwise become a creditor of another
member of such group and:
a. Charges no interest; or
b. Charges interest at a rate which is
not equal to an arms length rate
2. Arms Length Interest Rate
a. the rate of interest which was
charged or would have been
charged
at
the
time
the
indebtedness arose in independent
transaction
with
or
between
unrelated parties under similar
circumstances; or
b.
The Bank Reference Rate (BRR)
prescribed by the BSP
c. The fact that the interest rate
actually charged on a loan or
advance is expressly indicated on a
written
instrument
does
not
preclude the application of Section
50 to such loan or advance.
3. Interest Period

101

a.

Generally, the interest period

commences at the date the
indebtedness arises.
Except with respect to business out
of sales, lease, or supply of goods
and services which are considered
as trade accounts or receivables or
payables

The interest period shall not

commence if the taxpayer is
able to establish that the
normal practice in a given
industry is to allow balances, in
the case of similar transactions
with unrelated parties, to
remain outstanding for a longer
period
without
charging
interest.

the income tax benefit of said deduction (Tax

Benefit Rule).

Requisites for Deductibility

1. Payments must be for taxes
The word taxes means taxes proper and no
deduction should be allowed for amount
representing interest, surcharge, or penalties
incident to delinquency.
2. Tax must be imposed by law on, and
payable by the taxpayer
Taxes are deductible as such only by the
persons upon whom they are imposed by
law. Indirect taxes, like the VAT, passed on
by sellers are not deductible by the buyers
from their gross income.
3. Paid or incurred during the taxable year
in connection with taxpayers trade,
business or profession; and
4. Taxes are not specifically excluded by law
from being deducted from the taxpayers
gross income

Who are Not Entitled To Tax Credit?

1. non-resident citizens
2. aliens, whether residents or nonresidents
3. foreign corporations, whether residents
or non-residents

b.

III. Taxes

Taxes NOT Deductible

1. Philippine income tax;
2. Estate and donors tax
3. Special assessments and taxes assessed
against local benefits of a kind that tends to
increase the value of the property assessed;
4. excess electric consumption tax;
5. final taxes being in the nature of income tax.
Alternative treatments for income taxes paid
in foreign countries.
1. Claim as foreign tax credits against
Philippine income tax due of citizens and
domestic corporations.
2. Claim as deduction from gross income of
citizens and domestic corporations;
Taxes allowed as deductions, when refunded
or credited, shall be included as part of gross
income in the year of receipt to the extent of

TAX CREDIT
It is the right of an income taxpayer to deduct
from income tax payable the foreign income
tax he has paid to his foreign country subject
to limitation.
Who Can Claim Tax Credit?
1. resident citizens
2. resident aliens under the principle of
reciprocity
3. domestic
corporations
including
partnerships
except
general
professional partnership
4. beneficiaries of estates and trusts
5. members of general professional
partnerships

Reason: These taxpayers are subject to

Philippine income tax only on income
derived from sources within the Philippines.
BIR requirements include proof of:
1. total amount of income derived form
foreign sources;
2. the amount of income derived from each
country, the foreign tax paid or incurred,
which is claimed as a credit; and
3. all other information necessary for the
verification and computation of such
credit.
Limitation of Tax Credit
Limitation A: Per country limitation
Taxable Income
From Foreign Country
-------------------------------- x
Taxable Income
From all sources

Philippine
Income Tax

Limitation B: Over-all Limitation

Taxable Income
From outside sources
------------------------------- x
Taxable Income
From all sources

Philippines
Income Tax

Rules:

102

One foreign country the allowed credit is

the lower between limit A and the foreign
income tax paid.
Two or more foreign countries determine
first the lower between limit B and the total
foreign income taxes paid. Then compare
the result with limit A, the lower amount is
the allowed credit.

6.

When Credit for Taxes may be Taken:

The credit for taxes may ordinarily be taken
either in the return for the yea in which the
taxes accrued or on which the taxes were
paid,
depending
on
the
taxpayers
accounting method being adopted.
IV. Losses
The credit for taxes may ordinarily be taken
either in the return for the year in which the
taxes accrued or on which the taxes were
paid,
depending
on
the
taxpayers
accounting method being adopted.
Requisites for Deductibility
1. The loss must be that of the taxpayer
The loss is personal and NOT
transferable to another. The loss of
predecessor
partnership
is
not
deductible by a successor corporation.
The loss of the parent company may not
be deducted by its subsidiary. But the
loss of the branch within or outside the
Philippines is deductible from the gross
income of the head office located in the
Philippines, since the branch is only an
extension of its head office and there is
only a single entity.
2. Actually sustained and charged off
during the taxable year;
The taxpayers failure to record in his
books the alleged loss proves that the
loss had not been suffered, hence, not
deductible (City Lumber vs. Domingo
and Court of Tax Appeals, G.R. No. L18611; January 30, 1964).
3. Evidenced by a close and completed
transaction;
There should be an identifiable event
that fixes the loss like the delivery of the
thing purchases
4. Not claimed as a deduction for estate
tax purposes (for individual);
The taxpayer cannot claim double
benefits arising form the same casualty
loss for income tax and estate tax
purposes. He can only choose one.
5. Not compensated for by insurance or
other form of indemnity;
As a general rule, the loss is deductible
in the year the loss happens. However,
if the loss is compensated by insurance

7.

1.
2.
3.
4.

or otherwise, the loss is postponed to a

subsequent year in which it appears that
no compensation at all can be had, or
there is a remaining net loss (or there is
no full compensation). (Plaridel Surety
and Insurance Co. v. Collector, G.R. No.
L, 21520 December 11, 1967).
The loss must be connected with his
trade, business or profession or
incurred in any transaction entered
into for profit though not connected
with
his
trade,
business
or
profession (for individuals);
Notice of loss must be filed with the
BIR (i.e. within 45 days) from the
DATE
OF
OCCURRENCE
OR
DISCOVERY of the casualty or
robbery, theft or embezzlement.

File a sworn declaration of loss with the

nearest RDO. The sworn declaration of loss
shall contain the following:
the nature of the event giving rise to the loss
and the time of its occurrence;
a description of the damged property and its
location;
items needed to compute the loss; and
amount of insurance or other compensation
received or receivable.
Evidence to support these items should be
furnished, if available (Manotok Realty Inc.
vs. CIR, CTA Case No. 5485, October 18,
1999).
NOTE: In case of related taxpayers, a loss
remains
non-deductible
despite
the
concurrence of all the requisites.
CATEGORY AND TYPES OF LOSSES
I.
1.

2.

Ordinary Losses
Incurred in trade or business, or practice
of profession

Net Operating Loss Carry-Over

(NOLCO)
Of property connected with trade,
business, or profession, if the loss
arises from fires, storms, shipwreck o
other casualties, or from robbery, theft,
or embezzlement.
a. Total Destruction The basis of
the loss is the net book value
immediately preceding the casualty
to be reduced by the amount of
insurance
or
compensation
received.
b. Partial
Destruction

The
replacement cost to restore the
property to its normal operating
condition, but In no case shall the
deductible loss be more than the
net book value of the property as a

103

whole, immediately before the

casualty should be capitalized,
subject to depreciation over the
remaining useful life of the property.
II.

Capital Losses (losses are deductible

only to the extent of capital gains)
1. Losses from sale or exchange of
capital assets
2. Losses resulting from securities
becoming worthless and which are
capital assets.
3. Losses from short sales of property
4. Losses due to failure to exercise
privilege or option to buy or sell
property

III. Special Losses

1. Wagering Losses deductible
only to the extent of gain or
winnings [Sec. 34 (D) (6)]; deemed
to apply only to individuals.
2. Losses on wash sales of stocks
NOT deductible because these
are considered to be artificial loss.
3. Abandonment
losses
in
petroleum
operation

all
accumulated
exploration
and
development
expenditures
pertaining thereto shall be allowed
as a deduction
4. Abandonment
losses
in
producing well the unamortized
cost thereof as well as the
undepreciated cost of equipment
directly used therein, shall be
allowed as deduction in the year the
well, equipment or facility is
abandoned.
5. Losses due to voluntary removal
of building incident to renewal or
replacements - deductible expense
from gross income
NOTE: If an entity buys a land with
a building with a view of erecting
another building, the value and the
cost of demolishing the old building
are NOT deductible losses BUT
added instead to the cost of the
land.
6. Loss of useful value of capital
assets due to changes in
business conditions deductible
expense only to the extent of actual
loss sustained after adjustment for
improvement depreciation, and
salvage value;
7. Losses from sales or exchanges
of property between related
taxpayers losses of this nature is
NOT deductible but gains are
taxable;

8.

Losses of farmers if incurred in

the operation of farm business, it is
deductible.
9. Losses on sales which are not
deductible.
10. Loss in shrinkage in value of
stock if the stock of the
corporation becomes worthless (not
mere market fluctuations), the cost
or other basis may be deducted by
the owner in the taxable year in
which the stock became worthless.
NET OPERATING LOSS CARRYOVER (NOLCO) [Sec. 34 (D)(3)]
It is the excess of allowable deductions
over gross income of the business for
any taxable year, which had not been
previously offset as deduction from
gross income.
General Rule: it shall be carried over as
a deduction from gross income for the
next three (3)
consecutive taxable
years immediately following the year of
such loss.
Exception: any net loss incurred in a
taxably year during which the taxpayer
was exempt for income tax shall not be
allowed as a deduction under NOLCO
NOTE: A taxpayer who claims the 40%
OSD or is subject to MCIT shall NOT
simultaneously claim deduction of the
NOLCO.
Further,
the
three-year
reglementary period shall continue to
run notwithstanding the fact that the
aforesaid taxpayer availed of the OSD
or is liable under the MCIT during the
said period.
NOLCO shall be allowed only if there has
been no substantial change in the ownership
of the business or enterprise in that:
1. Not less than 75% in nominal value of
outstanding issued shares, if the
business is in the name of a corporation,
is held by or on behalf of the same
persons; or
2. Not less than 75% of the paid-up capital
of the corporation, if the business is in
the name of a corporation, is held by or
on behalf of the same person.
REVENUE REGULATION NO. 14-01-NOLCO
AS DEDUCTION FROM GROSS INCOME

104

General Policies and Principles

1. Deduction for NOLCO shall be limited only to
net operating loss accumulated beginning
January 1, 1998.
2. NOLCO shall be allowed as a deduction
from the gross income of the same taxpayer
who sustained or accumulated the net
operating losses regardless of the change in
its ownership. This rule shall also apply in
case of a merger where the taxpayer is the
surviving entity. Illustration: A Corp. has
NOLCO. It is a wholly owned subsidiary of X
Corp. Subsequently, A Corp. was purchased
by Y Corp. A Corps NOLCO will still be
allowed as deduction despite the change in
its ownership since the NOLCO is claimed
by the same taxpayer, A Corp.
3. Unless
otherwise
provided
by
the
regulations, NOLCO of the taxpayer shall not
be
transferred or assigned to another
person, whether directly or indirectly, such as
but not limited to, the transfer or assignment
through merger, consolidation or any other
form of business combination of such
taxpayer with another person.
4. NOLCO shall also be allowed if there has
been no substantial change (in case of
business combinations) in the ownership of
the business or enterprise. (75% Equity
Rule)

Not less than 75% in the nominal value

of the outstanding issued shares, if the
business is in the name of the
corporation, is held by or in behalf of the
same person;

Not less than 75% of the paid up capital

of the corporation, if the business is in
the name of the corporation, is held by
or on behalf of the same person.

Remember, the 75% equity rule shall

only apply to a transfer or assignment of
the taxpayers net operating losses as a
result of or arising from the said
taxpayers merger or consolidation or
business combination with another
person.
5. An individual (including estates and trusts)
engaged in trade or business or in the
exercise of profession or a domestic or
resident foreign corporation are allowed to
claim NOLCO as deduction.

An individual who claims 40% Optional

Standard
Deduction
may
not
simultaneously claim NOLCO
6. The 3 year reglementary period for claiming
NOLCO will continue to run despite that the
corporation paid income tax under the MCIT.
7. NOLCO is on a first in first out basis (FIFO)
8. the net operating loss incurred by a taxpayer
in the year in which a substantial change in
ownership in such taxpayer occurs shall not

be affected by such change in ownership,

notwithstanding number 3 and 4.
Taxpayers Entitled to Deduct NOLCO from
Gross Income:
1. individuals engaged in trade or business or
in the exercise of his profession
2. domestic and resident foreign corporation
subject to the normal income tax or
preferential tax rates
3. estates and trusts
The following are NOT entitled to NOLCO:
1. Offshore banking units (OBU) of a foreign
banking corporation, and Foreign Currency
Deposit Unit (FCDU) of domestic or foreign
banking corporation duly authorized by the
BSP;
2. an enterprise registered with the Board of
Investment with respect to its BOI registered
activity enjoying Income Tax Holiday
Incentive.
3. An enterprise registered with the Philippine
Economic Zone Authority (PEZA) with
respect to its PEZA-registered activity.
4. Enterprises registered with the Bases
Conservation and Development act, e.g.
SBMA-registered enterprises with respect to
its registered business activity.
5. Foreign
Corporations
engaged
in
international shipping or air carriage
business in the Philippines;
6. Any person, natural, juridical, enjoying
exemption from income tax.
Quarterly and Annual Availment of NOLCO
1. NOLCO shall be allowed as deduction in
computing the taxpayers income taxes per
quarter and annual final adjustment income
tax return
2. If the taxpayers final annual adjustment, the
entire operations for the year resulted to a
net operating loss, such net operating loss
may be claimed as NOLCO deduction in the
immediately succeeding taxable year;
3. NOLCO can be claimed as deductions only
within a period of 3 consecutive taxable
years immediately following the year the net
operating loss was sustained or incurred.
Rule for Mines OTHER than Oil Gas Wells
Net operating loss incurred in any of the first 10
years of operation may be carried over for the
next 5 years immediately following the year of
such loss.
WASH SALES [Sec. 34(D)(5)]
A sale of stock or securities where substantially
identical securities are acquired or purchased
within 61-day period, beginning 30 days before
the sale and ending 30 days after the sale (Sec.
38).

105

Elements of Wash Sales

1. The sale or other disposition of stock
resulted to a loss;
2. There was a acquisition or contract or option
for acquisition of stock or securities within 30
days before the sale or 30 days after the
sale; and
3. The stock or securities sold were
substantially the same as those acquired
within the 61-day period.
If the taxpayer is a dealer in securities, and the
transaction from which the loss resulted was
made in the ordinary course of business of such
dealer, the loss is deductible in full.
SHORT SALES
Any sale of a security which the seller does not
own or any sale which is consummated by the
delivery of a security borrowed by, or for the
account of the seller.
A person shall be deemed to own a security if:
1. he or his agent has title to it
2. he has purchased or has entered into an
unconditional contract, binding on both
parties thereto, to purchase it and has not
yet received it
3. he owns a security convertible into or
exchangeable for it and has tendered such
security for conversion or exchange
4. he has an option to purchase or acquire it
and has exercised such option; or
5. he has rights or warrants to subscribe to it
and has exercised such rights or warrants
provided however, that a person shall be
deemed to own securities only to the extent
he has a net long position in such securities
(SEC Reg Code RA 8799).
V.

Bad Debts

Debts resulting from the worthlessness or

uncollectibility, in whole or in part, of amounts
due the taxpayer by others, arising from money
lent or from uncollectible amounts of income from
goods sold or services rendered
Requisites for Deductibility
1. Existing, valid, and legally demandable
indebtedness due to the taxpayer;
2. Connected with the taxpayers trade,
business or practice of profession;
3. Must not be sustained in a transaction
entered into between related parties;
4. Actually charged off in the books of accounts
of the taxpayer as of the end of the taxable
year.

5.

The amount of money lent must be

previously recorded in the books of the
taxpayer as receivable and later cancelled
and written-off. (Sec. 2, RR 5-99 as
amended by RR 25-02).
Actually ascertained to be worthless and
uncollectible as of the end of the taxable
year; and
A debt is not worthless simply because it is
of doubtful value or difficult to collect. An
account is worthless when after taking
reasonable steps to collect the debt, there is
no likelihood of recovery at anytime in the
future.
The factors to be considered include, but are
not limited to the following:
a. debtor has neither property nor visible
income;
b. debtor has been adjudged bankrupt or
insolvent;
c. collateral
shares
have
become
worthless; and
d. numerous debtors with small amounts of
debts and further action on the accounts
would entail expenses exceeding the
amounts sought to be collected
Good faith on the part of the taxpayer is not
enough. He must show that he had
reasonably investigated the relevant facts
and had drawn a reasonable inference from
the information thus obtained by him.
(Collector vs. Goodrich International Rubber
G.R. No. L-22265 December 22, 1967).
General Rule: The determination by the
Commissioner of Internal revenue as to the
worthlessness of bad debt is adequate.
Exception:
a. for insurance or surety company, no bad
debts
deduction
UNLESS
such
company has been declared closed due
to insolvency or for any such similar
reason by the Insurance Commissioner
(R.R. No. 25-2002).
b. For banks, the taxpayer shall submit to
the BBSP/Monetary Board the written
approval of the writing off of the
indebtedness from banks books of
accounts at the end of the taxable year
(RR. No. 25-2002).
NOTE: Under the Tax Benefit Rule, recovery
of bad debts previously deducted from gross
income constitutes taxable income if in the
year the account was written off, the
deduction resulted in a tax benefit.
In a case where securities are ascertained to
be worthless and charged off within the

106

taxable year, and are capital assets, the loss

to the taxpayer (other than a bank or trust
company incorporated under the laws of the
Philippines a substantial part of whose
business is the receipt of deposits) will NOT
be treated as bad debts, but as capital loss
on the last day of the taxable year. The date
that the securities were written off is
immaterial [Sec. 34(E)(2)].
VI. Depreciation
Gradual diminution in the service or useful
value of tangible property due from
exhaustion, wear and tear and normal
obsolescence.
With respect to intangible property the use of
which in trade or business is of limited
duration, the term to be used is amortization.
Rationale: property gradually approaches a
point where its usefulness is exhausted.
Requisites for Deductibility:
1. The allowance for depreciation must be
reasonable.
2. It must be for property arising out of its
use in the trade or business, or out of its
not being used temporarily during the
year.
If the property is being used partly
personal and partly for business,
depreciation expense must be pro-rated
and oly the portion attributable to
business use is deductible.
Depreciation is allowed on depreciable
property that is not being used
temporarily during the year (Conwell
Bros. Co. vs. Collector, CTA Case No.
411).
3. The allowance must be charged off
within the taxable year.
4. Schedule of allowance must be attached
to the return
Determination of the Useful Life on Which
Depreciation Rate is Based
General Rule : BIR and the taxpayer may
agree in writing on the useful life of the
property to be depreciated subject to
modification IF justified by facts or
circumstances. The change shall not be
effective before the taxable year on which
notice in writing by certified mail or
registered mail is served by the party
initiating
Exception: If there is no agreement and the
BIR does not object to the rate and useful life

being used by the taxpayer, the same shall

be binding.
Who can Claim Depreciation Expense?
General Rule: The person who sustains an
economic loss from the decrease in property
value due to depreciation which is usually
the owner.
For NRA and FC, depreciation shall be
permitted only when such property is located
within the Philippines.
Special Rules:
1. for property held by one person for life
with remainder to another person
deduction shall be computed as if the
tenant was the absolute owner of the
property and, as such, the expense shall
accrue to him.
2. for property held in trust deductions
shall be apportioned between the
income beneficiaries and the trustees in
accordance with the pertinent provisions
of the instrument created or in the
absence of such provisions, on the
basis of the trust income allowable to
each.
Methods of Depreciation
1. Straight-line method
2. Declining-balance method
3. Sum of the years-digit method
4. Any other method which may be
prescribed by the Department of
Finance upon recommendation of the
Commissioner of Internal Revenue.
Special Types of Depreciation:
Petroleum Operation

For property directly related to

production shall use Straight Line (SL)
Method OR Declining Balance (DB)
method over 10 years OR shorter as
allowed by the Commissioner

May shift from DB to SL method

For property not directly related to

production: 5 years under Straight-Line
Method
Mining Operations

Depreciation on all properties in mining

operations OTHER than petroleum
operations at the normal rate IF
expected life is less than 10 years

IF expected life is more than 10 years

depreciation shall be any number of
years between 5 years and the
expected life.

107

VII. Depletion of Oil and Gas Wells

It is the removal, extraction, or exhaustion of
natural resources (wasting assets) as in
mines, oil, and gas wells as a result of
production or severance from such mines or
wells.

4.

Method allowed: cost depletion method

(similar to units-of- production-method of
depreciation) wherein the total of the
accumulated exploration and development
expenses is divided by the number of
recoverable units to arrive at a per unit
depletion cost.
5.
Mere economic or pecuniary advantage to
be derived by production by one who has no
capital investment in the mineral deposit
does NOT amount to economic interest.
Features:
1. Intangible exploration and development
drilling cost in petroleum exploration
shall be treated either as:
a. Revenue expenditures; or
b. Capital expenditures
2. The total amount deductible for
exploration
and
development
expenditures shall not exceed 25% of
net income from mining operation. The
excess shall be carried forward to the
succeeding year until fully deducted.
VIII. Charitable and other Contributions
Requisites of Deductibility
1. The contribution or gift must be actually
paid;
2. It must be made within the taxable year
3. It must be given to organization
specified by law;
4. It must be evidenced by adequate
receipts or records
5. The amount of charitable contribution of
property other than money shall be
based on the acquisition cost of said
property.
Contributions Deductible in Full:
1. Recipient is a foreign or international
organization with an agreement with the
Philippine Government on deductibility,
or in accordance with special law.
2. Recipient is:
a. Government of the Philippines
b. Any of its agencies or political
subdivision
c. Any
fully-owned
government
corporation
3. For priority activity in
a. Science

b. Education
c. Culture
d. Health
e. Economic Development
Recipient is an accredited NGO,
organized and operated for:
a. Scientific
b. Educational
c. Cultural
d. Character building/youth and sports
development
e. Charitable
f. Social welfare
g. Health
h. Research
Satisfying the following conditions:
a. Donation must be utilized not later
than the 15th day of the 3rd month
following the close of its taxable
year
b. Administrative expenses must not
exceed 30% of total expenses
c. Upon dissolution, assets must be
distributed to another non-profit
domestic corporation or to the state.

Contributions Subject to Limitation:

1. Recipient is:
a. Government of the Philippines
b. Any of its agencies or political
subdivision
2. For non-priority activities and exclusively
for public purposes
3. Recipient is an accredited domestic
corporation or association organized or
operated for (purposes):
a. Scientific
b. Educational
c. Cultural
d. Youth and sports development
e. Charitable
f. Social welfare
g. Religious
h. Rehabilitation of Veterans
If the conditions are not complied with:
Limitation: It must not exceed 10%
(individual) or 5% (corporation) of the
taxpayers taxable income derived from
trade, business, or profession before
charitable contributions.
NOTE: Whether deductible in full or subject
to limit, the NGO which serves as the
recipient of the donation must be accredited
by the Philippine Council for NGO
Accreditation.
IX. Research and Development

108

Costs for improvements of processes and

formula as well as the development of
improved or new products
1.
2.

the pension fund) one-tenth of the

reasonable amount paid by the
employer to cover pension liability
applicable to prior 10 years shall be
deductible as payment to pension trust.

May be expenditures for:

acquisition or improvements of property
subject to depreciation or depletion used in
research and development;
other research and development costs.

Non-deductible expenses
1. Personal living or family expenses
these are personal expenses;
2. Amount paid out for new buildings or for
permanent improvements, or betterment
made to increase the value of any
property or estate these are capital
expenditures added to the cost of the
property and the periodic depreciation is
the amount that is considered as
deductible expense;
3. Amount expended in restoring property
or in making good the exhaustion
thereof for which an allowance has been
made same reason as number 2;
4. Premiums paid on any life insurance
policy covering the life of any officer or
employee, or of any person financially
interested in any trade or business
carried on by the taxpayer, individual or
corporate, when the taxpayer is directly
or indirectly a beneficiary under such
policy these are items not normally
subject to income tax and therefore not
deductible;
5. Losses from sales or exchanges of
property, bad debts, and interest
expense between related taxpayers.

Taxpayer may treat it either as:

1. revenue expenditure it will be
deducted as ordinary and necessary
expense in the year it is paid or incurred
2. deferred expense allowed as
deduction ratably distributed over a
period of at least 60 months starting
from the month benefits are received
from such expenditure.
Deductibility of research and development
expenditures shall NOT apply to:
1. expenditure for the acquisition or
improvement of land or for the
improvement of property to be sued in
connection
with
research
and
development subject to depreciation and
depletion.
2. expenditure paid or incurred for the
purpose of ascertaining the existence,
location, extent or quality of any deposit
of ore or other mineral including oil or
gas.
X.

Pension Trust Contribution

Nature applicable only to the employer on
account of its contribution to a private
pension plan for the benefit of its employee.
Purely business in character.
Requisites for Deductibility
1. Employer must have established a
pension or retirement plan for the
payment of reasonable pension to its
employees;
2. Pension plan is reasonable and
actuarially sound;
3. Funded by the employer (employer
contributes cash)
4. Amount contributed must no longer be
subject to the control of the employer;
5. Payment has not yet been allowed as
deduction.
Deductible Payments to Pension Trust
1. Employers current liability (amount of
contribution during the taxable year or
present service cost) deductible as
ordinary and necessary expense.
2. Employers liability for past services
(past service cost requires lump sum to

ACCOUNTING PERIODS AND METHODS

ACCOUNTING PERIOD
General Rule: The accounting period of a
taxpayer is a period of 12 months.
1.

Calendar year accounting period from

January 1 to December 31 which is allowed
if:
a. Taxpayer is an individual;
b. Taxpayer is a partnership;
c. Accounting period is other than a fiscal
year;
d. Taxpayer has no accounting period;
e. Taxpayer does not keep books.

2.

Fiscal year accounting period of 12

months ending on the last day of any month
other than December which is allowed ONLY
to corporations

109

Exception: A taxpayer may have a taxable

period of less than 12 months where:
1. taxpayer dies
2. corporation is newly organized
3. corporation changes its accounting
period
4. corporation is dissolved

(page 112 Missing Page***)

Change of Accounting Period

A corporation may change its accounting period
wherein the net income shall, with the approval of
the commissioner, be computed on the basis of
such new accounting period, subject to the
provisions of Section 47.
2. Withholding Tax on Fringe Benefit
A separate adjustment or final return shall be
made for the period and the new accounting
period.

III. Withholding Tax on Creditable VAT

IV. Withholding of Percentage Tax

METHODS OF ACCOUNTING

I.

General Rule: Net income shall be computed in

accordance with the method of accounting
regularly employed in the books of the taxpayer.
Exception: Computation shall be made in such
method as in the opinion of CIR clearly reflects
the income:
1. if no such method has been so employed by
the taxpayer;
2. if the method of accounting employed does
not clearly reflect the income

Withholding Tax at Source

Arises at the time an income is paid or
payable, whichever comes first. The term
payable refers to the date the obligation
becomes due, demandable or legally
enforceable (Sec. 2.54.5 RR. No. 2.98).
1.

Final withholding tax

Effects if a PARTICULAR type of
income is
subjected to final
withholding tax:
a. Constituted as a full and final
payment of the income tax due from
the payee
b. No longer subject to the net income
tax (hence, the corresponding final
tax cannot be claimed as tax credit)
c. Limited only to the payees income
tax liability and does not extend to
other taxes that may be imposed on
said income
d. Liability for the payment of the tax
rests primarily on the payor as
withholding agent
e. Withholding agent files the return
(not the payee)

Methods Recognized by Law and Regulations

1. Cash Method income is reported in the
year payments are received while expenses
are deducted in the year paid.
2. Accrual Method income is reported in the
year it is earned while expense is deducted
in the year it is incurred regardless of receipt
or disbursement of cash
Allocation of Income and Deductions
In the case of two or more organizations, trades
or businesses (whether or not incorporated and
whether or not organized in the Philippines)
owned or controlled directly or indirectly by the
same interests the Commissioner is authorized to
distribute, apportion or allocate gross income or
deductions between or among such organization,
trade or business, if he determined that such
distribution, apportionment or allocation is
necessary in order to prevent evasion of taxes or
clearly to reflect the income of any such
organization, trade or business.

Formula:
Final tax = final tax rate x gross income
(deductions and/or personal and
additional exemptions NOT allowed)
2.

Creditable Withholding Tax

Withholding taxes on ordinary business
income which is still subjected to income
tax and therefore, it is deductible as tax
credit

110

Tax-Free Covenant BOND [Sec. 57(C)]

Covenant Bonds bonds, mortgages,
deeds of trust and other similar
obligations of domestic/resident foreign
corporation,
which
contain
a
contract/provision by which the obligor
agrees:
a. to pay any portion of the tax
imposed upon the obligee;
b. to reimburse the obligee for any
portion of the tax; or
c. to pay the interest without
deduction for nay tax which the
obligor may be required / permitted
to pay or to retain therefrom.

Obligor shall deduct and withhold a

tax equal to 30% of the interest and
other payments whether interest or
other payments are payable
annually or at a shorter period;
whether
bonds,
securities,
obligations
had
been/will
be
issued/marketed and the interest
and other payments pad within and
without the Philippines if the interest
or other payment is payable to a
non-resident alien or a citizen or
resident of the Philippines.
Income of Recipient [Sec. 58 (d)]
Income which any creditable tax is
required to be withheld at source shall
be included in the return of its recipient.
The excess of the amount of tax
withheld over the tax sue on his return
shall be refunded to him, subject to
Section 204 (abatement, refund/credit
taxes).
Return on Creditable Withholding Tax
The income payor who withheld a
creditable income tax should file a return
and pay the tax withheld.
II.

Withholding Tax on Compensation

It applies to all employed individuals whether
citizens or aliens, deriving income from
compensation for services rendered in the
Philippines wherein the employer is
constituted the withholding agent.
The income recipient (i.e. employee) is the
person liable to pay the income tax, yet to
improve the collection of compensation
income of employees the State requires the
employer to withhold the tax upon payment
of the compensation income.

Requisites:
1. employer-employee relationship
2. payment of compensation or wages for
services rendered; and
3. payroll period
Compensation Includes:
1. salaries and wages
2. commissions
3. tips
4. allowances
5. bonuses
6. fringe benefits of
employees

rank

and

file

Compensation Exempted:
Remunerations received as an incident of
employment
2. Remunerations paid for agriculture/labor
3. Remunerations paid for domestic services
4. Remunerations for casual not in the course
of an employers trade of business.
5. Compensation for services of a citizen,
resident of the Philippines, for a foreign
government or an international organization
6. Damage
7. Life Insurance
8. Amount received by the insured and
sickness
9. Income exempt under treaty
10. thirteenth (13th) month pay and other benefits
11. GSIS,
SSS,
Philhealth
and
other
contributions
1.

FINAL WITHHOLDING
TAX SYSTEM

CREDITABLE
WITHHOLDING TAX
SYSTEM
Amount of Tax Collected
constituted as a full Intended to equal or at
and final payment of least approximate the
the income due from tax due from the payee
the payee on the said on the said income
income due from the
payee on the said
income [Sec. 2.57 (a)
R.R. No. 2-98]
Who is primarily liable
Liability rests primarily Liability rests upon the
on the withholding taxpayer
agent
Need to File A Return
Payee is not required Income recipient is still
to file an income tax required to file an
return for the particular income
tax
return
income
and/or
pay
the
difference between the
tax withheld and the
tax due on the income
Coverage
a) All income subject Those
income
to final taxes (e.g. payments covered by
passive,
gross the
expanded

111

b)
c)

income of NRANETB)
Fringe benefit
Informers reward
to
persons
instrumental in the
discovery
of
violations of the
NIRC and the
discovery
and
seizure
of
smuggled goods

of goods for resale, shall be allowed

as deductions upon the withholding
agents payment of the basic withholding
tax and penalties incident to nonwithholding or under withholding.

withholding tax (R.R. 298)

Examples:
Professional fees,
talent fees
Fees paid to medical
practitioners
Income payments to
partners of GPP

III. WITHHOLDING TAX ON CREDITABLE VAT

IV. WITHHOLDING TAX ON PERCENTAGE
TAX
Bureaus offices, instrumentalities of the
government, including GOCCs as well as
their
subsidiaries,
provinces,
cities,
municipalities making any money payment to
private individuals, corporations, partnership
or association are required to deduct and
withhold taxes due from the payees on
account of such money payment.
Remedies of withholding agent if expense
is disallowed (R.R. 2-98 as amended by
R.R. 14-2002):
1. Pay the tax due thereon, including the
interest incident to failure to withhold
tax, and surcharges, if applicable, at the
time of the audit investigation or
reinvestigation provided the payees
reported the income.
2. Pay the amount that should have been
withheld, including the interest incident
to the failure to withhold the tax, and
surcharges if applicable, at the time of
the audit investigation or reinvestigation
if the payees did not report the income
and pay the tax.
3. In case of under withholding, pay the
difference between the correct amount
and the amount of tax withheld,
including the interest, incident to such
error and surcharges if applicable, at the
time
of
audit
investigation
or
reinvestigation.
If above remedies are availed of, the
expenses not previously subjected to
withholding tax will be allowed as a
deduction for income tax purposes.
Section 6 of R.R. 17-2003 items for
deduction representing return of
capital such as those pertaining to
purchase of raw materials forming
part of finished product or purchases

TAX RETURN AND PAYMENT

TAX RETURN this is a report made by the
taxpayer to the BIR of all gross income received
during the taxable year, the allowable deductions
including exemptions, the net taxable income, the
income tax rate, the income tax due, the income
tax withheld, if any, and the income tax still to be
paid or refundable.
PERSONS REQUIRED TO FILE INCOME TAX
RETURN (ITR)
1.

INDIVIDUAL
Individual Required to File ITR
a. RC on income from within and without
b. NRC on income from within
c. RA on income from within
d. NRAETB on income from within
e. Individual (citizens/ aliens) engaged in
business or practice of a profession
within the Philippine regardless of the
amount of gross income;
f. Individual
deriving
compensation
income concurrently from two or more
employers at any time during the
taxable year; and
g. Individual whose pure compensation
income derived from sources within the
Phil. Exceeds P60,000
Individuals Exempt form Filing ITR:
a. Individual whose gross income does not
exceed total personal and additional
exemptions;
b. Individual with respect to pure
compensation income derived from
sources within the Philippines, the
income tax on which has been correctly
withheld;
c. Individual whose sole income has been
subjected to final withholding income
tax; and
d. Individual who is exempt from income
tax.
NOTE: Individuals not required to file an
income tax return may nevertheless be
required to file an information return.
Under RA 9504 effective July 6,2008,
minimum wage earners are granted full tax

112

exemption by exempting them from the

payment of income tax.
Special Rules
Return of Husband and Wife
File one (1) return for the taxable year if the
following requisites are complied;
a. Married individuals (citizens, resident or
non-resident aliens)
b. Do not derive income purely from
compensation.
If impracticable to file one return: each
spouse shall file a separate return of income
but the return so filed shall be consolidated
by the Bureau for the purpose of verification
for the year.
Unmarried Minor
Income of unmarried minors derived from
property received by the living parent shall
be included in the return of the parent,
except:
a. when donors tax has been paid on such
property, or
b. when transfer of such property is
exempt from donors tax.
Persons under Disability:
If a taxpayer is unable to make his own
return, it may be made by his:
a. duly authorized agents
b. representative;
c. by guardian, or
d. other person charged with the care of
his person or property
who will assume the responsibility of making
the return and incurring penalties provided
for erroneous, false or fraudulent return
2.

TAXABLE ESTATE AND TRUST

The fiduciary shall file a return IF gross
income is at least P20,000 on or before April
15.

3.

GENERAL
PROFESSIONAL
PARTNERSHIP
The income tax return shall be signed and
filed, in duplicate, by the principal officer on
or before April 15, and shall set forth:
a. items of gross income and deductions
allowed;
b. name, address, and share of each
partners;
c. TIN

4.

CORPORATION
The following shall make a return and filed
by the president, vice president or other
principal officer, and shall be sworn to by

such officer and by the treasurer or assistant

treasurer.
a. Not exempt from income tax;
b. Exempt from income tax under Sec. 30
of NIRC but has NOT shown proof of
exemption;
c. Corporation subject
to tax having
existed during the taxable year, whether
with income or not;
d. Corporation in the process of liquidation
or receivership;
e. Insurance company doing business in
the Philippines or deriving income
therein; and
f. Foreign corporation having income from
within the Philippines
SUBSTITUTED FILING
Substituted filing is when the employers
annual return may be considered as the
substitute Income Tax Return (ITR) of employee
inasmuch as the information provided in his
income tax return would exactly be the same
information contained in the employers annual
return.
Non-filing applicable to certain types of
individual taxpayers who are not required under
the law to file an income tax return.
Substituted filing of Income Tax Returns by
Employees Receiving Purely Compensation
Income [Section 4, R.R. . No. 3-2002; RMC 0103]
Requisites:
1. employee receives purely compensation
income (regardless of amount);
2. the is income only from one employer
3. amount of tax due form the employee equals
the amount of tax withheld by the employer;
4. employees spouse also complies with all
three(3) conditions stated above;
5. employer files the annual information return
(BIR Form No. 1604-CF); and
6. employer issues BIR Form 2316 (Oct. 2002
ENCS) version to each employee.
Individuals NOT Qualified For Substituted
Filing (Still Required To File):
1. Individuals deriving compensation from two
or more employers concurrently or
successively;
2. Employees deriving compensation income,
the income tax of which has not been
withheld correctly.
3. Employees
whose
monthly
gross
compensation income does not exceed
P5,000 or the statutory minimum wage,
whichever is higher, and opted for nonwithholding of tax on said income;

113

4.

Individuals deriving other non-business, nonprofession-related income in addition to

compensation income not otherwise subject
to final tax;
Individuals receiving purely compensation
income from a single employer although the
income tax of which has been correctly
withheld, but whose spouse fall under 1 to 4
above;
NRA-ETB deriving purely compensation
income, or compensation income and other
non-business,
non-profession-related
income.

Second Installment On or before July 15,

following the close of the calendar year

NOTE: Non-filing of ITR, for employees who are

qualified for the substituted filing shall be
OPTIONAL for the taxable year 2001, the returns
for which shall be filed on or before April 15,
2002. Thereafter, substituted filing where
applicable shall be MANDATORY (Sec. 5 R.R.
No. 3-2002).

ELECTRONIC FILING AND PAYMENT SYSTEM

(EFPS)

Large taxpayers shall e-file their final

adjustment income tax returns for the
calendar/fiscal year and shall e-pay their
taxes on or before the 15th day of the fourth
month following the close of the taxable year.

The taxpayer must be enrolled in the EFPS

Electronic signatures of the taxfiler shall be

affixed in the return

The taxpayer that will e-pay shall enroll with

any authorized agent bank where he intends
to pay.

5.

6.

Requirement of Banks for Submission of an

ITR for Loan or Credit Card Applications:
Banks may require the submission of BIR Form
No. 1700 (for employees not entitled to
substituted filing of ITR). However, for employees
entitled to substituted filing of ITR, the
submission of the Joint Certification will suffice.
Joint Certification It is sworn statement made
by the employer and employee, which serve the
following purposes:
1. It contains the employees consent that BIR
Form No. 1604CF may be considered his
substituted return, in lieu of BIR Form No.
1700, which the employee no longer filed.
2. It contains the employers certification that
he has reported the employees income to
the BIR and that he has remitted the taxes
on the employees income, as indicated in
BIR Form No. 1604-CF.
3. It serves as proof of financial capacity in
case the employee decides to apply for a
bank loan or a credit card, or for any other
purpose as if he had in fact filed a BIR Form
No. 1700.
MANNER OF PAYMENT
General Rule: Pay-as-you-file-system, the
income tax shown on the return should be paid at
the time the return is filed.
Exception: Individuals may pay in two equal
installments if the income tax due on the annual
return exceeds Two thousand pesos (P2000).
First Installment At the time the return is filed.

Any creditable withholding tax shall be credited

against the tax due, r the first installment of the
tax, if the taxpayer desires to pay on installment.
Extension of Time to File Return:
The Commissioner may on meritorious cases
grant a reasonable extension of time for filing
income tax return and may subject the imposition
of twenty (20) percent interest per annum from
the original due date.

Who is a large taxpayer? (As amended by R.R.

10-2007)
A taxpayer who satisfies any of the following
criteria

Value Added Tax Business establishment

with VAT paid or payable of at least One
Hundred Thousand Pesos (P100,000) for
any quarter of the preceding taxable year).

Excise Tax Business establishment with

the excise tax paid or payable of at least
One Million pesos (P1,000,000) for the
preceding taxable year.

Corporate
Income
Tax

Business
establishment with the annual income tax
paid or payable of at least One million pesos
(P1,000,000) for the preceding taxable year.

Withholding Tax Business establishment

with a withholding tax payment or remittance
of at least One million pesos (P1,000,000)
and above;

Corporations with complete computerized

system; and

All government bidders pursuant to

Executive Order o. 398 as implemented by
R.R. 3-2005. It should be emphasized,
however,
that
non-stock
non-profit
corporations are excluded from the coverage
of this regulations.
REPORTORIAL REQUIREMENTS (R.R. No. 212002)

114

Submission of Financial Statements (FS) is

mandatory even if there is no income.

FS shall be composed of the balance sheet,

income statement, statement of retained
earnings, statement in changes in financial
position, and schedules attached to the
aforementioned statements

FS file WITH accompanying auditors

certificate shall show the comparative figures
of the current year and the previous year

The independent CPA who audited the

records and certified the FS of taxpayer,
equally as taxpayer, has the responsibility to
maintain and preserve copies of audited and
certified FS for a period of 3 years from due
date of filing the annual ITR or the actual
date of filing, whichever comes later.
Taxpayers are mandated to maintain books and
records that would reflect the reconciling items
between FS figures and/or data with those
reflected/presented in the filed Income Tax
Return (ITR).
RETURNS
OF
CONTEMPLATING
REORGANIZATION

CORPORATONS
DISSOLUTION/

Within thirty (30) days after the adoption of a

resolution or plan for its dissolution, or for the
liquidation of the whole or any part of its capital
stock, or notified of possible involuntary
dissolution by the SEC or for its reorganization
shall render a correct return to the Commissioner,
verified under oath, setting forth the terms of
such resolution or plan and such other
information.
Prior to the issuance by the SEC of the
Certificate of Dissolution or Reorganization, shall
secure a certificate of tax clearance from the BIR.

115

INCOME TAXPAYER

TAXBASE
(Taxable Source)

TAX RATES

EXEMPTIONS
PERSONAL

ADDITIONAL

OPTIONAL
STANDARD
DEDUCTIONS

DEDUCTIONS

INDIVIDUAL
Resident Citizen (RC)

Non-Resident Citizen
(NRC)

Resident Alien

Non-Resident Alien
Engaged in Trade and
Business (NRA-ETB)

INCOME TAXPAYER

All sources (Philippine

and Foreign

Income from sources

within the Philippines

Income from sources

within the Philippines

Income from sources

within the Philippines

TAXBASE
(Taxable Source)

5%-32% on taxable income

arising from employeremployee relationship

YES

YES

5% -32% on taxable income

arising from business and
other income.

YES

5%-32% on taxable income

arising from employeremployee relationship

YES

Yes
(NOTE: Deductible
firstly form
compensation
income, excess
from other income)
YES

5% -32% on taxable income

arising from business and
other income.
5%-32% on taxable income
arising from employeremployee relationship

YES

Yes

YES

YES

5% -32% on taxable income

arising from business and
other income.
5%-32% on taxable income
arising from employeremployee relationship

YES

Yes

YES
NOTE: by
reciprocity

NO

5% -32% on taxable income

arising from business and
other income.

YES
NOTE: by
reciprocity

NO

TAX RATES

EXEMPTIONS
PERSONAL
INDIVIDUAL

ADDITIONAL

General Rule: NO
Exception: Premium
Payments on Health
and/or Hospitalization
Insurance
YES

NO

General Rule: NO
Exception: Premium
Payments on Health
and/or Hospitalization
Insurance
YES

NO

General Rule: NO
Exception: Premium
Payments on Health
and/or Hospitalization
Insurance
YES

NO

General Rule: NO
Exception: Premium
Payments on Health
and/or Hospitalization
Insurance
YES

NO

DEDUCTIONS

YES
RATE: 40% of his
gross sales or gross
receipts

YES

YES

YES

OPTIONAL
STANDARD
DEDUCTIONS

Non-Resident Alien
Not Engaged in Trade
and Business (NRANETB)

Income from sources

within the Philippines

Special Classes of
Individual Employees
(Whether Filipino or
Alien) employed by:
1) Regional Area
Headquarters or
Regional
Operating
Headquarters in
the Philippines
2) Offshore banking
units established
in the Philippines;
3) Foreign service
Contractors or
subcontractor
engaged in
petroleum
operations in the
Philippines

Income from sources

within the Philippines

25% on gross income derived

from business
Gross income derived from
business equivalent to gross
sales less returns, discounts,
and allowances and cost of
goods sold
15% on Gross income
received as salaries, wages,
annuities, compensation,
remuneration and other
emoluments, such as
honoraria and allowances.
NOTE: For other sources
within the Philippines, income
shall be subject to pertinent
income tax (graduated tax
rates, final tax on passive
income, capital gains
depending whether a citizen or
an alien), as the case may be.

NO

NO

NO

NO

NO

NO

NO

NO

N/A

N/A

N/A

N/A

Passive Income subject to final tax

RC, NRC, RA, NRAETB

Interest Income

1)

2)

INCOME TAXPAYER

TAXBASE
(Taxable Source)

20% -from any currency

deposit and yield or other
monetary benefit from
deposit substitute and
from trust funds and
similar arrangements.
7.5% - From a depository
bank under the expanded
foreign currency deposit
system (FCDS)

TAX RATES

EXEMPTIONS
PERSONAL
INDIVIDUAL

ADDITIONAL

DEDUCTIONS

OPTIONAL
STANDARD
DEDUCTIONS

RC, NRC, RA, NRAETB

Interest Income

NRA-NETB

RC, NRC, RA, NRAETB

Royalties

NRA-ETB

RC, NRC, RA, NRAETB

Prizes and Winnings

From long-term deposit or

investment
a) Held for more than 5
years Exempt
b) 4 yrs less than 5
yrs- 5%
c) 3 yrs less than 4
yrs 12%
d) less than 3 yrs.
20%
1) 25% - from any currency
deposit and yield or other
monetary benefit from
deposit substitute and
from trust funds and
similar arrangements.
2) EXEMPT From a
depository bank under the
expanded foreign
currency deposit system
(FCDS)
3) 25% - From long-term
deposit or investment
1) 10% - From books,
literary works and musical
compositions
2) 20% - other royalties
1) 25% - From books,
literary works and musical
compositions
2) 25% - other royalties
20% on prizes exceeding
P10,000
NOTE: Prizes less than
P10,000 subject to graduated
rates
25% on prizes exceeding
P10,000

NRA-NETB

INCOME TAXPAYER

3)

TAXBASE
(Taxable Source)

TAX RATES

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

EXEMPTIONS
PERSONAL
INDIVIDUAL

ADDITIONAL

DEDUCTIONS

OPTIONAL
STANDARD
DEDUCTIONS

RC, NRC, RA

NRA-ETB

NRA-NETB

RC
NRC, RA
RC, NRC, RA
NRA-ETB, NRA-NETB

1)

Cash/ Property
Dividends from
Domestic
Corporations
2) Share in the
distributable net
income after tax
of a taxable or
business
partnership.
3) Share in the net
income after tax
of an association,
a joint account, or
a joint venture or
consortium
taxable as a
corporation of
which he is a
member or coventurer.
Cash/ Property
Dividend from Foreign
Corporations
Cinematographic Film
and Similar Works

10% final tax

N/A

N/A

N/A

N/A

20% final tax

N/A

N/A

N/A

N/A

25% final tax

N/A

N/A

N/A

N/A

Graduated rates

N/A

N/A

N/A

N/A

If considered as from source within

graduated rates
Graduated rates

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

25% final tax

N/A

N/A

N/A

N/A

TAX ON CORPORATIONS

Domestic Corporations
(DC)

Philippine and Foreign

Source

1)

NCIT-30% (effective January 1,

2009) on the taxable income
Capital Gains Tax
Final Tax on passive income
same rules as those imposed
on individuals
MCIT 2% Gross income
EXCEPT income tax and
income subject to final
withholding tax
Effective January 1, 2000, the
President through the Sec.
Finance may allow DC the
option to be taxed at 15% of
gross income
IATE 0 10% on improperly
accumulated taxable income
(in addition to other taxes

N/A

N/A

YES, if taxed under

NCIT otherwise, No

YES, if taxed under

NCIT otherwise, NO

General Rule: 10% of the net income

except those subject to capital gains tax
and passive income subject to final tax.

N/A

N/A

NO

NO

N/A

N/A

NO

NO

2)
3)
4)

5)

6)

Special Domestic Corporation

1)

2)

Proprietary
Educational
Institutions and
Non-Profit
Hospitals

Depositary Banks
(FCDU

Exception: 30% IF the gross income

from unrelated trade, business or other
activity exceeds 50% of the total gross
income derived from all sources.
General Rule: Exempt from all taxes,
except net income from such
transactions as may be specified by the
Secretary of Finance, upon
recommendation by the Monetary
Board to be subject to the regular
income tax payable by banks
Exceptions: Final tax of 10% on interest
income from foreign currency loans
granted by such depository banks
under said expanded system to
residents other than offshore units in
the Philippines or other depository
banks under the expanded system.

Resident Foreign
Corporation-engaged
in trade or business
(RFC

Philippine source
only

1)
2)
3)
4)

5)

6)

INCOME TAXPAYER

TAXBASE
(Taxable Source)

NCIT 30% (effective January

1,2009) on the taxable income
Capital Gains Tax
Final Tax on Passive income
MICT 2% Gross income
EXCEPT income exempt from
income tax and income subject to
final withholding tax
Effective January 1, 2000, the
President through Sec. Finance
may allow RFC the option to be
taxed at 15% of gross income.
BRANCH PROFIT REMITTANCE
TAX 15% of total profit applied
or earmarked for remittance
without any deduction for tax
component thereof

TAX RATES

N/A

N/A

YES, if taxed under

NCIT otherwise NO

EXEMPTIONS
PERSONAL

YES, it taxed under

NCIT otherwise, NO

OPTIONAL
STANDARD
DEDUCTIONS

DEDUCTIONS

ADDITIONAL

Special Resident Foreign Corporations

1)
2)

International
Carriers
Off Shore
Banking Units
authorized by
BSP

2.5% on Gross Philippine Billings

General Rule: EXEMPT
Exception: It is subject to final tax of
10% on interest income derived from
foreign currency loans granted to
residents other than offshore banking
units or local commercial banks,
including local branches of foreign
banks that may be authorized by the
BSP to transact business with offshore
banking units.

NO

NO

3)

Resident
Depositary Bank

Regional Area
Headquarters
5) Regional
Operating
Headquarters
Non-resident Foreign
Corporation not
engaged in trade or
business (NRFC

General Rule: Exempt from all taxes,

except net income from such
transactions as may be specified by the
Secretary of Finance, upon
recommendation of the Monetary Board
to be subject to the regular income tax
payable by banks.
Exception: It is subject to final tax of
10% on interest income from foreign
currency loans granted by such
depository banks under said expanded
system to residents other than offshore
units in the Philippines or other
depository banks under the expanded
system
EXEMP

4)

INCOME TAXPAYER

10% of the taxable income from

sources within the Philippines
Philippine source
only

TAXBASE
(Taxable Source)

1)
2)

35% final tax on gross income

Capital Gains Tax except capital
gains tax on sale or disposition of
real properties

TAX RATES

N/A

N/A

NO

NO

NO

NO

NO

NO

NO

NO

EXEMPTIONS
PERSONAL

OPTIONAL
STANDARD
DEDUCTIONS

DEDUCTIONS

ADDITIONAL

Special Non- Resident Foreign Corporations

1)

2)

Non-resident
Cinematographic
Film Owners,
Lessors or
Distributors
Non-resident
Owner or Lessor
of Vessels
Chartered by
Philippine
Nationals

25% on gross income from sources

within the Philippines

N/A

N/A

NO

NO

4.5% on Gross rentals, lease or charter

fees from leases or charters to Filipino
citizens or corporations, as approved by
the Maritime Authority

N/A

N/A

NO

NO

3)

Non-resident
Owner or Lessor
of Aircraft and
other Equipment

7.5% on gross rental or fee

N/A

N/A

NO

NO

REPUBLIC ACT NO. 9504

June 17, 2008
AN ACT AMENDING SECTION 22, 24, 34, 35,
51, AND 79 OF REPUBLIC ACT NO. 8424, AS
AMENDED OTHERWISE KNOWN AS THE
NATIONAL INTERNAL REVENUE OF 1997
SECTION 1. Section 22 of Republic Act No.
8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is
hereby further amended by adding the
following definition after Subsection (FF) to
read as follows:

The tax shall be computed in accordance

with and at the rates established in the
following schedule:
Not over P10,000

5%

Over P10,000 but not over P30,000

P500+10% of the
excess over
P10,000

Over P30,000 but not over P70,000

P2,500+15% of
the excess over
P30,000

Over P70,000 but not over P140,000

P8,500+20% of
the excess over
P70,000

Over P140,000 but not over P250,000

P22,500+25% of
the excess over
P140,000

Over P250,000 but not over P500,000

P50,000+30%of
the excess over
P250,000

Over P500,000

P125,000+32% of
the excess over
P500,000

SEC. 22. Definitions when used in this Title:

(A) x x x.
x x x
(FF) x x x .
(GG) the term statutory minimum wage
earner shall refer to rate fixed by the
Regional Tripartite Wage and Productivity
Board, as defined by the Bureau of Labor
and Employment of Labor and Employment
(DOLE)
(HH) the term minimum wage earner shall
refer to a worker in the private sector paid
the statutory minimum wage, or to an
employee in the public sector with
compensation income of not more than the
statutory minimum wage in the nonagricultural sector where he/she is
assigned.
SEC.2. Section 24(A) of Republic Act No. 8424,
as amended, otherwise known as the National
Internal Revenue Code of 1997, is hereby further
amended to read as follows:
SEC. 24. Income Tax Rates.
(A) Rates of Income Tax on Individual
Citizen and Individual Resident Alien of the
Philippines.
(1) x x x:
x x x; and
(c) On the taxable income defined in
Section 31 of this code, other than income
subject to tax-under Subsections (B), (C)
and (D) of this Section, derived for each
taxable year from all sources within the
Philippines by an individual alien who is a
resident of the Philippines. (2) Rates of Tax
on Tax on Taxable Income of Individuals.

For married individuals, the husband and

wife, subject to the provision of Section
51(D) hereof, shall compute separately their
individual income tax based on their
respective total taxable income: Provided,
that if any income cannot be definitely
attributed to or identified as income
exclusively earned or realized by either of
the spouses for the purpose of determining
their respective taxable income.
Provided, that minimum wage earners as
defined in Section 22(HH) of this Code shall
be exempt from the payment of income tax
on their taxable income: Provided, further,
That the holiday pay, overtime pay, night shift
differential pay and hazard pay received by
such minimum wage earners shall likewise
be exempt from income tax.
x x x.
SEC.3. Section 34(L) of Republic Act No. 8424,
as amended otherwise known as the National
Internal Revenue Code of 1997, is hereby
amended to read as follows:
SEC 34. Deductions from Gross Income.
Except for taxpayers earning compensation
income arising from personal services
rendered under an employer-employee
relationship where no deductions shall be
allowed under this Section other than under
Subsection (M) hereof, in computing taxable
income subject to income tax under Sections
24(A); 25(A); 26;27(A) (B), (C); and 28 (A)
(1), there shall be allowed the following
deductions from the gross income:
(A) Expenses.

x x x
(L) Optional Standard Deduction In lieu of
the deductions allowed under the preceding
Subsections, an individual subject to tax
under Section 24, other than a non-resident
alien, may elect a standard deduction in an
amount not exceeding forty percent (40%) of
his gross sales or gross receipts, as the case
may be. In the case of a corporation subject
to tax under section 27(A) and 28(A)(1), it
may elect a standard deduction in an amount
not exceeding forty percent (40%) of it gross
income as defined in Section 32 of this
Code. Unless the taxpayer signifies in his
return his intention to elect the optional
standard deduction, he shall be considered
as having availed himself of the deductions
allowed in the preceding Subsections. Such
election when made in the return shall be
irrevocable for the taxable year for which the
return is made: Provided, That an individual
who is entitled to and claimed for the
optional standard shall not be required to
submit with his tax return such financial
statements otherwise required under this
Code: Provided, further, That except when
the Commissioner otherwise permits, the
said individual shall keep such records
pertaining to his gross sales or gross
receipts, or the said corporation shall keep
such records pertaining to his gross income
as defined in Section 32 of this Code during
the taxable year, as may be required by the
rules and regulations promulgated by the
Secretary of Finance, upon recommendation
of the Commissioner.

(B) Additional Exemption for Dependents.

There shall be allowed an additional
exemption of Twenty five thousand pesos
925,000) for each dependent not exceeding
four (4).
The additional exemption for dependents
shall be claimed by only one of the spouses
in the case of married individuals.
In the case of legally separated spouses,
additional exemptions may be claimed only
be the spouse who has custody of the child
or children.
Provided, That the total amount of additional
exemptions that may be claimed by both
shall not exceed the maximum additional
exemptions herein allowed.
For purposes of this Subsection, a
dependent means a legitimate, illegitimate
or legally adopted child chiefly dependent
upon and living with the taxpayer if such
dependent is not more than twenty-one (21)
years of age, unmarried and not gainfully
employed or if such dependent, regardless
of age, is incapable of self-support because
of mental or physical defect.
x x x.
SEC. 5. Section 51(A)(2) of Republic Act No.
8424, as amended, otherwise known as the
National Internal revenue Code of 1997, is
hereby further amended to read as follows:
SEC 51, Individual Return

(M) x x x.
(A) Requirements:
x x x.
SEC. 4. Section 35(A) and (B) of Republic Act
No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is
hereby amended to read as follows:
SEC 35. Allowance of Personal Exemption
for Individual Taxpayer.
(A) In General. For purposes of
determining the tax provided in Section
24(A) of this title, there shall be allowed a
basic personal exemption amounting to Fifty
thousand pesos (P50,000) for each
individual taxpayer.
In the case of married individual where only
one of the spouses is deriving gross income,
only such spouse shall be allowed the
personal exemption.

(1) Except as provided in paragraph (2) of

this Subsection, the following individuals are
required to file an income tax return
(a) x x
x x x
(2) The following individuals shall not be
required to file an income tax return:
(a) x x x;
(b) An individual with respect to pure
compensation income, as defined in Section
32(A)(1), derived from such sources within
the Philippines, the income tax on which has
been correctly withheld under the provisions
of Section 79 of this Code: Provided, That an
individual
deriving
compensation

concurrently from two or more employers at

any time during the taxable year shall file an
income tax return;
(c) x x x; and
(d) A minimum wage earner as defined in
Section 22(HH) of this Code or an individual
who is exempt from income tax pursuant to
the provisions of this Code and other laws,
general or special.
x x x.
SEC 6. Section 79(A) of Republic Act No. 8424,
as amended, otherwise known as the National
Internal Revenue Code of 1997, is hereby further
amended to read as follows:
Section 79. Income Tax Collected at Source.
(A) Requirement of Withholding Except in
the case of a minimum wage earner as
defined in Section 22(HH) of this code, every
employer making payment of wages shall
deduct and withhold upon such wages a tax
determined in accordance with the rules and
regulations to be prescribed by the Secretary
of Finance, upon recommendation of the
Commissioner:
x x x
SEC. 7. Separability Clause If any provision of
this Act is declared invalid or unconstitutional,
other provisions hereof which are not affected
thereby shall continue to be in full force and
effect.
SEC. 8. repealing Clause Any law, presidential
decree or issuance, executive order, letter of
instruction, administrative order, rule or regulation
contrary to or inconsistent with any provision of
this Act as hereby amended or modified
accordingly.
SEC. 9. Effectivity Clause This Act shall take
fifteen (15) days following its publication in the
official Gazette or in at least two (2) newspaper of
general circulation.

REPUBLIC
ACT NO.
9257

EXPANDED SENIOR CITIZENS ACT OF 2003

(With R.R. No. 4-2006, December 2, 2005; R.R.
No. 1-2007, December 4, 2006)
Who is a senior citizen or elderly?
1. any resident citizen of the Philippines
2. at least sixty (60) years old
Is a senior citizen required to pay income tax?
A senior citizen is exempted from the payment of
individual income taxes; Provided, that their
annual taxable income does not exceed the
poverty level as determined by the National
Economic and Development Authority (NEDA) for
that year.
Annual Taxable Income of a resident senior
citizen shall refer to the annual gross
compensation, business and other income
received by a resident senior citizen during each
taxable year from all sources as defined in
Section 31 of the Tax Code.

Availment
of
Income
Tax
Exemp
tion
1)
2)

3)

He must be qualified as such by the

Commissioner or RDO of the place of his
residence
File a Annual Information Return indicating
that his annual taxable income does not
exceed the poverty level as determined by
the NEDA.
If qualified, his name shall be recorded by
the RDO in MASTER LIST OF TAX EXEMPT
SENIOR CITIZENS.

NOTE: A senior citizen who is a compensation

income earner subject to a withholding tax and
whose annual taxable income exceed the poverty
level is also entitled to substituted filing under
R.R. No. 2-98 as amended.

TAX
LIABILI
TIES
1)

Income Tax if the annual taxable income

exceeds the poverty level.
2) That tax on passive income (same rules with
resident citizens).
3) Capital gains tax same rules with resident
citizens)
4) VAT
5) Self-employed or engaged in business, or
practice of profession.
6) Gross annual sales or receipts exceeds
P1,500,000 or the adjusted amount under
section 109 (1) of the Tax Code.
7) 3% Percentage tax if not subject to VAT.
8) Donors Tax
9) Estate Tax
10) Excise Tax on certain goods
11) Documentary stamp tax
Availment of the Head of the Family Status by
Benefactors

Who is a
Benefa
ctor?
Any person whether related to the senior citizens
or not who takes care of him/her as a dependent;
Requisites:
1) The senior citizen whose annual taxable
income does not exceed the poverty level
must be dependent upon the benefactor for
his chief support.
2) Registered by the benefactor as his
dependent and himself/herself as benefactor.
3) Benefactor entitled only to P25,000 basic
personal exemptions.
4) In the ITR, the benefactor must indicate the
name, birthday and OSCA ID Number of the
senior citizen
How is a senior citizen treated under the tax
law?
The senior citizen shall be treated as dependents
provided for in the National Internal revenue
Code, as amended, and as such, individual

taxpayers caring for them, be they relatives or not

shall be accorded the privileges granted by the
Code insofar as having dependents are
concerned.
Is the discount granted by establishments to
senior citizens deductible?
YES. The establishment may claim the discounts
granted as tax deduction based on the net cost of
the goods sold or services rendered;
Requisites:
1) Only portion of gross sales exclusively used,
consumed or enjoyed by the senior citizen
shall be eligible for the deductible sales
discounts.
2) Gross selling price and sales discount must
be separately indicated in the official receipt
or sales invoice issued by the establishment
for the sale of goods or services to the senior
citizen
3) Only the actual amount of the discount
granted or a sales discount not exceeding
20% of the gross income, net of value added
tax, if applicable, for income tax purposes,
and from gross sales or gross receipts of the
business enterprise concerned, for VAT or
other percentage tax purposes.
4) The discount can only be allowed as
deduction from gross income for same
taxable year that the discount is granted.
5) The business establishment giving the sales
discounts to qualified senior citizen is
required to keep separate and accurate
record of sales, which shall include the name
of the senior citizen, OSCA ID, gross
sales/receipts, sales discounts granted,
dates of transactions and invoice number for
every sale transaction to senior citizen.
6) Only selected establishments mentioned in
R.R. No. 4-2006 may claim the said discount
granted as deduction from gross income.
Establishments which can claim the
discounts granted as deductions
1) Hotels and similar lodging establishments.
2) Restaurants
3) Recreation centers
4) Theaters, cinema houses, concert halls,
circuses, carnivals and other similar places
of culture, leisure and amusement.
5) Drug stores, hospital pharmacies, medical
and optical clinics and similar establishments
dispensing medicines.
6) Medical and dental services in private
facilities.
7) Domestic air and sea transportation
companies.
8) Public land transportation utilities.
9) Funeral parlors and similar establishments.

Are the salaries and wages paid to senior

citizen-employees deductible?
YES. Private entities that will employ senior
citizens as employees upon effectivity of this Act
shall be entitled to an additional deduction from
their gross income, equivalent to fifteen percent
(15%) of the total amount paid as salaries and
wages to senior citizens subject to the provision
of Section 34 of the National Internal Revenue
Code, as amended.

Conditions
1)
2)

3)

that such employment shall continue for

a period of at least six (6) months
the annual income of a senior citizen
does not exceed the poverty level as
determined by the National Economic
and Development Authority (NED) for
that year
In
addition,
expenses
otherwise
deductible may be allowed as a
deduction only if the tax required to be
deducted and withheld therefrom has
been paid to the BIR.

REALTY
TAX
HOLID
AY
Individuals or non-government institutions
establishing homes, residential communities or
retirement villages solely for the senior citizens
shall be accorded the following:
1) realty tax holiday for the fist five (5) years
starting from the first year of operation;
2) Priority in the building and/or maintenance of
the provincial or municipal roads leading to
the aforesaid home, residential community or
retirement
REPUBLIC ACT NO. 9480
AN ACT ENHANCING THRE REVENUE
ADMINSTRATION AND COLLECTION BY
GRANTING AN AMNESTY ON ALL UNPAID
INTERNAL REVENUE TAXES IMPOSED BY
THE NATIONAL GOVERNMENT FOR
TAXABLE YEAR 2005 AND PRIOR YEARS

(With Department Order No. 29-07; RMC No. 552007, August 8, 2007; RMC No. 69-2007,
November 5, 2007;RMC No. 90-2007, December
3, 2007; RMC No. 19-2008, February 22, 2008)

COVERAGE
Taxes
Covere
d
All national internal revenue taxes for the taxable
year 2005 and prior years, with or without
assessments duly issued therefore, that have
remained unpaid as of December 31, 2005.
1) income tax
2) estate tax
3) donors tax
4) capital gains tax
5) value added tax
6) other percentage taxes
7) excise taxes
8) documentary stamp taxes
NOTE: In case of donors tax and capital gains
tax, only cases that have underdeclarations/
undervaluations and were already issued with
Certificate Authorizing registration (CAR) by the
BIR are covered.

Taxes NOT
Covere
d
1)
2)

Withholding taxes and

Taxes passed-on and already collected from
the customers for remittance to the BIR

To Whom
Availab
le
1)
2)
3)
4)
5)

Individuals, whether resident or non-resident

citizens, or resident or non-resident or nonresident aliens;
Estates and trusts;
Corporations;
Cooperatives and tax exempt entities that
have become taxable as of December 31,
2005; and
Other juridical entities including partnerships.

NOTE: An individual taxpayer in his/her own

capacity shall be treated as a different taxpayer
when he acts as administrator/ executor of the
estate of a deceased taxpayer.

To Whom
NOT
Availab
le
1)
2)

3)

4)

Withholding agents with respect to their

withholding tax liabilities;
Those with pending cases
a.
Under the jurisdiction of the PCGG
b.
Involving violations of the Anti-Graft
and Corrupt Practices Act
c.
Involving violations of the AntiMoney Laundering Law
d.
For tax evasion and other criminal
offenses under the NIRC and/or the
RPC
Issues and cases which were ruled by any
court (even without finality) in favor of the
BIR prior to amnesty availment of the
taxpayer. (e.g. Taxpayers who have failed to
observe or follow BOI and/or PEZA rules on
entitlement to Income Tax Holiday Incentives
and other incentives).
Cases involving issues ruled with finality by
the Supreme Court prior to the effectivity of
R.A. No. 9480 (e.g. DST on Special Savings
Account)

5)
6)

Taxes passed-on and collected from

customers for remittance to the BIR.
Delinquent Accounts/ Accounts receivable
considered as assets of the BIR/
Government, including self-assessed tax.

Are cases subject of criminal complaint filed

with the DOJ still covered by the Tax
Amnesty?
YES, except cases filed under the RUN AFTER
TAX EVADER (RATE) Program of the BIR and
other cases involving tax evasion initiated and
instituted with the approval of the Commissioner
of Internal Revenue or his authorized
representatives pursuant to Section 220 of the
National Internal Revenue Code of 1997 as
amended.
In case of estate under administration who is
the person liable to avail of the tax amnesty?
In case of estate under administration, the
persons liable to avail of the tax amnesty shall be
the estate and the heirs.

AVAILMENT
AND
PAYME
NT OF
AMNES
TY

How to
Avail
Tax
Amnes
ty

When and
Where
to File
and
Play

Accomplish three (3) copies of the required forms

and submit the same to the BIR

When: The return, SALN and the payment of the

amnesty tax for those availing themselves of the
tax amnesty shall be made within six months
starting from the effectivity of the IRR.
Note: Under RMC 29-2008 and Department
Order No. 11-08, it is clarified that the last day of
availing benefits under R.A. No. 9480, otherwise
known as Tax Amnesty Act of 2007, shall be 6
months from November 76, 2007 or on may 5,
2008. Effectivity of DOF Department Order 29-07
commenced on November 7, 2007.

Proceed to the Authorized Agent Bank (AAB) and

pay the Amnesty Tax using the Payment Form
(BIR Form NO> 0617).
File the Tax Amnesty Return, Notice of Availment
and SALN with either the AAB or RDO

Where:
Forms to be submitted are:

Notice of Availment of Tax Amnesty

Statement of Assets, Liabilities and Networth

(SALN)

Tax Amnesty Return (BIR Form No. 2116)

Payment Form (BIR Form No. 0617)

Forms may be photocopied. Two (2) copies shall
be filed with the BIR , one (1) copy shall remain
with the taxpayer.
NOTE: An individual taxpayer, seeking to avail of
the tax amnesty and who at the same time is an
executor or administrator of the estate of a
deceased taxpayer who would also like to avail of
the tax amnesty, shall file two (2) separate
amnesty tax returns, one for himself as a
taxpayer and the other in his capacity as
executor or administrator of the estate of the
decedent with respect to the revenue and other
income earned or received by the estate.

Residents
Revenue District Officer (RDO)/Large Taxpayer
District Office of the BIR which has jurisdiction
over the legal residence or principal place of
business of the taxpayer, as the case may be.

Nonreside
nts
Commissioner of the BIR, or with any RDO.

Duties of
the
Reven
ue
District
Officer
1)

2)

The Revenue District Officer shall issue an

acceptance of payment form authorizing an
authorized agent bank, or in the absence
thereof, the collection agent or municipal
treasurer concerned, to accept the amnesty
tax payment.
At the option of the taxpayer, the RDO may
assist the taxpayer in accomplishing the
forms and computing the taxable base and
the amnesty tax payable, but may not look
into, question or examine the veracity of the
entries contained in the Tax Amnesty Return,
Statement of Assets, Liabilities and
Networth, or such other documents
submitted by the taxpayer.

Full
Compli
ance
The Acceptance of Payment Form. The notice of
Availment, the SALN, and the Tax Amnesty
Return shall be submitted to the RDO, which
shall be received only after complete payment.
The completion of these requirements shall be
deemed full compliance with the provisions of
R.A. No. 9480.
Tax Amnesty Rates
1) Tax amnesty rate of five percent (5%) based
on:
NETWORTH as of December 31, 2005, as
declared in the SALN as of the said period by
qualified taxpayers who have no previously filed

statements of assets and liabilities/balance sheet

as of December 31, 2005.
RESULTING INCREASE IN NETWORTH by
amending such previously filed statements to
include undeclared assets and/or liabilities by
qualified taxpayers who have filed with BIRs
authorized agents their SALN/balance sheet
together with their income tax returns for taxable
year 2005
TOTAL DECLARED NETWORTH as of
December 31, 2005 by taxpayer who have
previously filed their SALN as of December 31,
2005 and have no additional assets to declare,
but still wish to avail of their amnesty.
OR
2)

The absolute minimum amnesty payment,

whichever is higher, in accordance with the
following schedule:
ENTITIES

RATES

INDIVIDUALS
Citizens,
resident
or
nonresident aliens, Trusts
and Estates

5% or P50,000.00 whichever
is higher

CORPORATIONS
Subscribed
capital
of
above P50Million
Subscribed
capital
of
above P20 Million up to
P50 Million
Subscribed capital of P5
Million to 20 Million
With subscribed capital of
below P5 Million

5% orP500,000.00 whichever
is higher
5%
or
P250,000.00
whichever is higher
5%
or
P
100,000.00
whichever is higher
5% of P25,000,00 whichever
is higher

OTHERS
Other
juridical
entities
including, but not limited
to,
cooperatives
and
foundations, that have
become taxable as of
December 31, 2005
Taxpayers who filed their
balance sheet/ SALN,
together with their income
tax returns for 2005, and
who desire to avail of the
tax amnesty under this act
shall
amend
such
previously filed statements
by
including
still

5% or P 50,000.00 whichever
is higher

5% based on resulting
increase in networth or the
minimum absolute amount of
amnesty
tax
prescribed
above, whichever is higher

undeclared assets and/or

liabilities
For taxpayers who had been filing their
correct networth and have no additional asset
to declare further, but would like to participate
in the amnesty program, will they be allowed
to do so?
In case where the taxpayer decides to avail but
does not declare additional assets or decides that
h/it should not make any amendments of his/its
networth ad December 31, 2005, he/it can avail
of the amnesty program by paying five percent
(5%) of the total declared networth as of Balance
Sheet date in 2005 or the prescribed minimum
absolute amount, whichever is higher.
STATEMENT OF ASSETS, LIABILITIES AND
NETWORTH

Presumptio
n of
Correct
ness of
the
SALN

What to
Declar
e in
the
SALN

The SALN as of December 31, 2005 shall be

considered as true and correct.

1)

Assets within or without the Philippines,

whether real or personal, tangible or
intangible, whether or not used in trade or
business.
Property other than the money shall be
valued at the cost at which the property was
acquired.
Foreign currency assets and/or securities
shall be valued at the rate of exchange
prevailing as of the date of the SALN;

In lieu of the SALN , can taxpayers be allowed

to file a Balance Sheet for purpose of tax
amnesty availment?
While the Balance Sheet may be equivalent to
the SALN the regulations have prescribed a
specific SALN format to be filled-up and
submitted for purposes of availment . Thus, in the
availment of the tax amnesty, the Balance Sheet
should be converted to the SAN format as
provided by the BIR in the SALN form.

2)

All existing liabilities which are legitimate and

enforceable, secured and unsecured,
whether or not incurred in trade or business;
and

3)

The networth of the taxpayer, which shall be

the difference between the total assets and
total liabilities.

May husband and wife be allowed to submit

only one SALN? Would they be separately
liable for the minimum amount of amnesty tax
if they avail of the amnesty?
No. They have to submit two separate SALNs
reflecting their exclusive properties and liabilities
as well as their respective shares in the conjugal
properties and liabilities.
Will individuals engaged in business submit
two SALNs one strictly for business-related
assets/liabilities/networth and another one for

Exceptions:
1. Where the amount of declared networth is
understated to the extent of thirty percent
(30%) or more as may be established in
proceedings within one (1) year following the
date of filing of the Tax Amnesty Return and
the SALN, by, or at the instance of parties
other than the BIR or its agents.
2.

When findings of or admission in

congressional hearings or proceedings in
administrative agencies of the government,
and in courts, prove that there is at least
thirty percent (30%) underdeclaration.

non-business related assets/ liabilities/

networth?
An individual taxpayer/availer shall submit only
one SALN or Balance Sheet presenting the
assets and liabilities and networth into two major
groups which are those that are classified as
business-related and those that are non-business
related.
In the case of a representative office in the
Philippines of a foreign corporation which is
only required to file audited statements of
receipts and disbursements, what would be
the content of the SALN to be filed?
The resident foreign corporation shall report
assets and liabilities and networth related to the
business in the Philippines and the amnesty tax
shall be the 5% of the total declared Philippine
networth or 5% of the resulting increase in
Philippine networth, whichever is applicable, or
the minimum absolute amount, whichever is
higher.
What would be used as basis in determining
the minimum amnesty payment of a local
branch of a foreign corporation where the
subscribed capital stock is not determinable
for this purpose?
The basis of the 5% shall be the networth or
increase in networth of the branch located in the
Philippines, whichever is applicable, and the
amnesty tax payable, whichever is higher
between the resulting product therefrom and the
minimum absolute amount prescribed by the Tax
Amnesty Law where the subscribed capital refers
to the assigned capital in the Philippine Branch
lodged in the account Due to Head Office.

IMMUNITIE
S AND
PRIVIL
EGES
1)

2)

The taxpayer shall be immune from the

payment of taxes as well ad additions
thereto, and the apputenant civil, criminal or
administrative penalties under the National
Internal Revenue Code of 1997, as
amended, arising from the failure to pay any
and all internal revenue taxes for taxable
year 2005 and prior years.
The taxpayers Tax Amnesty Return and the
SALN as of December 31,2005 shall not be
admissible as evidence in all proceedings

3)

that pertain to taxable year 2005 and prior

years, insofar as such proceedings relate to
internal revenue taxes, before judicial, quasijudicial or administrative bodies in which he
is a defendant or respondent, and except for
the purpose of ascertaining the networth
beginning January 1, 2006, the same shall
not be examined, inquired or look into by any
person or government office. However, the
taxpayer may use this as a defense,
whenever appropriate, in cases brought
against him.
The books of accounts and other records of
the taxpayer for the years covered by the tax
amnesty availed of shall not be examined:
Provided, that the Commissioner of Internal
Revenue may authorize in writing the
examination of the said books of accounts
and other records to verify the validity or
correctness of a claim for any tax refund, tax
credit (other than refund or credit of taxes
withheld on wages), tax incentives, and/or
exemptions under existing laws.

Immunities
and
Privile
ges
NOT
availab
le
1)
2)

Where the person failed to file a SALN and

the Tax Amnesty Return, or
Where the amount of networth as of
December 31, 2005 is proven to be
understated to the extent of thirty percent
(30%) or more.

OFFENSES
AND
PENALT
IES
Penalties
1)

2)

3)

4)

Any person who, having filed a statement or

Tax Amnesty Return under this Act, willfully
understates his networth to the extent of
thirty percent (30%) or more shall upon
conviction, be subject to the penalties of
perjury under the Revised Penal Code.
The willful failure to declare and property in
the statement and/or in the Tax Amnesty
Return shall be deemed a prima facie
evidence or fraud and shall constitute a
ground upon which attachment of such
property may be issued in favor of the BIR
to answer for the satisfaction of any
judgment that may be acquired against the
declarant.
In addition to the penalties provided in
paragraphs (1) and (2) above, immediate
tax fraud investigation shall be conducted to
collect all taxes due, including increments,
and to criminally prosecute those found to
have willfully evaded lawful taxes due.

on the partner, president, general manager,

branch manager, treasurer, officer-in-charge
and employees responsible for the violation.
5)

Any person who makes an unlawful

divulgence of the Tax Amnesty Return or the
SALN shall be penalized by a fine of not
less than Fifty thousand pesos (P50,000.00)
and imprisonment of not less than six (6)
years but not more than ten (10) years.

6)

If the offender is an officer or employee of

the BIR or any government entity, he/she
shall likewise suffer an additional penalty of
perpetual disqualification to hold public
office, to vote and to participate in any public
election.
Unlawful Divulgence of Tax Amnesty
Return and Statement of Assets,
Liabilities and Networth

Gen. Rule: It shall be unlawful for any person

having knowledge of the Tax Amnesty Return
and SALN filed pursuant hereto, to disclose any
information relative to such declaration and
statement, and any violation hereof shall subject
the offender to the penalties under this Act:
Exceptions:
1) The Commissioner of Internal Revenue may
disclose the content of the Tax Amnesty
Return and SALN upon the request of
Congress pursuant to and in accordance
with:
a) in aid of legislation [Sec. 20(A), NIRC].
b) Congressional Oversight Committee
(Sec. 290, NIRC)
Publication of list of taxpayers and filers by the
Commissioner.

In the case of associations, partnerships, or

corporations the penalty shall be imposed

Transfer Taxes
Taxation Law
DEFINITION:
Taxes imposed upon the gratuitous disposition of
private property. They are not property taxes
because their imposition doe not rest upon
general ownership but rather they are privilege
tax, imposed on the act of passing ownership of
property.

KINDS OF
TRANS

FER
TAXES
1.
2.

Estate Tax
Donors Tax

II.

DIFFERENCES BETWEEN
DONORS TAXES

ESTATE TAX
Tax on privilege to
transfer property upon
ones death
Generally imposed on
Donations
Mortis
Causa
Tax Rate are relatively
higher (5%-20%)
Extension for payment
is allowed
Exemption from net
estate per table is PHP
200,000.00

I.

ESTATE

AND

DONORS TAX
Tax on privilege to
transfer property during
ones lifetime
Generally imposed on
Donations Inter vivos
Tax Rate lower (2%15%)
Extension for payment
is not allowed
Exemption from net
estate per table is PHP
100,000.00

The terms estate and gift subject to tax

include real and personal property, whether
tangible or intangible, wherever situated; but
where the decedent or nor was a non-resident
alien at the time of his death or donation, his real
and personal property transferred but which are
situated outside the Philippines shall not be
included as part of his Gross Estate or Gross
Gift.
INTANGIBLES DEEMED LOCATED IN THE
PHILIPPINES (SEC. 104, NIRC)
1. Franchise which must be exercised in the
Philippines;
2. Shares, obligations or bonds issued by any
corporation or sociedad anonima organized
or constituted in the Philippines in
accordance with its laws;
3. Shares, obligations or bonds issued by any
foreign corporation eighty-five per centum
(875%) of the business of which is located in
the Philippines;
4. Shares, obligations or bonds issued by any
foreign corporation, if such shares,
obligations or bonds have acquired a
business situs in the Philippines; and
5. Shares or rights in any partnership, business
or industry established in the Philippines.
EXCEPTIONS: Reciprocity Clause under Sec.
104 of the NIRC

If the decedent at the time of his death

was a citizen and resident of a foreign
country, who at the time of his death:
1.
did not impose a transfer tax or
death tax of any character;
2.
in respect of intangible personal
property of citizens of the Philippines not
residing in that foreign country; or
If the laws of the foreign country of
which the decedent was a citizen and
resident at the time of his death:
1.
allow a similar exemption form
transfer taxes or death taxes of every
character;
2.
In respect of intangible personal
property owned by citizens of the
Philippines not residing in that
foreign country.

ESTATE TAX

DEFINITION
An excise tax on the right of transmitting property
at the time of death and on the certain transfers
which are made by the statute the equivalent of
testamentary dispositions.

NATURE
It is a privilege or excise tax, not a property tax.

PURPOSE
To tax the shifting of economic benefits and
enjoyment of property from the dead to the living.
THEORIES REGARDING THE PURPOSE OF
ESTATE TAX
1. Benefit-received theory The tax is in
return for the services rendered by the state
in the distribution of the estate of the
decedent and for the benefits that accrue to
the estate and the heirs.
2. State-partnership theory The tax is in the
share of the state as a passive and silent
partner in the accumulation of property.
3. Ability-to-pay theory The tax is based on
the fact that the receipt of inheritance
creates an ability to pay and thus to
contribute to governmental income.
4. Redistribution-of-wealth theory Tax is
imposed to help reduce undue concentration
of wealth in society to which the receipt of
inheritance is a contributing factor.

ESTATE TAX
VS.
INHERI
TANCE
TAX
Inheritance Tax An imposition created by law
on the privilege to receive property. (Vera vs.
Navarro. 79 SCRA 434)
NOTE: Presently, there is no inheritance tax
imposed by law. Only estate taxes are imposed.

ESTATE TAX

INHERITANCE TAX

BASIS
Tax on the privilege to
transfer property upon
ones death

Tax on the privilege to

receive property from
the deceased.

WHO PAYS
THE TAX
Paid by the estate
represented by the
administrator
or
executor

Paid by the recipients

of the properties of the
estate

ESTATE TAX
FORMU
LA
Gross Estate (Sec. 85)
Less:
(1) Deductions (Sec. 86
(2) Net share of the SS in the CPP
-------------------------------------------------------------

Net Taxable Estate

Multiplied by: Tax rate (Sec. 84)
------------------------------------------------------------Estate Tax Due
Less: Tax Credit [if any] (Sec. 86[E] or 110[B]
------------------------------------------------------------Estate Tax Due, if any

ACCRUAL
OF
ESTATE
TAX

The estate tax accrues as of the death of the

decedent and the accrual of the tax is
distinct from the obligation to pay the same
which is 6 months after the death of the
decedent.
Basis: Article 777 of the Civil Code: The
rights to the succession are transmitted from
the moment of the death of the decedent.

LAW THAT GOVERN THE IMPOSITION OF

THE ESTATE TAX
Estate taxation is governed by the statute in force
at the time of the death of the decedent.

SCHEDULE
OF TAX
RATE
If the net estate is:
OVER

BUT NOT
OVER

TAX
SHALL
BE

OF THE
EXCESS
OVER

P200,000

EXEMPT

P200,000

500,000

5%

P200,000

500,000

2,000,000

P15,000

8%

P500,000

2,000,000

5,000,000

135,000

11%

2,000,000

5,000,000

10,000,000

465,000

15%

5,000,000

1,215,000

20%

10,000,000

10,000,000
and over

DETERMINA
TION
OF THE
GROSS
ESTATE
1.

2.

if the decedent is a resident or nonresident citizen, or a resident alien All

properties real or personal tangible or
intangible, wherever situated.
If the decedent is a non-resident alien
Only properties situated in the Philippines
provided that intangible personal property is
subject to the rule of reciprocity provided for
under Section 104 of the NIRC.

GROSS
ESTATE
SUBJEC
T TO
TAX
General Rule: Gross estate for purposes of
estate taxation of Filipinos, whether residents or
non-residents shall include the value of real
property and personal property wherever situated
to the extent of the interest of the decedent at the
time of his death. It shall include the following:
Dividends declared by a corporation
before
death
of
stockholder
although paid after death, if the
decedent was living on the record
date.
Partnership profits even if paid after
death of partner.
Proceeds of life insurance policy
payable to a revocable beneficiary.

Right of usufruct if transferable to their

heirs
NOTE: This is the general rule because there are
certain instances where the decedent does not
have any interest in a property at the time of his
death but the same is still included as part of his
gross income. The following are such transfers.
TRANSFERS
IN
CONTEMPLATION OF DEATH
1.

What are transfers considered in

contemplation of death? The transfer shall
be considered as transfer in contemplation of
death if the property during the lifetime of the
decedent, he still retained:
a. The possession or enjoyment of; or
b. Notwithstanding
the
transfer
he
continues to receive the income or the
fruits;
c. The right either aloe or in conjunction
with any person, to designate person
who shall possess or enjoy the property
or the income from such property.

2.

The following are transfers NOT

CONSIDERED IN CONTEMPLATION OF
DEATH and therefore not part of the
gross estate:
a. Bona fide sale;
b. Sale for adequate and full consideration
money or in moneys worth

3.

The concept of transfer in contemplation

of death has a technical meaning. This
does not constitute any transfers made by a
dying person. It is not the mere transfer that
constitutes a transfer in contemplation of
death but the retention of some type of
control over the property transferred. In
effect, there is no full transfer of all interests
in the property inter vivos.

REVOCABLE
TRANSFERS
1.

A revocable transfer is a transfer by trust

or otherwise, where the enjoyment
thereof was subject at the date of his
death to any change through the exercise
of a power (in whatever capacity
exercisable) by:
a. Decedent alone;
b. By
the
decedent
in
conjunction with any other
person without regard to
when or from what source
the decedent acquired such
power, to alter, amend,
revoke or terminate; or

c.

Where any such power is

relinquished
in
contemplation
of
the
decedents death other than
a bona fide sale for an
adequate
and
full
consideration in money or
moneys worth.

2.

Revocable Transfers Not Included As Part

of the Gross Estate
a. Bona fide sale
b. Sale for adequate and full
consideration in money or in
moneys worth.

3.

Power to alter, amend, or revoke

a. Considered to exist on the
death
b. Even thought he exercise of
the power is subject to a
precedent of giving notice or
c. Even though the alteration,
amendment, or revocation
takes effect only on the
expiration of a stated period
after the exercise of the power
and whether or not on or
before the decedents death
i. Notice has been given or
ii. The power has been exercised.
In such cases, proper adjustment shall be
made representing the interest which would
have been excluded from the power if the
decedent had lived, and for such purpose if
notice has not been given or the power has
not been exercised on or before the date of
his death such notice shall be considered to
have been given, or the power exercised on
the date of his death.
Only revocable transfers shall be
included in the gross estate
Irrevocable transfers are not included.
Why? Revocable transfers are included
in the gross estate because of the
tremendous power and control which
the transferor can exercise. The
transferor can anytime revoke the
transfer, hence, there was no transfer
made.
PROPERTY
PASSINGUNDER
THE GENERAL POWER OF
APPOINTMENT

1.

Power of appointment is the right to

designate the person or persons who shall
enjoy and possess certain property from the
estate of a prior decedent.

2.

Property over which the decedent held a

power of appointment is not includible in his
gross estate unless such power is general.
a.
General
Power
of
Appointment the decedent must have
had a power exercisable in favor of
himself, his estate, his creditors or
creditors of his estate.
b.
A power is NOT general (or
specific) if it can be exercised only in
favor of one or more designated person
or classes of persons exclusive of the
decedent, his estate, his creditors and
creditors of his estate, or if it is
expressly not exercisable in favor of the
decedent, his estate, his creditors or
creditors of his estate.

3.

The general power of appointment may

be exercised by the decedent:
a.
Will, or
b.
By
deed
executed
in
contemplation of or intended to take
effect in possession or enjoyment after
his death, or
c.
By deed under which he has
retained for his life or any period not
ascertainable without reference to his
death or for any period which does not
in fact end before his death
i.
Possession
or
enjoyment or the right to the income
from the property or
ii.
The right either alone
or in conjunction with any person to
designate the persons who shall
possess or enjoy the property or
income therefrom

4.
a.
b.

PROPERTIES NOT INCLUDED:

Bona fide sale
Sale in adequate and full
consideration in money or moneys
worth.
Properties
passing
through
general
power of appointment
is similar to transfers
in contemplation of
death.
The
only
difference
is
that
under this provision,
the
property
was
transferred
under
general
power
of
appointment.

PROCEEDS OF LIFE
INSURANCE

1.

2.

The decedent takes an insurance policy

on his own life
a.
the
amounts are receivable by
i. the decedents estate;
ii. the executor, or
iii. administrator irrespective of
whether or not the insured
retained
the
power
of
revocation; or
b.
The
amounts
receivable
by
any
beneficiary designated in the policy
as revocable beneficiary
c.
By
another person other than the
decedent take an insurance policy
on the life of the decedent.
i. The amount is receivable by
the
Decedents estate
Executor
Administrator
ii. Irrespective of whether or not
the insured retained the power
of revocation.
Proceeds of life insurance NOT included
in a decedents gross estate
a.
The
decedent takes the insurance policy
on his own life, and
b.
The
proceeds are receivable by a
beneficiary
designated
as
irrevocable. The beneficiary must
not be the decedents estate,
executor, or administrator, because
the proceeds are includible as part
of the gross estate whether not the
decedent retained the power of
revocation.

transfers in contemplation of death

revocable transfers and
transfers under general power of appointment
The transfers were made for a consideration,
but are not bona fide sales for an adequate
and full consideration in money or moneys
worth.
Exception: bona fide sale for an adequate
and full consideration in money or moneys
worth.
Formula: Fair market value of the property
at decedents death less actual consideration
received by the decedent equals amount
includible in decedents gross estate.

PROPERTY
RELATI
ONS
BETWE
EN
SPOUS
ES

TRANSFERS FOR INSUFFICIENT

CONSIDERATION

The property relations between the spouses shall

be governed by contract (marriage settlement)
executed before the marriage.

Transfers for insufficient consideration

refer to transfers, trusts, interests, rights or
powers (denominated as transfer in
contemplation of death revocable transfer
and property passing under general power of
appointment) made, created, exercised or
relinquished for a consideration in money or
moneys worth, but is not be a bona fide sale
for an adequate and full consideration in
money or moneys worth.

In the absence of such contract, or if the contract

is void:
1. On marriages contracted before August 3,
1988, the system of conjugal partnership of
gains shall govern;
2. On marriages contracted on or after August
3, 1988 (effectivity of the Family Code of the
Philippines), the system of absolute
community of property shall govern.

The value to be included in the gross estate

is the excess of the fair market value of the
property at the time of the decedents death
over the consideration received. This is
applicable in cases of:

NOTE: The capital of the surviving spouse of a

decedent shall not be deemed a part of the gross
estate. (Sec. 85 (H) NIRC)

Capital under the provisions of the Tax Code

should be taken to mean the property of the
spouses brought into marriage. Strictly speaking,
capital under the civil law refers to the property
brought by the husband to the marriage while
that brought into marriage by the wife known as
paraphernal property.

I.

1.

The strictissimi juris principle on the interpretation

of the exclusion being an exemption should not
be applied, otherwise the result would be absurd.
Applied strictly, the exclusion does not include the
property of the wife. Surely this is absurd if only
the separate property of the husband would be
excluded. (Abelardo Domondon, Basic Reviewer
in Taxation, 2008 ed., p. 966)
EXEMPTIONS FROM THE GROSS ESTATE (BU-F-F)
1. The merger of usufruct in the owner of the
naked title;
2. Fideicommissary substitution;
3. The transmission from the first heir, legatee
or donee in favor of another beneficiary, in
accordance with the desire or the
predecessor;
4. All bequests, devises, legacies or transfers
to social welfare, cultural and charitable
institutions, no part of the net income of
which inures to the benefit of any individual:
Provided, however, That not more than 30%
of the said bequests, devises, legacies or
transfers shall be used by such institutions
for administration purposes (Sec. 87, NIRC
of 1997)

DEDUCTIO
NS
FROM
THE
GROSS
ESTATE

Citizens and
Resident Aliens

2.
3.
4.
5.
6.
7.
8.
II.

Expenses, Losses, Indebtedness and

Taxes (ELIT) or Ordinary Deductions
a. Funeral expenses
b. Judicial expenses
c. Claims against the estate
d. Claims against insolvent persons
e. Unpaid mortgages
f. Unpaid taxes
g. Losses
Vanishing Deductions
Transfers for public use
Family Home
Standard Deduction
Medical expenses
Amount received by heirs under RA
4719 (Retirement Benefits)
Share of surviving spouse in the
conjugal

Deductions
resident Aliens
1.

Applicable

to

Non-

Expenses, losses, indebtedness and

taxes (ELIT) (ordinary deductions)

Formula:

TAX
CREDIT

2.
3.
4.

Phil. Gross
Estate
World Gross
Estate

x World ELIT Limit

Transfer for public use

Vanishing deduction on property in the
Philippines.
Conjugal share of the surviving spouse

The following expenses are not allowed

as deductions to non-resident aliens:
1. family home
2. standard deduction
3. hospitalization expenses
4. retirement pay
I.

ELIT OR ORDINARY DEDUCTIONS

1.

ACTUAL FUNERAL EXPENSES

Deductions Allowed: The actual funeral

expense or 5% of the gross estate whichever
is lower but not exceeding P 200,000.00.
Actual Funeral Expenses Those which
are actually incurred in connection with the
interment or burial of the deceases.
Expenses must be duly supported by
receipts or invoices or other evidence to
show that they were actually incurred.

Funeral Expenses Allowed as Deductions

(3rd par. Sec. 6[A][1], rev. Regs. No. 2-2003)
a. Mourning apparel of the surviving
spouse or unmarried minor children of
the deceased bought and used on the
occasion of the burial;
b. Expenses for the deceaseds wake,
including food and drinks
c. Publication charges for death notices
d. Telecommunication expenses incurred
in informing relatives of the deceased;
e. Cost of burial plot, tombstone,
monument or mausoleum but not their
upkeep. In case the deceased owns a
family estate or several burial lots, only
the value corresponding to the plot
where he is buried is deductible.
f. Interment and/or cremation fees and
charges; and
g. All other expenses incurred for the
performance of the rites and ceremonies
incident to interment.
Funeral Expenses
Deductions

2.

NOT

allowed

as

Expense incurred after the interment,

such
as
prayers,
masses,
entertainment, or the like are not
deductible. (4th par. Sec. 6[A][1] RR No.
2-2003)
Any portion of the funeral or burial
expenses borne or defrayed by relatives
and friends of the deceased are not
deductible. (Ibid)
Medical expenses as of the last illness
will not form part of funeral expenses
but should be claimed as medical
expenses incurred within 1 year before
the death of the decedent. (5th par.,
Ibid.)
JUDICIAL EXPENSES

Judicial Expenses of the Testamentary or

Intestate Proceedings
a.
The expenses include those
incurred in:
b.
Inventory-taking
of
assets
comprising the gross estate,
c.
Administration, payment of debts of
the estate; and
d.
The distribution of the estate among
the heirs
NOTE: It must be incurred during the
settlement of the estate but not beyond the
last day prescribed by law, or the extension
thereof, for the filing of the estate tax return.
ATTORNEYS FEES

Attorneys fees incident to litigation incurred

by the heirs in asserting their respective
rights or claims as to who are entitled to the
estate left by the deceased. (Johannes vs.
Imperial, G.R. No. L-19153, June 30, 1932)
Attorneys fees n order to be deductible from
gross estate must be essential to the
collection of assets, payment of debts, or
distribution of the property to the person
entitled to it. The services for which the fees
are charged must relate to the proper
settlement of the estate. (CIR vs. Court of
Appeals G.R. No. 123206, march 22, 2000)
Not included as judicial expenses of the
testamentary and judicial proceedings
a. Expenditures incurred for the individual
benefit of the heir, devisees or legatees;
b. Compensation paid to a trustee of the
decedents estate when it appeared that
such trustee was appointed for the
purpose of managing the decedents
real property for the benefit of the
testamentary heir;
c. Premiums paid on the bond filed by the
administrator as an expense of
administration since the giving of a bond
is in the nature of a qualification for the
office and not necessary for the
settlement of the estate.
d. Attorneys fees incident to litigation
incurred by the heirs in asserting their
respective rights (Commissioner of
Internal Revenue vs. Court of Appeals,
et al., G.R. No. 123206, March 22,
2000)
3.

CLAIMS AGAINST THE ESTATE

This refers to debts which may arise out of

contract, tort or under operation of law and
are properly chargeable and enforceable
against the estate
Requisites:
a. claims must existing at the time of
death, except those incurred incident to
his death or those medical expenses;
b. claims must be incurred in good faith
and for an adequate consideration in
money or moneys worth;
c. claims must be valid in law and
enforceable in court; and
d. claims must not have been condoned by
the creditor or the action must not have
prescribed.
NOTE: If claim arose out of a debt
instrument
a. debt instrument must be NOTARIZED

b.

if contracted within 3 years before the

death of the decedent, the administrator
or executor shall submit a statement
showing the disposition of the proceeds
of the loan.

4.

CLAIMS
AGAINST
PERSONS

NOTE: Casualty loss can be allowed as

deduction in one instance only, either for
income tax purposes or estate tax purposes.

II.

INSOLVENT

The amount deductible shall be the entire

amount of all bequests, legacies, devises or
transfers to or for the use of the
Government, exclusively for public purposes.

Requisites:
a. The amount thereof has been initially
included as part of his gross estate (for
otherwise they would constitute double
deductions if they were to be deducted);
and
b. The incapacity of the debtors to pay
their obligation is proven.
5.

NOTE: if there is a legal impediment to

recognize the same as receivable of the
estate, said unpaid obligation shall not be
allowed as deduction.
6.

UNPAID TAXES

Taxes which have accrued as of or before

the death of the decedent, which were
unpaid as of the time of his death, regardless
of whether or not it was incurred in
connection with trade or business.
7.

Requisites:
1. The disposition is in a last will and
testament;
2. To take effect after death;
3. In favor of the government of the
Philippines or any political subdivision
thereof; and
4. For exclusive public purpose.

UNPAID MORTGAGE

Conditions:
a. The value of the decedents interest
therein, undiminished such mortgage or
indebtedness, is included in the value of
the gross estate;
b. That they were contracted bona fide and
for an adequate and full consideration in
money or moneys worth.

LOSSES

Requisites:
a. Losses incurred during the settlement of
the estate;
b. Arising from fires, storms, shipwreck, or
other casualties, or from robbery, theft,
or embezzlement;
c. When such losses are not compensated
for by insurance or otherwise;
d. If ay the filing of return, such losses
have not been claimed as a deduction
for income tax purposes in an income
tax return;
e. Provided that such losses were incurred
not later than the last day for the
payment of the estate tax as prescribed
by law.

TRANSFER FOR
PUBLIC USE

NOTE: This should also include bequests,

devices, or transfers to social welfare,
cultural and charitable institutions.
III.

VANISHING
DEDUCTIONS
PROPERTY PREVIOUSLY TAXED

OR

Vanishing Deductions The deduction

allowed from the gross estate of citizens,
resident aliens and non-resident estates for
properties which were previously subject to
donors or estate taxes. The deduction is
called a vanishing deduction because the
deduction allowed diminishes over a period
of 5-years. It is also known as a deduction of
property previously taxed.
NOTE: In property previously taxes, there
are two transfers of the property. Within a
period of 5 years, the same property has
been transferred from the first to the second
decedent, or from a donor to the decedent.
In such a case, the first transfer has been
subjected to a transfer tax. The second
transfer would now be subject to a vanishing
deduction as provided in the code.
Conditions for Deductibility:
1. The gift tax or estate tax imposed were
finally determined and paid by or on
behalf of such donor or estate of such
prior decedent;
2. The deduction allowed is only in the
amount finally determined as the value
of such property in determining the
value of the gift, or the gross estate of
such prior decedent and
3. Only to the extent that the value of such
property is included in the decedents
gross estate, and

4.

5.

6.

7.

Only if in determining the value of the

estate of the prior decedent, no
deduction was allowed for property
previously taxed in respect of the
property or properties given in exchange
therefore.
Where a deduction was allowed of any
mortgage or lien in determining the gift
tax or the estate tax of the prior
decedent, which were paid in whole or
in part prior to the decedents death,
then the deduction allowable for
property previously taxed shall be
reduced by the amount so paid.
Such deduction allowable shall be
reduced by an amount which bears the
same ratio to the amounts allowable as
deductions for expenses, losses,
indebtedness, taxes, and transfers for
public use as the amount otherwise
deductible for property previously taxed
bears to the value of the decedents
estate.
Where the property referred to consists
of two or more items, the aggregate
value of such items shall be used for the
purpose of computing the deduction.

Property previously taxed allowed as a

deduction:
1.

Of an amount equal to the following

values:

Period prior to the

death of the decedent

% of the value of the

property allowed as
deduction

If the decedent died

within 1 year prior to
the death of the
decedent or if the gift
was transferred to him
by gift within the same
period.

100%

If more 1 year but not

more than 2 years prior
to the death

80%

If more than 2 years

but not more than 3
years

60%

If more than 3 years

but not more than 4
years

40%

If more than 4 years

but not more than 5
years prior to the death
2.
3.

4.

20%

Of any property forming part of the

gross estate situated in the Philippines;
Of any person who died within 5 years
prior to the death of the decedent, or
transferred to the decedent by gift within
5 years prior to his death
Where such property can be identified
as having been received by the
decedent from the donor by gift from
such decedent by gift, bequest, devise
or inheritance;

Which can be identified as having been acquired

in exchange of the property so received.

IV.

FAMILY HOME

Family Home the dwelling house,

including the land on which it is situated,
where the husband or the wife, or head of
the family, and members of their family
reside, as certified by the Barangay Captain
of the locality. The family home is deemed
constituted on the house and lot from the
time it is actually occupied as a family
residence and is considered as such for as
long as any of its beneficiaries actually
reside therein.

The
family
home
is
generally
characterized by permanency, that is the
place to which whenever absent for
business or pleasure, one still intends
return.

The family home must be part of the

properties of the absolute community of
property or of the conjugal partnership,
or of the exclusive properties of either
spouse
depending
upon
the
classification of the property (family
home) and the property relations
prevailing on the properties of the
husband and wife.
Conditions for Deductibility:
1. The family home must be the actual
residential home of the decedent and
his family at the time of his death, as
certified by the Barangay Captain of the
locality where the family home is
situated;
2. The total value of the family home must
be included as part of the gross estate
of the decedent ; and
3. Allowable deduction must be in an
amount equivalent to:

a.
b.

V.

the current fair market value of the

family home as declared or
included in the gross estate; or
the extent of the decedents interest
(whether conjugal/community or
exclusive property), whichever is
lower,
but
not
exceeding
P1,0000,000

included as part of the gross estate of the

decedent.
VIII.

After deducting the allowable deductions

appertaining to the conjugal or community
properties included in the gross estate, the
share of the surviving spouse must be
removed to ensure that only the decedents
interest in the estate is taxed.

STANDARD
DEDUCTION
A deduction in the amount of One Million
Pesos (P1,000,000) shall be allowed as an
additional deduction without need of
substantiation.

NOTE: Under Section 85(H), the capital of

the surviving spouse is considered as an
exclusion (meaning it is not included in the
gross estate), in Section 86, the share of
the surviving spouse in the absolute
community/conjugal
partnership
is
considered a deduction.

The full amount of P1,000,000 shall be

allowed as deduction for the benefit of the
decedent.
Difference between Standard Deduction
under Sec. 86 (A)(5) and Optional Standard
Deduction in Sec. 34 (L)
STANDARD
DEDUCTION
Sec. 86(A)(5)
Deduction in addition
to the other deductions
Amount of deduction:
P1,000,000
Available to resident
citizens, non-resident
citizens and resident
aliens

OPTIONAL
STANDARD
DEDUCTION
Sec. 34(L)
Deduction in lieu of
itemized deductions
Amount of deduction:
10% of gross income
Applies to all individual
taxpayers except nonresident aliens.

Conditions for Deductibility:

1. the expenses must have been incurred
within one (1) year prior to his death;
2. must be substantiated with receipts;
3. and it shall in no case exceed five
hundred thousand pesos (P500,000)
NOTE: Medical expenses in excess of P
500,000.00 can no longer be claimed as
deduction under other claims
RETIREMENT BENEFITS
Received Under R.A. No. 4917

SUMMARY RULES ON DEDUCTIONS FROM

GROSS ESTATE:
FE

JE

CAE

CAIP

UM

UT

OL

RC

NRC

RA

NRA

In the proportion to the value of the estate located in the

Philippines as against total estate.

SD

FH

ME

RB

TPU

SS

VD

RC

NRC

RA

NRA

Where:

x
-

VI. MEDICAL
EXPENSES

VII.

NET SHARE OF SURVIVING SPOUSE

IN THE CONJUGAL PARTNERSHIP OR
COMMUNITY PROPERTY

(Amount

Retirement benefits is allowed as deduction

provided the amount of separation benefit is

FE
JE
CAE
CAIP

UM
UT
CL
SD
FH
ME
RB

TPU
VD
SS

Applicable/Allowed
Not Applicable/ Not Allowed
Funeral Expenses
Judicial Expenses
Claims against the Estate
Claims against Insolvent
Persons
Unpaid Mortgage
Unpaid Taxes
Casualty Loss
Standard Deduction
Family Home
Medical Expenses
Retirement Benefits under RA
4917
Transfers for Public Use
Vanishing Deduction
Conjugal Share of
Surviving Spouse

PROCEDURE FOR ULTIMATE SETTLEMENT

OF ESTATE TAX

I.

Filing of notice of
death

II.

When notice of death is filed:

1. When the transfer is subject to tax;
or
2. Although exempt, the gross value of
the estate exceeds P 20,000.00
Not all transfer mortis causa requires a
written notice of death to be filed with
the Commissioner. It is only when the
transfer is subject to tax or when the
gross estate exceeds P20,000.
Period of filing 2 moths after the
decedents death or within a like period
after qualifying
as executor or
administrator, the notice must be filed
with the Commissioner.

Filing of Return

1.
2.

1.
2.

1.
2.
3.
4.

5.

III.

When estate tax return is filed:

When the gross estate exceeds
P200,000.00; or
Regardless of the value of the estate,
where the estate consists of registered
or registrable properties
When the gross estate exceeds P2M,
the estate tax return shall be supported
by a statement duly certified by a
Certified Public Accountant.
Period to file:
General Rule: estate tax return must be
filed within 6 months from the
decedents death.
Exception: In meritorious cases, the
Commissioner may grant reasonable
extension not exceeding 30 days.
Where to file:
Authorized Agent Bank
Revenue District Officer Collection
Officer
Collection Officer
Duly Authorized Treasurer of the city or
the municipality where the decedent
was domiciled at the time of his death;
or
If there be no legal residence in the
Philippines, with the Office of the
Commissioner.

Payment of Tax

General Rule: Pay-as-youfile system The time for paying the

estate tax is at the time the return is
filed.

Exception

The
Commissioner may grant an extension
of time:
Requisites:
1.
The request for extension must
be filed before the expiration of the
original period to pay which is within
6 months from death;
2.
There must be a finding that
the payment on the due date of the
estate tax would impose undue
hardship upon the estate or any
other heirs;
3.
The extension must be for a
period of not exceeding 5 years if
the estate is settled judicially or 2
years if settled extrajudicially; and
4.
The Commissioner may require
the posting of a bond in an amount
not exceeding double the amount of
tax to secure the payment thereof.
Persons liable to pay:
1. The estate tax shall be paid by the
executor or administrator before
delivery to any beneficiary of his
distributive share of the estate.
2. The beneficiary shall be subsidiarily
liable to the extent of his distributive
and of such portion of the estate tax
as his distributive share bears to
the value of the total net estate.

SAFEGUARDS IN THE NIRC FOR PAYMENT

OF THE ESTATE TAX

Duties of
Certain
Officer
s of
Debtor
s
1.

Executor or administrator must ensure that

payment shall be made of the amount of
which he is notified before he shall be
discharged from personal liability. (Sec. 92,
NIRC)

2.
3.

4.

5.

6.

7.

Judge will not issue authorization to deliver

distributive share until certification of
payment is shown (Sec. 94, NIRC)
Register of Deeds shall not register in the
Registry of Property any document
transferring real property or real rights
therein without certification from the
Commissioner that the tax actually due
thereon had been paid (Section 95, NIRC)
Lawyer notary public, or any government
officer, intervening in the preparation or
acknowledgment of documents regarding
partition or disposal of donation inter vivos
or mortis causa, legacy or inheritance, shall
have
the
duty
of
furnishing
the
Commissioner, Regional Director, Revenue
District Officer or Revenue Collection Officer
of such documents. (Section 95, NIRC).
A debtor of the deceased shall not pay his
debts to the heirs, legatee, executor or
administrator of his creditor, unless the
certification of the Commissioner that the
estate tax imposed by NIRC has been paid
is shown, but he may pay the executor or
judicial
administrator
without
said
certification if the credit is included in the
inventory of the estate of the deceased
(Section 95 NIRC).
A corporation will not transfer to new
owners of shares, bonds, obligation or rights
without certification from the commissioner
that the tax actually due thereon had been
paid. (Section 97, NIRC)
When a bank has knowledge of the death of
a person who maintained a joint account, it
shall not allow any withdrawal by the
surviving depositor without the above
certification (Sec. 97, NIRC).
Provided: that the administrator of the estate
or any one (1) of the heirs of the decedent
may,
upon
authorization
by
the
Commissioner, withdraw an amount not
exceeding twenty thousand pesos (P20,000)
without the said certification.

DONORS TAX
DONATION is an act of liberality whereby a
person (donor) disposes gratuitously of a thing or
right in favor of another (donee) who accepts it.
Requisites of a valid donation:
1. Capacity of the donor
All persons who may contract and dispose of
their property may make a donation (Art.
735, NCC). The donors capacity shall be
determined as of the time of the making of
the donation (Art. 737, NCC).
2. Donative Intent (intention to donate);

3.

4.

Donative intent is necessary only in cases of

direct gift. If the gift is indirectly taking place
by way of sale, exchange or other transfer of
property as contemplated in cases of
transfers for loss than adequate and full
consideration (Sec. 100, NIRC), not always
essential to constitute a gift.
Deliver, whether actual or constructive, of
the subject gift;
There is delivery if the subject matter is
within the dominion and control of the donee.
Acceptance by the donee.
The acceptance is necessary, because
nobody is obliged to receive a gift against his
will. And once the acceptance is made
known to the donor, the sill of the donor and
donee concur, and the donation, as a mode
of transferring ownership, become perfect.
(Osorio vs. Orosio, 41, Phil 531)
Acceptance must be made during the
lifetime of the donore or donee. If the donor
dies before he learns of the acceptance, the
donation does not take effect.

DEFINITION
Donors Tax is an excise tax imposed on the
privilege transfer of property by way of gift inter
vivos based on a pure act of liberality without any
or less than adequate consideration and without
any legal compulsion to give.

NATURE
It is an excise tax on the privilege of the donor to
give or on the transfer of property by way of gift
inter vivos.

PURPOSES
OF
GIFT
TAX OR
DONOR
S TAX
1.

2.

To supplement and prevent circumvention of

the estate and inheritance taxes through the
taxation of gift inter vivos without which the
property would not be subjected to tax.
To prevent avoidance of income tax through
the device of splitting income among
numerous donees who are usually members
of a family or into many trusts, with the donor
thereby escaping the effect of the
progressive rates of income taxation.

APPLICABL
E LAW
IN
DONOR
S TAX
The law in force at the time of the
perfection/completion of the donation shall
govern the imposition of the donors tax.

WHEN
DONOR
S TAX
APPLY
The Donors Tax shall not apply unless and until
there is a COMPLETED GIFT.
The transfer of property is perfected from the
moment the donor knows of the acceptance of
the donee; it is completed by delivery either
actually of constructively of the donated property
to the donee ( Sec 11 RR. No. 02-03)
WHEN
INCOMPLETE
GIFT
BECOME
COMPLETE
A gift that is incomplete because of reserved
powers becomes complete when either:
1. the donor renounces the power; or
2. his right to exercise the reserved power
ceases because of the happening of some
event or contingency or the fulfillment of
some condition, other than because of the
donors death the donor renounces the
power; or
3. his right to exercise the reserved power
ceases because of the happening of some
event or contingency or the fulfillment of
some condition, other than because of the
donors death.

Renunciation by the surviving spouse of

his/her share in the conjugal partnership
or absolute community after the
dissolution of the marriage in favor of
the heirs of the deceased spouse or any
other person/s is subject to donors tax

General renunciation by an heir,

including the surviving spouse, of
his/her share in the hereditary estate left
by the decedent is not subject to donors
tax, unless specifically and categorically
done in favor of identified heir/s to the
exclusion or disadvantage of the other
co-heirs in the hereditary estate (Sec.
11, R.R. No. 2-2003

STRANGER
S VS.
RELATI
VE

Section 99(B) enumerates who are

considered strangers in the negative:
1. A person who is NOT a brother or sister
(whether by whole or half-blood),
spouse,
ancestor,
and
lineal
descendants;
2. A person who is NOT a relative by
consanguinity in the collateral line within
the fourth degree of relationship.
A relative is taxed according to graduated tax
rates in Section 99(A) while a stranger is
taxed at a fixed rate of 30% as provided in
Section 99 (B).

IMPOSITION OF TAX (SEC. 98, NIRC)

There shall be levied, assessed, collected and
paid upon the transfer by any person, resident or
non-resident of the property by gift, a tax.
The tax shall apply whether the transfer is in trust
or otherwise, whether the gift is direct or indirect,
and whether the property is real or personal,
tangible or intangible.

II.

The tax for each calendar year shall be

computed on the basis of total net gifts
in accordance with the rates above.
The graduated tax rates are only
applicable if the donee is a relative.

FIXED RATE

If the donee is a stranger, the tax

payable by the donor shall be 30% of
the net gifts.

CUMULATIV
E VS.
SPLITT
ING
METHO
D
1.

Cumulative method when the donor makes

two or more donations within the same
calendar year, it is required that the said
donations be included in the return for the
last donation.

RATES OF TAX

Illustration:
A donated to his son B in January 2007, P2,000,000. In March 2007, A

I.

made another donation to Mr. B in the amount of P1,000,000, and in

GRADUATED RATES
Over

But Not
Over

Tax Shall
Be

Of The
Excess
Over

100,000

EXEMPT

100,000

200,000

2%

100,000

200,000

500,000

2,000

4%

200,000

500,000

1,000,000

14,000

6%

500,000

1,000,000

3,000,000

44,000

8%

1,000,000

3,000,000

5,000,000

204,000

10%

3,000,000

5,000,000

10,000,000

404,000

12%

5,000,000

1,004,000

15%

10,000,000

August 2007 in the amount of P500,000

RETURN NO. 1
Date of Donation
January 2007

10,000,000

Amount of
Donation
P2,000,000

Donors

Amount of
Donation

Donors

P124,000
[44,000 +
(1,000,000
x .08)]

RETURN NO. 2
Date of Donation

March
2007
ADD:
Janu
ary
2007
TOTAL
DON
ATIO
N
LESS:
TAX
CREDIT
(Don
ors
Tax
on
Janu

P2,000,000

P1,000,000

ary
2007
)
TAX DUE

P 80,000

RETURN NO. 3
Date of Donation

P3,000,000

P204,000

P 124,000

Amount of
Donation

Donors

August
2007

P 500,000

ADD:
January
2007
March 2007

P,000,000
P2,000,000

TOTAL
DON
ATIO
N

P3,500,000

LESS:
TAX
CRE
DIT
(Don
ors
Tax
Paid
Jan/
Mar,
2007
)

TAX DUE

2.

Will it not amount to double taxation,

since the previous donations were
already subjected to donors tax? NOT,
there is no double taxation. Under the
cumulative method, the tax paid for the
previous methods will be considered as tax
credit for succeeding donations.
Splitting method the donor makes two or
more donations during different calendar
years.

Significanc
e of
the
Two
Metho
ds

The significance is in relation to donees. For

relatives, the graduated tax rates are
applicable while for strangers, a fixed rate of
30% is applicable.
For strangers, whether the method to be
used is cumulative or splitting, it is
immaterial since any donation made to them
is subject to a fixed rate of 30%. However,
with respect to relatives cumulative and
splitting method is relevant.
By way of exception however, when the
amount of donation is P10,000,000 or above,
the cumulative method is no longer relevant
since in that case, the rate applicable is 15%
, hence, it is as if the rate is fixed

TRANSFER FOR LESS THAN ADEQUATE

CONSIDERATION

The property is transferred for less than

adequate and full consideration in money or
moneys worth, the amount by which the
FMV exceeds the consideration shall be
deemed a gift and be included in computing
the amount of gifs made during the year.

The Code considers the transfer as a

donation since what motivated the transferor
in transferring the property is his generosity.
It is as if the property was donated but in
order to avoid paying donors tax, the donor
opted to transfer the property for inadequate
consideration.
Real property considered as capital asset is
not subject to donors tax but a final income
tax of 6% of the fair market value or gross
selling price whichever is higher.

SPECIFIC CASES OF TRANSFERS INTER

VIVOS:
I.

1.
2.

Donations between spouses:

General Rule: Such donation during
their marriage is void.
Exceptions:
Donations mortis causa
Moderate gifts which the spouses may
give each other on the occasion of any
family rejoicing.

NOTE: Void donations are NOT subject to

donors tax. However, if it was already
paid, taxpayer only have two (2) years
from the date of payment to ask or file for
a claim for refund, regardless of any
supervening event.
II.

III.

Donations by one of the spouses:

If what was donated is a
conjugal or community property and
only the husband signed the deed of
donation, there is only one donor for
donors tax purposes, without prejudice
to the right of the wife to question the
validity of the donation without her
consent pursuant to the pertinent
provision of the Civil Code of the
Philippines and Family Code of the
Philippines (R.R. 2-2003).
Husband
and
wife
are
considered separate and distinct
taxpayers for purposes of donors tax.

Donations made to conceived and

unborn child

Such donations may be accepted by

those persons who would legally
represent them if they were already
born. (Art. 742, NCC)

IV. Contribution for

election campaign

The
NIRC
provides
that
Any
contribution in cash or in kind to any

V.

candidate, political party or coalition of

parties for campaign purposes shall be
governed by the Election Code, as
amended.
Republic Act No. 7166 providing for
synchronized
national
and
local
elections provides that Any provision of
law to the contrary notwithstanding, any
contribution in cash or kind to any
candidate, or political party or coalition
of parties for campaign purposes, duly
reported to the Commission, shall not be
subject to the payment of any gift tax.

Transfer for less than adequate and

full consideration.

The property is transferred for less than

adequate and full consideration in
money or moneys worth the amount by
which
the
FMV
exceeds
the
consideration shall be deemed a gift and
be included in comput8ng the amount of
gifts made during the year.

The Code considers the transfer as a

donation since what motivated the
transferor in transferring the property is
his generosity.

It is as if the property was donated but in

order to avoid paying donors tax, the
donor opted to transfer the property to
inadequate consideration.

Real property considered as capital

asset is not subject to donors tax but a
final income tax of 6% of the fair market
value or gross selling price whichever is
higher.

VI. Forgiveness of
indebtedness

If
the
creditor
condones
the
indebtedness of the debtor the following
rules apply:
1. On account of debtors services to
the creditor the same is in taxable
income to the debtor.
2. If no services were rendered but the
creditor simply condones the debt,
it is taxable gift not the taxable
income.

VII. Renunciation of
inheritance to a co-heir

A renunciation of inheritance in favor of

a co-heir is not a donation for the
purposes of taxation. The same
becomes the property of the co-heir is
treated as an additional inheritance.

VIII.

Renunciation of inheritance to
another person not a co-heir

In this case, there is donation since

there is a change in the distribution of
the estate.

IX.

Life insurance with third person as

beneficiary

There is donation in favor of the

beneficiary, not in the sum received by
the heir from the insurer, but in the total
amount of premiums that have been
paid by the insured, provided that:
1. all the benefits of which are payable
to beneficiaries other than the
insureds estate and the insured
retains no power to change the
beneficiaries;
2. insured
relinquishes
his
assignment, by designation of a
new beneficiary, or otherwise, every
power retained by him in a
previously issue policy.

In this case, an additional gift results

every time a premium is paid by the
insurer

X.

Remuneratory
donations

These are donations which compensate

past services which do not constitute
demandable debts. These donations are
not in consideration of liberality but of
services performed. These then are not
subject to gift tax but rather to income
tax.

EXEMPTIO
N OF
CERTAI
N
GIFTS
I.

Dowries

Requisites:
1. The gift was made on account of
marriage;

2.
3.
4.
5.

II.

Gifts made to the

Government

III.

It was made before or within one

year after the celebration of
marriage;
Donor is a parent
Donee is a legitimate, recognized
natural, or adopted child of the
donor
The amount of the gift exempted is
only to the extent of the first P
10,000

Gift made to or for the use of the

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

Gift in favor of an educational and/or

charitable, religious, cultural or social
welfare
corporation,
institution,
accredited non-government organization
or philanthropic organization or research
institution:

Requisites:
1. Not more than 30% of the said gift
should be used for administrative
purposes;
2. The donee must be a non-stock,
non-profit organization or institution;
3. The
donee
organization
or
institution should be governed by
trustees who do not receive any
compensation;
4. The said donee devotes all of its
income to the accomplishment and
promotion of its purposes.
5. Said donee devotes all of its
income to the accomplishment and
promotion of its purposes
6. The NGO must be accredited by
Philippine
Council
for
NGO
Certification (RR 03-02)
7. The donor engaged in business
shall give notice of donation on
every donation worth at least P
50,000 to the RDO which has
jurisdiction over his place of
business within 30 days after
receipt of the qualified donees
institutions duly issued Certificate
of Donation.

EXEMPTION OF GIFTS MADE BY NONRESIDENTS ALIENS

1. Gifts made to the Government;
2. Gift in favor of an educational and/or
charitable , religious, cultural or social

welfare corporation, institution accredited

non-government
organization
or
philanthropic organization or research
institution
Tax Credit for Donors Tax Paid to Foreign
Country
Limitations to the tax credit

The amount of credit shall not exceed the

same proportion of the tax against such
credit is taken, which the net gifts situated
within such country taxable under donors
tax bears to entire net gifts;

The amount of the tax credit shall not exceed

the same proportion of the tax against such
credit is taken, which the donors net gifts
situated outside the Philippines taxable
under donors tax bears to his entire net
gifts.

RETURN,
FILING,
AND
PAYME
NT

Filing of Return Any individual who makes

any transfer by gift and are required to pay
tax due shall make a return under oath in
duplicate.
1. Each gift made during the calendar year
which is to be included in computing net
gifts;
2. Deductions claimed and allowable;
3. Any previous net gifts made during the
same calendar year
4. The name of the donee
5. Relationship of the donor to the donee;
6. Such further information as the
Commissioner may require (Section 103
NIRC, RR 2-2003)
Time of Filing The return shall be filed
within thirty (30) days after the date the gift is
made and the tax due thereon shall be paid
the time of filing. (Pay-as-you-file system)
Payment of Gift Tax The donors tax is
paid upon filing of return. No extension is
allowed as compared to estate tax.

Value Added Tax

Taxation Law

GENERAL PRINCIPLES

F VAT

OUTPUT TAX the VAT due on the ale or lease

of taxable goods or properties or services by any
person registered or required to register under
VAT

VAT is a tax on consumption levied on the sale,

barter, exchange or lease of goods or properties
or services in the Philippines and on importation
of goods into the Philippines.

CROSS BORDER DOCTRINE (Destination

Principle) mandates that no VAT shall be
imposed to form part of the cost of the goods
destined for consumption outside the territorial
border of the taxing authority. Goods and
services are taxed only in the country where
these are consumed.

1.
2.
3.
4.

TRANSACTIONS COVERED BY VAT (CESI)

1. Sale of Commodities or Goods (in the course
of trade or business)
2. Exportation (in the course of trade or
business)
3. Sale of Services (in the course of trade or
business)
4. Importation (whether or not in the course or
trade or business)

VAT
5.
6.
7.
8.
9.

It is an indirect tax;
It is a tax on value added of the taxpayer;
It is a transparent form of sales tax;
It is a broad-based tax on consumption of
goods, properties or service in the
Philippines;
It is collected through the tax credit method;
There is no cascading (tax on tax) under the
VAT system;
VAT lost in the early stages may be
recovered under the catching-up principle or
under the recoupment principle;
It adopts the tax-inclusive method;
It follows the destination principle

INPUT TAX the VAT due from or paid by a VAT

registered person in the course of his trade or
business of importation of goods or local
purchase of goods or services, including lease or
use of property, from a VAT-registered person. It
includes the transitional input tax and the
presumptive input tax.

PERSONS
LIABLE
FOR
VAT
Any person who:
1. Sells, barters, exchanges, leases goods or
properties in the course of trade or business;
2. Renders services in the course of trade r
business (including professional services);
and
3. Imports goods whether or not in the course
of trade or business;
4. Buys or is the transferee of goods imported
into the Philippines by a VAT exempt
person wherein the buyer shall be deemed
the importer;
5. Whose gross sales or gross receipts is over
the threshold fixed by law or regulations
(only those with specific thresholds)
IN THE COURSE OF TRADE OR BUSINESS regular conduct or pursuit of a commercial or an
economic
activity,
including
transactions
incidental thereto, by any person regardless of
whether or not the person engaged therein is a
non-stock,
non-profit
private
organization
(irrespective of the disposition of its net income
and whether or not it sells exclusively to
members or their guests); or government entity.

I.

Services rendered in the Philippines by nonresident foreign persons shall be considered

as being in the course of trade or business.
VAT ON
PROPERTIES

SALE

OF

GOODS

OR

TAX BASE AND TAX RATE: 12% of the gross

selling price or gross value in money of the goods
or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor.
MEANING OF GROSS SELLING PRICE the
total amount of money or its equivalent which the
purchaser pays or is obligated to pay, including
any excise tax, to the seller in consideration of
the sale, barter or exchange of the goods or
properties, excluding VAT. (Section 106, NIRC)
ALLOWABLE DEDUCTIONS FROM GROSS
SELLING PRICE

1.
2.

Discounts determined and granted at the

time of the sale expressly indicated in the
invoice;
Sales returns and allowances for which a
proper credit or refund was made;

MEANING OF GOODS OR PROPERTIES all

tangible and intangible objects which are capable
of pecuniary estimation and shall include, among
others: (TEMPR)
1. Real properties primarily for sale to
customers or held for lease in the ordinary
course of trade of business;
2. The right or privilege to use Patent,
copyright, design or model, plan, secret
formula or process, goodwill, trademark,
trade brand, or other like property or right;
3. The right or privilege to use in the Philippines
of nay industrial, commercial, or scientific
equipment;
4. The right or privilege to use motion pictures
films, tapes, and discs;
5. Radio, television, satellite transmission and
cable transmission time. (Section 106, NIRC)
SALE OR REAL PROPERTIES
(Revenue Regulations No. 4-2007)
Sale of real properties held primarily for sale
to customers or held for lease in the ordinary
cause of trade or business of the seller shall
be subject to VAT.
SALE OF REAL PROPERTY COVERED BY
VAT:
1. Residential lot with gross selling price
exceeding P 1.5 million;
2. Residential house and lot or other residential
dwellings with gross selling price exceeding
P2.5 million
NOTE: Whether the instrument is nominated as a
deed of absolute sale, deed of conditional sale or
otherwise.
I.

Sale of Real Property on Installment

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

SALE
OF
REAL
PROPERTY
ON
INSTALLMENT PLAN sale of real property by
a real estate dealer, the initial payments of which
in the year of the sale do not exceed twenty-five
percent (25%) of the gross selling price.
GROSS SELLING PRICE (in case of sale or
exchange of real property) the consideration
stated in the sales document or the fair market
value whichever is higher. If the VAT is not billed
separately in the document of sale, the selling

price or the consideration stated therein shall be

deemed to be inclusive of VAT.

b.
3.

II.

Sale of Real Property on a Deferred

Payment Basis (Not On Installment Plan)
the transaction shall be treated as cash
sale which makes the entire selling price
taxable in the month of the sale.
SALE OF RELA PROPERTY ON A DEFERRED
BASIS sale of real property, the initial
payments of which in the year of the sale exceed
twenty-five percent (25%) of the gross selling
price.
INITIAL PAYMENTS payment or payments
which the seller receives before or upon
execution of the instrument of sale and payments
which he expects or is scheduled to receive in
cash or property (other than evidence of
indebtedness of the purchaser) during the year
when the sale or disposition of real property was
made.

INSTALLMENT
PLAN

DEFERRED PLAN

Initial payments do not

exceed 25% of the
gross selling price
Seller shall be subject to
output VAT on the
installment
payments
received, including the
interests and penalties
for late payment actually
and/or
constructively
received
The buyer of the
property can claim the
input tax in the same
period as the seller
recognized the output
tax

Initial
payments
exceed 25% of the
gross selling price
Transaction shall be
treated as cash sale
which
makes
the
entire selling price
taxable in the month
of sale.

Payments
that
are
subsequent to initial
payments
shall
be
subject to output VAT

Output tax shall be

recognized by the
seller and input tax
shall accrue to the
buyer at the time of
the execution of the
instrument of sale
Payments that are
subsequent to initial
payments shall no
longer be subject to
output VAT

TRANSACTIONS DEEMED SALE (TDCR)

1. Transfer use consumption not in the course
of business of goods or properties originally
intended for sale or for use in the course of
business (i.e. when a VAT-registered person
withdraws goods from his business for his
personal use);
2. Distribution or transfer to:
a. Shareholders or investors share in the
profits of VAT-registered person;

4.

II.

Creditors in payment of debt or

obligation;
Consignments of goods if actual sale is not
made within 60 days following the date such
goods were consigned. Consigned goods
returned by the consignee within the 60-day
period are not deemed sold;
Retirement from or cessation of business
with respect to all goods on hand, whether
capital goods, stock-in-trade, supplies or
materials as of the date of such retirement or
cessation.
VAT ON THE SALE OF SERVICE AND
USE OR LEASE OF PROPERTIES USE

TAX BASE AND TAX RATE: 12% of the gross

receipts derived from the sale or exchange of
services, including the use or lease of properties.
GROSS RECEIPTS refers to the total amount of
money or its equivalent representing the contract
price, compensation, service fee, rental or
royalty, including the amount charged for
materials supplied with the services rendered and
advance payments actually or constructively
received during the taxable period for the
services performed or to be performed for
another person, excluding VAT.
CONSTRUCTIVE RECEIPT occurs when the
money consideration or its equivalent is placed at
the control of the person who rendered the
service without restrictions by the payor.

The term sale or exchange of services means

the performance of all kinds of services in the
Philippines for a fee, remuneration or
consideration, whether in kind or in cash (please
refer to Sec. 108 NIRC or RR. No. 16-2005 for
the complete list)

F SERVICES
1.
2.
3.
4.

Professional/technical consultancy;
Transfer of technology;
Lease or use of intangible property; or
Lease or use of tangible property

LEGAL
SERVICES

Are lawyers liable for VAT?

YES. RA 9337 clearly provided that sale of legal
services by a lawyer or a law firm shall be subject
to VAT effective November 1, 2005. There was an
elimination of the exemption from VAT of legal
services, deleting the old Section 109 (BB) of RA
9238.

1.

2.

An individual can practice his law profession

either personally or through general professional
partnership. A lawyer who practices his
profession may be subject to or exempt from VAT
A LAWYER PRACTICING HIS PROFESSION IS
SUBJECT TO VAT IF:
1. There is no employer-employee relationship
between him and the person to whom he
provides the legal service; and
2. His gross receipts for the next 12 months
exceed P1.5 million
Otherwise, he is exempt from VAT
TAX BASE AND TAX RATE: 12% of the gross
receipts derived from the sale or exchange of
services, including the use or lease of properties.

The effectivity date of the increase in VAT

rate from 10% to 12% is February 1, 2006.

ZERO PERCENT RATE (0%) TAS XHALL

APPLY TO THE FOLLOWING:
1. Legal services rendered to a person
engaged in business conducted outside the
Philippines or to a non-resident person not
engaged in business who is outside the
Philippines when the services are performed,
the consideration for which is paid for in
acceptable foreign currency and accounted
with the rules and regulations of the BSP;
(payment of professional fee must be in
acceptable foreign currency and accounted
for in accordance with BSP rules.)
2. Legal services rendered to persons or
entities whose exemption under special laws
or international agreements to which the
Philippines is a signatory effectively subjects
the supply of such services to 0% rate and
(Payment of professional fee in foreign
currency is not required.)
3. Legal services rendered to persons engaged
in international shipping or international air
transport operations, including leases of
property for use thereof. (Payment of
professional fee in foreign currency is not
required.)

III.

VAT ON OODS

TAX BASE AND TAX RATE: 12% based on:

total value used by the BOC in determining

tariff and customs duties, plus customs
duties, excise taxes, if any, and other
charges;
landed cost in case the valuation used by
the BOC is based on volume and quantity.
Landed cost consists of the invoice amount,
customs duties, freight, insurance and other
charges and also excise tax, if any.

Same rule applies to technical

importation of goods sold by a person
located in a Special Economic Zone to a
customer located in a customs territory
(R.R. No. 16-2005 Sec. 4.107-1).
The VAT on importation shall be paid by
the importer prior to the release of such
goods from customs custody

IMPORTER refers to any person who brings

goods into the Philippines, whether or not made
in the course of trade or business. It includes
non-exempt persons or entities who acquire taxfree imported goods from exempt persons,
entities or agencies.
TRANSFER OF GOODS BY TAX-EXEMPT
PERSON
Where the importer is exempt from VAT and such
goods imported were subsequently sold,
transferred or exchanged in the Philippines to a
non-exempt person or entity, the non-exempt
purchaser, transferee or recipient shall be
considered as the importer and shall be liable for
VAT due on such importation.
Technical Importation Sale of goods by a
PEZA registered enterprise, to a buyer from the
customs territory shall be treated as a technical
importation. Such buyer shall be treated as an
importer thereof and shall be imposed with the
corresponding import taxes

ZERO-RATED SALES
I.

ZERO-RATED SALES OF GOODS OR

PROPERTIES (EFI)

1.

Export Sales (ANEGEI)

a. The sale and actual shipment of goods
from the Philippines to a foreign country;
b. The sale of raw materials or packaging
materials to non-resident buyer for
delivery to resident local export-oriented
enterprise to be used in manufacturing,
processing, packaging, or repacking in
the Philippines of the said buyers
goods;
NOTE: Subsections (a) & (b) must be
paid for in acceptable foreign currency

c.

d.
e.
f.

and accounted for in accordance with

the rules and regulations of BSP
Sale of raw materials or packaging
materials
to
an
export-oriented
enterprise whose export sales exceed
70% of total annual production;
Sale of gold to the BSP;
Those considered export sales under
EO No. 226 (Omnibus Investment Code
of 1987) and other special laws;
Sale of goods, supplies, equipment and
fuel to persons engaged exclusively in
international shipping or international air
transport operations

Considered
Export Sales
Without actual exportation the following shall be
considered CONSTRUCTIVELY EXPORTED for
purposes of these provisions: (BERD)
a. sales to Bonded manufacturing warehouses
of export-oriented manufacturers;
b. sales to Export processing zones;
c. sales to Registered export traders operating
bonded trading warehouses supplying raw
materials in the manufacture of export
products under guidelines to be set by the
board in consultation with the BIR and BOC;
d. sales to Diplomatic missions and other
agencies and/or instrumentalities granted tax
immunities,
of
locally
manufactured,
assembled or repacked products, whether
paid for in foreign currency or not.
2.

2.

3.

4.

5.

6.
7.

outside the Philippines, which goods are

subsequently exported;
Services other than those mentioned in the
preceding paragraph rendered to a person
engaged in business conducted Outside the
Philippines r to a non-resident person not
engaged in business who is outside the
Philippines when the services are performed;
NOTE: Subsection (a) & (b) must be paid fr
in acceptable foreign currency and
accounted for in accordance with the rules
and regulations of the BSP;
Services rendered to persons or entities
whose exemption under Special laws or
international agreements to which the
Philippines is a signatory effectively subjects
the supply of such services to 0% rate;
Services rendered to persons engaged
exclusively in International shipping or air
transport operations, including leases of
property for use thereof;
Services performed by Subcontractors
and/or contractors in processing, converting,
or manufacturing goods for an enterprise
whose export sales exceed 70% of the total
annual production;
Transport of passengers and cargo by
domestic air or sea carriers from the
Philippines to a foreign country; and
Sale of power or fuel generated through
Renewable sources of energy such as, but
not limited to, biomass, solar, wind,
hydropower, geothermal and steam, ocean
energy, and other emerging sources using
technologies such as fuel cells and hydrogen
fuels;
The sale of power or fuel is the one being
subject to 0% and not the operation or
maintenance of such energy sources.

Foreign Currency Denominated Sales

means the sale to non-resident of
automobiles (Sec. 149 NIRC) and nonessential goods (Sec. 150 NIRC), assembled
or manufactured in the Philippines for
delivery to a resident in the Philippines, paid
for in acceptable foreign currency and
accounted for in accordance with the rules
and regulations of the BSP.

PEZA REGISTERED ENTERPRISE GIVENT HE

OPTION

Sales to Persons or Entities deemed taxexempt

under
Special
Law
or
International Agreement
Such as the Asian Development Bank (ADB) and
international Rice Research Institute (IRRI)
which shall be effectively subject to zero-rate.

While an ecozone is geographically within the

Philippines, it is deemed a separate customs
territory an is regarded in laws as foreign soil.
Sales by supplies outside the borders of the
ecozone to this separate customs territory are
deemed exports and treated as export sales
(Commissioner of Internal Revenue vs. Seksui
Jushi Phils, Inc. G.R. No. 149671, July 21, 2006.)

3.

II.
1.

ZERO-RATED SALES OF SERVICES

(POSIST-R)
Processing, manufacturing or repacking of
goods for other persons doing business

PEZA registered enterprise is given option to

choose between two fiscal incentives (a) 5%
preferential tax rate on its gross income under
the said law or (b) income tax holiday provided
under E.O. 226 or Omnibus Investment Code of
1987 as amended.

EFFECTIVELY ZERO-RATED
SALES
Refers to the local sale of goods, properties, or
services by a VAT-registered person to a person
or entity who was granted indirect tax exemption
under special laws or international agreements.

AUTOMATICALLY
ZERORATED

that s NOT subject to output tax and the seller is

NOT allowed any tax credit of input tax on
purchases:
1.

Sale or importation of agricultural and marine

food products in their original state

Original state even if they have

undergone the simple process of
preparation or preservation for the
market such as freezing, drying, salting,
broiling, roasting, smoking or stripping.

Not a simple process if it is a physical

or chemical process which would alter
the exterior or inner substance of a
product in such a manner as to prepare
it for special use to which it could not
have been put in its original form or
condition;
like
the
addition
of
preservatives or anti-oxidants.

Polished and/or husked rice, corn grits,

raw cane sugar and molasses and
ordinary salt shall be considered in their
original state.

2.

Sale or importation of fertilizers; seeds,

seedlings, and fingerlings; fish, prawn,
livestock and poultry feeds, including
ingredients, whether locally produced or
imported, used in the manufacture of
finished feeds;

EXCEPTION: specially made feeds for

race horses, fighting cocks, aquarium
fish, zoo animals and other animals
generally considered as pets

3.

Importation of personal and household

effects belonging to residents of the
Philippines returning from abroad and nonresident citizen coming to resettle in the
Philippines. PROVIDED, that such goods are
exempt from customs duty under the Tariff
and Customs Code of the Philippines;

4.

Importation of professional instruments and

implements, wearing apparel, domestic
animals, and personal household effects

EFFECTIVELY
ZERO-RATED

A zero-rated sale of goods,

properties, or services (by
VAT-registered person) is a
taxable transaction for VAT
purposes, but shall not result
in any output tax. However,
the input tax on purchases of
goods, properties or services,
related to such zero-rated
sale, shall be available as tax
credit or refund.

Effectively zerorated sales shall

refer to the local
sale of goods,
properties,
or
services by a
VAT-registered
person to a
person or entity
who
was
granted indirect
tax exemption
Generally refers to the export under
special
sale of goods and supply of laws,
or
services.
international
agreements.
No need to file an application An application
form and to secure BIR for zero-rating
approval before the sale
must be filed
and the BIR
approval
is
necessary
before
the
transaction may
be considered
effectively zerorated
Results in no tax chargeable against the
purchaser
The seller an claim a refund of or a tax credit
certificate for the VAT previously charged by
suppliers.
NOTE: For zero-rated transactions, whether
automatic of effective, the word ZERO-RATED
must be prominently imprinted or stamped on the
face of the VAT invoice or receipt to be issued by
the seller, otherwise, the transaction becomes
subject to the regular VAT rate. This requirement
prevents the buyer from claiming input tax credits
arising from such taxable sale.

VAT-EXEMPT TRANSACTIONS
These refer to the sale of goods or properties
and/or services and the use or lease of properties

Requisites to be VAT-Exempt:
a. belonging to persons coming to settle in
the Philippines
b. for their own use and not for sale, barter
or exchange
c. accompanying such persons or arriving
within 90 days before or after their
arrival
d. satisfactory evidence is given to the CIR
that such persons are actually coming to
settle in the Philippines and that the
change of residence is bona fide
e. except any vehicle, vessel, aircraft,
machinery, other goods for use in the

manufacture and merchandise of any

kind in commercial quantity
5.

Services subject to the percentage taxes

under Title V of the NIRC;

6.

Services by agricultural contract growers and

milling fo others of palay into rice, corn into
grits and sugar cane into raw sugar;

7.

Medical, dental, hospital and veterinary

services except those rendered by
professionals;

Laboratory services are exempted. If the

hospital operates a pharmacy or
drugstore, the sale of drugs and
medicine is subject to VAT

Sale of medicine to in-patient are

exempt

8.

Educational services rendered by private

educational institutions duly accredited by
the DepED, CHED and TESDA and those
rendered
by
government
educational
institutions;

9.

Services rendered by individuals pursuant to

an employer-employee relationship;

10. Services rendered by regional or area

headquarters established in the Philippines
by multinational corporations;
11. Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under special
laws except those under Presidential Decree
No.
529
(Petroleum
Exploration
Concessionaires under the Petroleum Act of
1949);
12. Sales by agricultural cooperatives duly
registered and in good standing with the
Cooperative Development Authority (CDA)
to:

Their members whether or not the

cooperative is the producer

Non-members only if the cooperative

is the producer, whether in its original
state or processed form

Importation of direct farm inputs,

machineries and equipment, including
spare parts thereof, to be used directly
and exclusively in the production and/or
processing of their produce shall also be
exempt.
Note: Sale or importation of agricultural
food products in their original state is
exempt from VAT irrespective of the
seller and buyer thereof.

13. Gross receipts from lending activities of

credit or multi-purpose cooperatives duly
registered and in good standing with the
CDA;
14. Sales by non-agricultural, non-electrical and
non-credit cooperatives duly registered and
in good standing with the CDA. PROVIDED:
that the share capital contribution of each
member does not exceed P 15,000 and
regardless of the aggregate capital and net
surplus ratably distributed among the
members.

Importation by these cooperatives of

machineries and equipment, including
spare parts thereof, to be used by them
are subject to VAT
15. Export sales by persons who are not VAT
registered;

To encourage exporters of goods to

register as a VAT person with the BIR to
be able to claim unused input tax in the
form of refund or tax credit
16. Sale of real properties:

Sales Exempted:
a. Not primarily held for sale to
customers or held for lease in the
ordinary course of trade or
business;
b. Utilized for low-cost housing;
c. Utilized for socialized housing;
d. Residential lot valued at P 1.5
million and below;
e. House and lot and other residential
dwellings valued at P 2.5 million
and below; or
f. Two or more adjacent residential
lots where the aggregate value
does not exceed P 1.5 million

Even if the real property is not

primarily held for sale to
customers or held for sale to
customers or held for lease in
the ordinary course of trade or
business but the same is used
in the trade or business of the
seller, the sale thereof shall be
subject to VAT being a
transaction incidental to the
taxpayers main business (Sec.
14, R.R. 04-2007)
17. Lease of residential units, if the monthly rent:

Does not exceed P10,000 regardless of

the aggregate rentals received by the
lessor

Exceeds P10,000 but the aggregate

rentals received by the lessor do not

exceed P 1.5 million, however, the same

shall be subject to 3% percentage tax;
c.
18. Sale, importation, printing or publication of
books and any newspaper, magazine,
review, or bulletin which appears at regular
intervals with fixed prices for subscription
and sale and which is not devoted principally
to the publication of paid advertisements;
19. Sale, importation or lease of passenger or
cargo vessels, and aircraft, including engine,
equipment and spare parts thereof for
domestic
or
international
transport
operations weighing 150 tons and above;
20. Importation of life-saving equipment safety
and rescue equipment and communication
and navigational safety equipment steel
plates and other metal plates used for
shipping transport operations;
21. Importation f capital equipment machinery,
spare parts, lifesaving and navigational
equipment, steel plates and other metal
plates to be used in the construction, repair,
renovation or alteration of any merchant
marine vessel operated or to be operated in
the domestic trade;
22. Importation of fuel, goods and supplies by
persons engaged in international shipping or
air transport operations directly to a foreign
port without stopping at any other port in the
Philippines;
23. Services of banks, non-bank financial
intermediaries performing quasi-banking
functions, and other non-bank financial
intermediaries such as money changers and
pawnshops;
24. Sale or lease of goods or properties or the
performance of services other than the
transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of
P1,500,000.
NOTE: This exemption does not apply to the
preceding paragraphs except to the sale of
real properties and lease of residential units.
It refers to transactions undertaken by
VATable entities but because their gross
annual sales and/or receipts do not exceed
P1.5 million, they are exempt from VAT.
Requisites
a. the transaction is VATable;
b. said transaction does not fall under any
of the other exemptions (except for sale

of real properties and lease of

residential units);
the gross receipts and/or annual sales
must not exceed P 1.5 million

NOTE: A VAT-registered person may elect

that the exemption shall not apply to his
sales of goods, properties or service. Once
the election is made, it shall be irrevocable
or a period of 3 years counted from the
quarter when the election was made, except
for franchise grantees of radio and TV
broadcasting whose annual gross receipts
for the preceding year do not exceed P10
million
where
the
option
becomes
perpetually irrevocable. (R.R. No. 4-2007)
Rationale: The VAT exempt person may
incur a large amount of input tax in excess of
his output tax, and such input tax can be
credited against any tax under the NIRC.
Distinction between Zero-Rated Sales and
VAT-Exempt Sales

ZERO-RATED
SALES
The
transaction
is
completely free of VAT
because the tax rate
applied on the tax base
is zero, hence, the
seller
charges
no
output tax
VAT payer can claim
and enjoy a credit or
refund for the input tax
(total relief)
Still considered as
taxable sales for the
purpose of measuring
turnover sales VAT
registration is required

VAT-EXEMPT SALES

Exemption
only
removes the VAT at the
exempt stage

VAT payer cannot claim

a credit or tax (which
could
result
to
increased prices of
goods or services;
partial relief)
Not considered as
taxable sales; A person
who
makes
only
exempt sales is not a
taxable person for VAT
purposes and may not
register for VAT
VAT registration
is
optional

Distinction between Exempt Transaction and

Exempt Party

EXEMPT
TRANS
ACTION
Involves
goods
or
services which, by their
nature, are specifically

EXEMPT PARTY

A person or entity
granted
VAT
exemption under the

listed in and expressly

exempted from the VAT
under the Tax Code,
without regard to the tax
status VAT exempt or
not of the party to the
transaction
Transaction
is
not
subject to the VAT, but
the seller is not allowed
any tax refund of or
credit for any input taxes
paid

Tax Code, a special

law or an international
agreement to which
the Philippines is a
signatory, and by
virtue of which its
taxable transactions
become exempt from
the VAT
Such party is also not
subject to the VAT, vut
may be allowed a tax
refund of or credit for
input
taxes
paid,
depending
on
its
registration as a VAT
or non-VAT taxpayer

TAX CREDITS

INPUT TAX
Any input tax on the following transactions
evidenced by a VAR invoice or official receipt
issued by a VAT-registered person shall be
creditable against output tax:
VAT actually paid for: (IRST3P)
1. Purchase or importation of goods:
a. For sale; or
b. For conversion into or intended to form
part of a finished product for sale,
including packaging materials; or
c. For use as supplies in the course of
business; or
d. For use as raw materials supplied in the
sale of services; or
e. For use in trade or business for which
deduction
for
depreciation
or
amortization is allowed for income tax
purposes (capital goods)
2. Purchase of real properties;
3. Purchase of services;
4. Transactions deemed sale;
5. Transitional input tax;
6. Presumptive input tax;
7. Transitional input tax credits allowed under
transitory and other provisions

Who?
1.
2.

Importer upon payment of VAT prior to the

release of goods from customs custody; or
Purchaser of he domestic goods or
properties upon consummation of the sale;
or

3.

Purchaser of services or the lessee or

licensee upon payment of the compensation,
rental, royalty or fee.

TAX FORMULA:
Output Tax
Less: Input Tax
----------------------------Value-Added Payable

If the amount of input tax is greater than

the amount of output tax, the resulting
amount is treated as Tax credit or
Refund

How is Input tax creditable during the taxable

month or quarter determined? (R.R. NO. 162005, SEC. 4.110-5)
Adding all creditable input taxes during the month
or quarter plus any amount of input tax carriedover from the preceding month or quarter,
reduced by the amount of claim for VAT refund or
tax credit certificate (whether filed with BIR, with
Department of Finance, Board of Investments or
the BOC) and other adjustments, such as
purchase returns or allowances, input tax
attributable to exempt sales and input tax
attributable to sales subject to final VAT
withholding.
Determination of Output Tax and VAT Payable or
Excess Tax Credits (R.R. No. 16-2005, Sec.
4110-6)
1. Output Tax
a. Output tax is determined by multiplying
the gross selling price or gross receipts
by the VAT rate.
b. Where the basis for computing output
tax is either the gross selling price or
gross receipts, but the amount of VAT is
erroneously billed in the invoice, the
total invoice amount is presumed to be
comprising of gross selling price/gross
receipts plus the correct VAT. Hence, the
output tax is determined by multiplying
the total invoice amount by fraction
using rate of VAT as numerator and
100% plus VAT rate as denominator.
c. The input tax that can be claimed by the
buyer shall be the corrected amount of
VAT.
2. VAT Payable
Output tax less input tax to arrive at VAT
payable on a monthly VAT declaration and
the quarterly VAT returns, subject to
limitations prescribed by the regulations.
Vat Payable in Excess Output Or Excess Input
Tax

1.

2.

If at the end of any taxable quarter the output

tax exceeds the input tax, the excess shall
be paid by the VAT-registered person (R.R.
No. 16-2005, Sec. 4. 110-7).
If the input tax inclusive of input tax carried
over from the previous quarter exceeds the
output tax, the excess input tax shall be
carried over to the succeeding quarter or
quarters;

Any input tax attributable to zero-rated

sales by a VAT-registered person may at
his option be refunded or applied for a
tax credit certificate which may be used
in the payment of internal revenue
taxes, subject to the limitations as may
be provided for by law, as well as, other
implementing rules (R.R. No. 16-2005,
Sec. 4.110-7 as amended by R.R. No. 22007, Sec.

R.A. No. 9361 amended Sec. 110(B)

NIRC removing the 70% cap on
creditable input tax.

1.

NPUT TAX
Transitional input tax on the inventory on hand as
of the effectivity of the VAT registration of:
1. Taxpayers who became VAT-registered
persons upon exceeding the minimum
turnover of P1.5 million in any 12-month
period; or
2. Voluntarily registers as a VAT payer even if
turnover does not exceed P 1.5 million
3. Whichever is higher between:
a. 2% of the value of the beginning
inventory on hand; or
b. Actual VAT paid on such goods,
materials and supplies

2.

The amount is creditable against the output tax

of a VAT-registered person.
Persons of firms engaged in the:
1. Processing of sardines, mackerel and milk;
2. Manufacturing refined sugar, cooking oil and
packed noodle-based instant meals.
The presumptive input tax shall be 4% of the
gross value in money of their purchases of
primary agricultural products which are used as
inputs to their production.
The amount is creditable against the output tax
of a VAT-registered person.
CLAIMS
FOR
REFUN/TAX
CERTIFICATE OF INPUT TAX

CREDIT

3.

Zero-rated and Effectivly Zero-rated sales of

goods, properties or services
a.
Input tax that may be subject to
claim shall exclude the portion of input
tax that has been applied to output tax
b.
The application should be filed
within 2 years after the close of the
taxable quarter when such sales were
made.
c.
In case of zero-rated sales,
payments for the sales must have been
made in acceptable foreign currency
duly accounted for in accordance with
BSP rules and regulations.
d.
If both zero-rated or effectively
zero-rated and taxable or exempt and
the amount of creditable input tax due
cannot be directly and entirely attributed
to any one of the transactions, ONLY
PROPORTIONATE share of input taxes
allocated to zero-rated or effectively
zero-rated sales can be claimed for
refund or issuance of tax credit
certificate.
e.
If engaged in transport of
passenger and cargo by air or sea
vessels from Philippines to a foreign
country, input taxes allocated RATABLY
BETWEEN ZERO-RATED AND NONZERO RATED sale (subject to regular
rate, final withholding VAT and Vatexempt sales).
Cancellation of Registration
a.
A VAT-registered person may
apply for the issuance of credit tax
certificate for any unused input tax
within 2 years from the cancellation of
registration. Such credit tax certificate
may be used in the payment of other
internal revenue taxes.
b.
Cancellation of Registration
due to:

Retirement from or cessation of

business; or

Change in or cessation of status

c.
The taxpayer shall be entitled
to a refund if he has no internal revenue
tax liabilities against which the tax credit
certificate may be utilized.
Manner and Period Within Which Refund or
Tax Credit of input Taxes shall be Made
a.
Refunds shall be made upon
warrants drawn by the Commissioner or
by his duly authorized representative
without the necessity of being counter
signed by the Chairman of the
Commission of Audit.
b.
The application for tax credit or
refund for creditable input tax shall be
decided by the Commissioner within one
hundred twenty days from the

c.

submission of documents in support of

the application.
In case of denial or the inaction
of the Commissioner within the period
prescribed, the taxpayer may appeal the
decision or unacted claim within 30 days
from the receipt of the same or after the
expiration of 20 days to the Court of Tax
Appeals

3.
4.

REGISTRATION
PERSONS REQUIRED TO REGISTER FOR
VALUE-ADDED TAX:
1. Mandatory: Any person who in the course of
trade of business, sells, barters, or
exchanges of services, is required to register
if;

Gross sales or receipts for the past

twelve (12) months have exceeded P1.5
M; or

There is reasonable grounds to believe

that his gross sales or receipts for the
next 12 months will exceed P 1.5 M.
2. Optional: Any person not required to
registered for VAT may elect to register by
paying the annual registration fee.

Any person who elected to register shall

not be entitled to cancel his registration
for the next three years.

COMPLIANCE
REQUIREMENTS
A VAT-registered person shall issue:
1. VAT invoice for every sale, barter or
exchange of goods or services.
2. VAT official receipt for every lease of goods
or properties and for every sale, barter or
exchange of services.
INFORMATION CONTAINED IN VAT INVOICE
OR RECEIPT
1. Statement that the seller is a VAT-registered
person followed by his T.I.N.
2. The total amount paid by the purchaser with
the indication that such amount includes
VAT.

Amount of tax must be shown

separately on the receipt.

If the sale is exempt, the term VATEXEMPT SALE must be written or

printed prominently on the invoice or
receipt.

If the sale is subject to 0%, the term

ZERO-RATED SALE must be written or
printed prominently on the invoice or
receipt.

If the sale involves goods, properties or

services some which are subject to VAT
and some are exempt or zero-rated, the
breakdown of the sale price between it
taxable,
exempt,
and
zero-rated
components must be shown on the
invoice or receipt.
Date of the transaction, quantity, unit cost
and description of goods.
In case os sales in the amount of P1,000.00
or more and the sale is made to a VATregistered person, the name, business style,
address and TIN of the purchaser.

CONSEQUENCES ERRONEOUS ISSUANCE

OF VAT INVOICE OR RECEIPT
If a person who is not VAT-registered issues an
invoice or receipt showing his TIN, followed by
the word VAT:, the erroneous issuance shall
result to the following:
1. The non-VAT person shall be liable to:
a. The percentage taxes applicable to his
transactions;
b. VAT due on transactions under Sec 106
or 108 of the Tax Code, without the
benefit of any input tax credit; and
c. A 50% surcharge under Sec. 248(B) of
the Tax Code
2. VAT shall be recognized as an input tax
credit to the purchaser, provided the
requisite information is shown on the receipt
or invoice.

FILING OF RETURN AND

PAYMENT OF VAT
WHO ARE REQUIRED TO FILE A VAT
RATURN?
1. Every person or entity who in the course of
his trade or business, sells or leases goods,
properties and services subject to VAT, if the
aggregate amount of actual gross sales or
receipts exceed P1.5 million for any twelve
month period;
2. A person required to register as VAT
taxpayer but failed to register;
3. Any person who imports goods;
4. Professional practitioners

Professional Practitioners (PPs) were

formerly
classified
as
non-VAT
taxpayers and were exempt from VAT
and Percentage taxes under Section
109 NIRC until December 31, 2002.
Prior to this date, they were subject only
to Income Tax under Section 24 of the
Code.

Effective January 1, 2003, however, by

virtue of Republic Act Nos. 7716 and
9010, which were implemented by

Revenue Regulation Nos. 1-2003 and 32003, services of PPs were also subject
to either VAT or 3% Percentage Tax.
Pursuant to Revenue Regulations No.
16-2005, services of Professional
Practitioners are subject to:
a.
VAT
if the gross professional fees
exceed P 1.5 million for a 12-month
period; or
b.
3%
Percentage Tax if the gross
professional fees does not exceed
P1.5 million for a 12-month period

Professional Practitioners include:

1. Certified Public Accountants;
2. Insurance Agents (Life and Non-Life)
3. Other Professional Practitioners required to
pass the government examinations.

TIME FOR
FILING
A
RETUR
N

Every person liable to pay VAT shall file a

quarterly return of the amount of his
quarterly gross sales or receipts within 25
days following the close of the taxable
quarter.
A VAT-registered person shall pay the valueadded tax on a monthly basis
Taxable quarter shall mean the quarter that
is synchronized to the income tax quarter of
the taxpayer (i.e. calendar or fiscal year).

WITHHOLDING OF VALUE-ADDED TAX IN

THE CASE OF VAT ON GOVERNMENT
PURCHASES:
1. Sale of goods and services to government is
subject to 12% VAT
2. Government deducts and withholds a final
VAT of 5%
3. For payments to lease or use of properties or
property rights owned by non-residents;
services rendered to local insurance
companies, with respect to reinsurance
premiums payable to non-residents; other

services rendered in the Philippines by nonresidents- withholding is 10%

If actual input VAT exceeds 5% of gross
payments, the excess may form part of the
sellers cost; and
If actual input VAT is less than 5% of gross
payments, the difference must be treated as
income of the seller.

CANCELLATION OF VALUEADDED TAX

REGISTRATION
GENERAL RULE: The registration of any person
who ceases to be liable to a tax type shall be
cancelled upon filing with the Revenue District
Office where he is registered, an application for
registration information update in a form
prescribed therefore;
A VAT-registered person may cancel his
registration for VAT if:
1. He makes written application and can
demonstrate
to
the
Commissioners
satisfaction that his gross sales or receipts
for the following twelve (12) months, other
than those that are exempt under Section
109 (A) TO (U), will not exceed P 1.5 million;
or
2. He has ceased to carry on his trade or
business, and does no9t expect to
recommence any trade or business within
the next twelve (12) months.
The cancellation of registration will be effective
from the first day of the following month.

SUSPENSION OF BUSINESS
The
Commissioner
or
his
authorized
representative is empowered to suspend the
business operations and temporarily close the
business establishment of any person for any of
the following violations:
1. In the case of a VAT-registered person
a. Failure to issue receipts or invoices;
b. Failure to file a VAT return as required;
or
c. Understatement of taxable sales or
receipts by 30% or more of his correct
taxable sales or receipts for the taxable
quarter, and
2. For failure of any person to register as
required in Section 236
The temporary closure of the establishment for
the duration of not less than 5 days shall be lifted

only
upon
compliance
with
whatever
requirements prescribed by the CIR in the
closure order.

exempt from VAT, instead of being subject to 0%

percent

EXCEPTION: For exporters, although they are

required to be VAT-registered, non-registration
will not amount to temporary closure but the
penalty shall be that they will be considered as

NIRC Remedies
Taxation Law

OUTLINE OF REMEDIES

REMEDIES
OF THE
GOVER
NMENT
I.
II.
1.
2.

Assessment
Collection
Judicial
a. Civil
b. Criminal
Administrative
a. Tax lien;
b. Distraint of personal property, or
levy of real property or garnishment
of bank deposits
c. Sale of property
d. Forfeiture
e. Compromise and Abatement
f. Penalties and Fines
g. Suspension of Business Operations
h. Informers Reward

REMEDIES
OF THE
TAXPAY
ER
I.

Before Payment
1.
2.

II.

Administrative Remedies
a. Protest Against Assessment
b. Entering into a Compromise
Judicial Remedies
a. Appeal to the CTA up to the
Supreme Court

After Payment

Administrative Remedies
Claim for Tax Refund or Tax Credit

REMEDIES OF THE
GOVERNMENT
The Code provides the Government with two
remedies, namely:
1. Assessment; and
2. Collection
TWO
KINDS
COLLECTION
1.

OF

ASSESSMENT

AND

Normal or Ordinary Assessment and

Collection (Sec. 203, NIRC) Available to the
Government if there was a return filed by the
taxpayer and such return is not false or
fraudulent.
Prescriptive Period for Assessment: At
anytime within three (3) years.

a.
b.

c.

After the last day prescribed by law for

the filing of the return; or
Where a return is filed beyond the
period prescribed by law, the three year
period shall be counted from the day the
return was filed; or
Where the return was filed before the
last day prescribed by law for the filing
thereof, it shall be considered as filed on
such last day.

The Government has two remedies (options)

under abnormal assessment and collection:
a. Assess and collect; or
b. Collection without assessment
Prescriptive Period for Assessment:
Within ten (10) years from the discovery of
the non-filing of the return or the fraudulent
or false return.
Prescriptive Period For Collection: Five
(5) years from the date of final assessment.

Prescriptive Period for Collection: The Tax

Code does not provide for a prescriptive
period for the collection of taxes under
Section 203.
There are two views regarding the
prescriptive period for collection:
a. 1st VIEW. Five (5) years from final
assessment. Under the old Code, the
prescriptive period for both normal and
abnormal is three (3) years. Under the
new Code, the prescriptive period for
abnormal is five years, hence, it can be
concluded that the prescriptive period
for normal is also five years. (Sababan,
Taxation Law Review 2008 ed., p. 182)
b. 2nd VIEW. Within three (3) years from
the issuance of an assessment notice
where there was a return filed. The five
(5) year period refers to an instance
where there is an assessment issued on
the basis of false or fraudulent return,
the absence of a return (Sec. 222 (c) in
relation to Sec. 222 (a) of the NIRC of
1997) or in the instance of an extended
assessment under Sec. 222 (d). The
interpretation should be in favour of the
taxpayer, providing for a shorter period
of three (3) years from the issuance of
an assessment, because the five (5)
year period places a law-abiding
taxpayer in the same category as one
who is not law-abiding, i.e. who files a
false or fraudulent return, who does not
file a tax return, etc. (Domondon, Bar
reviewer in Taxation Vol. 1, 2008ed. Pp.
414-415)
2.

Abnormal or Extraordinary Assessment

and Collection (Sec. 222, NIRC) This
remedy is resorted to by the Government in
cases where:
a.
The taxpayer omits or fails to
file his return; or
b.
The taxpayer filed a return but
the retun was fraudulent; or
c.
The return filed by the taxpayer
was false.

Collection without Assessment

When the government opts to collect without
assessment, there would be no prescriptive
period for assessment. The prescriptive
period for collection, in this case, shall be
ten (10) years from the discovery of the nonfiling of the return or the fraudulent or false
return.
Can the BIR just collect without
assessment? This was answered by the
Supreme Court in the Fortune Tobacco case
where it was held that the BIR can avail of
the remedy of collection without assessment.
The BIR is allowed to exercise that option.
(Sababan, p. 183)
Grounds for suspension of the running of the
status of limitations (Sec. 223, NIRC) (PRA
PO)
1. When the CIR is Prohibited from making the
assessment or beginning the distraint or levy
or a proceeding in court, AND for sixty (60)
days thereafter;
2.

When the taxpayer requests for a

Reinvestigation which is granted by the CIR;
NOTE: The only agreement that can
suspend the running of the prescriptive
period for collection of taxes is a WRITTEN
agreement by TP and CIR before the
expiration of the 5-year period, extending the
period of limitation prescribed by law
(Mamalateo, Tax Reviewer)
Why does a request for reinvestigatoi and
not one for reconsideration toll the
running of the Statute of Limitations?
The former, which entails reception and
evaluation of additional evidence, will take
more time than the latter, which will be
limited to the evidence already at hand (CIR
vs. Philippine Global Communications, G.R.
No. 167146, Oct 31, 2006)

3.

When the taxpayer cannot be located in the

Address given by him in the return, UNLESS
he informs the CIR of any change in his
address.

4.

When the warrant of distraint or levy is duly

served, AND no Property is located; and

5.

When the taxpayer is Out of the Philippines

(Sec. 223, 1997 NIRC).
I.
ASSESSMENT

ASSESSMENT a finding by the taxing authority

that the taxpayer has not paid the correct taxed.
It is also a written notice to a taxpayer to the
effect that the amount stated therein is due as a
tax and containing a demand for the payment
thereof.
General rule: Taxes are self-assessing and thus,
do not require the issuance of an assessment
notice in order to establish the tax liability of a
taxpayer
Exceptions:
1. Tax period of a taxpayer is terminated
[Sec. 6(D), NIRC]
2. Deficiency tax liability arising from a tax audit
conducted by the BIR [Sec. 56(B), NIRC]
3. Tax lien [Sec. 219, NIRC]

4.

Dissolving corporation [Sec. 52(c), NIRC]

KINDS OF ASSESSMENT (SIDE-J)

1. Self-Assessment one in which the tax is
assessed by the taxpayer himself.
2. Deficiency Assessment made by the tax
assessor himself whereby the correct
amount o the tax is determined after an
examination or investigation is conducted.
3. Illegal and Void Assessment tax
assessor has no power to assess at all.
4. Erroneous Assessment - assessor has
power to assess but errs in the exercise
thereof.
5. Jeopardy Assessment is a tax
assessment made by an authorized
Revenue Officer without the benefit of
complete or partial audit, in light of the ROs
belief that the assessment and collection of a
deficiency tax will be jeopardized by delay
caused by the taxpayers failure to:
a.
Comply
with
audit
and
investigation requirements to present his
books of accounts and/or pertinent
records, or
b.
Substantiate all or any of the
deductions, exemptions or credits
claimed in his return.
MEANS EMPLOYED IN THE ASSESSMENT OF
TAXES

The Commissioner or his duly authorized

representative is authorized to use the following
powers to make assessment 9Sec. 6. NIRC):
1. Examination of return and determination of
tax due;
2. Use of best evidence obtainable
a.
When a report or return
required to be filed shall not be
forthcoming within the time fixed by
laws, rules and regulations;
b.
When there is a reason to
believe that any such report or return is
false, incomplete or erroneous;
Best Evidence Obtainable any data,
record, papers, documents, or any evidence
gathered by internal revenue officers from
government offices/agencies, corporations,
employees, clients, patients, tenants,
lessees, vendees and from all other sources
with whom the taxpayer had previous
transactions or from whom he received any
income 9Aban, 2001, p. 182)
3. Authority to conduct inventory taking,
surveillance and prescribe gross sales and
receipts if there is reason to believe that the
taxpayer is not declaring his correct income,
sales or receipts for internal revenue
purposes
4. Authority to terminate taxable period in the
following instances;
a.
Taxpayer is retiring from
business subject to tax;
b.
Taxpayer is intending to leave
the Philippines or to remove his property
therefrom or to hide or conceal his
property; and
c.
Taxpayer is performing any act
tending to obstruct the proceedings for
the collection of taxes.
5. Authority to prescribe real property values;
6. Authority to inquire into bank deposit
accounts in the following instances;
a.
A decedent to determine his
gross estate;
b.
Any taxpayer who has filed an
application for compromise of his tax
liability by reason of financial incapability
to pay his tax liability.
7. Authority to accredit and register tax agents;
8. Authority to prescribe additional procedural
or documentary requirements.

ASSESSMENT
PROCESS
Procedure in the Issuance of a Deficiency Tax
Assessment

[Sec. 228; Revenue Regulation 12-99]

I.

Special Investigation Division (in

case of Revenue Regional Office)
or to the Chief of Division (in case
of the BIR National Office) for
review.
NOTE: A Revenue Officer is
allowed only 120 days from the
date of receipt of a LA by the
taxpayer, to conduct the audit and
submit the required report of
investigation. If the Revenue Officer
is unable to submit his final report
of investigation, he must then
submit a Progress Report to his
Head of Office and surrender the
LA for revalidation.

Issuance of a Letter of Authority (LA).

LETTER OF AUTHORITY an official
document that empowers a Revenue Officer
to examine and scrutinize a taxpayers books
of accounts and other accounting records, in
order to determine the taxpayers correct
internal revenue tax liabilities.
Who may issue a letter of authority?
1. After a return has been filed, the CIR or
his duly authorized representative may
authorize the examination of the books
of any taxpayer and the assessment of
the correct amount of tax (Sec. 6,
NIRC).
2. The Revenue Regional Director shall
approve and sign all LAs for all audit
cases within his regional jurisdiction
a. cases involving civil or criminal tax
fraud falling under the jurisdiction of
the Tax Fraud
Division of the
Enforcement Service and;
b. policy cases under audit by Special
Teams in the National Office (RMO
36-99)
NOTE: It must be served to the
concerned taxpayer within 30 days
from its date of issuance otherwise,
it shall become null and void. The
taxpayer shall then have the right to
refuse the service of his LA unless
the LA is revalidated.
A tax return filed by a taxpayer may
be amended, revised or modified
within 3 years from date of such
filing; provided, that no notice for
audit, or investigation of such
return, statement or declaration or
letter of authority for investigation
has been actually served upon him
(Sec. 6, NIRC; R.R. No. 12-99).

II.

The Revenue Officer conducts audit

or tax investigation
1. If the Revenue Officer does not find any
deficiency taxes audit ends;
2. If the Revenue Officer finds that there is
a deficiency he informs the taxpayer
and writes in his report whether or not
the taxpayer is amenable with his
findings.
a. If taxpayer is AMENABLE
taxpayer pays the tax;
b. If taxpayer is NOT AMENABLE
The Revenue Officer shall state in
his audit report that the taxpayer
does not agree with his findings.
Such report is submitted to the
Revenue District Officer or the

III.

In case the taxpayer disputes the

audit report, the Revenue District Officer
shall inform the taxpayer in writing of the
discrepancies for the purpose of an
INFORMAL CONFERENCE.
NOTICE OF INFORMAL CONFERENCE It
is a written notice informing a taxpayer that
the findings of the audit conducted on his
book of accounts and accounting records
indicate that additional taxes of deficiency
assessment have to be paid.
NOTE: The taxpayer shall have 15 days from
the date of receipt of the notice of informal
conference to explain his side.
1. If the taxpayer responds within 15 days,
and informal conference will be held.
2. If the taxpayer does not respond, the
taxpayer shall be considered in default.
The RDO shall indorse the case to the
Assessment Division of the Revenue
Regional Officer or the Commissioner for
Review.

IV.

Review of the Assessment Division /

Commissioner
1. If there is no sufficient basis for
assessment case shall be dismissed;
2. If there is basis for the assessment a
Preliminary Assessment Notice (PAN)
shall be issued

V.

Issuance
of
a
Assessment Notice (PAN)

Preliminary

PRELIMINARY ASSESSMENT NOTICE

(PAN) a communication issued by the
Regional Assessment Division, or any other
concerned BIR office, informing a taxpayer
who has been audited of the findings of the
Revenue Officer, following a review of these
findings.
NOTE: The taxpayers shall be informed in
writing of the law and the facts on which the

assessment is made, otherwise the

assessment shall be void. (Sec. 228, NIRC)

Letter of Demand and Assessment Notice

(FAN) shall be issued by the Commissioner.

Reason: To give the taxpayer the

opportunity to refute the findings of the
examiner and give a more accurate and
detailed
explanation
regarding
the
assessment(s). [Sony Philippines vs.
Commissioner of Internal Revenue CTA
Case No. 6185, October 26, 2004, citing
various cases.]

The taxpayers shall be informed in writing of

the law and the facts on which the
assessment is made, otherwise the
assessment shall be void. (Sec. 228)

The BIR may opt to issue a PAN once or

twice from which the taxpayer shall have 15
days from receipt thereof to file a letter
contesting the proposed assessment. These
protests are different from the administrative
protests of request for reinvestigation/
reconsideration which may only be taken
from a Final Assessment Notice or FAN (may
refer to the case of Telesat Inc. vs. CIR, CTA
case No. 6812, January 2, 2006)
If the taxpayer fails to respond within 15
days from date of receipt of the PAN, he
shall be considered in DEFAULT in which
case, a formal letter of demand and
assessment notice shall be caused to be
issued by said Office.
A PAN is not required in the following:
(METER)
1. When the finding for any deficiency tax
is the result of Mathematical error in the
computation of the tax as appearing on
the face of the return;
2. When a discrepancy has been
determined between the Tax withheld
and the amount actually remitted by the
withholding agent;
3. When a taxpayer who opted to claim a
Refund or tax credit of excess creditable
withholding tax for a taxable period was
determined to have carried over and
automatically applied the same amount
claimed against the estimated tax
liabilities for the taxable quarter or
quarters of the succeeding taxable year;
4. When the Excise tax due on excisable
articles has not been paid; or
5. When an article locally purchased or
imported by an Exempt person, such as,
but not limited to, vehicles, capital
equipment, machineries and spare
parts, has been sold, traded or
transferred to non-exempt persons.
VI.

Issuance of a Formal Letter of

Demand and Assessment Notice (FAN)
If the taxpayer was not able to refute the
findings in PAN or if he is in default, a Formal

Remedies of the Taxpayer:

1. Protest the Assessment; or
2. If the taxpayer does nothing The
assessment becomes final, executory,
demandable and not appealable to the
Court of Tax Appeals.

VII. Collection of Taxes

II
COLLECTION OF TAXES
DELINQUENCY TAX VS. DEFICIENCY TAX
A taxpayer is considered delinquent in the
payment of his tax when:
1. The self-assessed tax per return filed by the
taxpayer on the prescribed date was not paid
at all or only partially paid;
2. The deficiency tax assessed by the BIR
became final and executory.
The term deficiency means:
1. The amount by which the tax imposed by law
as determined by the Commissioner of his
authorized representative exceeds the
amount shown as tax by taxpayer upon his
return;
2. If no amount is shown as tax by the taxpayer
upon his return or if no return is made by the
taxpayer, then the amount by which the tax
as determined by the Commissioner or his
authorized representative exceeds the
amounts previously assessed (or collected
without assessment as a deficiency.
Distinction
between
remedies
in
the
collection of deficiency tax and delinquent tax

DELINQUENCY
TAX

DEFICIENCY TAX

Delinquency tax can be

immediately
collected
administratively through
the issuance of a
warrant of distraint and
levy,
and/or
judicial
action.

Deficiency tax can be

collected
also
through
administrative and/or
judicial remedies but
has to go through the
process of filing the
protest
by
the
taxpayer against the
assessment ad the
denial of such protest

by the BIR.
The filing of a civil action
for the collection of the
delinquent tax in the
ordinary court is a proper
remedy.

A delinquent tax is
subject to administrative
penalties such as 25%
surcharge, interest, and
compromise penalty

The filing of a civil

action at the ordinary
court
for
the
collection
of
a
deficiency tax during
the
pendency
of
protest may be the
subject of a motion to
dismiss. In addition to
a motion to dismiss,
the taxpayer must file
a petition for review
with the CTA to toll
the running of the
prescriptive period.
A deficiency tax is
generally not subject
to
the
25%
surcharge, although
subject to interest
and
compromise
penalty.

DISTRAINT
AND
LEVY
DISTRAINT
Personal property

Real property

Distraint is effected
by the seizure of the
goods, chattels or
effects.

Notice
Sale

The notice of the

sale
shall
be
exhibited in not less
than 2 public places
in the municipality or
city
where
the
distraint was made.
(One
place
of
posting is the Office
of the Mayor

Levy shall be
effected
by
writing upon the
duly
authenticated
certificate the
description of
the
property
upon which the
levy is made
and AT THE
SAME
TIME,
written notice of
the levy shall
be mailed to or
served
upon
the Register of
Deeds
and
upon
the
taxpayer.
Within 20 days
after the levy,
the
real
property will be
advertised for
sale
for
a
period of at
least 30 days.
The
advertisement
shall
be
effected
by
posting a notice
at the main
entrance of the
municipal
building or city
hall and in a
public
and
conspicuous
place in the
barrio or district
in which the
real estate lies
and publication
once ever week
for
3
consecutive
weeks in a
newspaper of
general
circulation.

ADMINISTRATIVE REMEDIES
ENFORCEMENT OF TAX LIEN
Tax Lien is understood to denote a legal claim
or charge on property, either real or personal, as
security for the payment of some debt or
obligation.
When a taxpayer neglects or refuses to pay his
internal revenue tax liability after demand, the
amount so demanded shall be a lien in favour of
the government from the time the assessment
was made by the Commissioner until paid with
interest penalties and costs that may accrue in
addition thereto upon all property and rights to
property belonging to the taxpayer.
When does the lien in favour of the
Government arise?
1. With respect to personal property from the
time the tax became due and payable;
2. With respect to real property from the time
of registration with the Register of Deeds
Lien shall not be valid against any mortgagee
purchaser or judgment creditor until notice of
such lien shall be filed by the Commissioner in
the office of the Register of Deeds of the province
or city where the property of the taxpayer is
situated or located. [ Sec. 219, NIRC ]

LEVY

As to the
properties
covered
How it is
effected

of

Forfeiture of
the
Government
Right
of
Redemption

Right of Preemption

Forfeiture by the
government is not
provided
The taxpayer is not
given the right of
redemption
with
respect to distrained
personal property.

With right of preemption

Forfeiture
authorized

prepare a list of theproperty and in the

presence of two (2) witnesses leave a
copy thereof in the premises where the
property distrained is located. [Sec. 206,
NIRC]

is

The right of
redemption is
granted in case
of real property
levied upon and
sold,
or
forfeited to the
government.
With right of
pre-emption

2.

Distraint of Intangible Properties

Intangible properties which can be the
subject of distraint are: (1) stocks and other
securities; (2) debts and credits; (3) bank
accounts.
GARNISHMENT the taking of personal
properties, usually cash or sums of money,
owned by a delinquent taxpayer which is in
the possession of a third party
Stocks and securities shall be distrained by
serving a copy of the warrant of distraint
upon the taxpayer and upon the president,
manager, treasurer, or other responsible
officer of the corporation, company or
associateion, which issued the said stocks or
securities
Debts and Credits shall be distrained by
leaving with the person owning the debts or
having in his possession or under his control
such credits, or his agent, a copy of the
warrant of distraint.
Bank account shall be garnished by serving
a warrant of garnishment upon the taxpayer
and upon the president, manager, treasurer,
or other responsible officer of the bank.

3.

Actual Distraint resorted to when at the

time required for payment, a person fails to
pay his delinquent tax obligation. [Sec. 207
(A)]. Distraint consists in the actual seizure
and taking possession of personal property
of the taxpayer.

Distraint of
Proper
ty
Distraint is a remedy whereby the collection
of delinquent taxes is enforced on the goods,
chattels or effects and other personal
property of whatever character of the
taxpayer, including stocks and other
securities, debts, credits, bank accounts and
interests in and rights to personal property.
1.

Constructive Distraint issued where no

actual tax delinquency of the taxpayer is
necessary before the same is resorted to by
the government. It is issued in the following:
a. When the taxpayer is retiring from any
business subject to tax;
b. When the taxpayer is intending to leave
the Philippines;
c. When the taxpayer is intending to
remove his property from the Philippines
or to conceal the same;
d. When the taxpayer is intending to
perform any act tending to obstruct the
proceedings for collecting the tax due or
which may be due from him.
How is constructive distraint effected?
a. It is effected by requiring the
taxpayer or any person having
possession or control of such
property to sign a receipt covering
the property distrained and obligate
himself to preserve the same intact
and unaltered and not to dispose of
the same in any manner whatever
without the express authority of the
Commissioner.
b. In case the person refuses or fails to
sign the receipt the revenue officer
effecting the constructive distraint shall

Procedure for
Actual
Distraint
I.

Commencement of
Distraint Proceedings

Who can
comme
nce
distrai
nt
procee
dings?
1.
2.

II.

Commissioner or his duly authorized

representatives where the amount involved
is in excess of P 1 million;
Revenue District Officer where amount
involved is less than P 1 million.

Service of Warrant of
Distraint

How is
actual
distrai
nt
effecte
d?
By actual distraint, the personal property of the
taxpayer is physically taken by the distraining
officer.

III.

Report on the
distraint

Shall be submitted by the distraining officer

to the Revenue District Officer and to the
revenue Regional Director within 10 days
from receipt of warrant.
The Commissioner or his duly authorized
representative has the power to lift the order
of distraint.

IV. Notice of Sale of

Distrained Properties
Requirements of Notice:
1. Notice shall specify the time and place of
sale and the articles distrained;
2. The time of sale shall not be less than 20
days after notice to the owner or possessor
of the property and publication or posting of
such notice; and
3. The posting shall be made in not less than
two (2) public places in the city or
municipality where the distraint is made. One
place for posting of such notice is at the
Office of the Mayor of such city or
municipality in which the property is
distrained (Sec. 209, NIRC).

V.

Sale at Public
Auction

Rules
Govern
ing
Sale
1.
2.
3.

4.

Sale must be held at the time and place

stated in the notice.
It may be conducted by the revenue officer
(RO) OR through a licensed commodity or
stock exchange.
If the sale is conducted by Revenue Officer,
it must be held at a public auction and the
property shall be sold to the highest bidder
for CASH.
If sale is through a licensed commodity or
stock exchange, it must be with the approval
of the CIR.

5.

6.

7.

In case of stocks and other securities, the

officer making the sale shall execute a BILL
of SALE, which shall be delivered to the
buyer and to the corporation, company or
association (CCA) which issued the stocks
or other securities.
Upon receipt of the copy of the bill of sale an
entry of transfer should be made in the
CCAs book and a corresponding certificate
of stock shall be issued if required.
any RESIDUE over and above what is
required to pay the entire claim including
expenses shall be RETURNED to the owner
of the property sold.
Expenses chargeable upon seizure shall
include only those actual expenses of
seizure and preservation of the property
pending the sale and does not include
services of the RO.
The Officer making the sale shall make a
written report of the proceedings to the CIR
within 2 days after the sale (Sec. 211,
NIRC).

RIGHT OF PRE-EMPTION If at any time prior to

the consummation of the sale, ALL proper
charges are paid to the officer conducting the
sale, all the distrained properties shall be
restored to the owner (Sec. 210, NIRC).
Purchase by the government at sale upon
distraint (Sec. 212, NIRC)
The Commissioner or his deputies may purchase
in behalf of the national Government for the
amount of taxes, penalties and cost due thereon
when the amount bid for the distrained property
ins:
1. NOT equal to the amount of tax; or
2. Very much LESS than the actual market
value of the property offered for sale.
Property so purchased may be resold by the CIR
or his deputy; the net proceeds shall be remitted
to the National Treasury and accounted as
Internal Revenue.

Levy of
Real
Proper
ty

Levy is a remedy whereby the collection of

delinquent taxes is enforced in the real property
belonging to the delinquent taxpayer.

When may
levy be
effecte
d?
Real Property may be levied upon before,
simultaneously, or after the distraint of personal
property belonging to the delinquent taxpayer
[Sec. 207 (B), 1997 NIRC]; and the remedy by
distraint and levy may be repeated if necessary
until the full amount, including all expenses, is
collected (Sec. 217, 1997 NIRC).
Procedure for Levy
I.

Issuance of Warrant of Levy

Preparation of a duly authenticated certificate

containing: (DNA)
1. Description of the property levied;
2. Name of the taxpayer, and
3. The Amount of tax and penalty due from him
This certificate shall operate with the force of
a legal execution throughout the Philippines
(Sec. 207 (B), 1997 NIRC).

II.

Service of the
Warrant

How is levy
effecte
d?
Levy shall be effected by writing upon the
certificate, a description of the property upon
certificate, a description of the property upon
which levy is made. At the same time, written
notice of the levy shall be mailed or served upon:
1. The Register of Deeds of the province or city
where the property is located; and

2.

Upon the delinquent taxpayer, or if he is

absent from the Philippines, to his agent or
the manager of the business in respect to
which the liability arose, or if there be none,
or the occupant of the property in question.

NOTE: In case the warrant of levy is NOT issued

before or simultaneously with the warrant of
distraint AND the personal property of the TP is
NOT sufficient to satisfy his tax delinquency, the
CIR or his authorized representative shall, within
30 days after the execution of the distraint,
PROCEED with the levy on TPs real property
[Sec. 207 (B), NIRC]

III.

be turned over to the owner of the

property

V.

Redemption of
Property

1.
2.

Period within 1 year from the date of sale

Who may redeem the delinquent taxpayer
or any one for him
To whom made to the Revenue District
Officer
How made upon payment of the taxes,
penalties and interest thereon from the date
of delinquency to the date of sale, together
with interest on purchase price at 15% per
annum from the date of sale to the date of
redemption. (Sec. 214, NIRC)

The owner shall not be deprived of the

possession of said property and shall
be entitled to the rent and other income
thereof until the expiration of the time
allowed for its redemption.

3.
4.

Advertisement of the
Sale

The advertisement shall contain:

1. Amount of tax and penalties due
2. Time and Place of sale
3. Name of the taxpayer against whom taxes
are levied; and
4. Short Description of the property to be sold.
The advertisement shall be made within 20 days
after the levy, and the same shall be for a period
of at least 30 days.
It shall be effectuated by: (P2)
1. Posting a notice at the main entrance of the
municipal building or city hall and in a public
and conspicuous place in the barrio or
district in which the real property lies; and
2. Publication once a week for 3 weeks in a
newspaper of general circulation in the
municipality or city where the property is
located (Sec 213, NIRC)

IV. Public Sale of

Property under Levy

If taxpayer does not pay his taxes,

penalties and interest before the day
fixed for the sale, the sale shall proceed
and shall be held either at the main
entrance of the municipal building or city
hall, or on the premises to be sold, as
the officer conducting the proceedings
shall determine and as the notice of sale
shall specify
The taxpayer may discontinue all the
proceedings by paying the taxes,
penalties and interest.
A CERTIFICATE OF SALE shall be
delivered to the purchaser.
If the proceeds of the sale exceed the
claim and cost of sale, the excess shall

Effects of
redem
ption
of
proper
ty sold
1.
2.

Such payment shall entitle taxpayer the

purchaser and a certificate from RDO that
he has redeemed the property.
The RDO shall pay the purchaser the
amount by which such property has been
redeemed and said property shall be free
from lien of such taxes and penalties (Sec.
214, NIRC).

VI. Further Distraint and

Levy
The remedy of distraint and levy may be
repeated if necessary until the full amount of the
tax delinquency due including all expenses is
collected from the taxpayer. Otherwise, a clever

taxpayer who is able to conceal most of the

valuable part of his property would escape
payment of his tax liability by sacrificing an
insignificant portion of his holdings (Sec. 217,
NIRC).
Forfeiture to the Government for Want of
Bidder
When would property be forfeited in favor of the
Government?
1. No bidder for real property;
2. The highest bid is for an amount insufficient
to pay the taxes, penalties and costs.

The Register of Deeds shall transfer title

to the Government upon registration
with his office of the DECLARATION OF
FORFEITURE.

One year fro forfeiture, the taxpayer

may redeem the property.

The Commissioner may sell the forfeited

real estate in a public or private sale.

Resale of
Real
Estate
Taken
for
Taxes
The Commissioner of Internal Revenue shall
have charge of any real estate obtained by the
Government in payment of taxes, penalties or
cost arising under this Code or in compromise or
adjustment of any claim.
The CIR may:
3. sell and dispose of the same at a public
auction upon giving of not less than 20 days
notice; or
4. dispose of the same at a private sale with
the approval of the Secretary of Finance
5. In either case, the proceeds of the sale shall
be deposited with the National Treasury and
an accounting of the same shall be rendered
to COA (Sec 216, NIRC).

FORFEITUR
E
Forfeiture is the divestiture of property without
compensation, in consequence of a default or
offense.

Enforceme
nt of
the
remed
y of
forfeit
ure
1.
2.

3.

4.

Seizure and Sale or destruction of specific

forfeited property in case of personal
property.
Judgment of condemnation and sale in a
legal action or proceeding, civil or criminal,
as the case may require, in case of real
property.
Destruction upon order by the Commissioner
where the sale may be injurious to public
health or prejudicial to law enforcement in
case of distilled spirits, liquors, cigars, and
cigarettes manufactured products of tobacco
and apparatus used for their production.
Sale or destruction a the discretion of the
CIR in case of other articles subject to excise
tax which have been manufactured or
removed in violation of the Code, dies for
printing or making fake revenue stamps and
labels.

Sale of forfeited chattels and removable

fixtures shall be effected in the same
manner and under the same conditions
as the public notice and the time and
manner of sale as are prescribed for
sales of distrained property.

Forfeited
property shall not be
destroyed until at least 20 days from
seizure (Sec. 225, NIRC)

2.
3.

The Register of Deeds shall transfer title of

forfeited property to the Government without
necessity of a court order.
Within 1 year from the date of sale, the
property may be redeemed by the delinquent
taxpayer or any one for him, upon payment
of the taxes, penalties and interest thereon
and cost of sale; if NOT redeemed within
said period, the forfeiture shall become
ABSOLUTE 9Sec. 215, NIRC).

Effect of
the
forfeit
ure of
proper
ty

COMPROMI
SE AND
ABATE
MENT

COMPROMISE

ABATEMENT

Involves a reduction of
the taxpayers liability

Involves
the
cancellation
of
the
entire tax liability of a
taxpayer
Officer authorized to
abate or cancel tax,
penalties
and/or
interest: CIR
Grounds:
1. The tax or any
portion
thereof
appears
to be
unjustly
or
excessively
assessed; or
2. The administration
and
collection
costs involved do
not
justify
the
collection of the
amount due.

The effect is to transfer the title to the

specific thing from the owner to the
government. All the proceeds in case of a
sale go to the coffers of the government
(U.S. vs. Surla, G.R. No. 6536, September
2, 1911).
In seizure for the enforcement of a tax
lien, the residue, after deducting the tax
liability and expenses will go to the taxpayer
(Bank of the Phil. Island vs. Trinidad, G.R.
No. 16014, October 4, 1941)

Rules
govern
ing
Forfeit
ure
1.

If there is no bidder in the public sale or if the

amount of the highest bid is insufficient to
pay the taxes, penalties and costs, the real
property shall be forfeited to the
Government.

Officers authorized to
compromise: CIR and
Regional
Evaluation
Board
Grounds:
1. Reasonable doubt
as to validity of
assessment; or
2. Financial
incapacity of TP

COMPROMISE a contract whereby the parties,

by making reciprocal concessions, avoid litigation
or put an end to one already commenced.

Courts may reject a compromise or

settlement when it is contrary to law, morals,
good customs, public order, or public policy.

The CTA may issue an injunction to prevent

the Government from collecting taxes under
a compromise agreement especially when
the agreement is prejudicial to the
government.

When Payment of Internal Revenue Taxes

may be Compromised

Definition: It means that the entire tax liability of

the taxpayer is cancelled.

1.

When REASONABLE DOUBT as to the

validity of the claim against the taxpayer
exist.
MINIMUM COMPROMISE RATE: 40% of the
basic tax assessed

Grounds:
1. the tax or any portion thereof appears to be
unjustly or excessively assessed; or
2. the administration and collection costs
involved do not justify the collection of the
amount due.

2.

When the FINANCIAL POSITION of the

taxpayer demonstrates a clear inability to
pay the assessed tax
MINIMUM COMPROMISE RATE: 10% of the
basic tax assessed

When Compromise must be Approved by the

Evaluation Board (Commissioner and 4
Deputies)
1. If the basic tax involves exceeds P 1 million
2. The settlement offered is less than the
prescribed minimum rates

Compromis
e in
Crimin
al
Violati
ons
General Rule: Criminal violations may be
compromised
Exceptions:
1. Those already filed in court.
2. Those involving fraud.

ABATEMEN
T
(also see.
Program)

R.R.

No.

15-2006

Abatement

Instances when the tax liabilities, penalties

and/or interest imposed on the taxpayer may
be abated on the ground that the imposition
thereof is unjust or EXCESSIVE (WESIBLO)
1. Filing of the return/ payment of tax at the
Wrong Venue;
2. TP;s mistake in payment of tax is due to
Erroneous written official advice of a
Revenue Officer
3. TPs failure to file the return and pay the tax
on time is due to Substantial losses from
prolonged labor dispute, force majuere,
legitimate business reverses such as labor
strike for more than 6 months which has
caused temporary shutdown of business,
natural calamity, public turmoil etc., Provided
that the abatement shall cover only the
surcharge and the compromise penalty and
not the interest imposed under Sec. 249,
NIRC;
4. Assessment resulted from TPs noncompliance with the law due to a difficult
Interpretation of sail law;
5. TPs failure to file the return and pay the
correct tax on time due to circumstances
Beyond
his
control;
Provided,
that
abatement shall cover only the surcharge
and the compromise penalty but not the
interest;
6. Late payment of tax under meritorious
circumstance; (ex. Failure to beat bank cutoff time, surcharge erroneously imposed,
use of wrong tax form but correct tax
amount)
7. Other similar or analogous cases
Instances when the tax liabilities, penalties
and/or interest imposed on the taxpayer may
be abated on the ground
that tax
administration and collection cost are more
than the amount sought to be collected:
(AWARD)
1. Abatement of penalties on assessment
confirmed by the lower court but Appealed
by TP to a higher court;
2. Abatement of penalties on Withholding tax
assessment
under
meritorious
circumstances;
3. Abatement of penalties on Delayed
installment payment under meritorious
circumstances;

4.
5.

Abatement of penalties on assessment

reduced after Reinvestigation but TP is still
contesting reduced assessment; and
Other Analogous instances.

I.

PENALTIES
Enforceme
nt of
Surcha
rges
and
interes
t

2.

3.

4.

II.

It shall be imposed in addition to the basic tax

required to be paid:

Failure to file any return and pay the tax

due thereon as required under the
provisions of this Code or rules and
regulations on the date prescribed;
Unless otherwise authorized by the
Commissioner, filing a return with an
internal revenue officer other than those
with whom the return is required to be
filed;
Failure to pay the deficiency tax within
the time prescribed for its payment in
the notice of assessment; or
Failure to pay the full or part of the
amount of tax shown on any return
required to be filed under the provisions
of this Code or rules and regulations, or
the full amount of tax due for which no
return is required to be filed, on or
before the date prescribed for its
payment (Sec. 248, NIRC).

50% surcharge
1.

On case of willful neglect to file the

return within the period prescribed by
the Code it will not apply in case a
taxpayer, without notice from the
Commissioner, or his duly authorized
representative, voluntarily files the said
return (only 25% shall be imposed)
50% surcharge shall be imposed in case
the taxpayer files the return only after
prior notice in writing from the
Commissioner or his duly authorized
representative (Sec. 42, R.R. No. 12-99)
2. In case a false or fraudulent return is
willfully made

Definition: increments to the basic tax incident to

the taxpayers non-compliance with certain legal
requirements.

Civil
Penalt
y/
Surcha
rge

25% surcharge
1.

Prima Facie evidence of false or

fraudulent return
1. substantial
under-declaration
(exceeding 30% of that declared) of
taxable sales, receipts or income; or
2. or a substantial overstatement
(exceeding 30% of actual deductions) or
deductions (Sec. 248, NIRC)
COMPROMISE PENALTY a certain amount of
money which the taxpayer pays to compromise a
tax violation. It is paid in lieu of a criminal
prosecution.

Compromise penalty may not be imposed in

the absence of showing that the taxpayer
consented thereto.
In case the taxpayer reneges on his
conformity to the payment of the suggested
compromise the Commissioner may NOT
collect the compromise penalty thru an
action in court or by distraint and levy. This is

because compromise penalty is neither a tax

no an administrative penalty for tax
delinquency.
The
remedy
o
the
Commissioner is to file a criminal action
against the taxpayer for the tax violation.
INTEREST: 20% per annum or such higher rate
as may be prescribed by the rules and
regulations
1.

Deficiency interest (Sec. 249[B]) The

interest assessed and collected on any
unpaid amount of tax.
20% interest per annum or such higher rate
assessed and collected from the date
prescribed for its payment until the full
payment thereof.

2.

Delinquency interest (Sec. 249 [C])

In case of failure to pay:
a. the amount of tax due on any return
required to be filed;
b. the amount of tax due for which no
return is required to be filed
c. 20% interest per annum or such higher
rate prescribed on the unpaid amount in
case of failure to pay a deficiency tax or
any surcharge or interest thereon

3.

Interest on Extended Payment (Sec. 249

[D])
20% interest per annum or such higher rate
as may be prescribed on the tax or
deficiency tax or any part unpaid if: a person
required to pay tax elects to pay on
installment but fails to pay the tax or
installment; or the CIR has authorized an
extension of time within which to pay a tax,
deficiency or part thereof.

SUSPENSIO
N OF
BUSINE
SS
OPERA
TIONS

The Commissioner or his authorized

representative may suspend the business
operation and temporarily close the business
of
a
VAT-registered
person
for
understatement of taxable sales or receipts
by 30% or more of his correct taxable sales
or receipts for the taxable quarter.
The duration of the temporary closure shall
be for a period of not less than 5 days and
shall be lifted only upon compliance of
whatever requirements imposed by the
Commissioner in the collection order (Sec.
115 NIRC).

INFORMERS REWARD (Sec. 282, NIRC)

For violations of the NIRC, a reward of 10% of
the revenues, surcharges, or fees recovered
and/or fine or penalty imposed and collected or
P1M per case, whichever is lower, shall be given
to:
1. Any person who voluntarily gives definite
and sworn information not yet in the
possession of the BIR leading to the
discovery of fraud upon the internal
revenue Laws and/or any violations
thereof; or
2. An informer where the offender has offered
to compromse the violation of law committed
by him and his offer has been accepted and
collected by the CIR. This excludes an
Internal Revenue Officer/ employee or other
public official/ employee, or his relative within
the sixth degree of consanguinity
NOTE:

This shall not refer to a case already pending

or examined by the CIR.

For the discovery and seizure of smuggled

goods a reward of 10% of the FMV of the
smuggled and confiscated goods or P1M per
case, whichever is lower, shall be given to
persons instrumental in the discovery and
seizure of such smuggled goods.

This does not apply to all public officials

whether incumbent or retired, who acquired
the information in the course of performance
of their duties during their incumbency.

JUDICIAL
REMEDIES

CIVIL
ACTIO
N
Definition: for tax remedy purposes, these are
actions instituted by the government to
COLLECT internal revenue taxes including the
filing by the government of claims against the
deceased taxpayer with the probate court.
Two ways to enforce civil liability through civil
actions:
1. By filing a civil case for collection of a sum of
money with proper regular court; or
2. By filing an answer to the petition for review
filed by TP with CTA.

When
resorte
d to?
1.

2.

3.

When a tax is assessed and the assessment

becomes final and unappealable because
the taxpayer fails to file an administrative
protest with the CIR within 30 days from
receipt; or
When a protest against assessment is filed
and a decision of the CIR was rendered but
the said decision becomes final, executory,
and demandable for failure of the taxpayer to
appeal the decision to the CTA within 30
days from receipt of the decision.
When the protest is not acted upon within
180 days from submission of documents and
the taxpayer failed to appeal with the CTA
within 30 days from the lapse of the 180-day
period.

1.
2.
3.
4.

Civil actions shall be brought in the name of

the Government of the Philippines
It shall be conducted by legal officers of the
BIR.
No civil or criminal action for the recovery of
taxes shall be filed in court without the
approval of the Commissioner.
The approval of the CIR is essential in civil
cases. However, under Se. 7, 1997 NIRC,
the Commissioner may delegate such power
to a Regional Director. Further, the approval
by the Solicitor General for civil actions for
collection of delinquent taxes is required
before they are filed.

Jurisdiction:
1. Court of Tax Appeals where the principal
amount of taxes and fees, exclusive of
charges and penalties claimed is One million
pesos (P 1,000,000.00) and above.
2. Regional Trial Court, Municipal Trial
Court, Metropolitan Trial Court where
the principal amount of taxes and fees,
exclusive of charges and penalties claimed
is less than One Million pesos (Sec. 7, R.A.
No. 9282).
Defenses precluded by final and executory
assessments
1. validity or legality of the assessments; and
2. prescription of the Governments right to
assess.

CRIMINAL
ACTIO
N
Two Common Crimes Punishable under the
Tax Code
1. attempt to evade or defeat tax (Sec. 254,
NIRC)
2. failure to file return, supply correct and
accurate information, pay tax, withhold and
remit tax and refund excess taxes withheld
on compensation (Sec. 255, NIRC)

NOTE: Judicial action may be resorted to even

before assessment although impractical, as
stated in Sec. 203, 1997 NIRC and no
proceeding in court without assessment for the
collection of such taxes shall be instituted after
the expiration of such (3-year) period.

the judgment in the criminal case shall not only

impose the penalty but shall also order the
payment of taxes subject of the criminal case as
finally decided by the Commissioner (sec. 205,
NIRC).

Form and Mode of proceeding (Sec. 220,

NIRC)

Form and Mode of Proceeding (Sec. 220,

NIRC)
-same as Civil Action-

Jurisdiction:
1. Court of Tax Appeals on criminal offenses
arising from violations of the NIRC or TCC
and other laws administered by the BIR and
the BOC where the principal amount of taxes
and fees exclusive of charges and penalties
claimed is One mIllion pesos and above.
2. Regional trial Court, Municipal Trial
Court, Metropolitan Trial Court on
criminal offenses arising from violations of
the nIRC or TCC and other laws
administered by the BIR and the BOC,
where the principal amount of taxes and
fees, exclusive of charges and penalties
claimed is less than One million pesos or
where there is no specified amount claimed
(Sec. 7 RA No. 9282)

Important
Princip
les on
Crimin
al
Actions
1.

2.

Effect of acquittal of the taxpayer in a

criminal action
It does NOT necessarily result in the
exoneration of said taxpayer from his civil
liability to pay taxes.
Rationale: The duty to pay tax is imposed by
statute prior to and independent of any
attempt on the part of the tax payer to evade
payment. It is neither a mere consequence o
the felonious acts charged nor is it a mere
civil liability derived from a crime (Republic
vs. Patanao, GR No. L-14142, May 30,
1961)
The civil liability to pay taxes arises not
because of felony but upon taxpayers failure
to pay taxes. Criminal liability in taxation
arises as a result of ones liability to pay
taxes.
Effect of Subsequent Satisfaction of Civil
Liability
The subsequent satisfaction of civil liability
by payment or prescription DOES NOT
extinguish the taxpayers criminal liability.

3. No subsidiary Imprisonment
In case of insolvency on the part of the taxpayer,
subsidiary imprisonment CANNOT be imposed
as regards the tax which he is sentences to
pay. However, it may be imposed in cases of
failure to pay the fine imposed (Sec. 280, 1997
nIRC)
4. Criminal Action may be Filed during the
Pendency of an Administrative Protest in
the BIR
It is NOT a requirement for the filing thereof
that there be a precise computation and
assessment of the tax, since what is involved
in the criminal action is not the collection of
tax but a criminal prosecution for the
violation of the NIRC. Provided however, that
there is a prima facie showing of a willful
attempt to evade taxes or failure to file the
required return (see Ungab vs. Cusi, GR
Nos. L-41919-24, May 30, 1980, in relation
to Commissioner vs. Court of Appeals, GR
No. 119322, June 4, 1996, CIR vs. Pascor
Realty Development Corp., GR No. L128315, June 29, 1999).
Before anyone is prosecuted for willful
attempt to evade or defeat any tax, the fact
that a tax is due must first be proved.
5. Criminal action may be filed despite the
lapse of the period to file a civil action for
collection of taxes.
When the civil action arising from tax
delinquency has prescribed, the BIR has
only 5 years from assessment within which
to collect the tax through criminal action in
which case, would prescribe after lapse of 5
years from discovery of crime AND institution
of proceedings (Sec. 281, NIRC)

REMEDIES OF THE TAXPAYER

I.
BEFORE PAYMENT
ADMINISTRATIVE REMEDIES
1.

Protest
Protest As used in internal revenue
taxation, it is an act by the taxpayer of
questioning the validity of the imposition of
the corresponding delinquency increments
for internal revenue taxes as shown in the
notice of assessment and letter of demand.
The protest may be a:
a. Request for reconsideration a plea
for a re-evaluation of an assessment on
the basis of existing records without
need of additional evidence which may
involve a question of fact or law or both.

b.

Request for reinvestigation a plea

for the reinvestigation of the assessment
on the basis of the newly-discovered or
additional evidence that a taxpayer
intends to present in the reinvestigation.
It may also involve a question of law or
fact or both.

vi.

vii.
viii.

RECONSIDERATION

REINVESTIGATION

Involves
re-evaluation
of
assessment based on existing
records

Involves
presentation
of
newly-discovered or
additional evidence
It tolls the Statute of
Limitations

It does NOT toll the Statute of

Limitations

Requisites
of a
Valid
Protest
a.
b.

In writing
Addressed to Commissioner of Internal
Revenue;
c. It must be accompanied by a waiver of the
Statute of Limitations in favor of the
government.
NOTE: A request for reconsideration or
reinvestigation by the taxpayer without a valid
waiver of prescriptive period for the assessment
and collectionof tax, as required by the Tax Code
and implementing rules will not suspend the
running thereof. [Bank of the Philippine Islands
vs. Commissioner of Internal Revenue, G.R. No.
139736, October 17, 2005].
d. It must state the facts, applicable law, rules
and regulations or jurisprudence on which
his protest is based; otherwise, his protest
shall be considered void and without force
and effect on the event the letter of protest
submitted by the taxpayer is accepted;
e. It must contain the following:
i.
Name of the taxpayer and address for
the immediate past 3 taxable years;
ii.
Nature of the Request, specifying the
newly discovered evidence he intends to
present;
iii.
Taxable Periods covered by the
assessment;
iv.
Amount and kind of tax involved and the
assessment notice and number;
v.
Date of receipt of assessment notice or
letter of demand;

ix.

Itemized statement of the finding to

which the taxpayer agrees (if any) as
basis for the computation of the tax due,
which must be paid immediately upon
the filing of the protest;
Itemized schedule of the adjustments to
which the taxpayer does not agree;
Statements of facts or law in support of
the protest; and
Documentary evidence as it may deem
necessary and relevant to support its
protest to be submitted 60 days from the
filing thereof

Payment in
Protest
GENERAL RULE: No prior payment of assessed
internal revenue tax is required when protested
or disputed.
EXCEPTION: If there are several issues involved
in the FAN but the taxpayer only disputes or
protests against the validity of some of the issues
raised, the taxpayer shall be required to pay the
deficiency tax or taxes attributable tot the
undisputed issues. No action shall be taken on
the taxpayers disputed issues until the taxpayer
has paid the deficiency tax or taxes attributable to
the undisputed issues [Revenue Regulation 1299]. If the taxpayer does not pay, the disputed
issues shall be considered as undisputed.

Procedure
in
Protest
ing an
Assess
ment
I.

The Taxpayer shall file his Protest

Within 30 days from Receipt of the Final
Assessment.

If the taxpayer protest only to some of the

issues raised

The taxpayer must pay the deficiency

tax/taxes attributable to the undisputed
issues inclusive of interests and surcharges
before an action may be taken on the
disputed issues.

A collection letter shall be issued calling for

the payment of the said undisputed
deficiency tax.

In such case, the prescriptive period for

assessment or collection of the tax or taxes
attributable to the disputed issues shall be
suspended.
II.

Submission
of
All
Relevant
Supporting Documents Within 60 Days

1.

The 60 day period is counted from the filing

of the protest.
Non-submission of the documents renders
the assessment final, executory and
demandable.

2.

SUPPORTING DOCUMENT Such documents

which the taxpayer feels would be necessary to
support his protest and not what the
Commissioner feels should be submitted,
otherwise, taxpayer would always be at the
mercy of the BIR which may require production of
such documents which taxpayer could not
produce (Standard Chartered Bank vs. CIR, CTA
Case No. 5696, August 16, 2001).
III.

Administrative
Decision
Disputed Assessment

on

Protest is denied by the Commissioners

Authorized Representative taxpayer may
elevate the protest to the Commissioner
within 30 days from receipt of the decision
for a request for reconsideration and that his
case is referred to the Bureaus Appellate
Division. Otherwise, it becomes final and
appeal to the CTA may be taken.
NOTE: The authority to make tax
assessments may be delegated to
subordinate officers. Said assessment has
the same force and effect as that issued by
the CIR himself if NOT revised or reviewed
by the latter (Oceanic Network Wireless Inc.
vs. Commissioner of Internal revenue, G.R.
No. 148380 Dec. 9, 2005).
Failure to file a position paper that would
embody the grounds for reconsideration may
be construed as abandonment of request for
reconsideration (Oceanic Wireless Network
Inc. vs. CIR, supra).

If protest is Denied in Whole or in Part by

the Commissioner
Remedy: Appeal by the taxpayer to the CTA
within 30 days from receipt of decision;
OTHERWISE, the assessment shall become
final, executory and demandable: Provided,
however, that if the taxpayer elevates his
protest to the CIR within 30 days from date
of receipt of the final decision of CIR;s duly
authorized representative, the latters
decision shall NOT be considered final,
executory and demandable.
Failure to Act upon the Protest by the
Commissioner or His Duly Authorized
Representative within 180 days

180 days counted from the submission

by the taxpayer of the documents in
support of the protest.
In cases of inaction, the taxpayer has two (2)
options:
1. he may appeal to the CTA within 30
days from lapse of the 180 day period
provided for under Sec. 228 of the
NIRC; or
2. He may wait until the Commissioner
decides on his protest before he
elevates the case.
NOTE: These options are mutually exclusive
and resort to one bars the application of the
other
(Rizal
Commercial
Banking
Corporation vs. CIR, G.R. No. 168498. April
24, 2007)
Constructive Service of the decision
1. No response is received from the
taxpayer within the prescribed period
from date of the posting of the mall.
2. The decision is personally served on the
taxpayer or his duly authorized
representative,
who
refused
to
acknowledged receipt thereof.
3. By leaving the decision in the premises
of the taxpayer and this fact of
constructive service is attested to,
witnessed and signed by at least two
revenue officers other than the revenue
officer who constructively served the
same. The revenue officer who
constructively served the same shall
make a written report on the matter
which shall form part of the docket of the
case.
Forms of Denial
1. Direct denial of protest
a. By an administrative decision on a
disputed assessment the decision
of the Commissioner or his duly
authorized representative shall:

i.

ii.

2.

State the facts, the applicable

law, rules and regulations or
jurisprudence on which such
decision is based otherwise,
the decision shall be void, in
which case the same shall not
be considered a decision on a
disputed assessment and
That the same is his final
decision (Sec. 3.1 5, RR. No.
12-99)

Indirect denial of protest

a. Formal and final letter of demand
from the BIR to the taxpayer
i.
A final demand letter from the
Bureau of Internal Revenue,
reiterating to the taxpayer the
immediate payment of a tax
deficiency
assessment
previously made, is tantamount
to a denial of the taxpayers
request for reconsideration.
Such letter amounts to a final
decision
on
a
disputed
assessment and is thus
appealable to the Court of Tax
Appeals (CTA) (CIR vs. Isabela
Cultural Corp. G.R. No.
135210, July 11, 2001).
ii.
A formal letter of demand may
be considered a decision on a
disputed
or
protested
assessment. This is the reason
for the rule that the CIR should
ALWAYS indicate in clear and
unequivocal language what
constitutes
his
final
determination of the disputed
assessment. On the basis of
such statement, the aggrieved
taxpayer would be able to
determine when his right to
appeal to the tax court accrues
(Oceanic Wireless Network Inc.
vs. CIR, supra).
b. Civil collection can also be
considered as denial of protest of
assessment as held in the cases of
Yabes vs. Flojo G.R. No. 46954,
July 20, 1982 and BIR vs. Union
Shipping Corp G.R. No. 66160.
May 21, 1990.
c. Commissioner did not rule on the
taxpayers
motion
for
reconsideration of the assessment
it was only when respondent
received the summons on the civil
action for the collection of
deficiency income tax that the
period to appeal commenced to run
(Commissioner vs. Union Shipping

Corp. G.R. No. 66160. may 21,

1990.)
i.
Preliminary collection letter
may serve as assessment
notice (United International
Pictures vs. Commissioner
G.R. No. 110318 Aug. 28,
1996).
d. Issuance of warrant of distraint and
levy to enforce collection of
deficiency
assessment
is
tantamount to outright denial of the
request for reconsideration (Vicente
Hilado vs. CIR. CTA Case 1256.
Feb. 25, 1964).
Instances When Final Assessment Becomes
Final and Executory
1. Taxpayer fails to respond within 15 days
to the Preliminary Assessment Notice.
2. Taxpayer fails to file a valid protest
against the final notice of assessment
within 30 days from receipt (Dayrit vs.
Cruz G.R. No. L- 39910, September 26,
1988).
NOTE: A final notice or formal NOTICE of
assessment is different from a final and
executory assessment. The former is an
assessment that becomes final and
executory if no protest is filed within a period
of 30 days from its receipt (R.R. No. 12-99,
3.1.5, par. 4).
3. Taxpayer fails to appeal to CTA from the
adverse decision of the Commissioner
or his representative on the protest
within 30 days from receipt thereof.
EXCEPT if the protest is decided by the
Commissioers
representative
and
taxpayer
elevates
it
to
the
Commissioner, in which case, it is the
latters decision that becomes final and
executory if not appealed by the
taxpayer to the CTA.
4. If upon inaction on the protest by the
Commissioner or his representative
within 180 days from the submission of
the taxpayer of the supporting
documents, taxpayer fails to appeal to
the CTA within 30 days form the lapse of
the 180 day period which is counted
from the submission of the required
documents.
5. Taxpayer fails to appeal to the Supreme
Court from the adverse decision of the
CTA within 15 days.

JUDICIAL
REMED
IES
I.

Appeal to the Court of Tax Appeals

(Division) within 30 days from receipt of
decision on the protest or from the lapse of
180 days due to inaction of the
Commissioner otherwise it will be final and
executory (Sec. 228, NIRC)
NOTE: If the taxpayer chooses to wait for
positive action on part of theCommissioner,
then the same could not result in the
assessment becoming final executory and
demandable. To adopt the contrary theory
will not only sanction inefficiency, but will
likewise condone the Bureaus
inaction
(Lascona vs. CIR, CTA Case No. 5777, Jan.
4, 2000), which was not the intention of the
law.
Provided, further,t hat sould the taxpayer opt
to await the final decision of the CIR on the
disputed assessments beyond the 180-day
period abovementioned, the taxpayer may
appeal such final decision to the Court under
Section 3 (a), Rule 8 of these Rules (30 days
from receipt of the decision) (Revised Rules
of CTA, Rule 4, Sec. 3 (a)(2) A.M. No. 05-1107-CTA, Effective December 15, 2005).

II.

Appeal to the CTA en banc the party

adversely affected by the CTA Divisions
decision may file one motion for
reconsideration/new trial within 15 days from
receipt of the decision. If the MR is denied,
file a petition for review with the CTA en
banc.

III.

Appeal to the Supreme Court within

15 days from the receipt of the decision of
the CTA.

IV.

V.

By way of special civil action

Petition for certiorari, prohibition and
mandamus to the Supreme Court in cases of
grave abuse of discretion, lack of jurisdiction
or excess of jurisdiction.
Action to contest forfeiture of chattel,
at any time before the sale or destruction
thereof, to recover the same, and upon
giving proper bond, enjoin the sale; or after
the sale and within 6 months, an action to

recover the net proceeds realized at the sale

(Sec. 231, 1997 NIRC)
VI.

Action for damages against a revenue

officer by reason of any act done in the
performance of official duty (Sec 227, 1997
NIRC)

VII.

Injunction if collection may jeopardize

the interest of the government and/or the
taxpayer.

Effect of Failure to Appeal Assessment to the

Court of Tax Appeals:
1. The decision or assessment becomes final
and executory.
2. the taxpayer is barred in an action for the
collection of the tax by the government from
re-opening the question already decided;
3. The assessment is considered correct which
may be enforced by summary or judicial
remedies;
4. In a proceeding for collection of tax by
judicial action, the taxpayers defenses are
similar to those of the defendant in a case for
the enforcement of a judgment by judicial
action; and
5. The assessment which has become final and
executory cannot be superseded by a new
assessment.
II.
AFTER PAYMENT

ADMINISTR
ATIVE
REMED
IES
TAX REFUND the government issues a tax
credit certificate or a tax credit memo covering
the amount determined to be reimbursable can
be applied after proper verification against any
sum that may be due and collectible from the
taxpayer.
Grounds for filing a claim for tax refund or tax
credit (EPS):
1. Tax is collected Erroneously or illegally
2. Penalty is collected without authority.
3. Sum collected is excessive or in any manner
wrongfully collected.

Tax Refund
vs. Tax
Credit
TAX REFUND
The taxpayer asks for
restitution of the money
paid as tax.
Two year period to file
claim with the CIR
starts
after
the
payment of the tax or
penalty

TAX CREDIT
The taxpayer asks that
the money so paid be
applied to his existing
tax liability
Two-year period starts
from the date such
credit was allowed (in
case credit is wrongly
made).

Authority of Commissioner under Section 204

(c) NIRC:
1. Credit or refund taxes erroneously or illegally
received;
2. Credit or refund penalties imposed without
authority;
3. Refund the value of internal revenue stamps
when they are returned in good condition by
the purchaser; and
4. In his discretion, redeem or change unused
stamps that have been rendered unfit for use
and refund their value upon proof of
destruction.
Requisites of Tax Refund or Tax Credit: (W2P)
1. Claim must be in Writing; mandatory
requirement, necessary because:
a. It is an opportunity for the Commissioner
to correct the errors of his subordinates;
b. To notify the government
2. It must be filed with the Commissioner within
two (2) years after the payment of the tax or
penalty.
NOTE: No suit or proceeding shall be
instituted after the expiration of the said two
(2) years regardless of any supervening
cause that may arise after payment.
3. Show proof of Payment.
Requirement of filing the refund or credit
within years is a condition precedent, non
compliance bars recovery (Phil. Acetylene
Co., Inc. vs. Commissioner, CTA Case No.
1331, Nov. 7, 1965)

Quarterly
Income
Taxes

In case of OVERPAID QUARTERLY

INCOME TAX FOR CORPORATIONS the 2year period is counted from the date the final
adjustment return is filed after the end of the
taxable year.
NO AUTOMATIC CREDITING of the
overpaid income tax against taxes due in the
succeeding quarters fo the following year for
corporations and partnerships taxable as
corporations
THERE IS AUTOMATIC CREDITING and
refund may be claimed in cases of estates,
trusts and individuals for excess tax payment
against the quarterly income taxed due for
the succeeding year.

A return filed showing an overpayment shall be

considered as a written claim for credit or refund.
Tax Credit Certificate one which is validly
issued under the provisions of the Code and may
be applied against any internal revenue tax,
excluding withholding taxes, for which the
taxpayer is directly liable.
Any request for conversion into refund of
unutilized tax credits may be allowed under
Section 23C subject to the following:

Under Section 230 of NIRC- a tax credit

certificate issued, which
shall remain
unutilized AFTER 5 years from the date of
issue, shall, unless revalidated, be
considered INVALID and shall not be allowed
as payment for internal revenue tax liabilities
of the taxpayer, and the amount covered by
the certificate shall revert to the general
fund.

The original of the Tax Credit Certificate

showing creditable balance is surrendered to
the
appropriate
revenue
officer
for
verification and cancellation; and

In no case shall a tax refund be given

resulting from availment of incentives
granted pursuant to special laws for which
no actual payment was made.
Recovery of Tax Erroneously or Illegally
Collected (Sec. 229):
No suit or proceeding shall be maintained in
any court for the recovery of any national

internal revenue tax hereafter alleged to have

been (Scope of claims for refund).
1. Erroneously or illegally assessed or
collected;
2. Penalty claimed to have been collected
without authority; and
3. Sum alleged to have been excessively or in
any manner wrongfully collected.

3.

4.
Until a claim for refund or credit has been filed
with the Commissioner but the suit or proceeding
may be maintained whether or not such tax,
penalty or sum has been paid under protest or
duress.
In no case shall the suit or proceeding be filed
after the expiration of two (2) years from the date
of the payment of the tax or penalty regardless of
any supervening cause that may arise after
payment.

5.

UNDER THE PRESENT LAW, the supervening

cause is NOT considered in determining whether
or not prescription of the taxpayers right to claim
the refund has set in.
EVEN WITHOUT A WRITTEN
CLAIM,
COMMISSIONER MAY REFUND OR CREDIT
TAX where on the face of the return upon which
payment was made, such payment appears to
have been erroneously paid.

6.

Nature of Erroneously Paid or Illegally

Assessed or Collected Taxes taxpayer pays
under a mistake of fact, as when he is not aware
of an existing exemption in his favor at the time
the payment was made.
In the nature of an exemption from taxation,
strictly construed against the claimant, failure to
discharge such burden is fatal to the claim.
Right to contest tax before or after payment
The taxpayers willingness to pay the tax is no
waiver to raise defense against the taxs legality
(Commissioner of Internal Revenue vs.
Gonzales, G.R. No. L-19495, Nov. 24, 1966).
Commencement of the TWO (2) year period
(Jurisprudence)
1. Tax sought to be refunded is illegally or
erroneously collected from the date the
tax was paid (Commissioner vs. Victorias
Milling, G.R. No. L-24108, January 31,
1968).
2. Tax is paid only in installments or only in
part from the date the last or final
installment or payment because for tax
purposes, there is no payment until the
whole or entire tax liability is fully paid
(collector vs. Prieto, G.R. No. L-11976,
August 29, 1961).

7.

8.

Taxpayer merely made a deposit

counted from the conversion of the deposit
to payment (Union Garment vs. Collector,
CTA Case No. 416, November 17, 1958)
Merely making a deposit is not equivalent to
payment until the amount is actually applied
to the specific purpose for which it was
deposited.
Tax has been withheld from source
(through the withholding tax system)
counted from the date it falls due at the end
of the taxable year
A taxpayer who contributes to the
withholding tax system does not really
deposit an amount to the government, but in
truth, performs and extinguishes his tax
obligation for the year concerned (Gibbs vs.
Commissioner, G.R. No. L-17406, November
29, 1965).
End of taxable year vs. Date of the filing
of the final adjusted return from the date
when the final adjusted return was filed.
The rationale in computing this period is the
fact that it is only then that the corporation
can ascertain whether it made profits or
incurred losses in its business operations
(ACCRA Investments vs. Court of Appeals,
G.R. no. 96322, December 20, 1991).
Date when quarterly income tax was paid
vs. Date when final adjusted return was
filed from the date when final adjusted
return was filed.
The filing of the quarterly income tax return
(Sec. 68, NIRC) and payment of quarterly
income tax should only be considered mere
installments of the annual tax due
(Commissioner vs. TMX Sales, G.R. No.
83736, January 15, 1992).
Date when the final adjustment return
was actually filed (ex. Apr. 2) vs. Last day
when the adjustment return could still be
filed (ex. Apr. 15) from the date the final
adjustment return was actually filed
(Commissioner vs. Court of Appeals, G.R.
No 117254, January 21, 1999).
Tax was not erroneously or illegally paid
but the taxpayer became entitled to
refund
because
of
supervening
circumstances from the date the taxpayer
becomes entitled to refund and not from the
date of payment (Commissioner vs. Don
Pedro Central Azucarera, G.R.No. L-28467,
February 28, 1973).

NOTE: The claim for refund under the law refers

to the:
1. The administrative claim which the taxpayer
should file within two years from payment
with the BIR;
2. The judicial claim that the taxpayer should
commence in the CTA; in case the BIR fails
to act on the action for refund, taxpayer must

commence action for refund before the CTA

within the 2-year period.
When is there waiver of the prescription in a
action for refund?
If the government failed to plead prescription in a
motion to dismiss or as a defense in its answer to
the petition for review.
Exception: Taxpayer amends his petition for
review alleging therein a new cause of action and
the government pleads prescription in his answer
to the amended petition for review.
Payment under Protest is Not Necessary
under NIRC
A suit or proceeding for tax refund may be
maintained whether or not such tax, penalty or
sum has been paid under protest or duress
(Sec. 229, NIRC).
Suspension of the Two-year Prescriptive
Period for Refund
1. There is a pending litigation between the
Government and the taxpayer and
2. CIR in that litigated case agreed to abide by
the decision of the SC as to the collection of
taxes relative thereto (Panay Electric Co. vs.
Collector, G.R. no. L- 10574, May 28, 1958).

Interest on
TAX
Refund
s
General Rule: Government cannot be required to
pay interest on taxes refunded to the taxpayer in
the absence of a statutory provision clearly or
expressly directing or authorizing such payment
(Commissioner vs. Sweeney, G.R. No. L- 12178,
August 29, 1959).
Exceptions:
1. When the CIR acted with patent
arbitrariness. Arbitrariness presupposes
inexcusable or obstinate disregard of legal
provisions (Commissioner vs. Victorias
Milling, G.R. No. L-19667, Nov. 29, 1966).
2. Under Sec. 79 (c)(2) with respect to income
taxes withheld on the wages of the
employees.

Forfeiture of Cash Refund/Tax Credit (Sec.

230 NIRC)
1. Forfeiture of refund in favor of the
government when a refund check or warrant
remains unclaimed or uncashed within five
95) years from date of mailing or delivery.
2. Forfeiture of Tax Credit a tax credit
certificate which remains unutilized after five
(5) years from date of issue, shall be invalid,
unless revalidated (Sec. 230, 1997NIRC).
NOTES:

As a general rule, payment under protest is

not required under the NIRC, except when
partial payment of uncontroverted taxes is
required under R.R. No. 12-99. 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 t have been erroneously paid.

In case of the CIRs final denial of the claim

for refund, the 30-day period to appeal with
the CTA must be within the 2-year
peremptory period for instituting judicial
action.
Other Considerations Affecting Tax Refunds:
1. the 2-year prescriptive period is not
applicable to input VAT claims for refund
2. Payment under protest is not necessary in
order to obtain refund to internal revenue
taxes.
3. The Commissioner may grant refund or tax
credits even without a written claim if, on the
face of the return upon which payment was
made, the payment appears to have been
clearly erroneous.
4. The partial payment of tax cannot be a basis
for tax refund.
5. The remedy of tax refund cannot be availed
of to revive the right to contest the validity of
an assessment once the same has been lost
not only be failure to appeal but by the lapse
of the reglementary period within which
appeal could have been taken.
Corporate Withholding Agents
in the
Philippines of non-resident foreign corporations
are entitled to claim the refund of excess
withholding tax paid on the income of said
corporations in the Philippines.
Reglementary Period Applicable to Tax Credit/
Refund
1. The taxpayer must file a claim for
refund/credit within 2 years after the
payment of tax or penalty
2. In case of inaction by the CIR or his duly
authorized representative and the 2 year
period is about to expire, the taxpayer should

appeal to the CTA division (the appeal must

be within the 2-year period provided above).
TABLES OF COMPARISON
REMEDIES
Table 1 Distraint of Personal Property
DISTRAINT OF PERSONAL
PROPERTY
Is
there
CONSTRUCTIVE
DISTRAINT?
Issuing authority of the warrant
of distraint

INTERNAL REVENUE
YES
-

NO
Commissioner of Internal
Revenue If amount of tax
due is more than P 1M
Revenue District Officer If
less than P 1M.

Local Treasurer

Notification to be exhibited in
not less than 2 PUBLIC
PLACES in the municipality
where distraint is made. One
Place for posting is the Office
of the Mayor.

Notification to be exhibited in not

less than 3 PUBLIC AND
CONSPICUOUS PLACES in the
territory of the local government
unit where distraint is made. One
place for the posting of the notice
shall be at the office of the chief
executive of the local government
unit.
Within 5 days after the sale, the
local treasurer shall make a report
of the proceedings in writing to the
local chief executive concerned.

Posting of Notices

Report of Sale

Within 2 days after the sale, the

officer making the same shall
make a report of the proceedings
in writing to the Commissioner
and shall himself preserve a copy
of such report as an official
record.
Not less than 20 days after notice
to the owner or possessor of the
property AND the publication or
posting of such notice.
The amount of bid is not
equal to the amount of the
tax;
The amount of bid is very
mush less than the actual
market value of the articles
offered for sale.
The
Commissioner
may
purchase the same in behalf
of the National Government

Time of Sale

Purchase
of
Distrained
Property by the Government

Table 2 Levy upon Real Property

LOCAL TAXES / REAL

PROPERTY TAXES

Not less than 20 days after notice

to the owner and possessor AND
the publication or posting of such
notice
Should the property distrained be
not disposed of within 120 days
from the date of distraint, the
same shall be considered as sold
to the local government unit
concerned for the amount of the
assessment made thereon by the
Committee.

INTERNAL REVENUE

LOCAL TAXES / REAL

PROPERTY TAX

Within 20 DAYS AFTER THE

LEVY, the officer conducting the
proceedings shall advertise the
property or a usable portion
thereof as may be necessary to
satisfy the claim and the cost of
sale.
Levy shall be effected by writing
upon the duly authenticated
certificate a description of the
property upon which levy is made;
At the same time, written notice of
levy shall be mailed or served
upon the :
1. REGISTERED OF DEEDS
2. DELINQUENT TAX PAYER

Within 30 DAYS AFTER THE

LEVY, the local treasurer shall
proceed to publicly advertise for
sale or auction the property or a
usable portion thereof as may be
necessary to satisfy the claim and
the cost of sale.
Levy shall be effected by writing
upon the Duly Authenticated
Certificate the description of the
property upon which the levy is
made; At the same time, a written
notice of levy shall be mailed to or
served upon the:
1. ASSESSOR and REGISTER
OF DEEDS to annotate the
levy
on
the
TAX
DECLARATION
and
the
CERTIFICATE OF TITLE and
2. to
the
DELINQUENT
TAXPAYER

LEVY UPON REAL

PROPERTY
Advertisement

How levy is effected

Posting and Publication

Advance of the cost

Forfeiture in
government

favor

Posting a notice at the main

entrance of the municipal
building; AND
In a public and conspicuous
place in the barrio or district
in which the real estate lies;
AND
By publication once a week
for three weeks in a news
paper of general circulation in
the municipality or city where
the property is located.
The Revenue Collection Officer,
upon approval of the Revenue
District Officer, advance an
amount sufficient to defray the
costs of collection by means of
summary remedies.
If there is no bidder for real
property exposed for sale
The highest bid is for an
amount insufficient to pay the
taxes, penalties and costs,
The Internal Revenue Officer
shall declare the property
forfeited to the Government
in satisfaction of the claim in
question.
It shall be the duty of the
Register
of
Deeds
concerned, upon registration
with his office of the
DECLARATION
OF
FORFEITURE to transfer the
title of the property to the
Government
without
the
necessity of court order.
Upon giving of not less than
-

of

the

Resale of Real Estate Taken for

SAME

The local treasurer may, by

ordinance duly approved,
advance an amount sufficient to
defray the costs of collection by
means of the remedies provided
in the law.
No bidder for the real
property advertised for sale
If the highest bid is for an
amount insufficient to pay the
taxes, fees, or charges
The local treasurer
conducting the sale shall
purchase the property in
behalf of the local
government unit
It shall be the duty of the
Register of Deeds concerned,
upon registration with his
office of the DECLARATION
OF FORFEITURE to transfer
the title of the property to the
Government without the
necessity of court order
-

The sanggunian concerned,

Taxes

Interest rate on the redemption

price

20
days
notice,
the
Commissioner may sell and
dispose of the real property.
Sale may be at public auction
or on a private sale (upon
approval of the Sec. Of
Finance)
Proceeds of the sale shall be
deposited with the National
treasurer and an accounting
of the same shall be
rendered to the Chairman of
the Commission on Audit.
The redemption price shall be:
1. amount of public taxes,
penalties,
and
interest
thereon from the date of
delinquency to the date of
sale.
2. Interest on the purchase
price at the rate of 15% per
annum from the date of
purchase to the date of
redemption.

Table 3 Period of Collection and Assessment and Suspension Thereof

by an ordinance duly
approved and upon notice of
not less than 20 days may
sell and dispose of the real
property.
Sale is only by public auction.
The proceeds of the sale
shall accrue to the general
fund of the local government
unit concerned.

The redemption price shall be:

1. amount of public taxes,
penalties, and interest
thereon from the date of
delinquency to the date of
sale.
2. Interest on the purchase price
at the rate of 2 % per month
from the date of purchase to
the date of redemption.

Meaning
Assessment

of

Prescriptive Period for

Assessment

Exceptions to period
of assessment

Prescriptive Period for

Collection

NIRC

LOCAL TAXES

An assessment is a
finding by the taxing
authority
that
the
taxpayer has not paid
his correct taxes. The
ultimate
purpose
of
assessment
is
to
ascertain the amount
that a taxpayer should
pay. This is the context
in which assessment is
issued
for
internal
revenue taxation
Internal revenue taxes
shall be assessed within
3 years after the last day
prescribed by law for
filing a return.
1. In case of false or
fraudulent return or
failure to file a
return within 10
years
after
discovery of falsity,
fraud or omission.
2. Waiver of Statute of
Limitation before
the expiration of the
time prescribed the
Commissioner and
the taxpayer have
agreed in writing to
its assessment after
such time, the tax
may be assessed
within the period
agreed upon.
Any
internal
revenue tax which
has been assessed
within the period of
limitation
as
prescribed in par.
(a) (sec. 222) may
be collected by
distraint or levy or
by a proceeding in
court within 5 years
following
the
assessment of the
tax.
In case of false or
fraudulent return or
NON-FILING
OF
RETURN, the BIR
may file an ordinary
action to collect
even without an
assessment.
The

Same as that of the

NIRC

REAL PROPERTY
TAXES
Assessment in Real
Property Taxation means
the act or process of
determining the value of
the property subject to
tax
Assessment
means
OFFICIAL VALUATION
of the property

Within 5 years from the

date they become due

Within 5 years from the

date they become due

In case of fraud or intent

to evade payment
within 10 years from
discovery of fraud

In case of fraud or intent

to evade payment
within 10 years from
discovery of fraud

Local taxes, fees, or

charges
may
be
collected within 5 years
from
the
date
of
assessment
by
administrative or judicial
action. No such action
shall be instituted after
the expiration of said
period.

Basic real property

tax
shall
be
collected within 5
years from the date
they become due.
No action for the
collection of the tax,
whether
administrative
or
judicial shall be
instituted after the
expiration of the
period.
In case of fraud or
intent
to
evade
payment,
such
action
may
be
instituted for the
collection of the
same
within
10
years
from
the
discovery of such

Suspension
of
Prescriptive Periods

Table 4 Protest

period to collect is
10 years, reckoned
from the date of
discover of falsity or
fraud or non-filing.
Suspension of Running
of Statute of Limitation:
1. the Commissioner is
prohibited
from
making
the
assessment
or
beginning distraint
or
levy
or
a
proceeding in court
and for 60 days
thereafter;
2. When the taxpayer
requests
for
reinvestigation
which is granted by
the Commissioner;
3. When the taxpayer
cannot be located in
the address given
by him in the return
filed upon which the
tax
is
being
assessed
or
collected
4. When the warrant of
distraint or levy is
duly served upon
the taxpayer, his
authorized
representative, or a
member
of
his
household
with
sufficient discretion
and no property
could be located.
5. When the taxpayer
is
out
of
the
Philippines.

fraud or intent to
evade payment.

The prescriptive periods

shall
be
suspended
during
which
(Prescriptive period for
ASSESSMENT
and
COLLECTION):
1. The treasurer is
legally
prevented
from making the
assessment
of
collection;
2. The
taxpayer
requests
for
reinvestigation and
executes a waiver in
writing before the
expiration of the
period within which
to assess or collect;
3. The taxpayer is out
of the country or
otherwise cannot be
located. (Sec. 194
of the LGC)

The
period
of
prescription within which
to collect shall be
suspended for the time
during which:
1. The treasurer is
legally
prevented
from collecting the
tax;
2. The owner of the
property
or
the
person having legal
interest
therein
requests
for
reinvestigation and
executes a waiver in
writing before the
expiration of the
period within which
to collect;
3. The owner of the
property
or
the
person having legal
interest therein is ot
of the country or
otherwise cannot be
located. (Sec. 270
of the LGC)

PROTEST
Payment in Protest

Subject of Protest

TARIFF AND
CUSTOM CODE
YES

When a ruling or
decision of the
Collector is made
whereby
liability
for duties, fees, or
other
money
charge
is
determined,
the
adverse party may
protest such ruling
or decision.
The
scope
of
protest shall be
limited
to
the
subject matter of a
single adjustment
or
other
independent
transaction;
but
any number of
issues may be
raised in a protest
with reference to
the particular item
or
items
constituting
the
subject matter of
protest.
Single
adjustment refers
to
the
entire
content of one
liquidation,
including
all

NIRC
GEN RULE: NO
EXCEPTION:
If the taxpayer
only disputes or
protests against
the validity of
some
of
the
issues raised, the
taxpayer shall be
required to pay
the efficiency tax
or
taxes
attributable to the
undisputed
issues. No action
shall be taken on
the
taxpayers
disputed
issues
until the taxpayer
has
paid
the
deficiency tax or
taxes attributable
to the undisputed
issues (Revenue
Regulation 12-99)
The assessment
that will be the
subject of the
protest of the
taxpayer is the
Final Letter of
Demand
or
Assessment
Notice. (FAN)
Please note that
the procedure in
RR 12-99 must
first be followed

LOCAL TAXES
NO

Notice
of
Assessment
issued by the
local treasurer.

REAL
PROPERTY TAX
YES

Grounds available
to the taxpayer for
protesting
the
payment of the
basic
real
property tax:
1. The property
is
exempt
from
the
payment
of
real property
tax
under
Sec. 234 of
the Code;
2. The
assessment
of
the
property
excessive or
unreasonable
and is the
subject
of
appeal
pursuant to
Sec. 231 of
the Code;
3. The tax is
subject
to
discount
authorized
under
Sec.
251 of the
Code;
4. The

duties,
fees,
surcharges
or
fines
incident
thereto.

Period
protest

for filing a

Where to file
Period
Protest

to

Decide

Where to appeal in
case of denial of
protest

Within 15 days
from receipt of the
ruling or decision
of the Collector.
The
decision
referred to is the
classification and
appraisal of the
imported goods.
Collector
of
customs
30 Days
after
termination
hearing
1. Commissione
r
of
the
Bureau
of
Customs
2. Court of Tax
Appeal
Division
3. Court
of
Appeals
En
Banc
In
case
the
decision of the
collector
is
unfavourable
to
the government,
there
is
an
AUTOMATIC
REVIEW by the
Commissioner or
the Secretary of
Finance.

The assessment
may be protested
by filing a request
for
reconsideration or
reinvestigation
within 30 days
from receipt of the
assessment.

Within 60 days
from receipt of the
notice
of
assessment.

assessment
is illegal or
erroneous,
pursuant to
Sec. 253 of
the Code.
5. The
period
within which
to collect the
real property
tax
has
prescribed,
as provided
in Sec. 270 of
the Code.
(Ursal on Local
Government
Taxation)
The protest must
be filed within 30
days
form
payment of tax.

Commissioner of
Internal Revenue
180 days from
receipt of written
protest.
1. Court of Tax
Appeal
Division
2. Court of Tax
Appeals En
Banc

Local Treasurer

(The protest may

be filed at the time
of payment of the
tax
being
protested)
Local Treasurer

60 days from
receipt of written
protest
Court
of
Competent
Jurisdiction
(depending
on
jurisdictional
amount)

60 days
from
receipt of written
protest
1. LBAA
2. CBAA
3. CTA En Banc

Court of Tax Appeals

Taxation Law

OUTLINE OF REMEDIES

NATURE OF
THE
CTA
1.
2.
3.

4.

Court of special jurisdiction can ac only in

matters where it has exclusive original as
well as in aid of its appellate jurisdiction.
Generally, the Supreme Court is bound by
questions of fact as found by the Court of
Tax Appeals
The proceedings therein are judicial in
nature although the CTA is not bound by the
technical rules of evidence. (R.A 1125, Sec.
8).
Procedure is governed by the Revised Rules
of the Court of Tax Appeals (RRCTA) AM
No. 05-11-07-CTA which took effect on
December 15-2005. The Rules of Court
apply only by analogy or suppletorily.

LEGAL
BASIS

The Court of Tax Appeals was originally

created by virtue of Republic Act nO. 1125
enacted June 16, 1954.
Republic Act No. 9282 amended R.A. No.
1125. R.A. No. 9282 was enacted on March
30, 2004 and took effect on April 23, 2004.
Republic Act. No. 9503 which was enacted
June 12, 2008 further amended R.A. No.
1125.

Amendmen
ts of
Republ
ic Act
No.
9282
1.
2.
3.

The Court of Tax Appeals was elevated to

the same level as the Court of Appeals.
(Sec. 1)
Appeals from its decision (en banc) shall
now be made before the Supreme Court.
(Sec. 19)
The expanded jurisdiction of the Tax Court
included the following:
a.
Exclusive original jurisdiction
overall criminal offense under the NIRC
and TCC and other laws admissible by
the BIR and BOC where the amount of
taxes and fines is P 1 million or more;
b.
Exclusive appellate jurisdiction
in criminal offense over appeals from
the RTC whether in the exercise of its
original or appellate jurisdiction over tax
cases where the amount involved is less
than P 1 million.
c.
Appellate
jurisdiction
over
decisions of the RTC on local taxes.
d.
Exclusive original jurisdiction
over tax collection cases where the
amount involved is P 1 million or more;
e.
Exclusive appellate jurisdiction
over tax collection where the amount is
less than P 1 million.

Amendmen
ts of
Republ
ic Act
No.
9503

R.A No. 9503 enlarged the organizational

structure of the Court of Tax Appeals.
The number of justices was increased from 6
to 9.
The Divisions were also increased from two
to three.

POWERS OF CTA (PCS2O2-RED2)

1. to administer Oaths;
2. to receive Evidence;
3. to Summon witnesses by subpoena
4. to require Production of papers or
documents by subpoena duces tecum
5. to punish Contempt
6. to promulgate Rules and regulations for the
conduct of its business;
7. to assess Damages against appellant if
appeal to CTA is found to be frivolous or
dilatory
8. to Suspend the collection of the tax pending
appeal;
9. to render Decisions on bases brought before
it; and
10. to issue Order authorizing distraint of
personal property and levy of real property
NB: Power to issue writs of prohibition and
injunction is supplementary to its appellate
jurisdiction.
COMPOSITION AND APPOINTMENT OF
MEMBERS

Consists of a Presiding Justice and eight (8)

Associate Justices appointed by the
President upon nomination by the Judicial
and Bar council.

It may sit en banc or in three (3) Divisions,

each Division of three (3) Justices each,
including the presiding Justice, who shall be
the Chairperson of the First Division and the
two (2) most Senior Associate Justices shall

be served as Chairpersons of the Second

Divisions, respectively (RA No. 9503)

QUORUM
Sessions
Presence of
EN BANC

5 Justices

Decisions
Affirmative
Vote of
5 Justices

DIVISION

2 Justices

2 Justices

PROVIDED: where the necessary majority vote

cannot be had, the petition shall be dismissed; in
appealed cases, the judgment or order appealed
from shall stand affirmed; and on all incidental
matters, the petition or motion shall be denied
(RA No. 9503).

DISPOSITIO
N OF
CASES

Cases shall be decided within 30 days after

submission thereof for decision
Decisions shall be in writing, stating clearly
and distinctly the facts and the law on which
they are based and signed by the judges
who concurred therewith.
Publication of decision in the Official
Gazette.
This requirement however, is merely
directory

JURISDICTION OF THE TAX

COURT

JURISDICTIO
N OF CTADIVISION

I.

EXCLUSIVE
APPELLATE
JURISDICTION
1.

2.

3.

4.

5.

6.

Decisions of the Commissioner of

Internal Revenue
a. In
cases
involving
disputed
assessments, refunds of internal
revenue taxes, fees or other
charges, penalties in relation
thereto, or
b. Other matters arising under the
NIRC or other laws administered by
the BIR;
Inaction by the Commissioner of
Internal Revenue
a. in
cases
involving
disputed
assessments, refunds of internal
revenue taxes, fees or other
charges, penalties in relation
thereto, or
b. other matters arising under the
NIRC or other laws administered by
the BIR, where the NIRC provides a
specific period for action, in which
case the inaction shall be deemed a
denial;
Decisions, orders or resolutions of
the RTC in local tax cases originally
decided or resolved by them in the
exercise of their original jurisdiction;
Decisions of the Commissioner of
Customs
a. In cases involving liability for
customs duties, fees or other
money charges, seizure, detention
or release of property affected,
fines, forfeitures or other penalties
in relation thereto, or
b. Or other matters arising under the
Customs Law or other laws
administered by the Bureau of
Customs.
Decisions of the Secretary of Finance
on customs cases elevated to him
automatically for review from decisions
of the Commissioner of Customs which
are adverse to the Government under
Section 2325 of the Tariff and Customs
Code;
Decisions of the Secretary of trade
and Industry in the case of nonagricultural product, commodity or
article, and the Secretary of Agriculture
in the case of agricultural product
commodity or article, involving dumping
and countervailing duties under Section
301 and 302 respectively of the Tariff
and Customs Code, and safeguard
measures under R.A. No. 8800 where

either party may appeal the decision to

impose or not to impose said duties.
II.

JURISDICTION
OVER
CASES
INVOLVING CRIMINAL OFENSES
1. Exclusive original jurisdiction
a. Over all criminal cases arising from
violations of:
i.
NIRC;
ii.
Tariff and Customs
Code; and.
iii.
Other
laws
administered by the BIR or the
Bureau of Customs
b. the principal amount of taxes and
fees, exclusive of charges and
penalties claimed is less than one
million pesos (P1,000,000.00)
2. Exclusive appellate jurisdiction in
criminal offenses
a. Over appeals from the judgments
resolutions or orders of the
Regional Trial Courts in tax cases
originally decided by them, in their
respected territorial jurisdiction.
NOTE: Criminal offenses arising
from violations of NIRC or the
TCCP and other laws administered
by the BIR or BOC where the
principal amount of taxes and fees
is less than P1 million or where no
specified amount claimed shall be
tried by the RTC, jurisdiction of CTA
is appellate.
b. Over petitions for review of the
judgments, resolutions or orders of
the Regional trial Courts in the
exercise
of
their
appellate
jurisdiction over tax cases originally
decided by the MTCs or MCTCs.

III.

JURISDICTION
OVER
TAX
COLLECTION CASES
1. Exclusive original jurisdiction in tax
collection cases involving final and
executory assessments for taxes, fees,
charges and penalties.
2. appellate jurisdiction over appeals from
the judgments, resolution or orders of
the Regional Trial Court in tax collection
cases originally decided by them within
their respective territorial jurisdiction.
NOTE: In collection cases where the
principal amount of taxes and fees,
exclusive of charges and penalties,
claimed is less than one million pesos
(P1,000,000.00) shall be tried by the
proper
Municipal
Trial
Court,
Metropolitan Trial Court, or Regional trail
Court, or Regional Trial Court,
depending
on
their
respective
jurisdiction.

JURISDICTION OF CTA EN BANC

EXCLUSIVE APPELLATE JURISDICTION
Over the following cases:
1. Decisions or resolutions on motion for
reconsideration or new trial of the CTA in
Division in the exercise of its exclusive
appellate jurisdiction.
2. Decisions, resolutions or orders of the RTC
in the exercise of its appellate jurisdiction
over:
a) Local tax cases
b) Tax collection cases and
3. Cases involving criminal offenses arising
from violations of the NIRC, TCCP and other
laws administered by the BIR Decisions,
resolutions or orders on motions for
reconsideration or new trial of the CTA in
Division in the exercise of its exclusive
original jurisdiction over (1) tax collection
cases and (2) cases involving criminal
offenses arising from violations of NIRC,
TCCP and other laws.
4. Decisions of the Central Board of
Assessment Appeals (CBAA) in the exercise
of its appellate jurisdiction over cases
involving the assessment and taxation of real
property originally decided by the provincial
or city board of assessment appeals.
CTA
Without Jurisdiction on Final and
Executory assessments
The ordinary courts, not the Court of Tax Appeals
can entertain money claims
based on
assessments that have become final and
executory. The taxpayer not having availed
himself of the remedy (timely dispute of
assessment) to permit the Tax Court to exercise
jurisdiction, cannot be allowed to question, by
way of defense, the validity of the assessment.
(Republic vs. Abella, L-26989, 20 February 1981)

NO
INJUNC
TION
RULE
GENERAL RULE: No court shall have authority
to enjoin or restrain the collection of any national
internal revenue tax, fee or charge or any other
tax including customs duties, local government
taxes, real property taxes, etc.

EXCEPTION: No injunction rule does not apply to

Court of Tax Appeals.

Sec. 11 of R.A. No. 1125 gives the Tax Court

authority to order the suspension of tax
collection when in its view, such collection
would work to the serious prejudice of either
the taxpayer or the Government.

The ancillary remedy is available only when

there is a pending appeal over which the
Court of Tax appeals has jurisdiction [see
Commissioner of customs vs. Alikpala G.R.
No. L-32542, November 26, 1970]

Section 218 of the NIRC providing that no

court has authority to grant a writ of
injunction to restrain the collection the
collection of any internal revenue tax, fee, or
charged imposed by the Code refers to
courts other than the Court of Tax Appeals
(Blaquera, etc. vs. Rodriguez, G.R. No. L11295, march 29, 1958)

Appeal to the CTA does not automatically

suspend the collection of taxes except when
enjoined by the Court of Tax of Appeals at
any stage of the proceedings and when
circumstances so warrant.
Conditions for the Issuance of an Injunction
by Court of Tax Appeals
The Court of Tax Appeals may enjoin the
collection of taxes:
1. If in its opinion the same may jeopardize the
interest of the government and/or the
taxpayer.
2. The court may require either to deposit the
amount claimed or file a surety bond for not
more than double the amount.

RULES OF
PROCE
DURE

Pursuant to R.A. No. 9282, the decision of

the division of CTA is no longer appelable to
the Court of Appeals but to CTA en banc
Before filing an appeal by way of a petition
for review to the CTA en banc, a motion for
reconsideration or new trial with the division
which renders the adverse decision.
Within fifteen (15 days from receipt of the
resolution of the division denying the motion
for new trial or reconsideration, an appeal by
way of petition for review must be filed with
the CTA en banc.

From the en banc decision, the losing party

may file with the Supreme Court a unified
petition fore review on certiorari pursuant to
Rule 45 of the 1997 Rules of Civil
Procedure.

PERIOD
FOR
CTA
DECISI
ON

Cases shall be decided within 30 days after

submission thereof for decision
Decisions shall be in writing, stating clearly
and distinctly the facts and the law on which
they are based and signed by the judges
who concurred therewith.
Publication of decision in the Official
Gazette.
The requirement that cases brought before
the Tax Court shall be decided within 30
days after the submission thereof for
decision is merely directory. Hence,
decisions after the lapse of said period are
still valid.

APPEAL
I.

WHEN; PERIOD WITHIN WHICH TO

FILE APPEAL TO CTA
1. Within 30 days after the receipt of such
decision or ruling or after the expiration
of the period fixed by law or action (Sec.
11, R.A. o. 1125)
2. If the protest is denied, taxpayer may
appeal within 30 days from date of
receipt of decision (Sec. 3.1.5 par. 6,
R.R. 12-99)
3. If the Commissioner or his duly
authorized representative fails to act on
the taxpayers protest within one
hundred eighty (180) days from date of
submission by the taxpayer of the
required documents in support of his
protest, the taxpayer may appeal to the
court of Tax Appeals within thirty (30)
days from the lapse of the said 180-day

period, otherwise, the assessment shall

become
final,
executory
and
demandable (CIR vs. Lascona Land
Co., CA0GR SP No. 58061).
Thirty (30) Day Prescriptive Period for Appeal
with the CTA
1. runs from the date the taxpayer receives
the appealable decision
2. Jurisdictional
Effects of failure of the taxpayer to appeal
on time:
a. Renders the action final, executory and
demandable
b. Assessment is considered correct and
all that is necessary is for the
Commissioner to enforce the collection
of the tax by summary remedies or
judicial action
c. Taxpayer in a proceeding for collection
by judicial action may raise only
defenses of absence of jurisdiction,
collusion between the parties or fraud.
3. Non-extendible
After the 3-day period, an assessment may
no longer be disputed through the simple
expedient of paying the protested tax and by
subsequently claiming it as a refund within
the period of two years from date of payment
Reason: He would be doing indirectly what
he could not do directly, that is, open an
assessment that has become final.

MOTION
FOR
RECON
SIDERA
TION

II.

Requests
or
motions
fore
reconsideration, however, operate to
suspend he running of the period to
appeal;
A pro forma request for reconsideration
or one which is directed to the Secretary
of Finance does not suspend the period.

WHAT SUBJECT OF APPEAL ONLY A

FINAL DECISION IS APPEALABLE TO
THE COURT OF TAX APPEALS

A decision is appealable when it constitutes

the final action taken by him or his
authorized deputies with respect t the
taxpayers liability.

Preliminary collection letters, post

reporting notices and pre-assessment
notices attempt appealable because
they are not the final decision of the
Commissioner.

Rather, it is the action taken by the

commissioner in response to the
taxpayers protest on the assessment
that would constitute an appealable
decision

At times there is an exchange of

communication between the taxpayer
and the Commissioner, and the later
states that his action is final, the, period
for appeal begins to run.

Commissioner must state that his

decision is final for period of appeal to
run.
Instances when decisions are final:
1. a demand letter for tax deficiency issue d
and signed by an authorized subordinate
officer with the warning that failure to pay
would result to issuance of a warrant of
distraint and levy without further notice
(Oceanic Wireless Network Inc. vs. CIR G.R.
No. 148380) A letter of BIR Commissioner
reiterating previous demand to pay an
assessment (Commissioner vs. Ayala
Securities Corp G.R. No. 29485 Mar. 31,
1976)
2. The filing of a judicial action for collection
may be treated by the taxpayer as a denial
of a protest (Commissioner vs. Union
Shipping G.R. No. 66160, May 21, 1990)
Instances where CTA would have jurisdiction
even if there is no decision:
1. If the Commissioner of Internal rEvenue has
not acted in a refund case and the two year
prescriptive period is about to expire.
Reason: In fairness to the taxpayer so as not
to deprive him of his day in court.
2. If the Commissioner of Customs has not
rendered a decision on an application for
refund of internal revenue taxes and the suit
is about to prescribe.
Reason: If the taxpayer waits, then his right
of action prescribes.
NEW ISSUES CANNOT BE RAISED FOR THE
FIRST TIME ON APPEAL
General rule: New issues cannot be raised for
the first time on appeal.
Reason: The court which is supposed to review
would not review but determine and decide for
the first time, a question not raised at the

administrative forum (Commissioner of Internal

Revenue vs. Wander Philippines, Inc. G.R. No.
68375, Apr. 15, 1988)
Exceptions:
1. Defense of prescription
Reason: This is a statutory right (Visayan
Land Transportation vs. Collector CTA Case
No. 1119, Sept. 30, 1964).
2.

Errors of administrative officials

Reason: State can never be in estoppel and
lifeblood theory (Commissioner vs. Procter
and Gamble Phils. Mfg. Corp, G.R. No.
66838, April 15, 1988)
NOTE: However, this was reversed in
Supreme Courts subsequent resolution
wherein it was held that in the absence of
explicit statutory provisions to the contrary,
the Government must follow the same rules
of procedure which bind private parties
(Commissioner vs. Procter and Gamble,
G.R. No. 66838, December 2, 1991,
Resolution).

III.

WHO: PERSONS WHO CAN FILE AN

APPEAL

1.

Any party adversely affected by a decision or

ruling or inaction of
a. The Commissioner of Internal
Revenue
b. The Commissioner of Customs
c. The Secretary of Finance
d. The Secretary of Trade and
Industry
e. The Secretary of Agriculture
f. The Central Board of Assessment
Appeals
g. The Regional Trial Courts
Stockholders of dissolved corporation
Reason: They could be held personally
liable for the unpaid deficiency
assessments of a dissolved corporation
in proportion to their distributive shares
in the dissolved corporation (Tan Tiong
Bio vs. BIR, G.R. No. L- 15778 April 23,
1962)
Government
Reason: The right is available to any
party adversely affected by a decision
or ruling r inaction (Sec. 11, R.A. No.
1125, as amended by RA 9282)

2.

3.

IV. HOW: MODES OF

APPEAL
1.

By filing a petition for review under a

procedure analogous to that provided for
under Rule 42 of the 1997 Rules on Civil
Procedure

2.

Decision, rulings or inaction of the

Commissioner of Internal Revenue,
Commissioner
of
Customs,
the
Secretary of Finance, the Secretary of
Trade and Industry or the Secretary of
Agriculture or the Regional trial Courts

This appeal shall be heard by a Division

of the CTA
Requirements:
a. Filing of a verified petition for review
with the CTA in 7 eligible copies
b. Deposit of filing fees
c. Proof of service to the adverse party
d. Certification of non-forum shopping
e. Prior filing of motion of new trial or
reconsideration

15 day period under Rule 42 does not

apply, 30 day period applies
By filing a petition for review under a
procedure analogous to that provided for
under Rule 43 of 1997 Rules on Civil
Procedure

Decisions or rulings of the Central Board

of Assessment Appeals and the
Regional Trial Courts in the exercise of
its appellate jurisdiction

This appeal shall be heard by the CTA

en banc
Requirements:
a. filing of verified petition for review in 7
eligible copies with the CTA
b. Proof of service of a copy thereof to the
adverse party and on the court or
agency a quo
c. Certification of non-forum shopping
d. Filing of a motion fore reconsideration or
new trial when proper

Period of appeal is not 15 days under

Rule 453 but 30 days

Burden of
Taxpay
ers on
Appeal
to CTA
It is the burden of taxpayers on appeal to CTA to
prove by a full disclosure of data on his
possession that:
1. The tax assessment is wrong;

2.
3.

The tax assessment is merely a presumption

and not based on actual facts;
The correct computation of liability, if any.
The burden of proof is on the taxpayer
contesting the validity or correctness of the
assessment to prove not only that the one
who rendered the assailed decision is wrong
but that the taxpayer is right.
Providing that the assessment is wrong is
not enough

Reasons:
1. The tax court could settle nothing and
2. the way is open for subsequent assessments
and appeals. The roots of controversy must
be cut (Siy Po vs. Court of Appeals et. al.,
G.R. No. L- 81446 Aug. 18, 1988).

Tax
Collecti
on non
Suspen
ded
During
Appeal
General Rule: No appeal taken to the CTA shall
suspend the payment, levy or distraint, and/or
sale of any property of the taxpayer.
Reason: Lifeblood Theory
Exception: The CTA is empowered to suspend
the collection of internal revenue taxes and
custom duties or grant injunction only upon
showing:
1. That the collection of the tax may jeopardize
the interest of the government and/ or the
taxpayer
2. That the taxpayer is willing to deposit the
amount equal to the taxes assessed or to file
a bond amounting to not more than twice the
value of the tax being assessed.
3. That the CTA may issue an injunction only in
the exercise of its appellate jurisdiction.

4.
5.

6.

7.

8.

That the appeal is not frivolous or dilatory

Sec. 11 of R.A. No. 1125 as amended by
Sec. 9 of R.A No 9282 grants CTA power to
suspend collection of tax if such collection
works to serious prejudice of either taxpayer
or government
However, Sec. 218 of the Tax Code provides
that no court may grant injunction to restrain
collection of any tax, fee or charge imposed
by Tax Code.
The provision in the Tax Code refers to
courts other than the CTA (Blauera vs.
Rodriguez, GR No. L-11295, March 29,
1958).
Appeal to the CTA does not automatically
suspend collection unless CTA issues
suspension order at any stage of the
proceedings.

How motion to suspend collection of tax is

filed: may be filed together with the petition for
review or with the answer, or in a separate
motion filed by the interested party at any stage
of the proceedings (Section 3, Rule 10, PRCTA).

Interlocuto
ry
Order
of CTA
not
appeal
able
A CTA resolution denying a taxpayers motion to
declare a warrant of distraint and levy issued by
the Commissioner of Internal Revenue as illegal
is interlocutory and not appealable (Juan vs. CIR,
G.R. No. 24740 July 10, 1979)
Distraint of Personal Property and Levy of
Real Property if Decision is Favorable to the
Government
Upon the issuance of any ruling, order or
decision by the CTA favorable to the national
government, the CTA shall issue an order
authorizing the BIR, through the Commissioner:

1.

2.

to seize and distraint any goods, chattels, or

effects and the personal property, including
stocks and other securities, debts, credits,
bank accounts, and interests in and rights to
personal property and/or
levy the real property of such persons in
sufficient quantity to satisfy the tax or charge
together with any increment thereto incident
to delinquency.

NOTE: This remedy shall not be exclusive and

shall not preclude the Court from availing of other
means under the Rules of Court.
Failure to File on Time of A Taxpayer Claiming
for Refund to Recover Taxes Paid Under
Protest on the Ground of Illegality of
Assessment No Longer Available
Where a taxpayer seeking a refund of taxes
whose request is denied and whose appeal to the
CTA was dismissed for being filed out of time,
sues anew to recover such taxes already paid
under protest, his action is devoid of merit.
For in the same way that the expediency of an
appeal from a denial of a request for cancellation
of warrant or distraint and levy cannot be utilized
to test the legality of an assessment which has
become final for failure to appeal the same on
time. (CIR vs. Concepcion G.R. No. L-23912,
March 15, 1968).
Remedies of the Party Affected by the
Decisions of CTA
1. any party adversely affected by a ruling,
order or decision of a Division of the CTA
may file a motion for reconsideration or new
trial before the same Division within 15 days
from notice
2. Any party adversely affected by a resolution
of a Division of the CTA on a motion for
reconsideration or new trial may file a
petition for review with the CTA en banc.
3. Any party adversely affected by a decision or
ruling of the CTA en banc may file with the
Supreme Court a verified petition for review
on certiorari pursuant to Rule 45 of the 1997
Rules on Civil Procedure.

Grounds of
a
motion
for
new
trial
1.

2.

Fraud, accident, mistake, or excusable

negligence which ordinary prudence could
not have guarded against and by reason of
which such aggrieved party has probably
been impaired in his rights; or
Newly discovered evidence, which he could
not, with reasonable diligence, have
discovered and produced at the trial and
which, if presented, would probably alter the
result (Section 5, Rule 15, RRCTA).

NOTE: Where there is a clear showing of

entitlement to refund the technical rules may be
waived so as to allow a new trial even if the
requisites or grounds are not met especially
where the failure to present evidence in the first
instance was adequately explained (Philippine
Phospate Fertilizer Corp. vs. CIR, June 28,
2005).
Requisites for motion for new trial based on
newly discovered evidence
1. The evidence was discovered after the trial;
2. Such evidence could not have been
discovered and produced at the trial with
reasonable diligence ;
3. It is material, not merely cumulative,
corroborative or impeaching; and
4. It is of such weight that, if admitted, will
probably change the judgment (Philippine
Phosphate Fertilizer Corp. vs. CIR, June 28,
2005)
No second motion for reconsideration or new
trial
No party shall be allowed to file a second motion
for reconsideration of a decision, final resolution
or order of for new trial Rule 15, RRCTA).
Simultaneous Filing of An Application for
Refund or Credit and Institution of a Case
Before the CTA Allowed

The law fixes the same period of two (2) years for
filing a claim for refund with the Commissioner
and for filing a case with the CTA. The two-year
period for both starts from the date after the
payment of the tax or penalty, or from the
approval of the application for credit.

TAXPAYERS BILL OF RIGHTS

GENERAL
AUDIT
DOCUMENTATION
1.

2.

3.

4.

5.

6.

PROCEDURES

AND

When does the audit process begin?

The audit process commences with the
issuance of Letter of Authority to a taxpayer
who has been selected for audit.
What is a Letter of Authority?
The letter of Authority is an official document
that empowers a Revenue Officer to
examine and scrutinize a Taxpayers books
of accounts and other accounting records, in
order to determine the Taxpayers correct
internal revenue tax liabilities.
Who issues the Letter of Authority?
Letter of Authority, for audit/investigation of
taxpayers under the jurisdiction of National
Office, shall be issued and approved by the
Commissioner of Internal Revenue, while for
taxpayers under the jurisdiction of Regional
Offices, it shall be issued by the Regional
Director
When must a Letter of Authority be served?
A Letter of Authority must be served to the
concerned Taxpayer within thirty (30) days
from its date of issuance, otherwise, it shall
become null and void. The Taxpayer shall
then have the right to refuse the service of
this LA, unless the LA is revalidated.
How often can a Letter of Authority be
revalidated?
A Letter of Authority is revalidated through
the issuance of a new LA. However, a Letter
of Authority can be revalidated
Only once, for Las issued in the Revenue
Regional Offices or the Revenue District
Offices; or twice, in the case of Las issued by
the National Office. Any suspended LA(s)
must be attached to the new LA issued
(RMO 38-88).
How much time does a Revenue Officer
have to conduct an audit?
A Revenue Officer is allowed only one
hundred twenty (120) days from the date of
receipt of a Letter of Authority by the
Taxpayer to donduct the audit and submit the
required report of investigation. If the
Revenue Officer is unable to submit his final
report of investigation within the 120-day
period, he must then submit a Progress

7.

8.

9.

Report to his Head of Office, and surrender

the Letter of Authorization fore revalidation.
How is a particular taxpayer selected for
audit?
Officers of the Bureau (Revenue District
Officers, Chief, Large taxpayer Assessment
Division, Chief, Excise Taxpayer Operations
Division, Chief, Policy Cases and Tax Fraud
Division) responsible for the conduct of
audit/investigation shall prepare a list of all
taxpayer who fall within the selection criteria
prescribed in a Revenue Memorandum
Order issued by the CIR to establish
guidelines for the audit program of a
particular year. The list of taxpayers shall
then be submitted to their respective
Assistant Commissioner for pre-approval
and to the Commissioner of Internal
Revenue for final approval. The list
submitted by RDO shall be pre-approved by
the Regional Director and finally approved by
Assistant
Commissioner,
Assessment
Service (RMOs 64-99, 67-99, 18-2000 and
19-2000).
How many times can a taxpayer be
subjected to examination and inspection for
the same taxable year?
A taxpayers books of accounts shall be
subjected to examination and inspection only
once for a taxable year, except in the
following cases:
a. When the Commissioner determines
that fraud, irregularities, or mistakes
were committed by Taxpayer;
b. When the Taxpayer himself requests a
re-investigation or re-examination of his
books of accounts;
c. When there is a need to verify the
Taxpayers compliance with withholding
and other internal revenue taxes as
prescribed in a Revenue Memorandum
Order issued by the Commissioner of
Internal revenue.
d. When the Taxpayers capital gains tax
liabilities must be verified; and When the
Commissioner chooses to exercise his
power to obtain information relative to
the examination of other Taxpayers
(Secs. 5 and 235, NIRC)
What are some of the powers of the
Commissioner relative to the audit process?
In addition to the authority of the
Commissioner to examine and inspect the
books of accounts of a Taxpayer who is
being audited, the Commissioner may also:
a. Obtain data and information from private
parties other than the Taxpayer himself
(Sec. 5, NIRC)
b. Conduct inventory and surveillance, and
prescribe presumptive gross sales and
receipts (Sec. 6, NIRC)

10. What is a Notice for Informal Conference? A

11.

12.

13.

14.

Notice for Informal Conference is a written

notice informing a Taxpayer that the findings
of the audit conducted on his books of
accounts and accounting records indicate
that
additional
taxes
or
deficiency
assessments have to be paid. If, after the
culmination of an audit, a Revenue Officer
recommends the imposition of deficiency
assessments, this recommendation is
communicated by the Bureau to the
Taxpayer concerned during an informal
conference called for this purpose. The
Taxpayer shall then have fifteen (15) days
from the date of his receipt of the Notice for
Informal Conference to explain his side.
Within what time period must an assessment
be made?
An assessment must be made within three
(3) years from the last day prescribed by law
for the filing of the tax return for the tax that
is being subjected to assessment or from the
day the return was filed if filed late. However,
in cases involving tax fraud, the Bureau ha
ten (10) years from the date of discovery of
such fraud within which to make the
assessment. Any assessment issued after
the applicable period are deemed to have
prescribed, and can no longer be collected
from the Taxpayer, unless the Taxpayer has
previously executed a Waiver of Statute of
Limitations.
What is Jeopardy Assessment?
A jeopardy Assessment is a tax assessment
made by an authorized Revenue Officer
without the benefit of complete or partial
audit, in light of the ROs belief that the
assessment and collection of a deficiency
tax will be jeopardized by delay caused by
the Taxpayers failure to:
a. Comply with audit and investigation
requirements to present his books of
accounts and/or pertinent records, or
b. Substantiate all or any of the
deductions, exemptions or credits
claimed in his return.
What is a Pre-Assessment Notice (PAN)?
The
Pre-Asseessment
Notice
is
a
communication issued by the Regional
Assessment Division, or any other
concerned BIR Office, informing a Taxpayer
who has been audited of the findings of the
Revenue Officer, following the review of
these findings. If the Taxpayer disagrees with
the findings stated in the PAN, he shall then
have fifteen (15) days from his receipt of the
PAN to file a written reply contesting the
proposed assessment.
Under what instances is PAN no longer
required?
A Preliminary Assessment Notice shall nto
be required in any of the following cases, in

which case, issuance of the formal

assessment notice for the payment of the
taxpayers deficiency tax liability shall be
sufficient:
a. When the finding for any deficiency tax
is the result of mathematical error in the
computation of the tax appearing on the
face of the tax return filed by the
taxpayer; or
b. When a discrepancy has been
determined between the tax withheld
and the amount actually remitted by the
withholding agent; or
c. When a taxpayer who opted to claim a
refund or tax credit of excess creditable
withholding tax for a taxable period was
determined to have carried over and
automatically applied the same amount
claimed against the estimated tax
liabilities for the taxable quarter or
quarters of the succeeding taxable year;
or
d. When the excise tax due on excisable
articles has not been paid; or
e. When an article locally purchased or
imported by an exempt person, such as,
but not limited to, vehicles, capital
equipment, machineries and spare
parts, has been sold, traded or
transferred to non-exempt persons.
15. What is a Notice of Assessment/ Formal
Letter of Demand?
A Notice of Assessment s a declaration of
deficiency taxes issued to a Taxpayer who
fails to respond to a Pre-Assessment Notice
within the prescribed period of time, or
whose reply to the PAN was found to be
without merit. The Notice of Assessment
shall inform the Taxpayer of this fact, and
that the report of investigation submitted by
the Revenue Officer conducting the audit
shall be given due course.
The formal letter of demand calling for
payment of the taxpayers deficiency tax or
taxes shall state the facts, the law, rules and
regulations, or jurisprudence on which the
assessment is based, otherwise, the formal
letter of demand and the notice of
assessment shall be void.
TAXPAYERS OBLIGATIONS AND PRIVILEGES
16. What is required of a taxpayer who is being
audited?
A taxpayer who is being audited is obliged
to:
a. Duly acknowledge his receipt of the
appropriate Letter of Authority upon its
presentation by the Revenue Officer
authorized to conduct the audit by
affixing in the Letter of Authority the

17.

18.

19.

20.

name of the recipient and the date of the

receipt.
b. Present within a reasonable period of
time, his books of account sand other
related accounting records that may be
required by the Revenue Officer; and
c. Submit the necessary schedules as may
be requested by the Revenue Officer
within a reasonable amount of time from
his (taxpayers) receipt of the Letter of
Authority.
What is the recourse of a Taxpayer who
cannot submit the documents being required
of him within the prescribed period of time?
If a Taxpayer, believing that he cannot
present his books of accounts and/or other
accounting records, intends to request for
more time to present these documents in
order to avoid the issuance of a Jeopardy
Assessment, the Taxpayer may execute
what is referred to as a Waiver of the Statute
of Limitations.
What is a Waiver of the Statute of
Limitations?
The Waiver of the Statute of Limitations is a
signed statement whereby the Taxpayer
conveys his agreement to extend the period
within which the Bureau may validly issue an
assessment for deficiency taxes. If a
Taxpayer opts to execute a Waiver of the
Statute of Limitations, he shall likewise be, in
effect, waiving his right to invoke the defense
of prescription for assessments issued after
the reglementary period
No waiver of the Statute of limitations shall
be considered valid unless sit is accepted by
a duly authorized Bureau official.
If a Taxpayer does not agree with the
assessment made following an audit, can he
protest this Assessment?
Yes, he can. A Taxpayer has the right to
contest an assessment, and may do so by
filing a letter of protest stating in detail his
reasons for contesting the assessment.
What are the characteristics of a valid
protest?
A protest is considered valid if it satisfies the
following conditions:
It is made in writing, and addressed to the
Commissioner of Internal Revenue; It
contains the information, and complies with
the conditions required by Sec. 6 of Revenue
Regulations No. 12-85; to wit:
a. Name of the taxpayer and address for
the immediate past three (3) taxable
years.
b. Nature
of
request
whether
reinvestigation
or
reconsideration
specifying newly discovered evidence
he intends to present if it is a request for
investigation.
c. The taxable period covered.

d.
e.

Assessment number.
Date of receipt of assessment notice or
letter of demand.
f. Itemized statement of the findings to
which the taxpayer agrees as a basis for
computing the tax due, which amount
should be paid immediately upon the
filing of the protest. For this purpose, the
protest shall not be deemed validly filed
unless payment of the agreed portion of
the tax is paid first.
g. The
itemized
schedule
of
the
adjustments with which the taxpayer
does not agree.
h. A statement of facts and/or law in
support of the protest.
The taxpayer shall state the facts,
applicable law, rules and regulations or
jurisprudence on which his protest shall
be considered void ad without force and
effect on the event the letter of protest
submitted by the taxpayer is accepted,
the taxpayer shall submit the required
documents in support of his protest
within sixty (60) days from date of filing
of his letter of protest, otherwise, the
assessment
shall
become
final,
executory and demandable .
It is filed within thirty (30) days from the
Taxpayers receipt of the Notice of
Assessment and formal Letter of
Demand.
21. In the event the Commissioners duly
authorized
representative
denies
a
Taxpayers protest, what alternative course
of action is open to the Taxpayer? If a protest
filed by a Taxpayer be denied by the
Commissioners
duly
authorized
representative, the Taxpayer may request
the Commissioner for a reconsideration of
such denial and that his tax case be referred
to the Bureaus Appellate Division. The
Appellate Division serves as a Court,
where both parties, i.e. the Revenue Officer
on one hand, and the Taxpayer on the other,
can present testimony and evidence before a
Hearing Officer, to support their respective
claims.
22. What recourse is open to a Taxpayer if his
request of reconsideration is denied or his
protest is not acted?
Should
the
Taxpyers
request
for
reconsideration be denied or his protest is
not acted upon within 180 days from
submission
of
documents
by
the
Commissioner, the Taxpayer has the right to
appeal with the Court of Tax Appeals (CTA)
Any appeal must be done within thirty (30)
days from the date of the Taxpayers receipt
of the Commissioners decision denying the
request for reconsideration or from the lapse
of the 180-day period counted from the

submission of the documents (Sec. 228 of

the Tax Code, as amended)
23. If the Taxpayer is not satisfied with the CTAs
decision, can he appeal the decision to a
higher Court? Yes, he can. Decisions of the
Court of Tax Appeals may be appealed with
the Court of Appeals within fifteen (15) days
from the Taxpayers receipt of the CTAs
decision. In the event that the Taxpayer is
likewise unsatisfied with the decision of the
Court of Appeals, he may appeal this
decision with the Supreme Court.
24. Can a Taxpayer claim a refund or tax credit
for erroneously or illegally collected taxes?
Yes, he can. The Taxpayer may file such a
claim with the Commissioner of Internal
Revenue (Sec. 229, NIRC), within two (2)
years from the payment of the tax or penalty
sought to be refunded. Failure of the
Taxpayer to file such a claim within this
prescribed period shall result in the forfeiture
of his right to the refund or tax credit.
25. If a Taxpayer has filed a claim for refund and
the Bureau has yet to render a decision on
this claim, can the Taxpayer elevate his
claim to the CTA?
Yes, he can, if the two (2) year period stated
above is about to end and the Commissioner
has yet to render a decision on the claim
(Gibbs v. Collector, L-13453, February 29,
1960).
REMEDIES OF THE BUREAU IN THE AUDIT
PROCESS
AND
COLLECTION
OF
DELINQUENT ACCOUNTS
26. What means are available to the Bureau to
compel a Taxpayer to produce his books of
accounts and other records?
A Taxpayer shall be requested, in writing, not
more than two (2) times, to produce his
books of accounts and other pertinent
accounting records, for inspection. If, after
the Taxpayers receipt of the second written
request, he still fails to comply with the
requirements of the notice, the Bureau shall
then issue him a Subpoena Duces Tecum.
27. What course of action shall the Bureau take
if the Taxpayer fails to comply with the
Subpoena Duces Tecum?
If after the Taxpayer fails, refuses, or
neglects to comply with the requirements of
the Subpoena Duces Tecum, the Bureau
may:
a. File a criminal case against the
Taxpayer for violation of Section 5 as it
relates to Sections 14 and 266, of the
NIRC, as amended; and/or
b. Initiate proceedings to cite the Taxpayer
for contempt, under Section 3(f), Rule
71 of the Revised Rules of Court.
28. What alternatives are open to Government
for the collection of delinquent accounts?

Once an assessment becomes final and

demandable, the Government may employ
any, or all, of the following remedies for the
collection of delinquent accounts:
a. Distraint of personal property;
b. Levy of real property belonging to the
Taxpayer;
c. Civil Action; and
d. Criminal action.
29. What is Distraint of Personal Property?
Distraint of personal property involves the
seizure by the Government of personal
property tangible or intangible to enforce
the payment of taxes, followed by the public
sale of such property, if the Taxpayer fails to
pay the taxes voluntarily. What is Levy of
Real Property ? Levy of real property refers
to the same act of seizure, but in this case of
real property, and interest in or rights to such
property in order to enforce the payment of
taxes. As in the distrant of personal property,
the real property under levy shall be sold in a
public sale, if the taxes involved are not
voluntarily paid following such levy.
30. In what time period must collection be
made?
Any internal revenue tax, which has been
assessed within the period prescribed shall
be collected within three (3) years from date
of assessment. However, tax fraud cases
may be collected by distraint or levy or by a
court proceeding within five (5) years from
assessment of the tax or from the last
waiver.