Tax

J E L O N O T E S IN TAX LAW REVIEW 2009
Based on the Lectures of Atty. Francis J. Sababan
GENERAL PRINCIPLES
The power to tax is an inherent prerogative of sovereignty; it can be exercised and enforced even
without constitutional or statutory provision. This power is inherent in the national government but not in
the LGUs. Since LGUs has no inherent power to tax, it cannot impose taxes upon their respective
inhabitants unless the power to tax is expressly granted to them by the constitution or by law passed by
congress.
The power to tax depends on the existence of the state; the moment the state exists,
automatically, the power of taxation also exist. The Power to tax is an inherent power because it does not
need any law for the state to exercise this power.
Q: Is there a provision in the constitution authorizing the government to exercise the power to tax?
A: It depends. If we refer to the National Government there is none because the power to tax is inherent, but with regard
to the Local government units (LGU) we have Section 5 of Article X and Section 20 (2)also of Article X of the Constitution.
Section 5 of Article X authorizes Local government unit to impose or levy tax, which is a self executing provision. When
we speak of the Local government units we need to classify them. For those LGUs outside of the Autonomous Region,
their power to tax is delegated by the constitution as provided by Section 5, Article X of the Constitution. However, for
LGUs in the autonomous region, their power to tax is delegated by congress by virtue of an organic act passed by
Congress creating the autonomous region, as provided under Sec 20, No. 2 of Article X of the Constitution. This provision
is not self- executing but merely authorizes the congress to pass the organic act.
Therefore, the LGUs power to tax is based on 1987 Constitution subject only to such guidelines and limitations as the
Congress may provide. The power to tax of the LGUs within the ARs is based on the Organic Act which the 1987
Constitution authorizes Congress to pass. The limitation and guidelines under the LGC is applicable only to LGUs outside
the ARs.
INHERENT LIMITATIONS OF TAXATION:

1. It should be for public purpose;
2. It is inherently legislative;
3. Government is tax exempt;
4. Territoriality;
5. International Comity
Q: What if the Congress appropriate money for the development of a property belonging to a private person, is the
appropriation valid?
Ans: The SC in Pascual v. Sec. of Public Works and Highways ( GR no. L-10405, Dec. 29, 1960) says that It is general rule
that the legislature is without power to appropriate public revenue for anything but a public purpose. It is the essential
character of the direct object of expenditure, which must determine its validity as justifying a tax, and not in the magnitude
of the interest to be affected nor the degree to which the general advantage of the community, and thus, the public
welfare, may be ultimately benefited by their promotion. Incidental to the public or to the State, which results from the
promotion of private enterprises and the prosperity of private enterprise or business, does not justify their aid by the use of
public money.
Page 1 Compiled by Joel V. Ofilan
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CONSTITUTIONAL LIMITATIONS OF TAXATION

1. Due Process
The prohibition refers to Section 1, Art. III of the 1987 Constitution, which states that No person shall
be deprived of life, liberty or property, without due process of law, xxx The due process clause is a
limitation to the power to tax refers both to the Substantive and procedural due process.
Substantive due process requires that a tax statute must be within the constitutional authority to pass,
and that it must be reasonable, fair, and just. For instance when the congress passes a law exempting
the 13th month pay from tax but with the concurrence of only the majority of the quorum, the law
would be invalid because the constitution requires that any grant of tax exemption shall be passed
with the concurrence of the majority of all the members of congress. Hence, the constitutional
provision is violated by not following the requisite majority.
Procedural due process, on the other hand, requires notice and hearing or at least the opportunity to
be heard.
Q: if procedural due process requires notice and hearing, does it follow that the adverse party in a proceeding must
always be notified?
Ans: NO. As a rule, notice and hearing or opportunity to be heard is necessary only when expressly required by law.
Where there is no requirement, notice and opportunity to be heard are indispensable.
Example: Before Oct. 1, 1995, one can serve a TRO without notifying the adverse party. If a person is a suspect in a
criminal case, he has the right to have an opportunity to be heard if there is a law requiring such process; otherwise, it is
indispensable.
Another example is in cases of search warrants; a person to be searched is not notified. The person searched cannot
claim that there is a violation of due process because there is no law requiring a person to be searched should be
notified. Fortunately majority of the proceedings requires.
2. Equal Protection Clause
This is also based on Sec. 1, Art. III of the 1987 Constitution. It states xxx nor any person be denied of
equal protection of the laws. As a rule, tax payers of the same footing are treated alike, both as to the
privileges conferred and liabilities imposed. Difference in treatment is allowed only when based on
substantial distinction. Difference in treatment not based on substantial distinction is frowned upon as
class legislation
The equal protection clause is violated when taxpayers belonging to the same classification are treated
differently from another, and when tax payers belonging to different classifications are treated alike.

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Q: if a tax ordinance is applied to only one entity or tax payer, is there a violation of the equal protection clause?
Ans: It depends. If the ordinance is intended to apply a specific taxpayer and no one else regardless of whether or not
other entities belonging to the same class are established in the future, it is a violation of the equal protection clause.
But if the ordinance Is intended to apply also in the future, then the tax ordinance is valid even if in the meantime it
applies only to an entity or taxpayer for the simple reason that there is so far only one member of the class of subject
to the tax measure.
ORMOC SUGAR CENTRAL VS. ORMOC CITY/ GR No. L- 23794, February 17, 1968
When the tax ordinance was enacted, Ormoc Sugar Co., Inc. was the only sugar central in the city. A
reasonable classification should be in terms applicable to future conditions as well. The taxing ordinance
should not be singular and exclusive as to exclude any subsequent established sugar central.
Q: What are the requirements of reasonable classification?
Ans.: Equal protection clause applies only to persons or things identically situated and do not bar a reasonable
classification of the subject of legislation. A classification is reasonable where:
(1) it is based on substantial distinctions which make real differences;

(2) These are germane to the purpose of the law;
(3) The classification applies not only to present conditions but also to the future conditions which are
substantially identical to those of the present; (People v. Cayat)
(4) The classification applies only to those who belong to the same class. (Ormoc sugar supra)
TIU CASE 301 SCRA 278
Congress in 1992 enacted a law, signed by then Pres. Ramos, RA 7227, converting the land formerly
occupied by the US Military bases in Olongapo into a Special Economic Zone to make it more productive.
Subsequent to the enactment of the law, President Ramos signed an Executive Order providing tax
incentives and other privileges to those businessmen operating inside the economic zone. As a result of
this, businessmen conducting business outside of the special economic zone complained citing that the
said EO is violative of the equal protection clause because they are also Filipinos and businessmen at
the same time (in short they are attacking element no.1 of the requisites). The SC held that it was not
violative of the equal protection clause because there is substantial distinction between the
businessmen inside and outside of the economic zone. Businessmen inside the economic zone are
businessmen with substantial investment to be entitled of the incentives and privileges.

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3. Freedom of Religion
A: If you will read Article III, Section 5 of the Constitution, nothing has been mentioned there about taxation,
but why is it that we are saying that it is a limitation?
Q. Article III, Section 5 of the Constitution provides two things. (1) Freedom to choose the religion and (2)
the prohibition on the part of the state to establish an official religion. When it comes the constitutional
limitation to the power to tax, only the latter is considered limitation on the power to tax because it will
require special appropriation coming from the national treasury which is the taxes paid by the people.
4. Non-impairment of Contracts
Article III, Section X of the Constitution provides that No law impairing the obligation of contracts shall
be passed. Non-impairment clause is only applicable if the source of the obligation is contract. Under
Article 1157 of the New Civil Code there are several sources of obligations which are Law, Contracts,
Quasi-Contracts, Acts or Omissions punishable by Law (delicts) and Quasi Delicts. In this case, it is
necessary to know the sources of the obligations.
A: The obligation of the Husband to support the wife, is it pursuant to law because the civil code say so or to a
contract because of the marriage contract?
Q. it is pursuant to a contract of marriage.
Q. what about the obligation of the lessee towards the lessor?
A: It is pursuant to the contract of Lease

Q: What about the obligation of the citizens to pay the income tax?
A: it is pursuant to law
Q: What then is the determining factor whether an obligation is pursuant to law or contract?
A: When the law itself establishes the obligation, the law itself is the source of the obligation. However, when the
law merely recognizes or acknowledges, the existence of an obligation generated by an act which constitute a
contract, quasi-contract or delict and its only purpose is to regulate such obligation, then the act itself is the source
of the obligation and not the law.
A: Is the non-impairment clause a limitation on the power to tax?
Q. Generally, it can be said that it is not a limitation on the power to tax because normally, the obligation to pay
taxes arises from the law itself. If the obligation arises from law it is not subject to the Non-impairment clause.
However, when for instance, a taxpayer enters into a compromise agreement with the BIR, the obligation of the
taxpayer is converted to one that arises from the contract, hence, Non-impairment clause may be invoked.

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The non-impairment clause applies to taxation and not to police power and eminent domain. Furthermore,
it applies only where one of the parties is the government and the other, a private individual. If you could
prove that the source of the obligation is not a contract, there is no violation of the non-impairment clause,
except on franchise because it is always granted under a condition that it can be amended, altered or
repealed anytime if the public interest so requires.
5. Non-imprisonment for non-payment of a Poll Tax
Article III, Section 20 of the Constitution provides that No person shall be imprisonment for
nonpayment of a poll tax
Q: What is a poll tax?
A: it is a tax where tax payers are allowed to pay even if they are not qualified whether as to the income or to the
age requirement.
Q: The mere fact that it is a community tax, does it mean that it is the poll tax?
A: No. If its mandatory it is not a poll tax. An example of a Poll tax is the community tax under Sec. 162 of the
LGC. Under this, a person or a corporation who does not own any real property , does not receive any income, or
even a minor may be permitted to pay the basic community tax and issued a community tax certificate.
Q: Why is non-imprisonment for non-payment of poll tax a limitation on the power to tax?
A.: Because payment is optional, it is not mandatory or obligatory. The only penalty for non-payment of a poll
tax is fine, not imprisonment because if this is the case, the government will provide food and shelter that will
come from the national treasury, thereby limiting the power to tax.
The non-imprisonment rule applies to non-payment of poll tax which is punishable only by a
surcharge but not to other violations like falsification of community tax certificate and non-
payment of other taxes.

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6. Delegation of Taxing Power to Local Governments
Q: What is the source of power to tax of LGUs outside the autonomous Region and those within the autonomous
region?
Ans: LGUs outside the AR derived its power to tax from the 1987 Constitution. Sec. 5 of Article X states that Each
LGU shall have the power to create its own sources of revenues and levy taxes, fees and charges subject to such
guidelines and limitations as the congress may provide, consistent with the policy of local autonomy. Such taxes,
fees and charges shall accrue exclusively to the local governments. This constitutional provision is a self executing
provision.
However, the rule is applicable only to LGUs outside the ARs (Muslim Mindanao and Cordilleras) The authority
to tax of LGUs within Autonomous Regions (AR) is not delegated by the constitutional provision but by the
ORGANIC ACT creating the LGUs with the AR. This is implied under Art. X, Sec. 20, second number of the 1987
Constitution. It states that within its territorial jurisdiction and subject to the provisions of the constitution and
national laws, the organic act of ARs shall provide for legislative powers over xxxx9 (2) Creation of sources of
revenues.
This Constitution provision merely authorizes the Congress to pass the organic act of the ARs, which shall provide
for the legislative powers to levy taxes upon their inhabitants. Sec. 20, Art. X is not a self executing provision as
compared to Art. X section 5 also of the 1987 Constitution. Therefore, the LGUs power to tax is based on 1987
Constitution subject only to such guidelines and limitations as the Congress may provide. The power to tax of the
LGUs within the ARs is based on the Organic Act which the 1987 Constitution authorizes Congress to pass. The
\limitation and guidelines under the LGC is applicable only to LGUs outside the ARs.
Q: May the Government tax itself?
Ans: First determine who the taxing authority is. If the taxing authority is an LGU, the answer is NO, because RA
7610, otherwise known as Local Government Code, expressly prohibits LGUs from levying tax from the national
government, its agencies and instrumentalities and other LGUs.
Under Sec. 133(o) of the LGC, the taxing power of the LGUs shall not extend to taxes, fees, charges of any kind,
on the national government, its agencies and instrumentalities ( except income from public utilities under their
BASCO vs. PAGCOR
197 SCRA 52
The City of Manila, being a mere Municipal Corporation, has no inherent power to tax, LGUs have no power
to tax instrumentalities of the National Government, PAGCOR being an instrumentalities of the national
government, is therefore exempt from local taxes, otherwise, its operation might be burdened, impeded, or
subjected to control by a mere LGU.

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Mactan Cebu International Airport vs. Marcos
261 SCRA 667
Mactan cannot invoke Sec. 133 (o) of the LGC, it refers to local taxation, and since last paragraph of Sec. 234
unequivocally withdrew upon the effectivity of the LGC exemption from payment of real property taxes
granted to natural persons and including GOCCs except as provided in said section, and the petitioner is
undoubtedly a GOCC, it necessary follows that its exemption from tax granted in Sec. 14 of its charter, RA
6958, has been withdrawn.
NB: If the taxing authority is the national government, the answer to the previous question is yes. Pursuant
to the provisions of NIRC, RA 8424, it can levy tax upon GOCCs (see Section 27, NIRC), agencies and
instrumentalities although income derived by the government from public utility and income derived from
the exercise of essential governmental functions are exempt (see Sec. 32B7b of NIRC)
7. TERRITORIALITY
Taxation is territorial in such a manner that the taxing authority cannot impose taxes on subject beyond
its territorial jurisdiction. However, taxing authority may determine the tax situs.
EXEMPTION FROM REAL ESTATE TAX BY VIRTUE OF INCIDENTAL PURPOSE:
To fully understand this concept, four SC decisions should be scrutinized:
1. Herrera vs, QC Board of Assessment Appeals;

2. Abra Valley College vs. Aquino;
3. Province of Abra vs. Hernando
4. Phil. Lung Center vs. QC Board of Assessment Appeals
In these four cases, we have to know the governing constitution at the time the cause of action arose;
otherwise, we will not understand the relevance of these cases.
1. Herrera vs, QC Board of Assessment Appeals (1935)

2. Abra Valley College vs. Aquino (1935);
3. Province of Abra vs. Hernando(1973);
4. Phil. Lung Center vs. QC Board of Assessment Appeals (1987)
Q: What is the importance of determining the prevailing constitution at the time the cause of action arises?
Ans.: The requirement for exemption of the entity involved is different. In 1935 Constitution, the
exemption from real estate tax requires that the real property should be exclusively used for the entity
exempted. In 1973 and 1987 Constitutions, the requirements are exclusively, actually and directly

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Q: Who are the entities covered by these constitutions?
Ans.: In 1987 and 1935, the entities covered of such exemption are religious, charitable, and educational. In
1973 Constitution, it only provides for charitable and religious institution.
NB: Under the NIRC or in any other Philippine Statutes, there is no such thing as exemption by virtue of
incidental purpose. This principle originated in the SC decision in the case of Herrera vs. QC BOAA
HERRERA VS. QCBAA
GRN L- 15270, September 30, 1961
The entity involve here is a charitable institution. QC Wanted to collect real property tax because St.
Catherine hospital sometime collects fees from certain patients. It also operates a midwifery and nursing
school and dormitory. Quezon City contends that the real property must be used exclusively and St.
Catherine does not exclusively using the land from charitable purpose; hence, liable for real property tax.
The SC ruled the exemption from real property tax by virtue of incidental purpose. The exemption granted
was to all properties of St. Catherine whether for paying or non paying patient, whether it is used by nursing
school, midwifery school and dormitory.
This is the case where the SC coined the term exemption by virtue of incidental purpose from real property
tax.
PROVINCE OF ABRA VS. HERNANDO
GRN L- 9086, JUNE 15, 1988
The provincial prosecutor filed a petition for declaratory relief. The issues whether or not the property of
the Roman Catholic in Bangued, Abra is exempt or not exempt from real property tax. In this case, the judge
merely stated that the said properties are exempt without conducting a hearing. Take note that this case is
under the 1973 constitution. The petitioner went to the SC and filed a certiorari for violation of the
procedural process on the part of the province of Abra.,
The SC ruled that if only the judge had read the 1973 Constitution, he should have known the difference
between the 1935 and the 1973 Constitution and he could not have summarily dismissed the case. There is
a substantial distinction between the 1935 and 1973 Constitution. In the 1935 Consti, the requirement for
exemption for real property taxes is exclusively while the 1973 Consti requires actually, directly, and
exclusively. The SC remanded to the court of origin the case for further hearing.
The important thing in this case is that the SC had already noticed the great difference of the substantial
distinction between the exemptions from real property taxes.

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ABRA VALLEY COLLEGE VS. AQUINO
GRN L= 49336, AUGUST 31, 1981
The entity involve in this case is an educational institution and the cause of action arose under the 1935
Constitution. The school entered into a contract of lease as a lessor. The lessees are Northern Marketing
Corp. in the ground floor and the director of the school in the second floor. The province of Abra contended
that the property was not exclusively used for educational purposes and it tried to collect real property tax.
The SC ruled that the provincial government of Abra is partially correct. With regard to the lease where the
lessee is a domestic corporation, it is not exempt because it has nothing to do with the operation of the
entity of the school. But with regard to the lease to the director of the school, It is still exempt based on the
exemption by virtue of incidental purpose. In other words, it merely reiterated its prior ruling in the Herrera
Case.
However, the ruling here is not the same as Herrera, the exemption granted in Herrera is total while in this
case, the exemption is partial. Take note that both cases took place under the 1935 Constitution.
PHILIPPINE LUNG CENTER VS. QC
GR NO. 144104, JUNE 29, 2004
The cause of action arose under the 1987 Constitution. The petitioner is a charitable institution. QC
contended that the petitioner is liable for real property tax because the ground floor was leased to
drugstore, clinic and grocery and the vacant land was leased to planters of orchid. QC further contended
that under the 1987 Constitution, the real property of the exempt entities must be used actually, directly,
and exclusively for charitable purposes and the petitioner failed to fall within the exemption because of the
leases to private entities and the acceptance of paying patients. The Lung center invoked the SC ruling in the
case of Herrera.
The SC ruled that the Herrera ruling is no longer applicable because the cause of action arose under the
1935 Constitution. However, the SC ruled that the property leased to private entities should be assessed
real estate tax but those which are used by the patient, paying or non-paying, exempt from tax.
ANALYSIS:
The SC is correct in rejecting the Herrera ruling. But, when it ruled that the property leased to private
entities should be assessed real estate tax but those which are used by the patient, paying or non-paying,
are exempt from tax, it impliedly reiterated its ruling in the Abra Valley vs. Aquino, where the SC reiterated
the exemption by virtue of incidental purpose enunciated in Herrera.

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Q: Is exemption by virtue of incidental purpose still applicable in this case?
Ans.: It may be answered in two ways;
1. YES. In Phil. Lung Center vs. QC, the SC adhered to this policy. Impliedly, it goes back to the principle of
exemption by virtue of incidental purpose. The SC adopted the case of Abra Valley vs. Aquino, where it
reiterated the ruling in Herrera on exemption by virtue of incidental purpose.
2. NO. This principle originated from SC a decision in the case of Herrera during the time where the 1935
Constitution says that real property must be actually, directly and exclusively. The Herrera ruling is no
longer controlling because of the principle that the governing law in an actions is the law or the constitution
at the time the cause of action arose The Herrera ruling was decided under the 1935 Constitution while the
Phil. Lung Center is under the 1987 Constitution. In addition, Philippine lung Centers expressly rejects the
Herrera ruling in which the principle of exemption by virtue of incidental purpose originated.
INTERNATIONAL JURIDICAL DOUBLE TAXATION

The principle of international juridical double taxation is enunciated by the SC in the case of Commissioner
of Internal revenue vs. Johnson and Johnson, infra. The discussion of this principle has been incorporated in
the digested case below.
CIR VS. JOHNSON AND JOHNSON (Phil.) GRN. 127605, June 25, 1999
This is the landmark decision because the SC enunciated, for the first time, the principle of international
juridical double taxation.
In this case, Johnson and Johnson (Philippines) and Johnson and Johnson (USA), a non resident foreign
corporation (NRFC), entered into agreement allowing Johnson and Johnson Philippines to use its trademark,
trade name, goodwill and the secret formula. In turn, the domestic corporation (DC) will pay a certain sum
of money known in law as royalty. The income earner in this case is SC Johnson and Johnson (USA). This
income is subjected to income tax in the Philippines and US.
It is in this case where the SC coined the term international juridical double taxation because a particular
income is subjected to two income taxes. The Philippine income tax and the income tax law under the
Federal revenue Code of US.
The income earned by SC Johnson USA was subjected to Philippine income tax law; Johnson withheld
income tax of 25% of the royalties transmitted to the Johnson USA. After payment, the SC Johnson
discovered that under the subtitle the most favored nation the rate of income tax is 10% if it was paid
under similar circumstances. They filed a claim for refund.
According to CA and CTA, the meaning of under similar circumstances includes the receipt of royalty in the
payment of income tax. There is also similar provision in the RP-Germany Tax Treaty where they are paying
10%. Hence, they are only liable for 10% tax.
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The SC reversed the ruling. The payment under similar circumstances under the most favored nation shall
be construed as about matching tax credit.
Q: what is the tax credit provided for in this case?
Ans.: The German nationals and corporations earning income with the Philippines pay income tax in the
Philippines. In the RP-Germany tax treaty, German nationals and corporation pays income tax in the Philippines as
well as in their country. They will pay income tax in the Philippines for the royalty or any income they earned from
sources within the Philippines. As agreed in the RP-Germany Treaty, whatever income they had paid in the
Philippines, 20% will constitute as tax credit in the payment of income tax in Germany. Take note that the tax
credits deducted from tax due and not from gross income.
The German nationals and corporations, under the treaty, are allowed to pay 10% income tax. The SC explained
that in RP-US treaty, there is no such matching tax credit system provided for in that treaty. The claim for refund of
the Johnson and Johnson USA was denied because the Most favored Clause does not apply to them; this clause
refers to the tax credit as agreed upon in the treaty. There is no tax credit system agreed upon between the
Philippines and the United States in the RP-US Treaty.
NECESSITY OF TAX TREATIES

The SC declared that there is a necessity to enter into a tax treaty in order to minimize the burden
of international juridical double taxation. In a treaty, what could be agreed upon are the following:
1. Tax exemption;
2. Tax credit; and
3. Tax rate may be lowered (as opined by Prof. Sababan)
A tax payer may be liable because of the provision of the statute. But by virtue of a treaty, the
states can agree that a party or a taxpayer of either or both country may be exempt from tax.
In this case, the gross income tax (GIT) on NRFC is 35% (see 28B1 as amended by RA 9337). By
virtue of the treaty, it may be lowered to 25%, or they could agree on exemption. In tax credit a tax paid in
source country may be credited to the tax paid in their residence country.
We have remembered that the tax credit should be deducted after the tax had been computed. This is
different from deduction it is deducted from the gross income not from the tax due.

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EXISTENCE OF JURIDICAL DOUBLE TAXATION:

For purposes of income taxation, there are 2 kinds of taxability of income in international precept; an
income of a citizen or domestic corporation is subject to income tax not only in their country where the
income came from. The best example is Philippines And US. Therefore, a resident citizen of Philippines is
taxable under Philippine law as well as USA law if the income is derived in the latter ( see Sec. 23A of NIRC)
and vice versa.
For instance, if an American earned income from sources within the Philippines, like in this case, , they will
pay not only income tax in the Philippines but also in the US. Also, if a resident citizen of the Philippines
earned income in the US, in the Philippines, they are still subject to Philippine law.
nd
We have the 2 group, the income tax of a citizen and domestic corporation is only limited on income
within its country, and if they earn income from outside the country, they are not liable, hence, exempt.
One good example is the country of Switzerland entities earned income from sources in the Philippines,
under our law, they will have to pay income tax in the Philippines, but in Switzerland, they are exempt. In
this case, double taxation is not possible because when they go in their country, they are exempt.
International juridical double taxation happens only if both countries are within the first group where an
entity is taxable from its home country and the country of where the income is earned. Usually, countries
which tax its citizens and domestic corporations within and without its countries, are Philippines, USA,
Germany and Japan. They belong to the same class as far as application of income tax, Hence, juridical
double taxation will apply, for the second group, this principle is unlikely to happen.
DOCTRINE OF
OF EQUITABLE RECOUPMENT AND SET-
SET-OFF
As a rule do not interchange the doctrine of set-off or compensation in taxation with the doctrine of
equitable recoupment.
Doctrine of Set-off or compensation in taxation was taken from the New Civil Code and was changed to
compensation or set-off in taxation. In this doctrine, the taxpayer has claim against the government but
the government is claiming tax from the taxpayer.
For instance, the government initiated an expropriation proceeding. The government is obliged to pay the
taxpayer for just compensation, for example P500, 000.00, on the other hand, the taxpayer is obliged to pay
a tax, for instance, an income tax amounting to P100,000.00, and then the taxpayer may say, why not pay
me P500,000.00 but P400,000.00. The taxpayer in this example is requesting the application of
compensation under the new civil code.
The doctrine of equitable recoupment is different from doctrine of set-off. Under the doctrine of equitable
recoupment, the taxpayer is entitled to claim for a refund which was already barred by law on
prescription, and subsequently, he was obliged again to pay income tax.

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To illustrate, a taxpayer is liable only to pay income tax of P 10,000.00, instead of paying said tax, he paid an
income tax of P 100,000.00. Therefore, he is entitled to a claim for P 90,000.00 refund, his right to claim has
prescribed.
Subsequently, the tax payer is being obliged again to pay income tax of P 100,000.00. Can the taxpayer tell
the BIR, I do not deny my liability for this year of P 100,000.00, but I have a claim of P 90,000.00 tax refund
which I failed to recover because of prescription, may I request that the P 90,000.00 be credited so that I am
going to pay only P 10,000.00? If doctrine of equitable recoupment is applicable, the request will probably
be granted.
Take note that the doctrine of equitable recoupment is not allowed in our country. The prohibition is an
absolute prohibition. The reason is that to allow such prohibition, the government will be tempted to delay
the collection of tax and the taxpayer will be tempted to delay payment of their tax liability. Secondly, if this
doctrine will become applicable in our jurisdiction, the government will be bombarded with so many claims
for tax credit.
The study of set-off in taxation is best illustrated in the following cases:
1. Republic vs. Mambulao

2. Domingo vs. Garlitos
3. Francia vs. CIR
4. Caltex vs. CIR
5. Philex Mining vs. COA
Requisites of compensation
1. That each one of the obligor be bound principally, and that he be at the same time a principal
creditor of the other.
2. That both debts consist in a sum of money, or if the things due are consumable, they be of the
same kind and also of the same quality if the latter has been stated.
3. That the two (2) debts be due.
4. That they be liquidated and demandable.
5. That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtors.
Rules re: set off or compensation of debts
General rule: A tax delinquency cannot be extinguished by legal compensation. This is so because
the government and the tax delinquent are not mutually creditors and debtors. Neither is a tax
obligation an ordinary act. Moreover, the collection of a tax cannot await the results of a lawsuit
against the government. Finally, taxes are not in the nature of contracts but grow out of the duty
to, and are the positive acts of the government to the making and enforcing of which the personal
consent of the taxpayer is not required. (Francia v. IAC, 162 SCRA 754 and Republic v. Mambulao
Lumber, 4 SCRA 622)

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Exception: SC allowed set off in the case of Domingo v. Garlitos [8 SCRA 443] re: claim for payment
of unpaid services of a government employee vis--vis the estate taxes due from his estate. The
fact that the court having jurisdiction of the estate had found that the claim of the estate against
the government has been appropriated for the purpose by a corresponding law shows that both
the claim of the government for inheritance taxes and the claim of the intestate for services
rendered have already become overdue and demandable as well as fully liquidated. Compensation
therefore takes place by operation of law.
REPUBLIC VS. MAMBULAO

GRN L-177725, FEBRUARY 28, 1962
The tax being claim by the government against Mambulao is forest charges. (Take note that by virtue of EO
37 issued by Pres. Aquino, forest charges was abolished.) Mambulao lumber refused to pay forest charges
alleging that the government did not use reforestation charges under RA 115 for reforestation which they
had consistently paid in past year. Mambulao contended that their liability to pay charges should be offset
from the reforestation charges they had paid considering that the government did not use it for
reforestation. In the summary, Mambulao is claiming the application of the principle of set-off or
compensation under the New Civil Code.
The SC did not agree on the contention of Mambulao, According to the SC, the Government and Mambulao
are not mutually debtors and creditors with one another and that a tax is not a debt to be a subject matter
of set-off or compensation.
Q: What do we mean by the world mutual?
Ans.: Mutual means that the cause of action must arose from the same source. Considering the causes of
action of the parties in this case came from different sources, it is not a proper subject matter of a set-off.
Moreover, tax is not a debt. The subject matter of set-off or compensation under the civil code should be a
debt, therefore, set-off or compensation was not allowed in this case.
DOMINGO VS. GARLITOS
GRN L- 18994, JUNE 29, 1963
The government is trying to collect from the estate of the decedent inheritance tax and estate tax. (take
note that we do not have inheritance tax as well as donees tax. This were abolished in 1974 by virtue of PD
69). The surviving spouse is the administratrix of the estate and contended that her late husband has claim
against the government for the services rendered as cadastral surveyor. The administratrix, in turn is
invoking the application of doctrine of set-off or compensation in taxation under the new civil code.
The SC ruled that the set-off is allowed in this case on the ground that both demands are due, demandable
and liquidated. Fully liquidated means the amount is already determined up to the last centavo. Why is it
liquidated? The amount due is already determined because the congress enacts RA 2700 for the
appropriation of sum of money to the estate of the decedent for his service rendered as cadastral surveyor.
PUP COLLEGE OF LAW
Take note that the inheritance tax is not a debt. Normally this would not have been a subject of
compensation or set-off. Also, the causes of action arose from different sources.
Q: Why is the SC ruled otherwise although the facts of the case are almost identical with the case of Mambulao?
What is the compelling reason why the SC ruled in this manner?
Ans.: This is because of the enactment of RA 2700 appropriating money to be paid to the estate of the decedent
as compensation. The compensation is around P 200, 000.00 but the one claimed by the government for estate
and inheritance tax only P 40,000.00. The SC ruled that since both demands are due, demandable and fully
liquidated, compensation or set-off by operation of law should be applied pursuant to 1279 Article and 1290 of
the Civil Code.
FRANCIA VS. CIR

GRN L- 67649, JUNE 28, 1988
The tax collected by Pasay City in this case is a real estate tax. A portion of the petitioners parcel of land
was expropriated for the expansion of the street. He contended that the principle of set-off automatically
applies in his real estate tax liability and just compensation he will receive as payment of the expropriation
of his land by invoking the case of Domingo vs. Garlitos
The Sc ruled in the negative reiterating its prior ruling in the Mambulao case. In addition, the SC ruled that
the just compensation had been deposited to his PNB account in Pasay. Impliedly, the SC is saying that if he
had just withdrawn the money and pays his real estate tax then, he would not have his property sold in the
auction. (This case was asked in the 1996 bar examinations.)
CALIFORNIA TEXAS (CALTEX) VS. COA
GRN 92585, MAY 8, 1998
The government claimed the remittance of the contribution for the Oil Price Stabilization Fund (OPSF) in
which the purpose is to stabilize the prize of petroleum product. Under RA 6952, all petroleum companies in
the Philippines are obliged to remit a certain sum of money with OPSF. Caltex contended that they have a
pending claim for refund against the OPSF because of the oil price fluctuation in Europe and in Middle East.
Caltex does not deny the liability to contribute a certain sum of money but claims that it is entitled for a
refund in OPSF. In sum, Caltex is requesting the application of principle of compensation or set-off under the
New Civil Code.
The SC did not allow the set-off. The SC reiterated its ruling in the Mambulao and Francia stating that the
government and Caltex are not mutually creditors and debtors with each other. The SC added that the fund
of OPSF is not subject to compensation because RA 6952 expressly states that set-off or compensation
should not be made against the funds of OPSF. With this reasoning, the claim for set-off was rejected.

PUP COLLEGE OF LAW
Philex Mining Corporation v. Commissioner, 294 SCRA 687 (1998)
(Philex Mining Corporation was to set off its claims for VAT input credit/refund for the excise taxes due from
it. The Supreme Court disallowed such set off or compensation)
The tax being collected in this case is excise tax under title VI of NIRC (take note that excise tax is not
covered in the bar exam for the simple reason that most of the provision are about the rates. During this
time, forest charges were abolished because under the excise tax law one of the subject matter are mining
companies like Philex) Philex, on the other hand, alleged that they have a pending claim for refund under
the VAT law. In sum, Philex do not deny their liability to pay excise tax but invokes the principle of set-off or
compensation in taxation.
SC did not agree with Philex. The SC reiterated its prior pronouncement in Mambulao, Francia and Caltex,
where government and taxpayers are not mutually creditors and debtors with each other. In addition, the
SC added that the demand must be due and demandable. In this case, claim for refund of Philex is not yet
granted, hence, it cannot be determined how much is the actual amount to be refunded. It cannot be a
subject matter of set-off or compensation simply because the amount is not yet determined.
Philex mining invoked the application of Itogon case. However, nowadays, the claim for refund with the BIR
is not automatic. It has to be assessed and studied before it will be granted. Unlike in old days, it would
seem refund is automatic. If the refund is not yet granted, then the amount is not yet fully liquidated.
Corollary, the claim for application of set-off is denied.
DISCUSSIONS:
We will notice in these five cases, with the exception of Domingo vs. Garlitos, compensation or set-off was
denied. In all these cases compensation was denied, there is a common ground; a tax is not a debt because
the subject matters under the Civil Code of compensation must be a debt. Secondly, the SC keeps on
repeating that the taxpayer and the government are not mutually creditors and debtors with each other.
However, in all these cases were set off was denied by the government, there is always a second reason
after reiterating the rule in Mambulao case. To begin with, in the case of Francia, the SC after reiterating the
Mambulao ruling it ruled the money was already paid in the PNB account of Francia. In Caltex, we have the
same reason. In addition, the SC states that RA 6952 do not allow set-off or compensation to be made
against the fund of OPSF. Lastly, in Philex mining, we have the same ruling, but in addition, the SC added
that the claim for refund is not yet granted. In the application of principle of set-off or compensation, the
amount must be fully liquidated. It follows that set-off or compensation should be denied because the
refund is not yet granted.
In Domingo vs. Garlitos, although the parties are not mutually creditors and debtors, yet the SC ruled
otherwise simply because of the very unique circumstance that congress enacted RA 2700 appropriating
money to the estate of decedent.

PUP COLLEGE OF LAW
CLASSIFICATION
CLASSIFICATION OF INCOME TAXPAYERS
Income tax law can be classified by understanding the different kinds of income tax payers of the
Philippines under Section 22 (A):
1. Individual
a. Resident Citizen (RC)

b. Non-Resident Citizen (NRC)
c. OCW and Seamen
d. Non-Resident Alien (NRA)
e. Non-Resident Alien Engaged in Trade or Business(NRAE)
f. Non-Resident Alien Not Engaged in Trade or Business(NRANE)
g. Alien Employed by Multinational Corporations, Offshore Banking Units and Petroleum
Service Contractors/Subcontractors (MOPS)
2. Corporation
a. Domestic Corporation (DC)

b. Resident Foreign Corporation or Foreign Corporation Engaged (RFC)
c. Non-Resident Foreign Corporation Not Engaged (NRFC)
3. Estate and trust
Q: What is the relevance of the Classification?
A: It is important to determine the classification of income taxpayer in order to know whether he is liable to
pay income tax or not. The only income tax payer out of the 7 individuals who is liable to pay taxes within
and without is the RC; the other six are liable only for income derived from sources within the Philippines.
RESIDENT CITIZEN
We go to the first one; the RC. There are two Categories:
1. A Filipino Citizen residing in the Philippines; and
2. Filipinos abroad without the intention to reside permanently abroad. This is implied under
22E1. Included in this term are Filipinos abroad with the intention to reside permanently
abroad but failed to establish to the satisfaction of the CIR of their intention to reside
permanently in abroad.
Q: Is a Filipino living Abroad a NRC? What is the determining factor?
A: No. The determining factor is whether he has the intention to reside there permanently.

PUP COLLEGE OF LAW
Q: If a Filipino is living abroad, is it possible that he is still a RC for tax purposes?
A: Yes. If he does not have the intention to reside permanently.
NON RESIDENT CITIZEN
With the advent of OCWs, Section 22E number 3 and 4 and certain portion of number 2 are no longer
controlling, therefore , there are only two groups of NRC.
1. Filipino citizen who is in abroad who established to the satisfaction of the commissioner (CIR)
of his intention to reside permanently abroad and;
2. Filipino Citizen who is an immigrant of another country.
OVERSEAS CONTRACT WORKER AND SEAMAN
OCW refers to land based Filipino citizens working abroad with the benefit of an employment contract. Of
course seamen are sea based not water based. If we are going to read labor statutes, it speaks of OFWs not
OCWs to give protection to those working without the benefit of a working contract.
Q: Are the provisions of NIRC referring to OCWs applicable to Filipinos working abroad without a working
contract?
A: No. NIRC speaks of OCWs and not of OFWs.
There are 2 groups in this category; the Land based worker. The only requirement is that they have a
working permit or contract. But if the Filipino is working abroad as seaman, the additional requirement is
that the seaman must be a:
1. Member of the compliment of an International vessel; and

2. Vessel must be engaged exclusively in international trade. (underscore this phrase in Sec.
23C)
Q: Suppose the Filipino is working without a working contract, of course he is not an OCW, what will be his
status then?
A: He is still a RC. The importance is that a resident citizen is taxable on sources within and without. NRC and
OCW are taxable only on sources within.
NOTE: A Filipino seaman is deemed to be an OCW for purposes of taxation if he receives compensation for
services rendered abroad as member of a compliment of a vessel engaged exclusively in international trade.

PUP COLLEGE OF LAW
Consequently if he is not a member or even if he is but the vessel where he works is not exclusively engaged
in international trade, said seaman is not an OCW. He is ether RC or NRC depending on where he stays most
of the time during the taxable year, he is considered a RC, otherwise a NRC.
RESIDENT ALIEN
RAs are those individuals whose residence is within the Philippines and who is not a citizen thereof
(Section 22F)
Q: Is the intention of the foreigner to reside in the Philippines necessary?
A: No. What is necessary is that he resides in the Philippines because section 5 of RR-2 provides that RA is
neither a traveler nor sojourner. Meaning a tourist.
NON-
NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS
The term NRA means an individual whose residence is not within the Philippines and who is not a citizen
thereof (Section 22G)
When we say engaged or not engaged we are referring to an individual taxpayer. Use this phrase to NRA
because there is no RA engaged in trade. As far as individuals are concerned, when we say engaged or not
engaged in trade, this refers only to NRA. We do not use this term to individuals because we have another
concept when it comes to corporations.
There are three kinds of NRAE stated in Section 25A1 and RR2-98;
1. NRA engaged in Trade or business in the Philippines;

2. NRA who stays in the Philippines for an aggregate of more than 180 days in one
calendar year;
3. NRA who exercise profession here in the Philippines (See RR2-98)
NOTE : Foreigners who stays in the Philippines for an aggregate period of more than 180 days in one
calendar year is deemed to be NRAE; underscore the phrase one calendar year in section 25A1
Q: Suppose a foreigner stayed in the Philippines for 100 days in 2005 and 100 days in 2006, is he NRAE?
A: No. The stay of the foreigner of more than 180 days must be within the same calendar year.

PUP COLLEGE OF LAW
NON RESIDENT ALIEN NOT ENGAGED IN TRADE OR BUSINESS
NRANE is one who;
1. Not a resident of the Philippines;

2. Not engaged in trade or business or not receiving income in the Philippines
NRANE is included in income tax simply because there is a possibility that they must derive income from
sources within the Philippines. NRANE is subject to tax on their gross income received from sources within
the Philippines. This is the individual subject to Gross Income Tax (GIT).
ALIEN EMPLOYED IN MULTINATIONAL ORGANIZATIONS, OFFSHORE BANKING UNITY, PETROLEUM

SERVICE CONTRACTORS
CONTRACTORS ( AEMOPs)
AEMOP are subject to FIT of 15% on their Gross Income received from the employer. RR-2-98 required
that only alien individuals occupying managerial and technical positions are required to pay FIT of 15%
However, if AEMOP derives income from other sources within the Philippines , it shall be subject to NIT.
nd
Why? This is because of the 2 paragraph of Section 25E which states any income earned from all other
sources within the Philippines by the alien employees referred to under Subsections (c), (D) and (E) hereof
shall be subject to the pertinent income tax, as the case maybe, imposed under this code.
Aliens employed in Multinational organizations and Offshore Banking Units may be classified as RA, NRAE
or NRANE, if they derived income other than their compensation from their employers.
In case of Alien employed in Petroleum Service Contractors and subcontractors, they are either NRAE or
NRANE because Section 22E, First sentence, states that they are permanent resident of a foreign country.
Take note that the same treatment applies to the Filipinos employed and occupying the same position as
those aliens employed and occupying the same position as those AEMOPS.
CORPORATIONS
There are three kinds of Corporations as taxable persons;
1. Domestic Corporations (DC)

2. Resident Foreign Corporations (RFC)
3. Nonresident Foreign Corporations ( NRFC)
DOMESTIC CORPORATIONS
Section 22C states the term domestic when applied to corporation refers to one created or organized in
the Philippines or under its laws. It is taxable on income derived from sources within and without the
Philippines (Section 23E) Corollary to this, its counterpart is the RC, which is also taxable from sources within
and without (Sec. 23A).

PUP COLLEGE OF LAW
RESIDENT FOREIGN CORPORATIONS
RFC applies to a foreign corporation engaged in trade or business within the Philippines (Section 22H).
They are taxable only from sources within.
NON - RESIDENT FOREIGN CORPORATIONS
The term NRFC applies to foreign corporations not engaged in trade or business in the Philippines. (22Fi).
They are taxable only from sources within.
Note: In corporation, the term engaged or not engaged in trade or business refers to RFC and NRFC. It is
never applicable to DC. If foreign corporation is engaged in business, it becomes an RFC, if not it is an NRFC.
In relation to individuals, the term refers only to NRAE or NRANE.
Section 22B states that corporation shall include;
1. Partnership
2. Joint Stock companies
3. Joint Accounts
4. Associations; or
5. Insurance
Corporations no matter how created or organized, in the absence of specific provisions, always subject to
tax or does not matter whether it is created under Philippine laws or not.
CIR VS. BATANGAS 102 Phil 823
When the Tax Code includes "partnerships" among the entities subject to the tax on corporations, it must
refer to organizations which are not necessarily partnerships in the technical sense of the term, and that
furthermore, said law defined the term "corporation" as including partnerships no matter how created or
organized, thereby indicating that "a joint venture need not be undertaken in any of the standard forms, or
in conformity with the usual requirements of the law on partnerships, in order that one could be deemed
constituted for purposes of the tax on corporations"; that besides, said section 84 (b) provides that the term
"corporation" includes "joint accounts" (cuentas en participacion) and "associations", none of which has a
legal personality independent of that of its members. xxx What was actually done in this case was that,
although no legal personality may have been created by the Joint Emergency Operation, nevertheless, said
Joint Emergency Operation, joint venture, or joint management operated the business affairs of the two
companies as though they constituted a single entity, company or partnership, thereby obtaining substantial
economy and profits in the operation. The Joint Emergency Operation or sole management or joint venture
in this case falls under the provisions of section 84 (b) of the Internal Revenue Code, and consequently, it is
liable to income tax provided for in section 24 of the same code.

PUP COLLEGE OF LAW
The definition of corporation under the NIRC is broader that the definition of the Corporation Code.
Nonetheless, this definition is for taxation purposes only . The interpretation of no matter how created
in section 22B is not limited to partnership, this applies also to corporations.
Q: Is a corporation whose purpose is against the law, a corporation within the purview of the NIRC?
A: Yes. Under the NIRC, any corporations no matter how created is considered a corporation for taxation
purposes.
Q: What about Corporations created under the foreign law, are these corporations also included?
A: Yes. Section 22B includes all corporations no matter how created or organized either under local or foreign
laws.
Q: What about an organization, can we consider it a corporation?
A: Yes. Although NIRC is limited to the term association, organization is similar to association and operates
like an association. It is considered an association which is included in the definition of the corporation under
section 22B.
Q: How about Non-stock, non-profit corporation, is this subject to income tax?
A: Yes. Because there is still a possibility that they may earn income that could be subject to tax.
GENERAL PROFESSIONAL PARTNERSHIP
GPP is formed by persons for the exercise of a common profession. It is not a corporation and not subject
to corporate income tax provided that no part of its income is derived from engaging in any trade or
business. However its income is taxable in the hands of the partners.
There are 2 kinds of GPP as enunciated by the SC in the case of Tan vs. Del Rosario, 237 SCRA 324;
1. GPP which is not deemed corporation under section 22B ( practice of profession) and; - not
taxable
2. GPP which is deemed a corporation. (GPP deriving income in any trade or business) - taxable
Q: A GPP composed of lawyers deposited their attorneys fee in a bank. Though some time, it earned income.
Can we consider the GPP as deemed corporation for earning income, hence liable to tax?
A: No. although the GPP earned income, it is still exempt from tax. It does not earned income from engaging
in any trade or business. Furthermore, bank interest is already subjected to tax and this income is not
mentioned in the ITR of the GPP because the bank already filed a separate return for the interest. Hence, the
income derived is not within the meaning of engaging in trade or business.

PUP COLLEGE OF LAW
Remember that a partner in the GPP, which is exempt from taxation, has to file a return in their individual
capacity. Any interest derived by the GPP, which was given to the partners shall be subjected to the net
income tax (NIT) (See section 26)
In GPPs which are deemed corporation, the interest earned by the shareholders shall be subject to FIT
(See section 24B2 ; 10% FIT)- it is considered as dividends.
JOINT VENTURES
This entity refers to the merger of two or more corporations for the purpose of engaging in construction
project or energy operation pursuant to a consortium agreement or under service contract with the
government. Joint ventures is the commercial undertaking by two or more persons differing from a
partnership in that it relates to the disposition of a single goods or the completion of a single project.
As a rule Joint Ventures are NOT TAX EXEMPT; unlike GPPs which as a rule is tax exempt. However, if joint
ventures is engaged in public construction and projects involving petroleum, coal, geothermal and other
energy operation, then such joint venture is tax exempt (sec. 22B)
Q: How many entities are involved in a joint venture?
A: There are Three (3). The two corporations that combines for a particular purpose and the joint venture
created ( Batangas vs. CIR).
TRUST AND ESTATE
Although trust and estate is a separate thing under the Civil Code, they are considered the same for
purposes of taxation. They are the same category; hence, they are treated the same for tax purposes.
Estate is the property of the decedent whether located within or without the Philippines. During the
pendency of the settlement of the estate, there is a possibility that it may earn income; hence it is liable for
income tax.
Note that tax on the income of the estate and estate tax are two separate taxes. Income of the estate is
discussed under Chapter XI which refers to the income tax and estate tax under Chapter XIX.
The status of the estate is the same as the status of the individual immediately after his death, in this case
estate may be considered as RA, RC, NRA or any other of the seven individual. The tax to be imposed on
the income of the estate should be distinguished from the estate which is subject to estate tax.
Trust refers to an arrangement whereby the owner of property (trustor) transfers ownership to a person
(trustee) who is to hold and control the property under the owners instructions, for the benefit of the a
designated person(s) called beneficiaries legal title to the trust property is vested in the trustee, while the
equitable title belongs to the beneficiaries.
The status of the trust depends upon the status of the grantor or trustor or creator of the trust, hence, a
trust can also be a citizen or an alien. The following are the parties to a trust;

PUP COLLEGE OF LAW
1. Trustor or grantor or creator of the trust;

2. Trustee or fiduciary; and
3. Beneficiary
Q: Where the trust earns income, and such income is not passive, who among the parties mentioned is liable
for the payment of income tax thereon?
A. It depends:
1. If the trust is irrevocable, the trust itself is liable for the payment of income tax. And
the trustee is liable in behalf of the trust;
2. If the trust is revocable, the liability for the payment of income tax devolves upon the
trustor himself in his capacity as individual taxpayer.
The rules on deductions under section 61 and exemption under section 62 also applies to trsut as a taxpayer
under section 60.
DIFFERENT KIND OF INCOME

INCOME TAXES
The kinds of income taxes are the following;
1. Net Income Tax (NIT)

Sec. 24 A Sec. 28 A1
Sec. 25 A 1 Sec. 28 A 6 b
Sec. 26 Sec. 31
Sec. 27 A B C Sec. 32 A
2. Gross Income Tax (GIT)
Sec. 25 (B) First paragraph Sec. 28 (B) (1)
3. Final Income Tax (FIT)
Sec. 57 A Sec. 24B
4. Minimum Corporate Income Tax of 2% of Gross Income
Sec. 27 E Sec. 28 A2
RR 9-98
5. Optional Corporate Income tax of 15% of the Gross Income

th th th
Sec. 27 A 4 -10 Paragraphs Sec. 28 A1 4 and Last Paragraph
6. Improperly Accumulated Earnings Tax of 10%
Sec. 29 B RR 3-200
PUP COLLEGE OF LAW
NET INCOME TAX
If you are going to read Sec. 24, it did not directly state the income tax shall be paid by way of the net
income tax. It merely says that income tax shall be imposed on the taxable income or the gross income.
Section 31 however states that the term taxable income means the pertinent items of the gross income
specified in this code, less the deductions and/or personal and additional exemptions, if any authorized for
such types of income by this code or other special laws.
Section 31 does not state NIT; it states that when we say taxable income we are referring to the Net Income
tax. Thats why we are saying that that under Sec. 24 A this is about the payment of net income tax because
it says that a tax shall be imposed on the taxable income.
Under revenue regulations NIT referred to as the ordinary way of paying income tax or the normal way
of paying income tax. Accountant use the phrase includible in the gross income or payment by the net.
In computing the NIT, it is important to determine whether there is actual gain or loss. Gain is the flow of
wealth to the taxpayer. NIT is applicable only if there is gain or profit. If there is no profit, NIT is not
applicable; otherwise, it is tantamount to taxing the capital.
RATE : Individuals progressive; Corporations, tax is fixed at 35% (As amended by RA 9337)
FORMULA: Gross income Deductions/Exemptions x rate tax credit = NIT
LIABLE TO PAY:
RC Sec. 24A1 and 31

NRC - Sec. 24A1b and 31
OCW and Seaman - Sec. 24A1b and 31
RA - Sec. 24A1c and31
NRAE - Sec. 25A1 (same as citizen)
DC - Section 27 and 31
RFC - Section 28A1; and
AEMOP - section 25CDE for other income
NRANE and NRFC are the only individuals not liable to pay by way of net; the rule is absolute. NRANE and
NRFC are liable for the payment of GIT and not by way of NIT.
Take note that aliens who come and stay in the Philippines for an aggregate period of more than 180 days
during the taxable calendar year are considered NRAE; therefore, if his stay is only 180 days or less, he
becomes NRANE, which is taxable by way of the GIT.
AEMOP as a general rule are not liable for NIT but FIT of 15% under Sec. 25CDE except if they receive
income from sources other than from their respective employers. If they receive income other than those
nd
that came from their employers, the same may be subject to NIT ( Sec. 25E 2 par.)
Take note that aliens employed in Multinational Companies and OBU may be classified as RA or NRAE if
they receive income other than those received from their employers, his income may be subjected to NIT
PUP COLLEGE OF LAW
(25E). Aliens employed in petroleum contractor and subcontractor is always a permanent resident of
foreign country, hence he may be classified as NRAE or NRANE. If he is NRAE his income is subject to NIT. If
NRANE, then GIT of 25%.
So, with respect to Aliens employed in petroleum service contractors and subcontractors, they are always
st
non resident alien because Sec. 25E says the 1 paragraph that these are permanent resident of foreign
nd
countries who are not engaged. This is relevant because the 2 par. states that if these foreigners receive
nd
income from other sources, the 2 paragraph of Sec. 25E says the pertinent provision of this code applies,
hence they may be classified as NRAE or NRANE. If he is NRAE his income is subject to NIT. If NRANE, then
GIT of 25%.
It is a rule that when an income is subjected to GIT, it shall not be subjected to NIT.
The Withholding tax system for NIT is the Creditable Withholding System, the following are the tax
credit under the income tax law;
1. Income tax of foreign countries Section 34C3

2. Excess input or output tax Section 110B; and
3. Tax credit Certificate = Section 204
4. Tax paid to a foreign country
Q: what is the requisite in the withholding of NIT of the taxpayer?
A: Withholding of the NIT depends on whether there is a law explicitly stating that the NIT should be
withheld. Absence of such law or even if it is only silent, the income is not subject to withholding of NIT.
Q: Suppose the taxpayer is RC and derives income, is he going to include it in filing of the ITR?
A: Not necessarily. Determine first the nature of the income. If the income is passive and was already
subjected to FIT, then the income would no longer appear in the ITR, otherwise there will be double taxation.
If the income is not passive, it should be included in the ITR.
Net Income also applies to corporations. According to the provision of the code, it is only a DC and RFC
rd
which are allowed to pay by way of NET. The 3 group of corporations as income taxpayers, the NRFC is
not liable to pay by way of the NET but instead it is liable by way of the GIT.
In DC, the law is clear, under Sec. 27A pursuant to taxable income under Sec. 31 by way of net income tax.
With respect to RFC, under Sec. 28A! and Sec. 26 A6b, these corporations are allowed to pay by way of the
net because Sec. 28A1 speaks in a clear language that it is about the taxable income.
With respect to Regional Operating Headquarter, Sec. 28 A6b liable to pay 10% of its taxable income.
GROSS INCOME TAX
There are only two kinds of taxpayers liable to pay by way of the gross income, the NRANE and NRFC.
PUP COLLEGE OF LAW
FORMULA : Gross income x rate = GIT (35%)
Q: What is the similarity of GIT and FIT?

A: No deductions and exemptions are allowed in both cases.
To reiterate, if a taxpayer pays by way of the GIT, he should not be allowed to pay by way of the NIT. This
rule is absolute.
DISTINCTIONS BETWEEN GIT AND FIT:
GROSS INCOME TAX FINAL INCOME TAX

Applicable only to NRANE and NRFC Applicable to all taxpayers without distinction
Only one rate of 35% Rate varies
Derived by adding up all the income x 35% Derived by multiplying the amount with the tax rate
FINAL INCOME TAX
The actual determination of whether there is gain or loss is not important, in other words, in the application
of this income tax, loss or gain is immaterial because gain is presumed.
Q: A Frenchman sold a parcel of land and he does not want to pay the income tax because according to him,
he did not gain income at all, on the contrary, he incurred loss. Is he correct?
A: If the parcel of land is located in the Philippines, which is a capital asset, he is wrong. Because in the
imposition of FIT in the sale of realty, the actual determination of whether there was a gain or loss is
immaterial. In the sale of realty subject to FIT, the determination of the selling price or fair market value is
under 24D1.
Now, therefore, in FIT, the gain is presumed. Thats why the actual determination whether there is gain or
loss is immaterial except in sale of shares of stocks (Sec. 24C) because this is the FIT where the rule says, the
application of the FIT shall be on the Net Capital gain.
An income subject to FIT is known as PASSIVE because nothing is done by the taxpayer to receive the
income.
All income subject to FIT is income within. FIT is not applicable to income from sources outside the
Philippines because we do not have final withholding agent there. However, it is wrong to say that FIT is
always applicable to all the income within. What the rule provides that all income subject to FIT are income
incurred from within.
Deductions, exemptions and tax credit are not applicable.

PUP COLLEGE OF LAW
If an income is subjected to FIT, that income should no longer be included in the annual net income tax
return except in two cases;
1. Sale of realty and;

2. Sale of shares of stocks subject to FIT (RR 17-03)
In FIT the return is accomplished by the Final withholding agent not by the taxpayer. Also, if the FIT is not
paid, it is not the liability of the taxpayer anymore but on the final withholding agent, except in the above
exceptions. (See case of Procter and gamble)
Note: in the NIT it is the liability of the income tax payer if he fails to pay and he is also the one
responsible for the filing of the ITR but in FIT it is the liability of the final withholding agent, in case he
failed to pay and withhold the tax.
FORMULA: Income subject to FIT x rate = FIT
FIT is scattered in the NIRC. Some applications of FIT are the following, to wit;
1. Tax on Cash and Property Dividends

2. Interest (Bank)
3. Royalties
4. Prizes
5. Winnings
6. Capital gains from the shares of stocks not traded
7. Capital gains from the sale/exchange/disposition of lands/ and or buildings (6%) and;
8. Salaries of AEMOPs (15%)
Q: If an income is not subject to FIT, is the tax payer exempt>?

A: Not necessarily. It is possible that the income is subject to NIT or GIT
MINIMUM CORPORATE INCOME TAX

th
The 4 kind of income tax is the MCIT of 2% of the Gross Income. This tax is applicable to DC (Sec. 27E) and
RFC ( Sec. 28A2) only.
First thing to remember about this tax is that IT CANNOT BE IMPOSED SIMULTANEOUSLY WITH THE NIT
INCOME TAX because MCIT is paid in lieu of the NIT; it is either one or the other whichever is higher. The
rationale in the imposition of MCIT is to discourage corporations from claiming too many deductions.
FORMULA : Gross Income x 2% = MCIT

PUP COLLEGE OF LAW
OPTIONAL CORPORATE INCOME TAX
OPCIT is not yet applicable because of the failure of the President of the Philippines to implement the
th th th
same. You could find these provisions under Sec. 27A 4 to 10 paragraphs and sec. 28A1 4 to the last
paragraph.
IMPROPERLY ACCUMULATED EARNINGS
This tax is imposed on corporations with improperly accumulated earnings and profits. The purpose of this
imposition is to discourage the practice of accumulating earnings and profits in order to avoid the payment
of tax on the part of the shareholders and to oblige and compel the corporations to declare dividends. The
DC is the only corporations liable for IAET (RR 2-2001)
KINDS OF CREDITABLE WITHOLDING TAX SYSTEM
1. Final withholding System (FIT) - it is final because it is no longer credited to the net income tax due;
and
2. Creditable Withholding system (Tax Credit) NIT it is still included to the net income tax due.
APPLICABILITY OF DIFFERENT INCOME TAXES TO DIFFERENT INDIVIDUAL

TAXPAYERS
As you know there are: 7 individuals, 3 corporations and Estate and Trust
Deductions: Income tax payers are allowed to pay by way of NIT. Exempt are the non-resident alien not
engaged in trade or business in the Philippines and NRFC. The general rule is that the applicable income tax
shall be the net income tax, except with certain qualifications with aliens employed in MOPS.
Take Note: NET INCOME TAX IS APPLICABLE EXCEPT: NRANE AND NRFC
INDIVIDUAL TAXPAYER:
Except NRANE, they are allowed to pay:
1. Net income Tax

2. Final Income Tax
NRANE (not engaged) is liable to pay by way of Gross Income tax and Final Income Tax. Except also with
certain modifications, the alien employed in MOPS, generally they pay by way of FIT of 15% of their
salaries from these entities. However, if this alien will receive income from other sources, the pertinent
provision of the NIRC will be applied. Meaning you have to determine their classification because they are
aliens. If they were classified as RA or NRAE, they will pay by way of the Net and FIT for their salaries in
the MOPS.
PUP COLLEGE OF LAW
Note: of all the seven individuals, the applicable taxes are only two; the Net and the FIT or the Gross and FIT
DOMESTIC CORPORATION:
Not applicable:
1. Optional corporate income tax is not yet applicable because the President of the
Philippines failed to implement the same;
2. Optional corporate income tax of 15% of the Gross Income; and
3. The Gross Income Tax is not applicable to Domestic Corporations: (Only to

NRFC/NRANETB)
1. NIT
2. FIT
3. MCIT of 2% of the Gross income; and
4. The 10% income tax on corporation in improperly accumulated earnings
(only to DC)
The Gross income does not apply because it is only applicable to NRFC
RESIDENT FOREIGN CORPORATION:
There are three (3) applicable:
1. NIT
2. FIT
3. MCIT of 2%
Not Applicable:
1. GIT
2. Optional Income tax of 15% of the Gross because it is not yet applicable
3. 10% income tax on IAET because it is only applicable to domestic.
NON RESIDENT FOREIGN CORPORATIONS:
It is only the gross income and Final Income Tax that is applicable.
NON RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES:
They are liable to pay by way of the NIT because of the term taxable income under Sec. 25 A1

PUP COLLEGE OF LAW
NON RESIDENT ALIEN NOT ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES:
It is not liable for the Net because it is liable to pay by way of the Gross income tax.
REGIONAL OPERATING HEADQUARTERS:
Sec 28 A6b Net income of 10%.
ESTATE AND TRUST:
Except with certain modification on Sec. 60B the income tax is similarly done on the income being paid by
individuals.
Another relevant distinction of the different kinds of income taxpayers is by using the process of deduction
under Sec. 23, it is only the RC and DC which is liable to pay on income derived within and without the
Philippines, the rest their liability is only on income from sources within.
SOURCES OF INCOME
The relevance of section 42 is to identify whether the income is from sources within or without.
Q: Is Section 42 relevant to all taxpayers?

A: No. It is not relevant to RC and DC, but to the rest of the taxpayer, it is material because they are only
liable when the income is derived within the Philippines under Section 23.
So to all of them, Section 42 is material, but for RC and DC, Section 42 is not important because whether the
income is within or without, they are liable for tax. But to the rest, it is important because they are liable only
for income derived from within and as to the income derived outside of the Philippines, they are not liable or
they are exempt.
INTEREST
Let us go Section 42 par. 1. In 42A1, there are two incomes:
(1) Interest from sources within the Philippines [ Bank interest derived in the Philippines]
(2) Interest on Bonds, notes or other interest-bearing obligations of residents, corporate or

otherwise, in short corporations or individuals.
Take note of the very broad sweeping statement. What matter here is the status of the obligor. In an
interest and other interest bearing obligations or any kind of obligations that yields interest, we have to
determine the status of the debtor like in an interest in a contract of loan. An interest is an income within
provided that the obligor-debtor is a resident of the Philippines.
Q: Corollary to the debtor, if he is not a resident according to Section 42A1, what is the interest then?
PUP COLLEGE OF LAW
A:The interest is considered an income from sources derived outside of the Philippines. However, if the
debtor is a resident of the Philippines, whether a DC or individual, it is an income within while if the Debtor is
a non-resident, it is an income without.
NDC VS. CIR, 151 SCRA 471
In this case, the NDC, a domestic corporation, entered into contract with several Japanese corporations,
which are NRFCs, engaged in the construction of ocean vessels. After the construction of the Ship, NDC paid
interest of the promissory notes to the Japanese Corporations. The BIR contend that the Japanese
Corporation is liable to pay income tax for the interest received from NDC.
The SC ruled that the source of income is an income within because the NDC, the obligor in this case, is a
resident of the Philippines. According to the SC, it is an income within because the debtor-obligor is a DC
whose domicile is within the Philippines, therefore is considered a resident of the Philippines.
Take note that the petitioner, at first did not want to pay because the contract is perfected and
consummated in Japan. The Ships were also built in Japan and the down payment was paid also in Japan.
But the SC states that the determining factor here is the status of the obligor, who is the NDC, a domestic
corporation, meaning an entity whose residence is in the Philippines. Hence, the income is considered
income derived from sources within.
Therefore, in the payment of interest like forbearance of money, it is an income within if the debtor is a
resident of the Philippines, whether individual or corporation because the law says xxx and other interest
bearing obligation xxx ( Note: this was already asked in the bar.)
Remember that it is not the place of the perfection of the contract but the status of the obligor-debtor
that determines whether the income is from sources within or without.
SHARES OF STOCKS AND DIVIDENDS:
RULE:
1. Amounts received as dividends from a Domestic always an income within;

2. If received from a RFC apply the 50% and 3 year rule.
3. If received from FC place where it is sold. Income within, if sold in the Philippines and income
without if outside the Philippines
Q: In the sale of share of stocks, is it an income within or without.

A: It is considered an income within provided it is a share of stocks in a DC and it is classified as such
regardless where the said shares of stocks are sold.
Section 42E, second paragraph after the fourth sentences states that provided however, that the sale of
shares in a DC, it is always an income from sources within regardless of the place of the sale of the shares.
So, it is going to be automatic if it is a share in DC.
Q: Suppose it is from a Foreign Corporation (FC) ?

A: If the shares were sold outside the Philippines, the income is a source from without. If it is sold within
the Philippines, then it is an income from sources within.
PUP COLLEGE OF LAW
When it comes to personal property, which excludes shares of stocks, it is considered an income in that
place where it has been sold. Hence, if it is sold in the Philippines, it is an income within. If sold abroad, it is
an income without.
So in answering question in the bar regarding the taxpayers liability with regard to DC and RC , you do not
determine whether the income is within or without because for sure, they are always liable whether the
income is within or Without.
For taxpayers other than these two, you have to determine whether it is an income within or without for
reason that if it is an income without, they are exempt.
1999 BAR:
Q: an individual is a stockholder in two corporations, one is the DC and the other one is a RFC. He sold his
shares in both corporations. Is he liable for the sale of shares in both corporations?
A: For the sale of shares of stock in DC, he is always liable because it is an income within. For the shares of
stocks in the RFC, distinction must be made on the income whether it is an income within or without.
Fortunately the facts of the case states that the share was sold in Manila, the one issued by the FC,
therefore, the taxpayer is liable.
Q: If before the sale, the DC and the FC declared dividends. Is the receiver liable for the receipt of the
dividend declared by the DC?
A: Yes. Because the dividend declared by the DC Corporation is an automatic one, it is an income within.
Q: What about the one declared by the RFC?

A: It depends.
1. If 50% of the Gross Income of such FC

2. for the Three (3) Year period ending with the close of the taxable year preceding the
declaration of such dividends was derived from sources within the Philippines, then it is an
income within.
Take note that Section 42A2b has defined this one in the negative manner; if at least 50% of the gross
income of the FC declaring dividends is a gross income from sources within the lapse of three (3) years
preceding the declaration of dividend, then it is an income within.
Q: What if one or two elements are not present, is it an income within?

A: It is an income without. Corollary, if either of the two (2) is absent, then it is an income from sources
without.
NOTE: If the income is from sources within, the receiver is LIABLE; if its an income without, he is NOT liable.
It is not a matter of whether the money was received abroad or in the Philippines. For DC, it is automatic.
For FC declaring dividends, it may be an income within or without depending on the presence of all the
elements.

PUP COLLEGE OF LAW
SERVICES
Now, we go to 42A3, this was asked in the 2000 and 1999 Bar. Normally, in the bar, the example is a FC with
a branch in the Philippines, but in 1999 bar, the example was reversed.
Q: A Company, a Philippine corporation has an executive (P), who is a Filipino citizen. A CO. has a subsidiary
in HK (HK Co.) and will assign P for an indefinite period to work full time in HK Co. P will bring his family to
reside in HK and will lease out his residence in the Philippines. The salary of P will be shouldered 50% by A
CO. while the other 50% plus housing, cost of living and educational allowances of Ps dependents will be
shouldered by HK Co., who will credit the 50% of Ps salary to Ps Philippine bank account. P will also be
receiving rental income for the lease of his Philippine residence. Is the Filipino branch manager in HK liable
to pay income tax in the Philippines?
A: It is not taxable. The taxpayer is an OCW. Under Section 23, the liabilities of the OCW are only to those
incomes derived from sources within. Under Section 42, the income is considered an income without the
Philippines, therefore he is not liable.
In the 1991 Bar, the example is a DC, San Miguel manufacturing equipment. It hired a Singaporean firm, A
NRFC, to advertise all its products in Singapore and in turn it will receive compensation from San Miguel.
Q: Is the compensation to be paid by San Miguel subject to withholding tax?

A: No. because it is exempt from income tax. The income earner is a NRFC. The services were performed in
Singapore. Being a NRFC, its liability is only from income derived from sources within. In this case the income
here is without because payment and performance were in Singapore.
NOTE: This is applicable not only to workers but also to entertainers so long as it is personal or recognized
services.
Q: Suppose the examiner ask, A performer lives in Australia before she performs in Manila, can she refuse
payment of Income tax.
A: No. because the performance was done in the Philippines.
Q: David Pomeranz manifested his intention to reside in the Philippines. Hence, a resident alien. Suppose he
will be hired in Guam, can he refuse to pay tax in the Philippines for the performance made in Guam?
A: Yes. Because that is an income without and being a foreigner his liability is only from sources within.
To summarize, THE PLACE OF THE PERFORMANCE OF THE SERVICE FOR PERSONAL OR LABOR SERVICES
DEPEND ON THE PLACE OF THE SERVICE.
ROYALTIES AND RENTALS
We go now to number 4 on royalties and rentals. Because of Section 42A4, the following are income from
sources within;
(a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan,
secret formula or process, goodwill, trademark, trade brand or other like property or right;
For example Mc Donald, the one granting is a NRFC, it authorized a Filipino proprietor, DC and partnership
to use its trademark. They established a restaurant using the name Mc Donald. The agreement is that the
PUP COLLEGE OF LAW
Filipino will pay a certain sum of money, maybe 5% of the gross or 2% of the net. That is known under the
law as royalty.
Q: Who is obliged to file a return?

A: The Filipino proprietor is the one obliged to file the return.
Q: What is the income tax of a NRFC? How much is the withholding tax?
A: Gross income tax at the rate of 35% because the income earner is a NRFC.
Suppose we are franchise owners of Jollibee? The one granting the franchise is a DC. Under RR 12-2002, the
DC pays by way of the Net Income tax of 35%. How much is the withholding tax? It is much lower than 35%
because the computation of the NIT there are deductions . In the computations nowadays, it was decreased
to 15%. Take note of that defense. The reason behind the law is that after the deductions, the tax rate of
35% will be more or less equivalent to 15%
Let us go to secret formula. For example KFC, it authorizes the used of the secret formula for cooking
chicken this is subject also to tax. Rubberworld was authorized by Adidas to manufacture its shoes. This is
also covered. But the most important is the last phrase,
(b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment;
One example is the privilege to use the cellular sites in the Philippines by foreign companies.
(c) The supply of scientific, technical, industrial or commercial knowledge or information;
Whatever scientific and technical knowledge, it is also an income from sources within. Therefore, whatever
supplies of scientific or technical knowledge of a cellular site is an income from sources within.
(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling
the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such
equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in
paragraph (c);
(e) The supply of services by a nonresident person or his employee in connection with the use of property or
rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased
from such nonresident person;
For example , a non-resident had sold a machine or equipment in the Philippines and supplied services
including his workers, that is an income from sources within.
(f) Technical advice, assistance or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and
(g) The use of or the right to use:

(i) Motion picture films;
(ii) Films or video tapes for use in connection with television; and
(iii) Tapes for use in connection with radio broadcasting.

PUP COLLEGE OF LAW
So, the use of or the right to use of foreign movies, videos and tapes, whenever used, it is an income within.
SALE OF REAL PROPERTY
Now we go to section 42A5, the sale of real property.
Q: When do we consider sale of real property an income from sources within or without?
A: It is an income within if the property is located in the Philippines. Therefore, if the property is located
abroad, it is an income without. This is the very simple rule with regard to sale of real property.
SALE OF PERSONAL PROPERTY
Q: In the sale of personal property, is it an income within or without?

A: It depends. If the sale of personal property was produced or manufactured in the Philippines and sold
abroad or manufactured abroad and sold within, it is an income partly within and partly without under
Sec. 42AE.
Q: How about personal property purchased within and sold abroad and vice versa?
A: It shall be treated entirely from sources within the country in which it was sold.
But let us see the case of CIR vs. CTA, 127 SCRA 9. The taxpayer is RFC because it is a FC that has branch in
the Philippines. The issue here is the claim for refund for the overpayment of tax due to erroneous
computations of expenses claimed as deductions. The contention of the taxpayer is that the business
expenses should have been determined where it was spent.
In DC, the expense is deductible even the income is within or without. For RFC, deductions are important
because it can only claim deductions that must be related to the trade and business in the Philippines on the
income within. If it is NRFC, we do not discuss deductions also because there are no deductions because the
tax is Gross Income Tax.
In this case, the taxpayer is RFC that is why they are claiming deduction expenses. The trouble here is that it
is unknown whether it is the expense abroad or in the Philippines.
The SC ruled that where an expense is clearly related to the productions of Philippine-derived income or to
Philippine operations, that expense can be deducted from the gross income acquired in the Philippines
without resorting to apportionment.
The SC also ruled that the overhead expenses can be deducted from the gross income acquired in the
Philippines by the parent company in connection with finance, administration and RND, all of which are
directly benefit its branches all over the world cannot be allocated with the operation in the Philippines.
However, the RFC can claim as its deductible share a ratable part of such expense based upon the ratio of
the local branch gross income versus gross income worldwide.

PUP COLLEGE OF LAW
Illustration:
Income derived from sources within x 100

Gross income in the whole world
= Percentage of allowed deduction from the expense worldwide
Section 42B refers to taxable income from sources within the Philippines; meaning AFTER all the
deductions.
CAPITAL AND ORDINARY ASSETS

We go now to Sections 39.
CODAL:
SEC. 39. Capital Gains and Losses. -
(A) Definitions. - As used in this Title -
(1) Capital Assets. - The term "capital assets" means property held by the
taxpayer (whether or not connected with his trade or business), but does not
include stock in trade of the taxpayer or other property of a kind which would
properly be included in the inventory of the taxpayer if on hand at the close of
the taxable year, or property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or property used in
the trade or business, of a character which is subject to the allowance for
depreciation provided in Subsection (F) of Section 34; or real property used in
trade or business of the taxpayer.
(2) Net Capital Gain. - The term "net capital gain" means the excess of the
gains from sales or exchanges of capital assets over the losses from such sales
or exchanges.
(3) Net Capital Loss. - The term "net capital loss" means the excess of the
losses from sales or exchanges of capital assets over the gains from such sales
or exchanges.
2003 BAR: What is a capital asset?

2005 bar: Did you include it in your ITR, the capital gains?
A: Capital asset is an asset or property which is not an ordinary asset.
In section 39A1, cross out the phrase whether or not connected in trade or business. If the property is used
in business, it is usually included in the inventory at the close of the taxable year. Hence, it becomes an
ordinary asset.

PUP COLLEGE OF LAW
The following are ordinary asset: (ISSU)
1. Stock in trade of the taxpayer or other property of a kind which would properly be included in
the inventory of the taxpayer if on hand at the close of the taxable year;
2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade
or business;
3. Property used in the trade or business, of a character which is subject to the allowance for
depreciation provided in Subsection (F) of Section 34;
4. Real property used in trade or business of the taxpayer.
All of these are related to business. Hence, those properties that are not mentioned in the exceptions are
classified as capital assets. A capital asset does not have something to do with the business of the
taxpayer.
However, there are some examples of capital assets that has something to do with the business of the
taxpayer. Examples of which are; Section 39E, retirement of bonds and short sales under paragraph F.
Q: What do we mean by capital loss, capital gains and ordinary loss and ordinary gain?
A: When we say capital gain, it is a gain incurred from the sale or exchange of the taxpayers property
classified as capital asset.
Capital loss are those loss incurred from the sale or exchange from taxpayers property classified as capital
assets.
Ordinary loss is a loss incurred from sale or exchange of taxpayers property classified as ordinary asset
Ordinary gains are gains from sale or exchange from taxpayers property classified as ordinary assets
Q: What is the relevance of knowing whether the property is ordinary or capital asset?
A: It is important for the proper application of the following;
1. Holding period under Section 39B;
2. Section 39C; Capital Loss shall be the extent of the capital gain or the Loss Limitation Rule
and
3. Application of Net Capital Loss Carry-over rule under 39D.
These principles can only be applied if the property is a capital asset and not if the property is an ordinary.
HOLDING PERIOD:
CODAL :
(B) Percentage Taken Into Account. - In the case of a taxpayer, other than
a corporation, only the following percentages of the gain or loss recognized upon
the sale or exchange of a capital asset shall be taken into account in computing
net capital gain, net capital loss, and net income:

PUP COLLEGE OF LAW
(1) One hundred percent (100%) if the capital asset has been held for not more
than twelve (12) months; and
(2) Fifty percent (50%) if the capital asset has been held for more than twelve
(12) months;
Q: What and when is the Holding period or percentage taken into account?
A: It is the length of time or the duration of a period by which a capital asset has been held by an individual
taxpayer.
Requisites:
1. Property must be a capital asset;

2. Tax payer must be an individual, because 39B states in case of a taxpayer, other than a
corporation
There are 2 kinds of holding period under Section 39B; the Long term holding period and the short-term
holding period;
Q: What is a Long- term and short term holding periods ?

A: Long term is where the individual taxpayer held the capital asset for more than 12 months;
The short-term period is where individual taxpayer held the capital asset not exceeding 12 months.
Q: What is the consequence of these periods?

A: Under the Long-term period, only or 50% of the net capital gains is subject to income tax. The
remaining is exempt from income tax.
Q: Suppose it is a loss, will this rule applies, the 50%?

A: Yes. Because the law says gain or loss.
Q: what about the short term?

A: 100% of the net capital gains are subject to income tax. If it is a loss, the 100% is subject to deductions.
Q: Do you ignore in your ITR the capital gains because in short term only is subject to income tax, what
kind of income tax?
A: It is the NIT because capital gain should be included in the ITR in the gross income.
Exception is with regard to capital asset with the sales of share and sale of real property which is not
included in the annual ITR because they are subject to FIT. Normally therefore, a capital gain is subject to
NIT except, sales of shares and real property because they are subject to FIT.
Q: Is it safe to say that capital gains are subject to FIT?

A: No. Ordinarily capital gains are included in the annual ITR because it is subject to NIT.
If the asset is an ordinary, regardless of whether it was held for more than or not exceeding 12 months,
100% shall be ordinarily subject to income tax. The holding period do not apply.
It is worthy to remember that there are three kinds of capital assets which are not subject to holding
period. They are the following;

PUP COLLEGE OF LAW
1. Those held by a corporation; because the law says that it is only applicable to taxpayer other
than a corporation;
2. Sales of shares of stocks; and ( subject to FIT)
3. Sales of real property ( subject to FIT)
LOSS LIMITATION RULE
CODAL:
(C) Limitation on Capital Losses. - Losses from sales or exchanges

of capital assets shall be allowed only to the extent of the gains from
such sales or exchanges. If a bank or trust company incorporated under
the laws of the Philippines, a substantial part of whose business is the
receipt of deposits, sells any bond, debenture, note, or certificate or
other evidence of indebtedness issued by any corporation (including one
issued by a government or political subdivision thereof), with interest
coupons or in registered form, any loss resulting from such sale shall not
be subject to the foregoing limitation and shall not be included in
determining the applicability of such limitation to other losses.
Now, we go to limitation on capital losses, capital loss or loss limitation rule:
All these terms are synonyms but what are the effects.
1. Capital loss can only be deducted from capital gains but not from ordinary gains;
2. Ordinary loss may be deducted from either capital gain or ordinary gain.
Q: Is this applicable to Corporation?

A: Yes for two reasons;
1. The phrase to taxpayer other than a corporations is not found in 39 C; and
2. Because the wording of the law itself. It says that If a bank or trust company incorporated
under the laws of the Philippines , meaning to say, a bank or trust company, which are
domestic because they are incorporated under the Philippine laws, a substantial part of whose
business receive deposits, sells bond, debenture, note or certificate or other indebtedness.
Section 39C last portion of this paragraph states the foregoing rule does not apply and what rule? It is the
limitation on capital loss rule. Meaning to say, to other corporations other than this two limitation on capital
losses is still applicable. So, it is applicable to individual and corporations on two grounds.
Q: Why is that the Capital loss can only be deducted from capital gains but not from ordinary gains and
Ordinary loss is deducted from either capital gain or ordinary gains?

PUP COLLEGE OF LAW
A :It has something to do with section 34d. Suppose the deduction in Section 34D is required, the deducted
must be connected or directly connected with the trade or business of the taxpayer. If the capital loss is
not connected with the trade or business, then it must not be allowed to be deducted from the gross
income of the ordinary gain. It is the reason why a capital loss cannot be deducted from an ordinary gain.
Because in ordinary gain, the law require under Section 34D that it must be connected with the trade or
business in the taxpayer. In Capital loss it has nothing to do with the trade or business.
Q: Do we include in our annual ITR in gross income the capital gains?

A: As a rule yes, if the taxpayer is a business man, he shall include in his gross income the capital gain
together with the ordinary gain.
The taxpayer of course, will claim the deductions. In crediting and applying the deductions on ordinary
losses, it will cover all those mentioned in gross income then he will deduct all the deductions.
Q: So what are included in the gross income?

A: Capital gains and ordinary gains. That is the reason why an ordinary loss is deductible from either
capital gains or ordinary assets because you include in the gross income not only the ordinary gain but
also the capital gain.
NET CAPITAL CARRY OVER RULE
(D) Net Capital Loss Carry-over. - 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.
Let us say in year 2000, sometime we are not allowed to deduct capital loss because there was no capital
gains. Is there a remedy because of that? There is remedy. We have to apply the Net capital loss carry over
rule.
Meaning to say, in the following year of 2001, we will be allowed to deduct, provided in 2001, we have
capital gains, provided further, that the capital loss incurred in 2000 should not exceed the amount of the
net income in 2000.
So if the capital loss in 2000 is P 100,000 and the net income is P 75,000. In 2001, assuming there is a capital
gain , we are only allowed up P 75,000 deductions, provided finally that the holding period shall be under
the short term holding period.
Q: Is it possible that in 2000 we will not be allowed to claim ordinary loss?

A: Normally, that is quite impossible because it is deductible from either ordinary or capital gain. But there is
a possibility in two instances:
1. If you do not have any gain (lugi) or;

2. Ordinary loss is more than the gross income.
Q: if that is the case, what is the carry over there?

PUP COLLEGE OF LAW
A: The answer is found under Section 34D3. The Net Operation Loss carry-over rule (NOLCO). The carry over
there shall lapse for three years except in 2 cases that the carry-over shall be for five years. The carry over for
5 years could be either for oil drilling corporations or mining corporations. In short, if the carry-over is an
ordinary loss, we go to NOLCO, net operation loss carry over rule.
Q: Why it has to be distinguished?

A: First the carry over in a capital loss shall only be up to the extent of the next year, so that if in the next
year, they do not have any capital gain, it will be barred forever.
Q; What about in Ordinary loss?

A: The carryover will not be barred as a rule because its prescription is three years. For instance in 2000,
we can claim that in 2001, if not in 2002, if not in 2003; certainly, in the fourth and the fifth, but only with
respect to drilling and mining corporations, provided further, that next year there is no substantial change in
the ownership of the business.
TAX ON INDIVIDUALS
We go now to Sections 22, 23 and 24. In section 22, this is the section that provides for the definitions of
the terms used in the code and we will go to them as we go along. Section 23 provides for the general
principles which is discussed earlier.
Now, in section 24 we speak of NIT. In the tax code we will never see the phrase net income tax. The Net is
always been referred to as, generally, the taxable income and the other one, the minority, gross income. in
this section, it states , an income tax shall be imposed on the taxable income defined in Section 31.
Q: what do you mean by taxable income?

A: it means the pertinent item of gross income specified in the code less deduction and/or personal and
additional exemptions. If any, authorized for such types of income by the tax code or special laws
This section states that income tax shall be imposed on the taxable income as defined under Section 31 but
it continuous to state, other than the income subject to tax under subsection B, C and D of this section.
Q: What do you mean by that phrase? Are they still subject to NIT?
A: No. it is subject to FIT provided the elements are present.
So, let us go to letter B. They are subject to FIT because under subsection A other than that income subject
to tax under subsection B,C, and D if the elements are present.
Let us go to 24A.
Q: Who are liable by way of the net under Section 24 A1?

A: The following are liable by way of the Net: RC, NRC, OCW and RA
Q: What about the NRAE? Are they also liable by way of the NET? Under What Section?
PUP COLLEGE OF LAW
A: Yes. Under 25A1

Q: Why?
A: Because 25 A1 states that an NRAE is liable to pay income tax in the same manner as RC on their taxable
income. Then again, it mentioned taxable income
Q: What about NRANE, what is their tax liability?

A: Under 25B, they are subject to Gross income tax.
Q: What about alien employed in MOPs?

A: Normally they pay the FIT of 15% on their salaries received from their companies. However for other
income received from other sources, section 25E second paragraph is applicable. It provides that the
pertinent provision of the code applies. In which case it is necessary to determine whether the taxpayer is
RA, NRAE or NRANE.
If they are RA, normally they pay by way of the net because they fall under 24A1c. When they will be
classified as NRAE, they will be classified under 25A1, in which they are liable by way of net. However, if
they will be classified as NRANE, they will pay by way of the gross income.
Q: What about Domestic Corporation?

A: They will pay by way of the net because Section 27A states that an income tax is hereby imposed upon the
taxable income.
Q: How about RFC?

A: Also by way of the net. Section 28A1 states that xxx shall be subject to an income tax xxx the taxable
income derived
FILING OF THE ITR BY HUSBAND AND WIFE
Now we go on the last paragraph of section 24A, this rule is applicable for legally married individual. Read
this in relation to 51D.
Q: What is the rule for legally married individuals in filing the ITR? Are they joint or separate?
A: If the income is pure compensation, Section 24 A last paragraph says that they have to file the return
separately.
Q: What is the income included in Section 51D?

A: It includes business compensation and compensation income.
Q: How about Business income, is it included in the phrase derived income purely from compensation?
A: No. It is not.
Q: If one is purely compensation and the other one is business income, how will you file the return?
A: They should file the return jointly under section 51D

PUP COLLEGE OF LAW
TAX ON PASSIVE INCOME
The rates of tax on certain passive income are mentioned under section 24B
Q: What are the rates of tax on certain passive income received by individuals?
A: Interests, Royalties, Prizes and other Winnings shall be subject to 20% FIT except:
1. Royalties on books, literary works and musical compositions which shall be

subjected to FIT of 10%;
2. Prizes of less than P 10,000.00 which shall be subject to NIT;
3. Winnings from Lotto and Sweepstakes, which shall be subjected to NIT
BANK INTEREST:
Even without going to the codal provision, if the elements are present in order that final income tax on bank
interest is applicable. What is the requirement? THE BANK INTEREST MUST BE EARNED WITHIN THE
PHILIPPINES.
In bank interest, for fit of 20% to apply, recipient must be RC, NRC, OCW or RA except on the following;
1. Interest from long term deposit (time deposit) or investment of individuals it is

exempt, but if pre-terminated;
a. 4 yrs. to less than 5 yrs 5%

b. 3 yrs. to less than 4 yrs 12% and
c. Less than 3 yrs 20%
If the depositor is a corporation the long term deposit is not applicable.
2. If the bank interest is in pursuant to the so called Expanded Foreign Currency Deposit
System (EFCDS) rate is 7.5% of such income
Note : If the depositor in EFCDS is a nonresident, he is exempt under section 24B or

if the depositor is a nonresident and the bank is expanded, bank interest earned by
the non-resident is exempt from income tax.
Q: If RC or DC deposited money abroad and it earned interest, are they liable to pay FIT of 20%
A: RC or DC depositing money abroad is not liable to pay FIT because we do not have withholding agent
abroad. However, such income is taxable under the NIT.

PUP COLLEGE OF LAW
Q: What about NRAE, is he liable for 20% FIT on interest?

A:Yes. Under Section 25A2
Q: How about the NRANE?

A: He shall be liable for GIT of 25%
Q: What about if the depositor is alien employed in MOPs?

A: It depends whether the alien is classified as RA, NRAE or NRANE.
For alien employed in Multinational companies and offshore banking, they may be classified as the
following:
1. RA FIT of 20%
2. NRAE FIT of 20%
3. NRANE GIT of 25%
For aliens employed in petroleum contractor, it can only be NRAE or NRANE because the law says xxx
permanent resident of foreign corporations, hence the following rates;
1. NRAE FIT of 20%

2. NRANE GIT of 25%
SUMMARY:
INDIVIDUALS TAX RATES
RC FIT OF 20%
NRC FIT OF 20%
OCW FIT OF 20%
RA FIT OF 20%
NRAE FIT OF 20%
NRANE GIT OF 25%
MOPS If RA, NRAE - FIT OF 20%
If NRANE GIT of 25%
PRIZES:
Prizes refer to those derived from contests and promotions. If the recipient is an individual, it is subject to
final income tax. However if the recipient is a corporation, it is not subject to FIT.
Q: What happen to the prize received by a corporation, is it exempt from tax?

A: Not really, since the law is silent, it shall be included in the NIT for Domestic Corporations and Resident
Foreign Corporations or to the Gross income for Nonresident Foreign Corporation.
Q: What are the requisites for the application of 20% FIT to Prizes?
A: The following are the requisites:
1. It must be an income derived from the Philippines; and

2. It must not be less than P 10,000.00 ( If exceeds 10K, the NIT applies)

PUP COLLEGE OF LAW
Q: What are the instances where NIT applies to Prizes?

A: There are only 3, namely;
1. If it is not an income within the Philippines;

2. If it exceeds 10K; and
3. If received by a corporation
Q: Are all prizes subject to income tax?

A: NO. There are prizes, which are exempt from income tax, namely;
1. Under Section 32B7c, prizes and awards primarily in recognition of religious, charitable,
scientific, education, artistic, literary or civic achievements are exclusions from the gross
income if the following conditions concur:
a. If the recipient was selected without action on his part to enter the contract or proceeding;
b. The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
2. RA 7549 provides that all prizes and awards granted to athletes in local and international
competition and local tournaments whether held in the Philippines or abroad and sanctioned
by their national associations are likewise exclusion from the gross income.
Q: A telephone rang and the one in the other line told you that if you can answer the question you will win
and get down your prize in the radio station. Suppose your answer is correct, is the prize subject to tax?
Balbas: It is not taxable because he did not exert an effort in joining the contest, except that he only lifted
the phone.
WINNINGS:
Winnings are pursuant to gambling. The requirements for FIT of 20% to apply are;
1. Income must be derived from sources within.

2. Must be received by an individual
The limitation of 10K is not applicable to winnings. Winnings from Lotto and sweepstakes are not subject
to FIT; however, that income shall be included in the NIT.
If the recipient is a corporation, the income is not passive, hence NIT or GIT applies. Also, the law is silent
as to the kind of income, hence DC and RFC will be liable for NIT and NRFC will be liable for GIT.
ROYALTIES:
GR : For the FIT of 20% to apply, the royalty must come from sources within.
Expn. : However, royalties received by RC, NRC, OCW and RA on books, literary and musical compositions
the rate of 10% FIT apply.

PUP COLLEGE OF LAW
For NRAE, is it always 20% regardless if it royalties on books, literary and musical compositions as
mentioned under Section 25a2, it says in any form, so the 10% rate is not applicable. For NRANE, the GIT is
applicable.
For aliens employed in MOPS, we have to classify them whether they are RA, NRAE, or NRANE. Once
classified, apply the rule above.
If the recipient of royalties is a DC, the 20% FIT also applies as mentioned in Section 27D1. Preferential
rate of 10% is also not applicable. For RFC, we have section 28A7a, 20% FIT is applicable. The 10%
preferential rate also does not apply, For NRFC, 35% GIT is applicable.
TAX ON DIVIDENDS
Tax on dividends includes the topic under Section 73. The dividend must come only from the surplus profits
of the corporation. A dividend is defined under Section 73 formerly section 66 paragraph A and explained in
case of Manning vs. CIR.
Q: What is a dividend?
A: dividend is any distribution made by a corporation to its shareholders out of its earnings or profits and
payable either in money or property. (Sec. 73A)
Q: What are the Kinds of Dividends:

A: Dividends are classified as the following: Stock, Cash, Property, Disguised and Liquidating
Q: What is a disguised dividends?

A: it is the amount paid by a DC to NRFC for the services rendered by the latter to the former, when the
amount paid exceeds the value of the services rendered.
MANNING VS. CIR

66 SCRA 14
The company declared stock dividend. The shares of stocks of the stockholders were distributed to the
remaining stockholders and they are claiming that it was a stock dividend. The SC rules that it was not a
stock dividend because it came not from the profit of the corporation but from the share of stock from one
of the stockholders. It was not a dividend because a dividend should come from the profit of the
corporation.
Q: How can a corporation transfer its profits to the stockholder?

A: Through a stock dividend, cash dividend, and property dividend.
Q: What is a stock dividend?

A: Stock dividend is a mode of transfer of surplus profit to the authorized capital stock of the corporation.
Assuming there five incorporators. Each of them contributed 10M, so the authorized capital will be 50M.
After successful operation, the DC earned a surplus profit of 1 M. how can the corporation divide the
profits? There are only three: cash, property and stock dividends. Liquidating dividend was not included
here. Under Section 24B2, it refers to cash dividend and property dividend.

PUP COLLEGE OF LAW
Let us go to stock dividend, there are 5 incorporators and the surplus profit is 1M. Dividing the profit, each
of the incorporator will receive 20K because they own the same stock. If property dividend, they will also
receive the same property, let say motor vehicle.
In stock dividend, the 1M will be transferred to the authorized capital stock of 50M to make it 51M
Q: What is a stock dividend? Is it subject to income tax?

A: No. it is not subject to income tax because the profit did not go to the stockholders. Second, the
controlling interests before and after the declaration of the stock dividend remains the same.
Pursuant to the rule that stock dividend is not subject to income tax, there is an exemption of payment of
FIT under Section 73B; if the issuance of stock dividend is equivalent to redemption or cancellation. In
short, when the corporation purchased stock dividend, section 73B says it is subject to income tax to be
paid as taxable.
Q: Who is now liable?

A: the individual stockholder because he is the seller. We have to remember that in common term, normally
it is the creditor or the obligee that is the one liable to pay the income tax unless there is an agreement to
the contrary.
So, it is the stockholder that is liable and that is the subject matter of the case of ANSCOR vs. CIR, 301 SCRA
152. The SC ruled that in case of redemption the stockholder cannot escape the payment of income tax.
CASH DIVIDEND AND PROPERTY DIVIDENDS (TAXABLE DIVIDENDS)
We now go to cash dividend and property dividend. We will notice that under Section 24B2, the one subject
to FIT is either cash dividend or property dividend.
CODAL 24B2:
Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the
cash and/or property dividends actually or constructively received by an individual from a
domestic corporation or from a joint stock company, insurance or mutual fund companies
and regional operating headquarters of multinational companies, or on the share of an
individual in the distributable net income after tax of a partnership (except a general
professional partnership) of which he is a partner, or on the share of an individual 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 co-venturer:
Six percent (6%) beginning January 1, 1998;

Eight percent (8%) beginning January 1, 1999; and
Ten percent (10% beginning January 1, 2000. (prevailing rate)
Provided, however, That the tax on dividends shall apply only on income earned on or after
January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not,
even if declared or distributed on or after January 1, 1998, be subject to this tax.
Q: Stock dividend was never mentioned under the above provision, why?
A: Because it is not subject to FIT

PUP COLLEGE OF LAW
Q: Why is it not in the exceptional instance under Section 73B that it is subject to income tax, yet it was not
mentioned there?
A: it was not mentioned in the exceptional circumstance under Section 73B because the income tax liability
of the stockholder shall be based on the taxable income, so the income tax is NIT.
Stock Dividend is not included in Section 24B2 because it refers to FIT while Section 73B refers to NIT.
When the provision of the NIRC speaks of the NIT and FIT, these taxes cannot be imposed simultaneously,
hence it has to be separated.
Going back to section 24B2 , the FIT on taxable dividend. In stock Dividend, it is not a taxable dividend
because as a rule it is exempt from tax.
Q: What is the requirement for the imposition of FIT under 24B?

A: One requirement is that it must be issued by a DC. Exemption is Regional Operating Headquarters
because it is a RFC.
Q: Is the term dividend limited to the dividend mentioned under the Corporation Code?
A: No. It may include a share of a partner in a partnership. SO the term dividend is not limited to the
definition under the corporation code. So it may include the share of partner in a partnership, including its
share of members of an association.
Q: Who is now liable to pay the FIT of 10%?

A: They are mentioned under Section 24A: RC, NRC, OCW and RA
Q: how about NRAE?

A: According to Section 25A2, NRAE is also subject to FIT on dividends but not 10% but of 20%
Q: Suppose the stockholder is NRANE?

A: It is the GIT of 25% under section 25B
Q: Suppose the stockholder is MOPs?

A: We have to consult section 25 E last paragraph. If these aliens create income from other sources, the law
says that it is subject to the pertinent income tax. So, we have to determine whether the MOPs are NRAE or
NRANE. If NRAE, they will be subject to Section 25A2; if NRANE, GIT of 25% under Section 25B
Q: What is the stockholder is a DC?

A: According to Section 27D4, it is not subject to income tax and therefore exempt.
Q: What if the stockholder is a RFC?

A: According to Section 28A7d, it is not subject to income tax hence, it is exempt.
Q: What if the stockholder is NRFC?

A: According to Section 28B5b, the FIT of 35% or maybe, if the tax deemed paid credit rule is present, the
rate of 15%.
NOTE: These are the tax rate for cash and property dividend. But for stock dividends, they are exempt,
except only on cancellation or redemption.

PUP COLLEGE OF LAW
Suppose the one issuing a dividend is a foreign corporation. It does not matter whether it is a resident or
non-resident. For the dividend issued by DC, according to Section 42A2a it is always an income within. But
if it issued by a foreign corporation, take note that under Section 42A2b, there is no further distinction, so
long as it was issued by a foreign corporation, it may be an income within or an income without.
If the one issuing a dividend is a foreign corporation, we have to determine whether it is an income within
or without because most of the taxpayers are exempt from income tax.
Q: When can it be an income within or without?

A: The answer is found under Section 42A2b. If the two elements are present, at least 50% of the foreign
corporation declaring dividend is an income from sources within for the three year period preceding the
declaration of dividend. It is a source within if one or both the elements, the 50% and the three year period,
is not present, then the dividend issued by the FC is an income without.
If it is an income without, most of the taxpayers mentioned under Section 23 are exempt, except RC and DC.
If it an income within because the two elements are present, all of them are liable to pay by way of the net
except NRFC and NRANE, which pays by way of the gross income tax.
Q: What about the MCIT. Is it possible to pay the MCIT in dividends?

A: Yes. For DC receiving dividend from a foreign corporation, they are liable to pay by of the NIT whether it
is an income within or without. If the Nit is lower the MCIT, the DC has to pay MCIT.
For RFC receiving taxable dividend from sources without, it is exempt. So, we do not apply the MCIT. If the
taxable dividend is from sources within, the RFC is liable to pay by way of the NIT, AND IF IT IS LOWER than
the MCIT, then the latter shall be applied.
In 24B2, it speaks that if the taxable dividend was earned before January 1, 1998, nonetheless, it is exempt
because beginning 1987 down to 1998; individuals are exempt from FIT from the receipt of a taxable
dividend from a DC.
SUMMARY:
1. DC TO INDIVIDUALS:
ISSUER RECIPIENT APPLICABLE
DC RC FIT OF 10%
DC NRC FIT OF 10%
DC OCW FIT OF 10%
DC RA FIT OF 10%
DC NRAE FIT OF 20%
DC NRANE GIT OF 25%
DC AEMOP:
DC RA/ NRAE FIT OF 10%/ 20%
DC NRANE GIT OF 30%

PUP COLLEGE OF LAW
2. INTERCORPORATE DIVIDEND:
ISSUER RECIPIENT APPLICABLE
DC DC EXEMPT
DC RFC EXEMPT
DC NRFC FIT OF 15% / 30%
FC DC NIT
FC RFC If income Within, NIT;
If income without, Exempt
FC NRFC If income Within, GIT;
If income without, Exempt
TAX ON SALE OF SHARES
We go to section 24C. The first to be understood in this section is the phrase the provision of the section
39B notwithstanding
Codal:
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock
Exchange. - The provisions of Section 39(B) notwithstanding, a final tax
at the rates prescribed below is hereby imposed upon the net capital gains
realized during the taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation, except shares
sold, or disposed of through the stock exchange.
Not over P100,000........ 5%
On any amount in excess of P100,000 10%
Q: What is Section 39 all about?

A: It is about the HOLDING PERIOD entitled, Percentage taken into account
Q: What is the relevance of that?

A: Because Section 39B and 24C speaks of Capital Assets. When it is a capital asset, the holding period
applies. However, it is not applicable in the following;
1. Sale of shares of Stock which are capital assets

2. Sale of real property which are capital assets
3. Capital assets of the Corporations
Q: What is the reason for item no. 3 in the above given exceptions?
A: Because Section 39B provides that taxpayer other than the corporation
Q: What is the Holding Period?

A: It is the length of time where the taxpayer held the property (capital assets)
1. If it is held more than 12 months and if the elements are present 50% of the net capital gains are
exempt; the remaining is subject to income tax. (Thats why the holding period is not applicable
PUP COLLEGE OF LAW
to the sale of shares because the basis there is not the holding period but rather how much is the
gain.)
2. If it is held for not more than 12 months- 100% of the capital gain is subject to income tax.
Q: How much is the rate?

A: For the first P 100, 000.00 it is 5% and in excess of P 100, 000.00 it is for 10%. So the basis here is not the
holding period but the net capital gains.
Income tax to be applied to sale of shares:
1. FIT depending upon the elements

2. NIT
3. GIT
4. MCIT
5. Percentage tax based on gross income
All shares of stock are capital except those being sold by a broker or dealer, which is an ordinary asset.
Now, the trouble here is that the law is only explicit about the application of the percentage tax under
Section 127 and also the application of the FIT.
Q: What are the elements for the application of the FIT?

A: The following are the elements for the application of FIT to sales of shares of stocks;
1. The share of stock being sold as shares in DC;

2. It must be a capital asset;
3. The share must not be listed and transacted under the local stock exchange;
4. The seller is the stockholder himself
If these elements are present, the FIT applies regardless of who is the taxpayer. And as a matter of fact, it
is the only income tax where the FIT applies even if the taxpayer is a NRFC or NRANE.
Q: Who are liable to this FIT considering that Section 24C does not mention any taxpayer?
A: Those mentioned under Section 24A; The RC, NRC, OCW and RA
Q. How about NRAE?

A: We have section 25A3
Q: how about NRANE?

A: in the last portion of Section 25B says it shall be subject to 5% / 10% tax prescribed under section 24C. If
that is the case, all the individuals will pay a uniform income tax of 5% / 10% in shares of stocks sold by
DC, if the elements are present.
Q: What happen now to alien employed in MOPs? Are we going to determine whether they are not RA, NRAE
or NRANE?
A: No more because whether they are engaged or not, they will be liable for the same rate.
Q: How about DC?

PUP COLLEGE OF LAW
A: We have section 27D2 and we have the same rate.
Q: How about RFC?

A:We have Section 28B5c. In other words, all income taxpayer will be liable for the FIT of 5% or 10%. That
is if the elements are present.
Let us discuss the first element that it must be a share in DC.
Q: What if the share is owned by a foreign corporation, whether a resident or non-resident?

A: We have to determine whether it is an income within or without.
If it is a sale in DC, it is always an income from sources within and that is according to Section 42E second
paragraph saying that gain from the sale of shares of stock in a DC shall be treated as derived entirely from
sources within the Philippines regardless of where the said shares are sold
Q: What about shares of stocks in a foreign corporation?

A: We have section 42e Second paragraph saying Gains, profits and income derived from the purchase of
personal property within and its sale without the Philippines, or from the purchase of personal property
without and its sale within the Philippines shall be treated as derived entirely form sources within the country
in which sold
So, if the shares in foreign corporations are sold in the Philippines; it is an income within; If sold outside the
Philippines, it is an income without.
If it is an income without because the shares in a foreign corporation were sold outside the Philippines,
most of the taxpayer are exempt from income tax under Section 23. Only two taxpayers are liable; the RC
and DC, they have to pay by way of the NIT.
With regard to whether it is an income within or without, most of the taxpayer pays by way of the Net
except NRANE and NRFC, which pays by way of the gross. So if one of the elements is not present and the
gains are still an income within, most of the taxpayer pays by way of the gross.
Second Element, the shares of stock must be a capital asset.
Q: When is the share considered a capital asset?

A: It was answered in China Bank vs. CIR, 336SCRA 178. In this case, the share of stock is only an ordinary
asset if sold by a broker and therefore, with respect to all other shares, it is a capital asset. This is important
because all those shares in the domestic if it is not capital, then the final income tax will not apply.
It means to say that those shares not being sold by dealers, those shares are capital assets. If the share is
classified as capital asset, assuming all other elements are present, the FIT of 5% or the 10% will be applied.
Q: Suppose it is an ordinary asset, what will be the rule?

A: The rule will be the same. If it is an income within, (The share in DC) most of the taxpayers will be liable for
the NIT except only to NRFC and NRANE, which will be liable for the GIT.
If it is an ordinary but an income without (Shares in the foreign Corporation), most of the taxpayers are
exempt except only the DC and RC which will be liable for the NIT.
PUP COLLEGE OF LAW
Third Element, sale of share is not transacted and listed in a local exchange.
Q: Suppose it is not listed, what should be tax applied?

A: It is percentage tax under Section 127.
Under RA 7717, if it is listed and transacted in the local stock market, the percentage tax, which is a nature
of a business tax under Section 127, will apply.
Q: If Section 127 will be applied, it is the percentage tax in lieu of the other income tax?
A: yes. Because RA 7717 says that percentage tax shall be in lieu of all corporate and individual income tax.
Therefore, if the shares are transacted and listed in a local stock exchange the FIT of 5% or 10% will not apply
but the percentage tax under Section 127. If it is not transacted and listed in a local stock exchange, the 5%
or 10% FIT will apply.
TAX ON DISTRIBUTIVE SHARES IN A GPP
Codal:
SEC. 26. Tax Liability of Members of General Professional Partnerships. - A

general professional partnership as such shall not be subject to the income tax imposed under
this Chapter. Persons engaging in business as partners in a general professional partnership
shall be liable for income tax only in their separate and individual capacities.
For purposes of computing the distributive share of the partners, the net income of the
partnership shall be computed in the same manner as a corporation.
Each partner shall report as gross income his distributive share, actually or constructively
received, in the net income of the partnership
We go now to distribution of shares to a partner in a GPP. In the First paragraph of Section 26, it says that
GPP is exempt from corporate income tax. Take note of the phrase as such
Q: What happens to the shares of the partners in a GPP, is it exempt?

A: Accordingly, the law says that the distributive shares, shall be included in the gross income; the partner
will not be liable for NIT.
Q: if the GPP is deemed to be a corporation, what tax should be applied?

A: The FIT mentioned under Section 24B2
TAX ON SALE OF REALTY
Codal:
(A) Capital Gains from Sale of Real Property.

PUP COLLEGE OF LAW
(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six
percent (6%) based on the gross selling price or current fair market value as
determined in accordance with Section 6(E) of this Code, whichever is higher, is
hereby imposed upon capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in the Philippines,
classified as capital assets, including pacto de retro sales and other forms of
conditional sales, by individuals, including estates and trusts: Provided, That the
tax liability, if any, on gains from sales or other dispositions of real property to
the government or any of its political subdivisions or agencies or to government-
owned or controlled corporations shall be determined either under Section 24 (A)
or under this Subsection, at the option of the taxpayer.
Again the provision begins with the phrase the provision of the section 39B notwithstanding, meaning
the provision on holding period does not apply to the sale of realty which is subject to FIT.
Q:Why is that phrase mentioned?

A: Because both Section 24D1 and 39B speak of Capital assets, and for the sale of realty, it is not subject to
the Holding period because the basis of the income tax is not for how long was the property possessed by the
taxpayer but of how much of the 6% of the Gross selling price or the fair market value of the realty. Hence,
the holding period does not apply.
Holding period applies only to personal property which is capital asset, except sale of shares of stocks, for
a real property whether it is capital asset or ordinary asset the holding period does not apply. There is no
way that the holding period will be applied to a real property. Therefore, the holding period applies only to
personal property.
Q: What are the elements necessary for the application of FIT on the sale of Real property?
A: The elements were enumerated under Section 24D;
1. Real property must be located in the Philippines

2. It must be a capital asset; and
3. The seller is any kind of individual including a DC
According to Section 27D5, DC is also subject to this tax.
If all the elements are present, the FIT will apply except for RFC and NRFC. Even if the elements are present,
the FIT will not apply to RFC and NRFC because the law is silent; hence, the NIT (for RFC) or GIT (for NRFC)
will be applied.
Therefore, if all the elements are present, the general rule is that the FIT of 6% will be applied except,
when the taxpayer is RFC or a NRFC.
Going back to the First element, realty must be located in the Philippines?
Q: suppose the real property was located abroad, does the FIT apply?
A: According to Sec. 42 it is an income without and as such, in connection with Sec. 23, most of the taxpayers
are exempt except the RC and DC, which will be liable for the NIT. We do not apply the FIT outside the
country.

PUP COLLEGE OF LAW
If it is located in the Philippines and the other elements are present, the FIT of 6% will be applied except RFC
and the NRFC, which will be liable for NIT and GIT successively.
We go to the second element, assuming all other elements are present, the FIT will apply. Again, except the
RFC and NRFC.
Q: When do we consider the real property a capital asset?

A: RR7-2003 says that realty is capital asset if not ordinary. The following are ordinary asset assets (The BIR
merely copied section 39A1 but added the phrase real property);
1. Real property held by the taxpayer include d in the inventory of the taxpayer if on hand at
the close of the taxable year,
2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of
his trade or business, it refers also to realtors;
3. Real property used in the trade or business of the taxpayer;
4. Real property which is a subject matter of depreciation except a parcel of land. Depreciation
do not apply to parcel of land, we apply it other than a parcel of land.
Those are ordinary assets; other real properties not included in the enumerations are capital assets.
Q: if the realty is located abroad, what tax will be applied?

A:If realty is located abroad, it is not necessary to determine whether the real property is an ordinary or
capital assets. Most of the taxpayers are exempt from income tax except RC and DC, which will be liable by
way of the net.
Q: What if it is an ordinary asset, assuming it is located in the Philippines? What is the tax to be applied?
A: Most of the taxpayer will be liable by way of the NET except the NRANE and NRFC, which will be liable by
way of the Gross.
Q: How about the NRANE, is it also liable by way of the FIT of 6% for sale of realty, assuming all the elements
are present?
A: Yes. Section 25B last sentence says. Capital gains realized by a NRANE xxx real property shall be subject to
the income tax prescribed under subsection D of Section 24, the GIT will not apply but the 6%.
Hence, for NRANE if the elements are not present and the income from sale of realty is an income within,
the GIT will apply. For NRFC, whether the elements are present or not, if it is an income within, it is only
the GIT that will apply.
We go to the last element; seller must be any kind of individual.
As stated earlier, any kind of individual shall be liable for FIT of 6% if all the elements are present.

PUP COLLEGE OF LAW
For Corporations, the DC is the only liable for this tax under Section 27D5. For RFC and NRFC, the FIT do
not apply. RFC is liable for NIT and NRFC is liable for GIT even if all the elements are present as long it is an
income within.
Q: What is the difference if the seller is an individual or a corporation?

A: Section 27D5 says that the FIT will be applied on real property which refers to land or building. For any
kind of individual, it includes any kind of real property enumerated under article 415 of the Civil Code.
Q: Assuming all the elements are present and the seller is a RC, is there a possibility that the NIT will be
applied?
A: Yes. If the buyer is the government or any of its political subdivisions or agencies or to GOCCs. Taxpayer is
given the choice to pay FIT of 6% or the NIT at the rate of 5% to 32%
Q: if you are the lawyer of the individual who is selling his real property to the government that is located in
the Philippines, will you advise the payment of the 6% FIT or the NIT;
A: It depends. Determine whether there is substantial profit or not.
1. If sale will incur loss ( e.i. the price of the land is 1M and the government bought the property
for P 750, 000), then it is better to apply the NIT because there is no profit; hence NIT will not
apply simply because NIT presupposes that there is profit.
2. If there is substantial profit, in NIT the rate is 32%, therefore it is advisable to pay the 6% FIT.
If the buyer is the government, the option can only be exercised by those enumerated under Section 24A.
It is exclusive. It cannot be exercised by those not included in the enumeration. Hence, only the RC, NRC,
OCW and RA are allowed to avail of this privilege.
For NRAE, it can only be taxed for FIT. Assuming the elements are present, under Section 25A3.
For NRANE, if the elements are present, it is still the FIT as mentioned in the last portion of Section 25B.
For MOPs, there is no need to distinguish whether they are resident alien or not, they have to pay the FIT of
6%
For DC under 2D5, we have the same elements except that it is only limited to lands and buildings.
For RFC it is the NIT because the law is silent,
For NRFC, it is the GIT of 30%
INVOLUNTARY SALE ( Revenue Regulations 4-99)
If you have real property and you failed to pay the indebtedness of course , the parcel of land will be
subjected to auction sale. Assuming it is a capital asset, you will be given a period of one (1) year to redeem
the property.

PUP COLLEGE OF LAW
Now, if after the period or maybe within the period you redeem the property; there are 2 sales;
1. It was sold at public auction;

2. You redeem or failed to redeem
Q: Is the Final income tax applicable?

A: Under RR 4-99, Yes. However, provision of said RR must be considered. It provides that For the first time
it was sold at public auction for failure to pay the indebtedness. If the mortgagee is a bank or financial
institution, the FIT do not apply because there is no yet transfer of ownership because owner is still given the
period of one (1) year within which to redeem the property.
If after one year, the mortgagor failed to redeem the property that is the only time FIT will apply because
there is now a change in the ownership. Now, if the mortgagor is other than a bank, FIT will apply .
Q: What about involuntary sale, like auction sale, do we apply this tax?
A: Yes. Because the law says , sale, barter or other modes of disposition.
This tax must be correlated with Section 100 of the tax Code; the donors tax will apply provided the real
property is not the one mentioned in 24D1.
Q: A parcel of land located in Metro Manila worth 1M was sold for only P60, 000.00 to a relative, Can we
apply the donors tax?
A: Yes. If the realty is not one mentioned in 24D1. If the real property is located in the Philippines and a
capital assets, the seller is an individual, the donors tax do not apply.
Reason: Because section 100 says xxx other than real property referred to in section 24D1 xxx. Clearly the
FIT of 6% is preferred than the donors tax, if the elements are present.
Q: Is the sale of real property subject to VAT?

A: The answer is provided for in Section 106A1a, that the sale of realty is subject to VAT provided it is the one
held by the taxpayer primarily for sale to customers or held for lease in the ordinary course of business. This
is no other than if the seller is a realtor.
Q: If the taxpayer received a real property from a relative and he resells that, is he liable for vat?
A: No. The realty must be for sale to customer in the ordinary course business. In short, VAT is only applicable
if the seller is a realtor.
Q: when it is subject to VAT, do we apply the FIT of 6%

A: No. Because the elements there is conflicting.
Q: Why conflicting?
A: If the seller is a realtor, the real property is not a capital asset but instead an ordinary asset, because it
belong to the enumeration under RR 7-2003 as copied under Section 39A1.Hence, i f it is an ordinary asset,
the 6% FIT will not apply.
Q: If its not subject to VAT, is it exempt from income tax?

A: No. It is subject to NIT.
PUP COLLEGE OF LAW
Q: Is it a violation of the equal protection clause?

A: No. if its subject to fir because it is a capital asset, there is no way that VAT will be imposed. The rule is
absolute. It is no longer subject to VAT the moment it is subject to FIT.
Q: But is the other way around true?

A: No. If the VAT has been applied although FIT does not apply, the NIT will be applied. However, if the FIT of
6% applies, it will not be subject to VAT. The rule is absolute.
CALASANZ VS. CIR
Petitioner Ursula Calasanz inherited from her father Mariano de Torres an agricultural land located in
Cainta, Rizal . In order to liquidate her inheritance, Ursula Calasanz had the land surveyed and subdivided
into lots. Improvements, such as good roads, concrete gutters, drainage and lighting system, were
introduced to make the lots saleable. Soon after, the lots were sold to the public at a profit. Upon an audit
and review of the return this filed, the Revenue Examiner adjudged petitioners engaged in business as real
estate dealers, as defined in Section 194 [s] 1 of the National Internal Revenue Code, required them to pay
the real estate dealer's tax and assessed a deficiency income tax on profits derived from the sale of the lots
based on the rates for ordinary income. The issues for consideration are: (a) Whether or not petitioners are
real estate dealers liable for real estate dealer's fixed tax; and (b) Whether the gains realized from the sale
of the lots are taxable in full as ordinary income or capital gains taxable at capital gain rates. The SC ruled
that in the course of selling the subdivided lots, petitioners engaged in the real estate business and
accordingly, the gains from the sale of the lots are ordinary income taxable in full.
We now go to Section 24D2.
Codal:
(1) Exception. - The provisions of paragraph (1) of this Subsection to the contrary
notwithstanding, capital gains presumed to have been realized from the sale or disposition
of their principal residence by natural persons, the proceeds of which is fully utilized in
acquiring or constructing a new principal residence within eighteen (18) calendar months
from the date of sale or disposition, shall be exempt from the capital gains tax imposed
under this Subsection: Provided, That the historical cost or adjusted basis of the real
property sold or disposed shall be carried over to the new principal residence built or
acquired: Provided, further, That the Commissioner shall have been duly notified by the
taxpayer within thirty (30) days from the date of sale or disposition through a prescribed
return of his intention to avail of the tax exemption herein mentioned: Provided, still
further, That the said tax exemption can only be availed of once every ten (10) years:
Provided, finally, that if there is no full utilization of the proceeds of sale or disposition,
the portion of the gain presumed to have been realized from the sale or disposition shall be
subject to capital gains tax. For this purpose, the gross selling price or fair market value at
the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized
amount bears to the gross selling price in order to determine the taxable portion and the
tax prescribed under paragraph (1) of this Subsection shall be imposed thereon.
If the purpose of selling the real property is to acquire a new principal residence, if the elements are
present, there is a chance that the taxpayer may be exempt from the payment of 6% FIT.
PUP COLLEGE OF LAW
The elements are as follows;
1. Property being sold is a residential property;

2. Seller must inform the BIR within 30 days from the date of transaction;
3. The proceeds of the sale is fully utilized in acquiring or constructing a new principal residence
within 18 months;
4. The historical cost will be carried over to the newly acquired residence; and
5. The privilege can only availed once on every ten years
For example, an individual sold residential place worth 10K but he had purchased a new realty for a total
cost of 6M used for residential purposes. The balance of four million will be subject to FIT.
Q: Suppose it is a contract of barter, exchange, do we apply the 6% FIT?

A: both parties will be liable for FIT because they are considered the seller and the buyer at the same time.
Under RR 13-99, the Barangay captain must certify that the property being sold was used for residential
purposes.
SUMMARY:
SELLER IMPOSABLE TAX

Individual If elements are present: FIT/ If not NIT or GIT
Corporation
DC FIT (only land and buildings)
RFC NIT
NRFC GIT
TAXES ON DOMESTIC CORPORATION
Codal:
SEC. 27. Rates of Income tax on Domestic Corporations. -
(A) In General. - Except as otherwise provided in this Code, an income tax of

thirty-five percent (35%) is hereby imposed upon the taxable income derived
during each taxable year from all sources within and without the Philippines by
every corporation, as defined in Section 22(B) of this Code and taxable under this
Title as a corporation, organized in, or existing under the laws of the Philippines:
Provided, That effective January 1, 1998, the rate of income tax shall be thirty-
four percent (34%); effective January 1, 1999, the rate shall be thirty-three
percent (33%); and effective January 1, 2000 and thereafter, the rate shall be
thirty-two percent (32%).
In the case of corporations adopting the fiscal-year accounting period, the taxable
income shall be computed without regard to the specific date when specific sales,
purchases and other transactions occur. Their income and expenses for the fiscal

PUP COLLEGE OF LAW
year shall be deemed to have been earned and spent equally for each month of
the period.
The reduced corporate income tax rates shall be applied on the amount computed
by multiplying the number of months covered by the new rates within the fiscal
year by the taxable income of the corporation for the period, divided by twelve.
Provided, further, That the President, upon the recommendation of the Secretary
of Finance, may effective January 1, 2000, allow corporations the option to be
taxed at fifteen percent (15%) of gross income as defined herein, after the
following conditions have been satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial
Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be available only to firms
whose ratio of cost of sales to gross sales or receipts from all sources does not
exceed fifty-five percent (55%).
The election of the gross income tax option by the corporation shall be
irrevocable for three (3) consecutive taxable years during which the corporation
is qualified under the scheme.
For purposes of this Section, the term 'gross income' derived from business shall
be equivalent to gross sales less sales returns, discounts and allowances and cost
of goods sold. "Cost of goods sold" shall include all business expenses directly
incurred to produce the merchandise to bring them to their present location and
use.
For a trading or merchandising concern, "cost of goods" sold shall include the
invoice cost of the goods sold, plus import duties, freight in transporting the
goods to the place where the goods are actually sold, including insurance while
the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold" shall

include all costs of production of finished goods, such as raw materials used,
direct labor and manufacturing overhead, freight cost, insurance premiums and
other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross
receipts less sales returns, allowances and discounts.
Q: What are the income taxes to be paid by DC?

A: Supposedly there are five income taxes. However, the OPCIT is not yet implemented. The GIT will also not
be applied because GIT is only applicable to NRFC. Therefore, the following shall be applied to DC:
1. NIT under Section 27A, B and C under Section 27A, it refers to a taxable income. so it refers to
NIT;
2. FIT under Section 27 D1, D2, D3 and D5;
3. MCIT under Section 27 E; and
4. IAET
PUP COLLEGE OF LAW
So, there are four income taxes.

Q: Do we apply these taxes simultaneously?
A: NO. Because MCIT and the NIT cannot be applied simultaneously. It should be either of the two, whichever
is higher.
TAX ON EDUCATIONAL INSTITUTIONS
Codal Section 27B :
Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and

hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except
those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof
shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated
trade, business or other activity' means any trade, business or other activity, the conduct of which is
not substantially related to the exercise or performance by such educational institution or hospital
of its primary purpose or function. A "Proprietary educational institution" is any private school
maintained and administered by private individuals or groups with an issued permit to operate
from the Department of Education, Culture and Sports (DECS), or the Commission on Higher
Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the
case may be, in accordance with existing laws and regulations.
In Section 27B, It speaks of a DC which is a non-profit proprietary educational institution and because it
speaks of educational institution, we have to go over to the tax statutes providing for the tax liability of
educational institution from a particular tax. We have the following:
1. Article XIV, Section 4, paragraph 3 of the 1987 Constitution;

2. Article VI of Section 28 , paragraph 3 0f the 1987 Constitution;
3. Section 234B of the LGC;
4. Section 30H and I of the NIRC;
5. Section 101A3 of the NIRC;
6. Section 109 (m) now par. (h) of NIRC as amended by RA 9337; and
7. Section 193 of LGC
DISCUSSIONS:
1. Article XIV, Section 4, Par. 3
All revenues and assets of non-stock, non-profit educational institutions used actually directly,
and exclusively for educational purposes shall be exempt from taxes and duties. Upon the
dissolution or cessation of the corporate existence of such institutions, their assets shall be
disposed of in the manner provided by law.
2. Art. VI, Sec. 28. xxx

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(3) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques,

non-profit cemeteries, and all lands, buildings and improvements, actually, directly, and
exclusively used for religious, charitable or educational purposes shall be exempt from
taxation.
3. Section 234. Exemptions from Real Property Tax. - The following are exempted from
payment of the real property tax:
(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 purposes;
4. SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be
taxed under this Title in respect to income received by them as such:
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
5. SEC. 101. Exemption of Certain Gifts. - The following gifts or donations shall be exempt
from the tax provided for in this Chapter:
(A) In the Case of Gifts Made by a Resident. - (1) Dowries or gifts made on account of
marriage and before its celebration or within one year thereafter by parents to each of
their legitimate, recognized natural, or adopted children to the extent of the first Ten
thousand pesos (P10,000):
(3) Gifts in favor of an educational and/or charitable,

religious, cultural or social welfare corporation, institution,
accredited nongovernment organization, trust or
philanthropic organization or research institution or
organization: Provided, however, That not more than thirty
percent (30%) of said gifts shall be used by such donee for
administration purposes. For the purpose of the exemption, a
'non-profit educational and/or charitable corporation,
institution, accredited nongovernment organization, trust or
philanthropic organization and/or research institution or
organization' is a school, college or university and/or
charitable corporation, accredited nongovernment
organization, trust or philanthropic organization and/or
research institution or organization, incorporated as a
nonstock entity, paying no dividends, governed by trustees
who receive no compensation, and devoting all its income,
whether students' fees or gifts, donation, subsidies or other
forms of philanthropy, to the accomplishment and promotion
of the purposes enumerated in its Articles of Incorporation.
6. Section 109 (m) now Paragraph H of NIRC as amended by RA 9337;

PUP COLLEGE OF LAW
(m) Educational services rendered by private educational institutions, duly accredited by the
Department of Education, Culture and Sports (DECS) and the Commission on Higher
Education (CHED), and those rendered by government educational institutions;
7. Section 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock
and non-profit hospitals and educational institutions, are hereby withdrawn upon the
effectivity of this Code.
All of these provisions speak about educational institutions.
First, article XIV, Section 3 of the 1987 Constitution is redundant. It is enough to say that it is exempt from
all kinds of taxes because when you say all kinds of taxes, automatically, it includes the exemption from
custom duties because custom duties are a form of tax.
Q: A non-profit, non-stock educational institution earns a profit from the operation of drugstore, hospital
and a dormitory. Is the educational institution exempt from tax?
A: No. It must be proven that the revenue was used actually, directly and exclusively for educational purpose.
In addition, Section 30 says that educational institution is exempt from income tax received by them as
such. Meaning, the exemption of the school shall only with regard to an income received by them as
educational institution. Further, the last paragraph qualifies that income of whatever kind and character
from any sale of real or personal property or from any of their activities conducted for profit regardless of
the disposition made of such income is subject to income tax.
This income should be subject to income tax because it is an activity conducted for profit, and it is not an
income received by the educational institution as such.
Q: Other commentator says that the last paragraph of Section 30 of NIRC is unconstitutional; does it mean
that in the given problem the educational institution is now exempt from tax?
A: No. Assuming arguendo that Section 30 is unconstitutional, nonetheless, a law is presumed constitutional
until has been invalidated by the SC. There is a need for a declaration of unconstitutionality of the SC before
a law become inoperative. A law may be unconstitutional but still valid until there is a final decision by the SC
that said law is null and void. Therefore section 30 is very much unenforceable.
There is no conflict between section 30 of the NIRC and the Article XIV of the 1987 Constitution; the former
speaks in particular, the income tax, while the latter speaks in general.
Therefore, if we are a lawyer of a non-stock, non-profit educational institution, we must invoke section 30 of
the NIRC because we do not have to prove that the income is actually, directly, and exclusively used for
educational purposes.
PUP COLLEGE OF LAW
TAX ON PROPRIETARY EDUCATIONAL INSTITUTIONS
Q: What is the income tax being referred to Section 27B?
A: NIT, because it speaks of taxable income. It refers to NIT, not of 35%, but 10%. So, schools, if the elements
are present, are not liable to pay by way of NIT of 35% but to 10%. The requirements are the following;
1. The School must be non-profit, proprietary educational institution;
2. The Gross Income from unrelated trade, business or other activity does not exceed 50%,
meaning exactly 50% or more of the gross income must not come from unrelated activities. So,
if the school earned 51% of its gross income from selling balut, then it cannot avail of the 10%
NIT;
3. It must be duly accredited by CHED, TESDA and DECS
If these elements are present, the non-profit, proprietary institution will only be liable for 10% tax and not
35% NIT
Q: What does the term unrelated trade or business mean?
A: means any trade or business of other activity, the conduct of which is not substantially related to the
exercise of or performance by such educational institution and hospital of its primary purpose or functions.
GUIDE:
1. Stock, profit educational institution - 35% NIT, it is a regular DC (Section

27A)
2. Stock, non-profit educational institution - 10% (Section 27B)
3. Non-Stock, non-profit educational institution - Exempt ( Sec. 30H and I); and
4. Non - Stock, profit educational institution - There is no such animal
Q: But if the school wants to be exempt from real estate tax, what are the requirements?
A: The real property must be actually, directly and exclusively used for educational purposes as stated under
Section 28 par. 3 of Article VI of the 1987 Constitution, it has been the identical provision under Section 234b
of LGC. But this section 234b is more specific; it speaks of exemption from real property tax. This was asked
in the 2006 bar.
2006 BAR:
Q: The Constitution provides that charitable institutions, churches, parsonages, or convents appurtenants,
mosques and non-profit cemeteries and all land buildings, and improvements actually, directly and
exclusively used for religious, charitable and educational purposes shall be exempt from taxation. This

PUP COLLEGE OF LAW
exemption exempts charitable religious institutions from what kind of taxes? Choose the best answer.
Explain. 5%
1. From all kind of taxes, i.e. income, VAT, Customs duties, local taxes and real property taxes,
2. From income tax only;
3. From Value Added Tax only
4. From Real Property Taxes Only
5. From Capital Gains Tax only
A: Obviously, the answer is real property tax only.
In exemption from real property tax, we claim Section 28 par. 3 of Article VI of the 1987 Constitution or
Section 234b of the LGC. We do not invoke Section4 par. 3 of Article XIV of the Constitution because the
former is more specific, it refers to real property tax.
DONORS TAX ON GIFTS IN FAVOR OF AN EDUCATIONAL INSTITUTION
CODAL:
(3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare
corporation, institution, accredited nongovernment organization, trust or philanthropic
organization or research institution or organization: Provided, however, That not more than
thirty percent (30%) of said gifts shall be used by such donee for administration purposes. For
the purpose of the exemption, a 'non-profit educational and/or charitable corporation,
institution, accredited nongovernment organization, trust or philanthropic organization and/or
research institution or organization' is a school, college or university and/or charitable
corporation, accredited nongovernment organization, trust or philanthropic organization
and/or research institution or organization, incorporated as a nonstock entity, paying no
dividends, governed by trustees who receive no compensation, and devoting all its income,
whether students' fees or gifts, donation, subsidies or other forms of philanthropy, to the
accomplishment and promotion of the purposes enumerated in its Articles of Incorporation.
We go to Section 101 (3); Donors tax on gifts in favor of an educational institution. This is in the nature of a
deduction but also refers to the exemption of the educational institution with regard to the donor. But
strictly speaking, this section refers to deductions.
Q: If a donor donated a real property to educational institution, what are the requirements for its
deductibility? In short, what are the grounds for exemption?
A: The following are the requirements.
1. Not more than 30% of said gifts shall be used by such done for administration purposes;
2. It is a non-stock, non-profit educational institution;
3. It pays no dividend;
4. Governed by trustees who received no compensation

PUP COLLEGE OF LAW
5. It devotes no income to accomplishment and promotion of the purposes enumerated in its

Article of Incorporation
In taxation, when the law says exemption or exclusion they are the same because tax will not apply. So
strictly speaking, this section refers to deduction; the donors tax does not apply, so it is exempt from
donors tax.
Q: Is an educational Institution exempt from VAT?

A: It depends. For government educational institution, it is automatically exempt from VAT. There is no
requirement at all.
With respect to private institutions, under par. (H), formerly par. (m). of Section 109 of NIRC as amended by
RA 9337, educational services rendered by a private educational institution must be duly accredited by
DECS, CHED and TESDA before it can be exempt from VAT. The accreditation must is necessary for
government educational institution. For private educational institution, the amendatory law says it must be
duly accredited by DECS, TESDA and CHED.
Q: What is the amendment?

A: It included TESDA. But for government educational institution like PUP and UP, there is no further
requirement. It is going to be automatic, it is exempt from tax.
Q: Are schools exempt from local tax?

A: Section 193 of the LGC says that it is exempt provided it is non-stock and non-profit.
In the exemption from income tax, donor s tax, VAT, real estate tax, including local tax, we do not invoke
Article XIV Section 4, par 3 of the 1987 Constitution. We invoke other statutes.
Q: Does it mean that article XIV, Section 4 par. 3 is already an obsolete or a dead law? Where can we apply
this provision?
A: It is very much applicable. If the tax statute is totally silent about tax exemption of the educational
institutions for a particular tax, and then we could invoke Article XIV Section 4 par. 3 of the 1987
Constitution.
TAX ON GOCCS
Codal :
(C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The

provisions of existing special or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or controlled by the Government, except
the Government Service Insurance System (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office
(PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such
rate of tax upon their taxable income as are imposed by this Section upon corporations or
associations engaged in s similar business, industry, or activity.
We go to Section 27C. GOCCs are now subject to income tax except the following:

PUP COLLEGE OF LAW
1. GSIS
2. SSS
3. PHIC
4. PCSO
RA 9337 now removed PAGCOR from the exemption; hence, it is now taxable. So, the general rule that
GOCCs are liable to pay NIT except the 4 mentioned above.
Q: Is PUP subject to income tax?

A: No. the governing rule on government educational institution is Section 30, Par. 1
Q: Suppose you are the lawyer of the GOCC, which is not exempt from income tax which states that Section
27C, are you going to allow the BIR to collect?
A: Not really. We have to determine the nature of the income of the GOCC. We have Section 32B7b, which
states that income derived from any public utility or from the exercise of any essential government function
accruing to the government of the Philippines or to any political subdivisions thereof. This is about exclusions
in the computation of the gross income.
For GOCCs the net income from the exercise of governmental function or from any public utility like
telephone and water, the income is exempt from income tax because it is exclusion.
The best example is the case of NAPOCOR found in the BIR rulings of November 2000. In this case, the BIR
wants to impose tax on to NAPOCOR because it is not one of those enumerated under Section 27C. The BIR
argued that it is not exempt from income tax under Section 27C. However, NAPOCOR was able to prove that
100% of its income came from the exercise of public utility, which is electricity. Subsequently the office of
the Commissioner ruled that it is exempt notwithstanding it not included in the enumerations under section
27C because all of its income is exclusion in the gross income.
The second one is the exercise of the governmental function, it is also an exclusion, and therefore exempt.
This is applicable to GOCCs which has proprietary functions. However those GOCCs under Section 27C, it is
always exempt because whether it is exercising its essential governmental function or earning as a public
utility . Those GOCCs which are normally liable for income tax, the determination whether an income came
from proprietary or governmental function is relevant. That will answer the question may the government
tax itself? This is with regard to the national government imposing tax on itself.
Q: What about the LGUs, can the government tax the LGUs?
A: Yes, there is no prohibition.
Q: How about the other way around, the LGUs taxing the national government or other LGUs
A: No. Section 133 par. (o) of the LGC prohibits LGUs from taxing the national government.
Q: Is that prohibition absolute?

A: Not really because section 154 of the LGC states that the LGUs may fix the rates for the operation of public
utilities owned, operated and maintained by them within their jurisdiction.

PUP COLLEGE OF LAW
BASCO V. PAGCOR, GR No. 91649, May 14, 1991
The City of Manila imposes tax on PAGCOR. PAGCOR objected the tax on so many grounds and one of these
objections is that PAGCOR is a government agency. It invoked Section 133 par. O of the local tax code, PD
231. The SC agreed with the PAGCOR that Manila being an LGU cannot impose tax on PAGCOR because it is
prohibited by the local tax code and also of so many grounds. Hence, the SC declared the tax ordinance of
City of Manila null and void for being contrary to law.
MACTAN CEBU INTL AIRPORT vs. CITY OF CEBU

GRN 120082, September 11, 1996
The City government of Cebu tried to collect tax real property tax from Mactan Cebu Airport. Mactan
invoked section 133 Par. (o) of the LGC and also invoked the ruling in Basco vs. PAGCOR. Unfortunately the
SC was misled. Fortunately, it has a correct conclusion Mactan Airport should pay real estate tax.
The argument of the lawyers of City of Cebu was not discussed by the SC. That is why the ruling of the MIAA
vs. City of Paranaque was misled again.
Q: Was the argument of Mactan Airport correct?

A: Absolutely no. We cannot invoke the case of Basco because it is not about real property tax, it is about
local taxation.. We cannot invoke Section 133 par. (o) of the LGC because it governs only local taxation . Nit
is not applicable to real estate taxation.
LRTAA vs. CBAA, GRN 127316-October 12, 2000
The City Government of Manila tried to collect real property tax from LRT because the stations of LRT have
railroads and stations. These are real property because these are attached to the immovable. The LRT did
not argue that the government owns the real property. It argues that it exclusively used for public office.
Q: Did the SC agreed with that?

A: No. because the SC ruled that those real properties are not exclusively used for public use because if we
want to use the same, we have to pay; it is not for public use. Hence, it is subject to real estate tax.
MIAA vs. City of Paranaque, July 20, 2006
The City of Paranaque was trying to collect real property tax from MIAA. CTA ruled in favor of the CITY of
Paranaque that it should pay real property tax.
The SC ruled that MIAA is not owned by the government; it is not controlled by the government, the airport
is not an agency of the government; it is a mere instrumentality of the government. The SC declared that
the MIAA is exempt invoking Section 133 par. (o) of the LGC. The City of Paranaque being an LGU cannot
impose tax on the instrumentality of the government.
Before the LGC, we should look PD 231, revised local tax Autonomy Act and PD 464. Principles under local
taxation cannot apply to real estate tax. But the other commentator will say, it is now with the LGC.
Nonetheless, although they are in the same law, these two books are well separated from each other. It
PUP COLLEGE OF LAW
means to say that the law wants to preserve the old principle that whatever governs the local tax cannot
apply to real property tax.
Note: See the dissenting opinion of Justice Tinga, which point out the correct answer.
Q: Is it correct to say that GOCCs is not liable for real property tax?
A: The SC in MIAA case that there is no debate that GOCCs are liable to pay real property tax. But in the
instant case, they ruled otherwise, because the one taxed is not owned by the government, but it is an
instrumentality of the government; hence, it is not taxable applying Section 133 (o) of the LGC (which is
erroneous because laws on local tax under LGC is not applicable in laws on real property tax under the LGC
TAX ON BANK INTEREST
Codal:
(D) Rates of Tax on Certain Passive Incomes. -
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes
and from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of
twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit
and yield or any other monetary benefit from deposit substitutes and from trust funds and
similar arrangements received by domestic corporations, and royalties, derived from sources
within the Philippines: Provided, however, That interest income derived by a domestic
corporation from a depository bank under the expanded foreign currency deposit system shall
be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such
interest income.
Section 27D is about bank interest earned by a DC and Royalty. We have to compare this with 24B!; the one
earned by individuals.
Q: What is the difference between the two?

A: On bank interest, the long term holding period under section 24b1 does not apply if the depositor is DC.
With respect to royalty, the lower rate of 10% on individual is not also applicable if the income earner is a
DC.
TAX ON EXPANDED FOREIGN CURRENCY DEPOSIT SYSTEM

Codal:
3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. - Income
derived by a depository bank under the expanded foreign currency deposit system from
foreign currency transactions with nonresidents, offshore banking units in the Philippines,
local commercial banks including branches of foreign banks that may be authorized by the
Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system
units and other depository banks under the expanded foreign currency deposit system shall
be 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: Provided, however, That interest income from foreign
currency loans granted by such depository banks under said expanded system to residents

PUP COLLEGE OF LAW
other than offshore banking units in the Philippines or other depository banks under the
expanded system shall be subject to a final tax at the rate of ten percent (10%).
"Any income of nonresidents, whether individuals or corporations, from transactions with

depository banks under the expanded system shall be exempt from income tax.
Section 27D3, tax on income under the expanded foreign currency deposit system, was substantially
amended by RA 9337, we do not read now Section 27D3, but RA 9337. Section 27D3 is identical paragraph
in Section 287b which is amended by RA 9337, but even under RA 9337, it is worded identically.
Q: Who is liable to for this tax?

A: In income tax derived from EFCDS. It is the bank, which could either be a DC or RFC. For DC 27D3; For RFC
it is 28A7b. It is a bank, which is either a DC or RFC authorized by the Bangko Sentral ng Pilipinas to transact
business not only in the Philippine Currency but also in acceptable foreign currency.
Q: Normally, what is the income tax imposed on the Bank?

A: It is the NIT, because it is under the topic of DC which normally pays by way of the NET and also under it
the topic of the RFC Section 28A which normally pays by way of the NIT.
The first paragraph nowadays, unlike before, provides for two things; it provides exemption from income
tax. The first paragraph under RA 9337 speaks of exemption but the latter portion of the first paragraph
speaks also of income tax liability.
Q: What now is the first portion?
A: The first portion of the first paragraph speaks of the exemption of the expanded foreign currency deposit,
the bank itself, whether the DC or RFC, if transacting business of acceptable foreign currency because it is
also allowed to transact Philippine currency. When it transacts business in acceptable foreign currency and it
earns income, referring to the expanded, the bank, it earns income from the following:
1. Nonresident
2. Local commercial bank;
3. Branches of foreign bank authorized by the Bangko Sentral ng Pilipinas to transact business in
the Philippines;
4. Other offshore banking units;
5. Other depository banks under the EFCDS.
When the bank earns income from these five entities, and it must be an acceptable foreign currency
transaction, the bank is exempt.
However in the last portion, of the second paragraph, in foreign currency loans, where the creditor is the
bank, the expanded and the borrower is the resident, the income tax is FIT of 10% when the borrower is
resident except to the offshore banking unit and expanded because an offshore is also a resident because it
is RFC.
Now, to the expanded, it is also a resident because it is doing business in the Philippines, and it is a RFC the
FIT of 10% will not apply.

PUP COLLEGE OF LAW
Q: And what did the RA9337 says?
A: The Secretary of Finance will determine on whether it is subject to income tax or it will be exempt. He has
the discretion to determine if the foreign currency loan is on offshore or expanded.
So if the Secretary of Finance says Oh, exempt yan because it is a foreign currency loan, it is also a foreign
currency transaction. In short, in the first paragraph, it is always the expanded, the bank itself, which is the
income earner in transacting business with the abovementioned:
Second paragraph, the income earner is no longer the bank but the nonresidents. If the nonresident earn
income in the expanded and the law says it is exempt from income tax, it is exempt from income tax.
INTERCCORPORATE DIVIDEND
CODAL:
(4) Intercorporate Dividends. - Dividends received by a domestic corporation from

another domestic corporation shall not be subject to tax.
We go to Section 27D4. The Stockholder here is a DC, it earns dividend from another DC, the law is clear,
and it is exempt from income tax because the law says it is not subject to income tax
Q: What if stockholder is a DC, and it earned income by receiving taxable dividends from a RFC?
A: It is not exempt because it is not the one mentioned under Section 28A7d: it is liable for NIT.
Q: What if it is the other way around, it is the RFC, which is the stockholder in a DC?
A: It is exempt under Section 28A7d.
MINIMUM CORPORATE INCOME TAX
CODAL:
(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross
income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation
taxable under this Title, beginning on the fourth taxable year immediately following the year in
which such corporation commenced its business operations, when the minimum income tax is
greater than the tax computed under Subsection (A) of this Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporate income
tax over the normal income tax as computed under Subsection (A) of this Section shall be
carried forward and credited against the normal income tax for the three (3) immediately
succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The
Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate
income tax on any corporation which suffers losses on account of prolonged labor dispute, or
because of force majeure, or because of legitimate business reverses.

PUP COLLEGE OF LAW
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the

Commissioner, the necessary rules and regulation that shall define the terms and conditions
under which he may suspend the imposition of the minimum corporate income tax in a
meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum corporate income tax
provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales
returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all
business expenses directly incurred to produce the merchandise to bring them to their present
location and use.
For a trading or merchandising concern, "cost of goods sold' shall include the invoice cost of
the goods sold, plus import duties, freight in transporting the goods to the place where the
goods are actually sold including insurance while the goods are in transit.
For a manufacturing concern, cost of "goods manufactured and sold" shall include all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials
to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less
sales returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct
costs and expenses necessarily incurred to provide the services required by the customers and
clients including (A) salaries and employee benefits of personnel, consultants and specialists
directly rendering the service and (B) cost of facilities directly utilized in providing the service
such as depreciation or rental of equipment used and cost of supplies: Provided, however, That
in the case of banks, "cost of services" shall include interest expense.
MCIT under Section 27E and 28A2 is applicable only to DC and RFC. This tax is applied in lieu of the NIT if it is
lower than 2% of the gross income; we apply 2% and not the NIT. For NRFC, it is not applicable because it
pays way of the gross.
Q: What is the ratio decidendi of the enactment of MCIT?

A: To discourage, prohibit or prevent the corporations from claiming too much deductions.
If we are officer of a DC or RFC and we claim too much deduction, the probability is that the 2% of the gross
income will be higher than NIT. Hence, it prevents the DC or RFC from claiming too much deduction.
This is applicable for DC and RFC operating already for a period of four years. The formula for this tax is
shown below:
Gross Income x 2% = MCIT

rd
But the most important thing here is MCIT carry over rule. This is the 3 carry-over rule under the income
tax law. The first one is under 39D, The Net Capital Loss Carry-over Rule. The second one is under Section
34D3, the net operating loss carry-over rule.
For example, in 2000 the net income tax of the DC which is already operating for Four years is higher than
the MCIT. We do not begin computing the carry-over (assuming the corporation is adopting a calendar
year). We begin computing if in 2000 the MCIT of 2% is higher than the NIT. Now, if in 2000 the MCIT is
200,000 the nit is P120, 000. So the tax liability will be the MCIT of 2%, which is P 200, 000.00
Q: What is the carry over there?

PUP COLLEGE OF LAW
A: The carry over there is the difference of P 200,000 and P 120,000 which is P 80,000. In 2001, the DC can
claim credit or the so called carry-over.
Q: How?
A: If in 2001 the NIT is higher than the MCIT, e.g. NIT is P 300, 000 and MCIT of 2% is P 200,000. So the DC
pays the NIT because it is higher than the MCIT.
Q: Do you pay exactly P 300,000?

A: No. It will be P 300,000 minus P80, 000; that is the carry-over rule. Therefore the DC will pay not P300, 000
but only P 22,000.00.
But if in 2001, if the one which is higher is the MCIT, the Dc cannot claim carry-over credit. But the credit can
be applied in 2002 because the carry-over is up to three years. But if in 2002 MCIT is higher than the NIT, still,
the DC will not be allowed to carry-over. In 2003, suppose, the MCIT is still higher than the NIT, the DC
cannot claim the carry-over.
Q: In 2004, if the MCIT is higher than the MCIT, can the DC claim the carry over?
A: No. because it is already beyond the three year period. However the carry-over from 2001, 2002 and 2003
on a cumulative basis this may claim as a credit but not the one in 2000.
IMPROPERLY ACCUMULATED EARNINGS TAX
CODAL:
SEC. 29. Imposition of Improperly Accumulated Earnings Tax. -
(A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year
on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an
improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable
income.
(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. -
(1) In General. - The improperly accumulated earnings tax imposed in the preceding Section
shall apply to every corporation formed or availed for the purpose of avoiding the income tax
with respect to its shareholders or the shareholders of any other corporation, by permitting
earnings and profits to accumulate instead of being divided or distributed.
(2) Exceptions. - The improperly accumulated earnings tax as provided for under this Section
shall not apply to:
(a) Publicly-held corporations;

(b) Banks and other nonbank financial intermediaries; and
(c) Insurance companies.
(C) Evidence of Purpose to Avoid Income Tax. -

(1) Prima Facie Evidence. - the fact that any corporation is a mere holding company or
investment company shall be prima facie evidence of a purpose to avoid the tax upon its
shareholders or members.
PUP COLLEGE OF LAW
(2) Evidence Determinative of Purpose. - The fact that the earnings or profits of a corporation
are permitted to accumulate beyond the reasonable needs of the business shall be
determinative of the purpose to avoid the tax upon its shareholders or members unless the
corporation, by the clear preponderance of evidence, shall prove to the contrary.
(D) Improperly Accumulated Taxable Income. - For purposes of this Section, the term 'improperly
accumulated taxable income' means taxable income' adjusted by:
(1) Income exempt from tax;

(2) Income excluded from gross income;
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-over deducted;
And reduced by the sum of:

(1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year.
Provided, however, That for corporations using the calendar year basis, the accumulated
earnings under tax shall not apply on improperly accumulated income as of December 31, 1997.
In the case of corporations adopting the fiscal year accounting period, the improperly
accumulated income not subject to this tax, shall be reckoned, as of the end of the month
comprising the twelve (12)-month period of fiscal year 1997-1998.
(E) Reasonable Needs of the Business. - For purposes of this Section, the term 'reasonable needs of the
business' includes the reasonably anticipated needs of the business.
This is the only income tax that does not mention gross income.
Q: This tax is applicable to what kind of corporation?

A: It is only applicable to DC
Q: How would you justify that section 28 does not extinguish?

A: it is provided for in RR 2-2001 that it is only applicable to DC. We do not apply the rule if the law does not
distinguish, the court should not distinguish, because of RR 2-2001.
This tax was abolished in 1987 by virtue of EO 37 because the FIT on dividend received by an individual from
DC was also abolished in 1987. This tax was abolished because it is more of a sanction rather than that of an
income.
Q: Why is this tax more of a sanction rather than an income?

A: Because corporations are obliged to declare dividends.
The tax on taxable dividend was revived in 1998, together with this revival, IAET was also revived. On the
revival of the FIT on Dividend, the IAET was also revived so that DC will be obliged to declare dividends.
Q: Are there instances where corporation liable to pay IAET exempt from this tax?
A: yes. Those corporations who accumulated profits for reasonable needs of the business are exempt from
this tax. This is the first group exempt from this kind of tax under RR 2-2001.
Q: What is the example of reasonable needs of the business?

A: Example is expenses for business expansion.

PUP COLLEGE OF LAW
In other words there two groups of exemption; the first one is that DC can prove the accumulation of profits
was used for reasonable needs of the business. In relation to this is the case of CYAMIDE vs. CIR, 332 SCRA
639 saying that failure to declare dividend is not justified if the corporation merely asserted that the
earnings was withheld for reasonable needs of the business without any documentary evidence to prove
the same.
In short, normally DC will be liable for IAET, but if it was able to prove that it used its earnings for
reasonable needs of the business they are exempt from tax.
Under the Second group, these are the DCs that are totally exempt regardless of the whether or not it will
be for reasonable needs of the business, these are the following:
1. Publicly held corporation

2. Banks and other financial intermediaries; and
3. Insurance companies;
Q: What is the antonym of publicly held corporations?

A: Closely held corporations ( HINDI PRIVATELY HELD CORPORATION)
Q: What Is the distinction between the two?

A: It is closely held when at least 50% of the stocks are owned by not more than 20% stockholders under RR
2-2001, If it exceeds 20 stockholders, then it is publicly held corporation.
Q: Aside from those mentioned under Sec. 29, what are the other exempt from this tax?
A: under RR2-2001,it provides additional entities exempt from tax:
1. Taxable partnership
2. Non-taxable partnership
3. GPP and
4. Enterprise under PEZA
Q: Suppose until now the DC did not declare dividends for the calendar year 2005, can it be compelled to
declare dividends?
A: No. RR 2-2001 provides for 1 year grace period. Hence, the DC will be compelled to declare dividend on
January 2007.
Q: Assuming the DC is not exempt, are you going to allow the BIR to collect this tax assuming that grace
period already lapsed?
A: Not really. We have to determine whether the taxable income is adjusted by:
1. Income exempt from tax
2. Income excluded from the gross income
3. Income subject to Fit
4. The amount of the net operating loss carry over rule
And reduced by the sum of;

1. Dividends actually or constructively paid;
2. Income tax paid for the taxable year

PUP COLLEGE OF LAW
Consequently even if the grace period had lapsed, but if the income was already subjected to Fit or exempt
from tax or excluded from the gross deducted from carry-over, the IAET may be adjusted. Strictly speaking,
section 29 D are deductions although the law says adjusted by from the imposition of the IAET.
Q: Suppose the profits to be declared as dividend was invested to US Treasury bill, is the DC liable for IAET?
A: Yes. When the profit was invested for another investment, it is not considered reasonable needs of the
business (Manila Wine Merchant Case)
Q: If the profits were invested with the same line of business, e.g. from realty to another realty corporation,
is the DC liable for IAET?
A: No. The SC ruled in TUAZON vs. CIR, that since the profit was invested in the same line of business; that is
considered reasonable needs of the business. However, if its proven that merely 1/2 of the profit was not
used for the investment, the balance was subjected to this tax.
These doctrines are now embodies in the RR 2-2001.
TAX ON RESIDENT FOREIGN CORPORATIONS
CODAL:
(1) In General. - Except as otherwise provided in this Code, a corporation organized,

authorized, or existing under the laws of any foreign country, engaged in trade or business
within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%)
of the taxable income derived in the preceding taxable year from all sources within the
Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four
percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and
effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).
In the case of corporations adopting the fiscal-year accounting period, the taxable income shall
be computed without regard to the specific date when sales, purchases and other transactions
occur. Their income and expenses for the fiscal year shall be deemed to have been earned and
spent equally for each month of the period.
The reduced corporate income tax rates shall be applied on the amount computed by
multiplying the number of months covered by the new rates within the fiscal year by the
taxable income of the corporation for the period, divided by twelve.
Provided, however, That a resident foreign corporation shall be granted the option to be taxed
at fifteen percent (15%) on gross income under the same conditions, as provided in Section 27
(A).
RFCs are foreign corporation engaged in trade or business in the Philippines. Normally, all paragraphs of
Section 28A speaks about RFC simply because of the title of Section 28A is Resident Foreign Corporations.
In other words, all the sentences under 28A from 1-7, refers to RFC and under 28B from 1-5, refers to NRFC.
Q: Normally, what is the income tax to be paid by RFC?

A: Section 28A1 says that it is subject to income tax xxx of the taxable income xxx Normally, it is liable to
pay by way of the net.
RFCs pay three kinds of income taxes out of the six income tax: NIT, MCIT, and FIT. RFC is liable for NIT of
35% as amended by RA 9337 under Section 28A1 up to the third paragraph, and the second NIT is 28a6b
PUP COLLEGE OF LAW
which speaks of the 10% Nit on regional operating headquarters. Second kind of income tax to be paid is the
MCIT and that is under the 28A1, and the third, the FIT under Section 28A3, 28A4, 28A5 and 28A7 small
letters a, b, and c; letter d is an exemption. It is not liable for the OPCIT under Section 28A1 last paragraph
because of the failure by the president to implement the same. So, never mind this one.
So out of three, it can only pay simultaneously the NIT and the FIT, or MCIT and FIT because the NIT and
MCIT cannot be applied simultaneously.
GROSSS PHILIPPINE BILLING
CODAL:
"(3) International Carrier. - An international carrier doing business in the

Philippines shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross
Philippine Billings' as defined hereunder:
"(a) International Air Carrier. - 'Gross Philippine Billings' refers to the

amount of 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: Provided, That 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: Provided, further, That 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.
"(b) International Shipping. - 'Gross Philippine Billings' means 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.
We go to 28A3 in relation to RR 15-2002, the Gross Philippine Billing that is the nature of FIT of 2-1/2%. This
is only applicable to common carriers, which are RFC; it could only be either a ship or an airplane. When a
common carrier is an international one but it is DC, we do not apply this tax, if the common carrier is a
NRFC, they also do not pay this tax, the 2 1/2%.
If the following elements are not present, the income tax to be paid by the RFC is NIT of 35% if it is an
income within. If it is an income without, then it is exempt. Hence, the application of 2 % occurs only
when the elements are present and it depends on whether it is an airplane or ship.
For an Airline Company, it should be classified as RFC if it has a landing rights and it is known as online
airline company. If it has no landing rights, it is called an offline airline and at such it is an NRFC not liable to
pay this tax but instead liable to pay the gross income of 35%.
RR 15-2002 and Section 28A3 superseded and abrogated the old case of BOAC, Air India, American Airline
and Japan Airline. These jurisprudence are now substantially modified. Why? In these cases, the airlines

PUP COLLEGE OF LAW
have no landing rights in the Philippines but have office in the Philippines selling tickets and documents. The
ruling in this cases is that the 2 1/2% can still be applied in Gross Philippine Billings because the law says
then that Gross Philippine Billings includes gross revenue realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of passage of documents sold therein, whether for
passenger, excess baggage or mail provided the cargo or mail originates from the Philippines.
Q: Are the rulings on these cases totally abrogated?

A: No. Because the ruling here which says that if the ticket were sold in the Philippines is an income within,
that follows from the provision under Section 42A3, the place of the performance of the service. Since the
place of the performance of services is in Manila, it is an income within, To that certain extent, those ruling
are still applicable.
But those decisions are no longer controlling. It is only controlling with respect to the application of Section
42A3. With regard to the Gross Philippine Billing, those ruling are substantially abrogated. The new law now
says that the trip must originate from the Philippines; in these cases it originated in foreign ports. That is
why RR 15-2002 clarified it; to be considered as a RFC, which will be liable to 2 % it must have a landing
rights, which is known as online.
If the airline has no landing rights it will not be considered RFC but NRFC which will be liable for 35% NIT.
The Gross Philippine Billing will be applicable in the following instances:
1. The gross revenue from the carriage of passengers, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight irrespective of place
of tickets and documents;
2. In cases of revalidation, endorsement and exchange to another international airline and the
flight is originating in the Philippines, we have to apply the 2 %; and
3. In cases of transshipment that occurred in any point outside the Philippines from trips
originating from the Philippines the 2 % shall only be applied to the portion of the trip as to
the place of transshipment.
Lets go the first instances; the carriage of persons, excess baggage, cargo and mail.
Q: What are the elements for the application? Are the RFCS engaged in carrying passengers, excess baggage,
cargo and mail liable to pay the 2 1/2%
A: No. We have to determine the following elements:
1. The trip must originated in the Philippines;

2. It must be continuous and uninterrupted;
3. Irrespective of the sale of ticket and passage documents
Q: The airline is RFC, meaning it has landing rights in the Philippines; normally the requirement is that the
trip originated in the Philippines. Suppose the passengers did not board in the NAIA but in Singapore, What
A: No. It has to comply with the requirement that the passenger must originate in the Philippines.
PUP COLLEGE OF LAW
Q: Why is it not liable to for 2 %?

A: Because the passenger boarded in Singapore. Since it is an International common carrier, although a RFC,
it has also a branch in other countries.
Q: What happen now to the income of the sale of ticket to the passenger, is it subject to 2 %?
A: No. because it failed to comply with the requirements.
Q:: Is it liable to any income tax?

A: Yes. If the source of the income is within the Philippines, meaning the sale of the ticket commenced in the
Philippines, then the RFC will be liable for NIT of 35%.
Q: Suppose it boarded, the airplane of the RFC, from foreign country but the ticket was purchased in
Hongkong, is the RFC liable for any tax?
A: No. It should be exempt in line with Section 23F in relation to Section 42, that the place of performance of
the sale of the ticket without the Philippines, it is an income without, RFC are only liable for income within.
Q: Suppose the ticket was sold in Makati, where the passengers boarded in Singapore, is the RFC liable for 2
%
A: No. the 35% NIT applies..
Q: What do we mean by irrespective of the place of sale or issue and the place of the payment of the ticket
or passage document?
A: When the passenger boarded in the City of Paranaque and the sale of ticket was in Manila, the 2 % will
be applied.
That also goes with the excess baggage, cargo and mail; we have the same elements;
RR 15-2002, says that the stop-over does not exceed 48 hours nonetheless, the flight is still continuous
and uninterrupted. Assuming the other elements are present, the 2 % will be applied.
Q: If the stop-over is more than 48 hours, and the other elements are present, do we apply the 2 %?
A: No. RR 15-2002 says the flight is uninterrupted, and even if the other elements are present, we do not
apply the said rate.
We go to the second instance, revalidation, exchange and endorsement.
Exchange:
Two passengers going abroad, the other one will go on December, the other will be on January.
P1 : Palit tayo
P2 : Okay lang
P1: Oryt!
That is exchange. But the exchange must be to another airline because if it is with the same airline, the 2 %
do not apply.

PUP COLLEGE OF LAW
Endorsement:
P1 : Di an ko babalik sa tate, ayoko na. Ikaw pinsan babalik ka?
P2 : Oo, pero wala pa ko ticket
P1: (nag-eendorse, parang tseke) Sa yon a to!
REVALIDATION:
O, yung mga nahuli ng byahe, o wala, irevalidate, But to another airline.
The 2 % will apply but it must be to another airline and the trip must originate in the Philippines because
the passenger must originate from a port within the Philippines.
We go to the third one TRANSHIPMENT.
For example, Philippines to USA, halfway of the trip is Guam before going to California. The Transshipment
occurred in Guam but the law says to another airline and that the trip must originate from the Philippines.
So, the passenger must originate from the Philippines.
Q: So, where is the application 2 %?

A: It must apply only from the cost of ticket from the Philippines to Guam before the transshipment to
another airline.
Q: What happen to the proportionate cost of ticket from Guam to USA?

A: Of course the 2 % will not be applied.
Q: Is it subject to income tax?

A: If it is an income within, the NIT of 35% applies. If income without because the ticket was purchased
outside the Philippines, then it is exempt.
Q: What if the port of origin is NAIA and the port of transshipment is in Cebu, do we apply the 2 %?
A: No. Because the transshipment did not occur outside of the Philippines.
With regard to SHIPPING LINES ( cargo), there is only one instance of application of the 2 % the gross
revenue from carriage of passengers, excess baggage, cargo and mail originating from the Philippines up to
final destination, regardless of the place of or payments of the passenger or freight documents.
OFFSHORE BANKING UNITS

CODAL:
"(4) Offshore Banking Units. - The provisions of any law to the contrary
notwithstanding, income derived by offshore banking units authorized by the
Bangko Sentral ng Pilipinas (BSP), from foreign currency transactions with
nonresidents, other offshore banking units, local commercial banks, including
branches of foreign banks that may be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with offshore banking units shall be 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 which shall be
subject to the regular income tax payable by banks: Provided, however, That any
interest income derived from foreign currency loans granted to residents, other
than offshore banking units or local commercial banks, including local branches of

PUP COLLEGE OF LAW
foreign banks that may be authorized by the BSP to transact business with offshore
banking units, shall be subject only to a final; tax at the rate of ten percent (10%).
"Any income of nonresidents, whether individuals or corporations, from
Section 28A4 is amended by RA 9337. An OBU is always a RFC because it is a branch of a foreign corporation
authorized by the Bangko Sentral ng Pilipinas to transact business but only in acceptable foreign currencies.
They do not transact in Philippine money. We will notice that whether it is the expanded or the Offshore, it
refers only to acceptable foreign currencies. We have to foreign currencies; First, acceptable foreign
currencies, and second, unacceptable foreign currencies. Nowadays, all banks in the entire world accept
Philippine Currency.
Q: Why do we not accept other foreign currencies?

A: For practical reasons. For example, currencies from nations of former USSR. We do not accept their
money. P 1,000.00 worth of money will be equivalent to 6 trucks of their money. It is not practical to carry
one truck of money.
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Since OBU is a RFC, it is always subject to income tax. The law says, as amended by RA 9337. In the 1 par.
under the amendatory law, where the offshore bank earns income, it is exempt from income tax, provided
the other parties to which the offshore bank earned are the following; (see below), but only limited to
acceptable foreign currency. For expanded unauthorized to transact business in the Philippine money, are
they exempt? No, They are not exempt when earning income from income tax from transacting business
even assuming the parties are those enumerated below.
In these cases, if the OBU earned income in a foreign currency transaction from the following, they are
exempt;
1. Nonresidents;
2. Local Commercial banks authorized by BSP to operate in the Philippines;
3. Branches of Foreign banks authorized by BSP to transact business in the Philippines;
4. Other Offshore Banks.
We will notice that there are only four here; For Expanded there are Five. What is missing here is other
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depositary bank But the last portion of the 1 paragraph is very much similar to the expanded where it says
where the offshore bank is the lender of the money, the borrower is the resident of the Philippines, except
the offshore and expanded the income tax is FIT of 10%.
In second paragraph, if a nonresident, whether individual or corporation, earned income from transacting
business with Offshore bank, it is exempt.
TAX ON BRANCH PROFITS REMITTANCES
CODAL:
"(5) Tax on Branch Profits Remittances. - any profit remitted by a branch to its head office shall be subject to a
tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance
without any deduction for the tax component thereof (except those activities which are registered with the
Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in
PUP COLLEGE OF LAW
Sections 57 and 58 of this Code: Provided, That 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.
Foreign corporations have the following choices in conducting business in the Philippines;
1. Establish a branch and the governing statutes as far as income taxation is concern is Section
28a5; or
2. The Foreign Corporation may purchase stock in a DC and be a stockholder; or
3. It might establish a subsidiary in the Philippines.
Q: What do we mean to establish a subsidiary in the Philippines?

A: The Foreign Corporation will organize a corporation in the Philippines and become a stockholder that
corporation. Since it is established under the Philippine laws, the said corporation is a DC.
Fort the second and third options, being a stockholder or creating a subsidiary, the governing statute will be
section 28B5b, the intercorporate dividend.
If the foreign corporation chooses to establish a branch, the law says that the branch is always a RFC
simply because it is under the topic of RFC in Section 28A.
Now, if this foreign corporation establishes a branch in the Philippines and the branch now remits income
in the foreign corporation in abroad, this is the income subject to this income tax.
Q: Is this in lieu of the Nit of 35%?

A: No. This is in addition to the corporation income tax of 35% being a RFC.
Q: What is the 15% FIT to be paid by the branch to the mother company in abroad?
A: This is the profit remitted by a branch to its head office in abroad.
Q: How do we multiply the FIT of 15%?

A: The proper procedure is to go to Bangko Sentral ng Pilipinas and apply for a form of remittance and
multiply 15% in the total profits applied or earmarked for remittance without any deduction for the tax
component thereof. For example, the branch will remit one million pesos to its head office, then P 150,
000.00 will be paid as branch profit remittance tax.
Q: What are the branches that are not subject to this income tax?
A: Branches registered under Philippine Economic Zone Authority are not subject to branch profit
remittance tax. However, the law says, it must be connected with the conduct of its trade or business in the
Philippines
We have two interpretations here, First: if the mother foreign corporation is selling motor vehicle, the
branch must also be selling motor vehicle; otherwise, if the foreign corporation abroad is selling motor
vehicle and the branch here in the Philippine is selling hopia this income tax does not apply.

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Another interpretation is the case of Marubeni.
Marubeni Corporation vs. CIR

G.R. No. 76573 September 14, 1989
Marubeni Corporation established a branch in the Philippines. But Marubeni later on entered into a contract
with AG&P Corporation where the former bought shares of stock to later and Marubeni became a
stockholder of AG&P.
Although Marubeni had branch in the Philippines, this branch does not participate in any capacity
whatsoever in the said contract. Hence, the transaction is totally independent of its branch in the
Philippines. When AG&P declared the dividend, It paid the following (under the old law, interoperate
dividend is taxable, now it is exempt) and the branch profit remittance of 15% arguing that Marubeni is a
RFC because it has a branch in the Philippines.
Issue: is the payment of branch profits remittances of 15% correct?
Ruling: The SC says it is not correct because the branch did not participate in any capacity so it is erroneous
to pay the 15% branch profits remittance tax because the law says, it must be effective connected with the
conduct of its trade or business in the Philippines.
These interpretations are both correct, Hence, if the mother corporation abroad is selling motor vehicle and
establishes a branch here in the Philippines here and sells balut and one day old Chick this income tax
will not apply. Therefore, they are exempt.
TAX ON NON-RESIDENT FOREIGN CORPORATION

CODAL:
(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged
in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the
gross income received during each taxable year from all sources within the Philippines, such as
interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums),
annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits
and income, and capital gains, except capital gains subject to tax under subparagraphs (C) and
(d): Provided, That effective 1, 1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1,
2000 and thereafter, the rate shall be thirty-two percent (32%).
Paragraph B of Section 28 speaks of NRFC, and according to Section 221, these are the foreign corporation
not engaged in trade or business in the Philippines.
Q: What are the income taxes to be paid by NRFC:

A: GIT and FIT. There are only two income taxes out of six income taxes. Fit mentioned in Section 28B2,3, 4
and 5 paragraphs a,b and c.
First in the list is section 28B2; lessor in movies.

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Q: Who is the lessor is here?

A: NRFC which is liable for FIT of 25%
Q: Suppose the lessor is DC, what will be the income tax?

A: NIT of 35% under Section 27A
Lets go to Section 28B3, the lessor of vessel chartered by Philippine Nationals.
Q: Who is the lessor is here?

A: NRFC which is liable for FIT of 35%
Q: Suppose the lessor of a DC, what will be the income tax?

A: NIT of 35%.
Q; What if the lessor is a RFC, what will be the income tax?

A: The NIT of 35% under Section 28A
Let us go to Section 28B5; interest on foreign loans. We have to correlate this to Section 32B7a.
Q: Who is the lender here.

A: The NRFC
A: What about the lender in Section 32B7a?

Q: It is the foreign governments, financing institutions owned, controlled, or enjoying refinancing from
foreign governments and international or regional financing institutions established by the foreign
governments.
Q: So if the lender of the money is a plain and simple NRFC, is the interest on loans subject to income tax?
A: Yes. FIT of 20% under Section 28b5a
Q; If the lender of the money is a foreign government, is the interest subject to income tax?
A: No. because it is exclusion under Section 32B7a; thus, exempt.
MITSUBISHI VS.CIR, 181 SCRA 214
The borrower of the money here is Atlas Mining Corp. a Dc, The lender of the money is Mitsubishi but since
the money borrowed by atlas was substantial, the former obtained a loan from EXIM Bank. The trouble
arose when Mitsubishi claims that it is tax exempt, because EXIM Bank under the present law, Section
32B7a, it is exempt. But Mitsubishi is governed nowadays by section 28B5a because it is a plain and simple
RFC. However BIR claimed that interest of loans is subject to income tax because the lender of the money
was Exim bank because they only borrowed money from the latter, which is tax exempt because the latter is
owned by Japanese government.
The SC invoked the principle of res inter alios acta (the contract is only binding on the parties). Under the
provision of Article 1311 of Civil Code. The Contract is between Atlas and Mitsubishi borrowed money from
Exim Bank is of no moment because it was not mentioned in the contract. When Mitsubishi secured the loans
it was in its own independent capacity as a private entity and not as a conduit of Exim bank.
PUP COLLEGE OF LAW
This is material because if the parties are those mentioned in Section 32Ba, the interest in the foreign loans
is considered to be exclusions from gross income, hence, exempt.
INTERCORPORATE DIVIDEND
CODAL:
"(b) Intercorporate Dividends. - A final withholding tax at the rate of
fifteen percent (15%) is hereby imposed on the amount of cash and/or
property dividends received from a domestic corporation, which shall be
collected and paid as provided in Section 57(A) of this Code, subject to the
condition that the country in which the nonresident foreign corporation is
domiciled, shall allow a credit against the tax due from the nonresident
foreign corporation taxes deemed to have been paid in the Philippines
equivalent to twenty percent (20%), which represents the difference
between the regular income tax of thirty-five percent (35%) and the fifteen
percent (15%) tax on dividends as provided in this subparagraph:
Provided, That effective January 1, 2009, the credit against the tax due
shall be equivalent to fifteen percent (15%), which represents the
difference between the regular income tax of thirty percent (30%) and the
fifteen percent (15%) tax on dividends;
Q: What are the intercorporate dividends mentioned under the NIRC?
A: We have the following;
1. DC to DC under Section 27D4;

2. DC to RFC, meaning the stockholder is the RFC, under Section 28A7d;
3. DC to NRFC under 28B5b
The first two are exempt while in number three it is no. When a NRFC received dividend from a DC it is now
subject to FIT of 35% as increased by RA 9337 from 32% to 35%, subject to a lower rate of 15%
In this topic, we must visit the case of Marubeni, Proctor and Gamble and Wander Cases.
MARUBENI CORPORATION vs. CIR

GR No. 76573, September 14, 1989
Marubeni paid FIT of 10% for intercorporate dividend having in mind that Marubeni is a RFC. At that time,
RFC is liable for FIT of 10% for intercorporate dividend but now it is exempt under Section 28A7d. The SC
ruled that the payment is not correct because Marubeni is not a RFC but NRFC. Since it is a NRFC, it is liable
for 35%.The claim for tax refund of Marubeni, the 10% intercorporate dividend and branch profit tax of 15%
with a total of 25%, was indirectly granted by SC. However in the ultimate analysis, it was denied because it
was not given to them because the 25% was applied by the SC to the payment of fit or dividend pursuant to
the tax treaty of Japan and the Philippines, the rate of 35% has been lowered to 25%.

PUP COLLEGE OF LAW
The moral lesson here that although Marubeni has a branch here in the Philippines, but the fact that the
branch did not participate in the transaction, Marubeni is still considered a NRFC
Q: What is the significance of the determination of whether it is a RFC or NRFC?
A: Under the present law, RFC is exempt for intercorporate dividend.
Q: When do we apply the 35% and the 15%
CIR vs. PROCTER AND GAMBLE

160 SCRA 560
PGC Philippines is a corporation duly organized and existing under the Philippines laws; it is engaged in the
business in the Philippines and is wholly-owned subsidiary of PGC USA, a NRFC. PGC Philippines declared
cash dividends in favor of its parent corporation, PGC USA, which was subject to 35% tax. PGC Philippines
discovered that there was an overpayment because only 15% should be paid based on the tax sparing
rule, so it filed a refund of 20%.
The SC denied:
1. PGC Philippines is not proper party to claim reimbursement of the alleged overpaid taxes. The
real party in interest is PGC USA because PGC Philippines is mere withholding agent;
2. No complete requirements were submitted in order that the tax sparing rule may be applied.
PGC Philippines failed to present income tax return to its mother corporation when the
dividends were received.
The tax sparing rule is also known as the tax deemed paid credit rule or the reciprocity rule. There is only
tax credit by virtue of the technical provision of the Internal Federal Revenue Code of USA, a tax deemed
paid credit of 20% Do not forget the word deemed
Under the USA laws, a DC and its citizen in USA is liable to pay income tax for income derived within and
without USA, on this particular, PGC USA will pay income tax in the Philippines as well as in the USA for that
same income, and the laws in USA considers that the tax is deemed paid.
Since there is such provision, the NRFC (PGC USA) will not be liable for 35% under the Philippine laws but
only 15% for the intercorporate dividend
Q; When will the 35% intercorporate dividend apply?

A: If the laws of the NRFC does not provide for the tax deemed paid credit rule, the 35% will be applied, If
there is such provision under the foreign laws, then 155 will be applied.
CIR vs. PROCTER AND GAMBLE, 204 SCRA 377 (ON MR)
The SC reversed itself on two grounds:
1. The withholding agent is the proper party to claim refund because it is who is liable to pay
(who is required to deduct and withholding any tax.) PGC Philippines will be liable for the tax
as withholding agent if it failed to withhold the tax; hence, the withholding agent having
PUP COLLEGE OF LAW
sufficient legal interest can bring a suit for refund of taxes, if it believed were illegally collected
from it. There are two reasons why there is no tax deemed paid credit rule : first, there is a
law, but the law is silent and second: there is no law at all requiring payment of the tax from
sources within.
GUIDE ON THE APPLICABILITY OF 35% AND 15%
There are two types of country with respect to taxation:
First Countries: Where its citizens and DCs are liable from sources within and without like USA,
Philippines, Germany, and Japan
Second Countries: Where its citizens and DCs are liable only for income earned from sources
within, like Switzerland, but for income without, they are exempt.
Q: If the country belongs to the second group, is there a possibility that the 35% will be applied?
A: None.
Q: when can we therefore apply the 35%?

A: When the corporations belong to the first group, meaning that the country of the NRFC tax its citizens
from sources within and without, and their country does not provide for the tax-deemed paid credit rule as
stated in Procter and Gamble.
Q; When can we apply the 15% rate?

st
A; We can apply the 155 on both groups. On the 1 group, if there is a tax deemed paid credit on the
foreign laws, we apply the 15%. In second group, we apply the 15% rate because of the wander case.
Q: So which is better for a corporation, to establish a branch, a subsidiary or become a stockholder of the
DC?
A: It depends. The First One to consider is the rate of 35% or 15% Determine if the laws of the resident
country provides for a :tax-deemed paid credit rule and belongs to the first or second group. If it belongs to
st
the 1 group and does not provide for the tax deemed paid credit rule then 35% will be applied, it might be
better to establish a branch. If the resident country of the foreign corporation belongs to the second group or
in the first group but provides for the tax deemed paid credit rule, then it might be better to become a
stockholder of a DC.
EXEMPTION FROM TAX ON CORPORATIONS
CODAL:
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall
not be taxed under this Title in respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not organized principally for profit;
(B) 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;

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(C) 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 mutual aid
association or a nonstock corporation organized by employees providing for the payment of
life, sickness, accident, or other benefits exclusively to the members of such society, order, or
association, or nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Nonstock corporation 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 inures to the benefit of any member,
organizer, officer or any specific person;
(F) 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 stock-holder, or individual;
(G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely local
character, the income of which consists solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the
purpose of marketing the products of its members 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;
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations 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, shall be subject to tax imposed under this Code.
Section 30 states that the following organizations shall not be taxed under this title in respect to income
received by them as such
Q: What is the exemption being referred to under section 30?

A: It refers to tax on income because section 30 says under this Title referring to title II- tax on income.
Consequently, it refers to the exemption from income tax.
Q: Does it also refer to association:

A: Yes. According to BIR Ruling, associations are also corporations.
Q: Are those mentioned under Section 30 the only entities exempt from income tax?
A: No. The following are entities are also exempt:

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1. Section 27C states that SSS, GSIS, PCSO, and PHIC are exempt from tax. PAGCOR was now
removed from the exemption;
2. Those mentioned under Section 32B7b are also exempt;
3. GPP and
4. Joint ventures for the purpose of undertaking construction projects or engaging in petroleum,
coal, geothermal and other energy operations with the government are also exempt.
Q: What is the difference between exemption under Section 30 and 27C? Why is it not within the same
provision?
A:In section 27C, the exemption is absolute, In Section 30, the exemption is only for income received by them
as such ; hence, the exemption is relative. Consequently, we cannot include those mentioned under Section
27C in Section 30.
Q: How about those under section 22B:

A: joint ventures are not exempt as a rule, it is exempt only by way of exemption. Normally, joint ventures
are subject to income tax. Therefore, this cannot also be included in under Section 30.
Ordinarily, GPP is exempt from income tax. However, the qualification for exemption of GPP is different
than those under section 30. In Section 30, the exemption is only for income received by them as such. This
is qualified by the last paragraph. There are three kind of transaction under the last paragraph where these
organizations are liable for income tax because it states Notwithstanding the provisions in the preceding
paragraph, the income of whatever kind and character of the foregoing corporations xxx:
1. Sale of personal property;

2. Sale of real property;
3. Activities conducted for profit regardless of the disposition of the proceeds.
For example under letter D of Section 30, if the employee contributes money for the development of the
cemetery, it is exempt from tax, because it is an income received by them as such.
The exemption is not absolute because if the organizations do the activities mention in the last paragraph, it
is now liable for income tax regardless of the disposition of the proceeds. To illustrate, If in front of the
cemetery the organization sell bulalo, then it will be the subject of income tax because it is an activity
conducted for profit.
Q: What are the requirements of mutual banks and cooperative for exemption under section 30?
A: The requirements are the following:
1. Mutual savings bank not having a capital stock represented by shares: and
2. Cooperative bank without capital stock organized and operated for mutual purpose
and without profit.
Q: What is the lodge system mentioned in Section 30?

A: It means operating in an inter-country level.
The most important enumeration in Section 30 is the under letter E because one of the exempt entities is
the religious organization. But the exemption is not automatic. There are three requirements;

PUP COLLEGE OF LAW
1. It must be non-stock
2. It must be operated exclusively for religious purposes;
3. No part of its income or asset shall belong to inures to the benefit of any member, organizer,
officer ort any specific person, including the sacristan
Base on this requirement, it is impossible for a religious institution to exempt from income tax. The
requirements are very strict, and if it will be applied, most religious entities will not be exempted, hence
they are liable for income tax.
Computation of Gross Income
Taxable income is the pertinent items in the gross income less allowable deductions and personal
exemption. If this is the case, this is about the payment of the NIT. Under the Tax Code, NIT is being referred
to as the taxable income or the gross income. Under Revenue Regulations, it is also called the ordinary way
of paying income tax or the normal way of paying income tax. Hence, if we come across with the term
taxable income, we are talking about the NIT.
Now we go to the Section 32A.
(A) General Definition. - Except when otherwise provided in this Title,

gross income means all income derived from whatever source, including
(but not limited to) the following items:
(1) Compensation for services in whatever form paid, including, but not
limited to fees, salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the
exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents ( if taxpayer pays by way of NIT, always subject to income
tax);
(6) Royalties;
(7) Dividends (one declared by FC);
(8) Annuities; (those received while the insured is still alive)
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the general
professional partnership.
Q. What is the meaning of the term gross income in this section?
A. Gross income here shall refer to the payment of NIT. Hence, Section 32 is about payment of the NIT.
First thing to remember, if an income is mentioned in this section, it does not exclusively refer to the
payment of the NIT. We have to determine what kind of income it is.

PUP COLLEGE OF LAW
For example, in number one wages and salary, it does not necessarily follows that it is included in the
payment of NIT because this section states that The following shall be included in the computation of the
gross income except as provided for in this code xxx Take note, that this is the one mentioned in the
computation of the annual ITR for individual.
However the following shall not be included in the computation of the gross income in the filing of the
annual net income returns:
1. Income which are exclusions;

2. Income which are exempt;
3. Income subject to FIT; and
4. Income subject to GIT.
Therefore if the taxpayer is not allowed to pay by way of the NIT, Section 32A does not apply.
Q. Who are those not allowed to pay by way of the net?
A. The NRFC and NRANE.
If an income is mentioned in this section, it does not follow that it is subject to income tax. Nor it follows
that it is the one to be included in the annual ITR.
First in the list is wages and salary. It is the wages and salary that is not included in the four mentioned
above. The moment the taxpayer is a NRANE or a NFRC, automatically, Section 32A does not apply because
they are only allowed to pay the GIT.
Q. Assuming the taxpayer is paying by way of the net, he received wages and salary, should it be included in
the computation of the annual ITR?
A. Yes, but the rule is not absolute.
For Filipinos, whether resident or non-resident, they pay by way of the NIT. Filipinos employed in
multinational, off-shore and petroleum, as a rule, they pay by way of FIT of 15% on their wages and
salary. However, if the Filipino is employed in multinational, they have the option to pay by way of the
net or the final income tax irrespective whether or not they are holding a managerial position under
Section 25C as amended by RR 12-2001.
Iff the Filipino is deployed in offshore bank and petroleum service contractor, the Filipino has no other
option but to pay by way of the FIT.
Q. Assuming that the FIT applies, should it be included in the annual ITR?
A. No because there is a separate return for that. Also, if the taxpayer pays by way of the GIT, this section
does not apply.

PUP COLLEGE OF LAW
We go to gross income from the exercise of business or profession.
If the taxpayer earnest income and he is paying by way of the NIT, all income from the exercise of the
business or profession is subject to the net. That should be included in the annual ITR in the gross income.
The third one is dealings with property.
The law did not distinguish on whether the property is real or personal.
Q. Let us say the taxpayer earned income from dealings with personal property, will it be included in the NIT
assuming the taxpayer is paying by way of the NIT?
A. Yes. Whether the gain is capital gain or ordinary gain, the same shall be included in the computation.
However, if the personal property is a sale of share subject to FIT, the return there shall be accomplished by
the taxpayer himself but separate from his annual ITR.
Q. In the sale of real property, do we include it in the annual ITR?
A. Yes provided the sale of the real property is subject to the NIT. If it is the capital asset located in the
Philippines, we do not include this in the annual ITR because there is a separate return for this. It is subject to
FIT.
We go to interest. The law did not distinguish on whether this is an interest on loan or bank interest.
Q. Is it the interest which was derived in the Philippines?
A. No. If the interest is derived from the bank within the Philippines, it is not included because there should
be a separate return for FIT to be accomplished by the bank officer.
Q. If a taxpayer earns interest from PNB, is it included in the computation of gross incomes?
A. It depends. If the PNB is located abroad, the interest shall be included in the NIT; if within the Philippines,
FIT.
Take note that this is only limited to RC and DC because to all other income earner, they are exempt from
the interest earned from the bank abroad.
We go to rent.
Assuming the taxpayer is paying by way of the net, this is always included in the computation of the gross
income unless the income earner is a NRANE or NRFC.
We go to royalties.
Take note that royalties have no definition under the tax code or in the revenue regulations.
Q. What is the distinction of sale of service from royalties?

PUP COLLEGE OF LAW
A. If it is royalties which is derived from the Philippines, it is not subject to NIT; if it is sale of services and was
derived from the Philippines, it is subject to NIT.
Q. If we are the composers of Sugar free and Sugar Babes, do we include the royalties received from these
bands?
A. For Sugarfree, we do not include that because it is subject to FIT; for Sugar Babe, it is included in NIT
because it is an income from sources without.
On annuity, normally it is subject to NIT and will be included in the ITR. We will discuss this in Section 32B2.
We go to dividends.
Here, we are taking of dividends that is the one declared by a foreign corporation which is subject to NIT.
We go to annuities.
It is the one received by the insured while still alive because if received after the death, it is a total exclusion.
We go to prizes and winnings.
With regard to prizes, the one to be included in the ITR is the one derived outside the country, if the prize
does not exceeds ten thousand pesos. Also, those received by DC, whether it is an income within or without
the Philippines
For winnings, the only one subject to NIT is the winnings derived outside the country and those received by
RC and DC.
For pensions which are not exempt, then, it is included in the NIT. This will be discussed under Section 32B2.
Lastly, shares of partner in GPP.
Q. is the share of the partners will be included in the ITR?
A. Not really. Section 32A11 is the one mentioned under Section 26 third paragraph where the GPP is
exempt. The share of the partner is subject to the NIT because the law says it shall be included in the
computation of the gross income.
If the GPP is deemed to be a corporation, it is not the one mentioned in Section 32A11 because it is subject
to FIT.
Exclusions from computation of Gross income
B) Exclusions from Gross Income. - The following items shall not be included in gross income
and shall be exempt from taxation under this title:

PUP COLLEGE OF LAW
(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single sum or otherwise, but
if such amounts are held by the insurer under an agreement to pay interest thereon,
the interest payments shall be included in gross income.
We go to Section 32B1.
Q. Are proceeds of life insurance subject or exempt from NIT?
A. We have to determine whether the proceeds of life insurance are under Section 32B1 or 32B2.
In Section 32B1, it says that the proceeds of life insurance is an exclusion provided it is payable upon the
death of the insured. The only qualification that it is an exclusion is when it is payable upon the death of
the insured. It does not matter on who is the beneficiary and whether the beneficiary is appointed as
revocable or irrevocable. The most important thing is that it is payable upon the death. It does not matter
whether it will be paid in lump sum or in installment so long as it is payable upon the death of the insured.
However, this exclusion provides a proviso, If such amounts are held by the insurer under an agreement
to pay interest thereon, the interest payment shall be included in the gross income.
For example, in addition to one million as life insurance proceeds, the beneficiary also received fifty
thousand as interest; then, the latter is not exclusion. The fifty thousand is subject to gross income but the
entire one million is exclusion.
(2) Amount Received by Insured as Return of Premium. - The amount received by the
insured, as a return of premiums paid by him under life insurance, endowment, or annuity
contracts, either during the term or at the maturity of the term mentioned in the contract or
upon surrender of the contract.
This is proceeds of life insurance contract is ten while the insured is still alive. As a matter of fact, it is
called the return of premium.
Let us say, the life insurance contract is ten years, after ten years, the insurance now matures, then the
insured will collect the proceeds.
Q. If the proceed is one million, how much will be exclusion?
A. We have to determine how much is the premium paid in the whole ten years. If the insured had paid a
total of one hundred thousand, then the one included in the exclusion is only one hundred thousand. The
remaining nine hundred thousand is subject to income tax and that is so-called annuity under Section 32A8.
it is only the return of the premium which is subject to exclusions.

PUP COLLEGE OF LAW
2003 and 2005 Bar
Q. Is it subject to estate tax?
A. The related provision is Section 85E. The following are requirements:
1. Only applicable if the person is insured himself and he is the one who died. The rule does not
apply if the person insured the life of another one. If the proceed is included in the computation of the gross
estate, the proceeds is exempt from the payment of NIT because it is an exclusion.
2. If beneficiary of the insured is the estate, executor or administrator, the proceeds of the life
insurance shall always be included in the gross estate, whether the appoint of the estate as a beneficiary is
revocable or irrevocable.
3. If the beneficiary is other than the estate, we have to determine whether the designation of
the beneficiary is revocable or irrevocable. Assuming the first requirement has been complied with and the
appointment of the beneficiary is other than the estate and the designation is revocable, it should be
included in the gross estate, and, therefore, subject to estate tax. If the appointment of the beneficiary is
other than the estate and the designation is irrevocable, it will not be included in the gross estate and
therefore exempt.
(3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest,
devise, or descent: Provided, however, That income from such property, as well as
gift, bequest, devise or descent of income from any property, in cases of transfers of
divided interest, shall be included in gross income.
We go to contract of donations.
Q. Why is it, that property by virtue of donation is exempt from income tax?
A. It is exempt because these are exclusions. It does not matter whether the subject matter is donated is
real or personal. Hence, donee is exempt from income tax because donation is exclusions.
(4) Compensation for Injuries or Sickness. - amounts received, through Accident or

Health Insurance or under Workmen's Compensation Acts, as compensation for
personal injuries or sickness, plus the amounts of any damages received, whether by
suit or agreement, on account of such injuries or sickness.
We go to compensation under Workmens Compensation Act.
With regard to health and accident insurance, here, it is only the mentioned in Workmens Compensation
Act in relation to Labor Code. We cannot say that this is different from the Workmens Compensation Act
because under the word or after the word accident, there is no comma. It means to say that this is the

PUP COLLEGE OF LAW
only one mentioned under the Workmens Compensation Act. Take note in statutory construction, in
enumeration without comma, it means that it mention only one thing.
But that is not the only one which is deemed exclusion under number four. It includes amounts received by
virtue of injury or illness including damages on account of such injury or illness.
Q. Suppose the taxpayer died, is it the one mentioned here?
A. Yes. Under independent civil actions under the Civil Code, the term injury includes death.
(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any
treaty obligation binding upon the Government of the Philippines.
We go to number five; income under treaty. These are also exclusion under the law.
(6) Retirement Benefits, Pensions, Gratuities, etc.-
(a) Retirement benefits received under Republic Act No. 7641 and those
received by officials and employees of private firms, whether individual or
corporate, in accordance with a reasonable private benefit plan maintained
by the employer: Provided, That the retiring official or employee has been in
the service of the same employer for at least ten (10) years and is not less
than fifty (50) years of age at the time of his retirement: Provided, further,
That the benefits granted under this subparagraph shall be availed of by an
official or employee only once. For purposes of this Subsection, the term
'reasonable private benefit plan' means a pension, gratuity, stock bonus or
profit-sharing plan maintained by an employer for the benefit of some or all
of his officials or employees, wherein contributions are made by such
employer for the officials or employees, or both, for the purpose of
distributing to such officials and employees the earnings and principal of the
fund thus accumulated, and wherein its is provided in said plan that at no
time shall any part of the corpus or income of the fund be used for, or be
diverted to, any purpose other than for the exclusive benefit of the said
officials and employees.
(b) Any amount received by an official or employee or by his heirs from the
employer as a consequence of separation of such official or employee from
the service of the employer because of death sickness or other physical
disability or for any cause beyond the control of the said official or employee.
(c) The provisions of any existing law to the contrary notwithstanding, social
security benefits, retirement gratuities, pensions and other similar benefits
received by resident or nonresident citizens of the Philippines or aliens who
come to reside permanently in the Philippines from foreign government
agencies and other institutions, private or public.
(d) Payments of benefits due or to become due to any person residing in the
Philippines under the laws of the United States administered by the United
States Veterans Administration.
PUP COLLEGE OF LAW
(e) Benefits received from or enjoyed under the Social Security System in
accordance with the provisions of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including
retirement gratuity received by government officials and employees.
We have number six; the concept of retirement pay, separation pay and terminal leave benefits.
Unfortunately, the tax code is silent on terminal leaves benefits.
First, we have to determine whether the sum of money we receive is a retirement pay, separation pay or a
terminal pay because the requirement for classifying it for exclusion varies. They have the different
requirements.
Retirement pay is the sum of money received when the employee reached the maximum age for
employment. Separation pay is the amount received by virtue of illness, injury, sickness, physical
disability or other injury. Terminal leave is the unused vacation and sick leave converted into cash money.
The governing rules retirement pay is Section 32B6 a,c,d,e, and f; in other words, all other enumeration
under 32B6 except paragraph b.
For separation pay it is Section 32B b and c. for terminal leave, it all depends on whether it is granted on a
yearly basis, we have section 2.78.1 par. A7 of RR 2-98 and executive order 291 of the former Pres. Estrada,
RMC 16-2000. If granted in a yearly basis, we have the following cases: in Re Atty. Zialcita, 190 SCRA 851,
Borromeo vs. Civil Service 199 SCRA 911, Castaneda vs. CA, 203 SCRA 70.
Retirement Benefits
The proper way to read it is to begin at Section 32B6c. never mind the statement there if receive by
resident or nonresident citizen of the Philippines xxx because we already have section 23. It further states
from foreign government agencies and other institution, private or public which means to say, retirement
benefits given by foreign government agencies and foreign corporation, public or private are exclusions.
Why foreign corporation? Because it is says and other institution, private or public. Hence, it includes
foreign corporation, whether public or private.
If we receive retirement benefits from foreign government or foreign corporation located in the city of
Makati, it is automatically deemed exclusions. There are no requirements with respect to the years of
service and age of the retiree. The reason is that we copy this provision from US, Canada, Germany and
England where the retirement age is forty.
If the one granting the benefits is the Philippine government or DC, under Section 33B6 d and e, the
PVAO, SSS and GSIS, these are all exclusions without any qualification.
The following retirement benefits are exempt from tax:

PUP COLLEGE OF LAW
1. RA 7641 Retirement benefits received under this law pertains to private firms without retirement
trust fund.
2. RA 4971 Retirement benefits pursuant to RA 4917 received by official and employees of private
firms
If the retirement benefit is given by private institution by virtue of Sec. 32B6a, determine if there is a private
benefit plan. If there is a private benefit plan, there are requirements for exemption. If there is no private
benefit plan, the requirements are different.
RA 7641 applies to private firms without retirement plan. The following are the requirements (N60B5)
1. The firm has no retirement trust fund;

2. Retiring employee is at least 60 years old but not more than 65;
th
3. The benefits are equivalent to 15 days salary and of the 13 month pay for every year of
service; and
4. The employee has been in the service for 5 years.
Here the source of the benefit is the management.
RA 4971 applies to private firms with retirement plan. The requirements are: (10-50-1-A)
1. Retiring employee has been in the service of the same employer for the past 10 years;
2. He is not less than 50 years of age at the time of his retirement;
3. He avails of the benefits only once; and
4. The private benefit plan is approved by the BIR (RR-2-98).
Situation: SMC engineer will retire. He claims retirement pay only once. Later on, same engineer, after
retirement, became a consultant of SMC, the he retired again. This time he cannot claim the exemption
anymore.
Separation Pay (Sec 32B6b)
If an employee is terminated because of justifiable reason, there is no separation pay. It is important to

know if the separation pay is derived from a foreign government because the phrase other similar
benefits under Sec 32B6c, the separation pay is deemed included.
It is does not matter however, if the separation pay is given by the Philippine government or a private
institution if the separation pay is given due to causes such as
1. Death, sickness, injury, or other physical disability; or

2. Any cause beyond the control of the employee; in these cases, the exclusion is automatic.
The moment separation pay is received on account of death, sickness or other physical disability or for
causes beyond the control of an employee, it is automatically excluded. No more other qualifications.

PUP COLLEGE OF LAW
If however grounds are other than the above-stated, a qualification is to be made of whether or not the
cause is beyond the control of the employee.
Example: The management installed a labor-saving device for cost-cutting, and the personnel manager ask
an employee to voluntary resign; that is retrenchment. In this case, the employee is still entitled to
separation pay because the cause for termination is still beyond the employees control.
When the management lay off employees because of bankruptcy, it is beyond the employees control hence,
entitled to separation pay. When an employee is terminated for failing eyesight, it is still not subject to
income tax, it is still an illness.
When an employee voluntarily resigns but the CBA provides separation pay, the separation pay is subject to
income tax because the cause is other than the causes provided by law.
Terminal Leave Benefits
It is given on a yearly basis upon retirement. If given on a yearly basis, determine whether sick leave or
vacations leave.
Rule if Sick Leave: If sick leave given in a yearly basis, it is subject to income tax.
Rule if vacation leave: it is subject to income tax except if it is 10 days or less, in which case it is exempt.
RR-2-98 (January 1999) covers only private sector EO 291 (Under ERAP Administration adopted in RMC-16-
200) covers government terminal leave benefits.
Q. Does it matter if the worker received it from the government?
A. Yes.
Private Sector given on a yearly basis,
Subject to income tax
Government Sector vacation leave, regardless
Of number of days is not
Subject to income tax
Q. How about if given in retirement?
A. We have three rulings
1. In Re: Zialcita, 190 SCRA 851

2. Borromeo vs. Civil Service Commission, 199 SCRA 911
3. CIR vs. Castaneda
PUP COLLEGE OF LAW
In re: Zialcita
190 SCRA 851
Zialcita is a retiree of DOJ. The DOJ withhold the sum of money. Zialcita did not agree to the deduction. He
claimed that it is exclusion. He cited PD 220 which provides that terminal leave benefits received by
employees of the government and the private sectors are exempt from tax. It is under the phrase other
similar benefits received by the retiring employee (similar to the retirement benefit pay).
The SC agreed with Zialcita. It ruled that it is in the nature of retirement pay.
Note: Ruling is based on the old law, but it still relevant in the new law because what was changed is only
the section number. The SC committed a mistake that is in the nature of a retirement pay, Sec. 28, but the
ruling is still correct. However it added in the dispositive portion that the exemption applies only to DOJ
employees.
This ruling is modified in the case of Borromeo. The ruling was that the exemption is applicable to all
government employees.
Borromeo vs. Civil Service Commission
199 SCRA 911
Borromeo is an officer of the Civil Service Commission. The issues in this case were:
1. WON the terminal leave benefits of Borromeo is subject to tax;

2. WON his terminal leave pay should be computed on the basis of his highest monthly salary
including allowance or on the basis of the highest monthly salary without said allowances should be
subject to tax.
The SC ruled that is should not be subject to tax. It reiterated the ruling in Zialcita; it should be exempt from
tax. This case however, modified the ruling in Zialcita in the sense that the income tax exemption to DOJ
employees was applied to workers of the other branches of the government.
CIR VS. Castaeda
203 SCRA 72
Castaeda is a labor Attache of Philippine Embassy in London.
Issue: WON terminal leave pay received by a government official or employee or his retirement from
government service is subject to income tax.

PUP COLLEGE OF LAW
Ruling: The SC held that the terminal leave pay received by retiring employee is tax exempt, not being part
of the gross salary or income but of retirement benefit, citing the ruling in the case of Zialcita.
Note however, that in all 3 cases, the petitioners were all government employees.
Q. Suppose worker from a private corporation receives the terminal leave benefits, is it exempt from tax?
A. Yes. Under PD 220, it is provided that terminal leave benefits received by a worker in the private as well
as public sector are exempt from tax.
Note: PD 220 argued in Zialcita is not abandoned or superseded; it still forms part of the law of the land.
Monetization of Leave Credits of Government Officials and Employees
EO 291 (Under ERAP Administration adopted in RMC-16-200) with respect to terminal leave benefits
received by government employees is ALWAYS EXEMPT FROM TAX, no qualification.
(7) Miscellaneous Items. -
(a) Income Derived by Foreign Government. - Income derived from investments in

the Philippines in loans, stocks, bonds or other domestic securities, or from interest
on deposits in banks in the Philippines by (i) foreign governments, (ii) financing
institutions owned, controlled, or enjoying refinancing from foreign governments, and
(iii) international or regional financial institutions established by foreign
governments.
Income derived by Foreign Government (Sec 32B7a)
Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or
from interest on deposits in banks in the Philippines by :
1. Foreign governments
2. Financing institutions owned, controlled, or enjoying refinancing from foreign governments,
and
3. International or regional financial institutions established by foreign governments are
exclusions from gross income.
Notes: Transaction contemplated in Sec 32B7a:
1. contract of loans
2. bonds
3. stock
4. domestic securities
5. Interest from deposit of money in the Philippines.

PUP COLLEGE OF LAW
Parties:
1. Foreign government
2. Financing institutions owned, controlled, or enjoying refinancing from foreign governments,
and
3. International or regional financial institutions established by foreign governments.
Situation: The foreign government of Brunei is a stockholder of a DC (Development Bank of the Philippines).
It deposited money in a bank in Makati. Is it subject to income tax? No. it is exclusion; exempt.
(b) Income Derived by the Government or its Political Subdivisions. - Income

derived from any public utility or from the exercise of any essential governmental
function accruing to the Government of the Philippines or to any political subdivision
thereof.
Income Derived by the Government or its Political Subdivisions (Sec 32B7b)
Income derived from any public utility or from the exercise of any essential governmental function accruing
to the Government of the Philippines or to any political subdivisions thereof is an exclusion from gross
income.
Note: The exemption from income tax under this section pertains only to income derived by the
government or any of its political subdivisions from:
1. Public utility; and

2. The exercise of any essential governmental function.
Consequently, incomes from sources other than those mentioned are subject to income tax.
Do not confuse Sec37B7a with Sec 27D which states that: all GOCCs, agencies or instrumentalities of the
government are taxable, with the exception of GSIS,, SSS, PHIC, and PAGCOR Even if they are not among
the four specifically enumerated, GOCC can still be exempt if it derived income from public utility and the
exercise of any essential governmental function. There is no conflict between the two provisions.
Also on the issue of whether or not the government may tax itself, correlate this provision with Sec 133 (o),
LGC (RA 7160) which states that LGU cannot impose taxes on the national government or any of its political
subdivisions.
(c) Prizes and Awards. - Prizes and awards made primarily in recognition of
religious, charitable, scientific, educational, artistic, literary, or civic achievement but
only if:
(i) The recipient was selected without any action on his part to enter the
contest or proceeding; and

PUP COLLEGE OF LAW
(ii) The recipient is not required to render substantial future services as a

condition to receiving the prize or award.
(d) Prizes and Awards in Sports Competition. - All prizes and awards granted to
athletes in local and international sports competitions and tournaments whether held
in the Philippines or abroad and sanctioned by their national sports associations.
Prizes and Awards (Sec 32B7c)
Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic,
literally or civic achievements (are exclusion from the gross income) but only if:
1. The recipient was selected without any action on his part to enter the contest of proceeding;
and
2. The recipient is not required to render substantial future services as a condition to receiving
the prize or award.
Prizes and Awards in Sports Competition (Sec 32B7d)
All prizes and awards granted to athletes in local and international sports competitions and tournaments
whether held in the Philippines or abroad and sanctioned by their national sports associations (are
exclusions from gross income).
Note Requirements for exemption:
1. Granted to athletes in local and international sports competitions and tournaments;

2. Whether held in the Philippines or abroad; and
3. Sanctioned by their national sports associations.
Example: In the case of Grand Master Antonio, his award was sanctioned by the National Sports Association
(NSA) hence exempt from tax.
In the case of Onyok Velasco, the proper answer at that time would be it is not exempt from tax (because it
was not sanctioned by the NSA, it was sanctioned by the Philippine Olympic Committee).
Q. Is the amendment from Philippine Olympic Committee to National Sports Committee to National Sports
Association important?
A. Yes, because it covers all associations under the umbrella of NSA.
(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and
employees of public and private entities: Provided, however, That the total exclusion
under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which
shall cover:

PUP COLLEGE OF LAW
(i) Benefits received by officials and employees of the national and local
government pursuant to Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851,

as amended by Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential

decree No. 851, as amended by Memorandum Order No. 28, dated August
13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus:

Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may
be increased through rules and regulations issued by the Secretary of
Finance, upon recommendation of the Commissioner, after considering
among others, the effect on the same of the inflation rate at the end of the
taxable year.
th
13 Month Pay and other Benefits (Sec 32B7e)
Gross benefits received by officials and employees of public and private entities (are exclusions from gross
income): Provided, That the total exclusions under this subparagraph shall not exceed P30,000.00 (may be
increased by the Sec of Finance) which shall cover:
1. Benefits received by officials and employees of the national and local government pursuant
top Act No. 6686;
2. Benefits received by officials and employees pursuant to PD 851,
3. Benefits received by officials and employees not covered by PD 851 as amended by
Memorandum Order No. 29, dated August 13, 1986; and
4. Other benefits such as productivity incentives and Christmas bonus. Provided, further, that the
ceiling of P30,000.00 may be increased through rules and regulations issued by the Secretary
of Finance, upon recommendation of the Commissioner, after considering, among others, the
effect on the same of the inflation rate at the end of the taxable year.
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and
Pag-ibig contributions, and union dues of individuals.
GSIS, SSS, Medicare and Other Contributions (Sec 32Bf)
GSIS, SSS, Medicare and Pag-Ibig and union dues of individuals (are exclusion from gross income).
First deduct this form from the gross income. It is not included in the gross income for the purpose of
computing the net income tax. Contributions from GSIS, SSS, PAGIBIG, should not be included in the gross
income.
(g) Gains from the Sale of Bonds, Debentures or other Certificate of

Indebtedness. - Gains realized from the same or exchange or retirement of
bonds, debentures or other certificate of indebtedness with a maturity of
more than five (5) years.

PUP COLLEGE OF LAW
Gains from the Sale of Bonds, Debentures or Other Certificate of Indebtedness (Sec 32B7g)
Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of
indebtedness with a maturity of more than 5 years (are exclusions from gross income)
If certificate of indebtedness has a maturity of more than 5 years it is excluded, exempt; if lower than 5
years, subject to FIT (5%/12%/20%). (This is similar to the FIT on interest on bank deposit under Sec 24B1)
(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by

the investor upon redemption of shares of stock in a mutual fund company as
defined in Section 22 (BB) of this Code.
Gains from Redemption of Shares in Mutual Fund (Sec 32B7h)
Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in
Sec 22BB of this Code (are exclusions from gross income).
Take note that interests on government securities are now taxable!
TAX ON FRINGE BENEFITS
CODAL:
SEC. 33. Special Treatment of Fringe Benefit.-
(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1,
1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent
(32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up
monetary value of fringe benefit furnished or granted to the employee (except rank
and file employees as defined herein) by the employer, whether an individual or a
corporation (unless the fringe benefit is required by the nature of, or necessary to the
trade, business or profession of the employer, or when the fringe benefit is for the
convenience or advantage of the employer). The tax herein imposed is payable by the
employer which tax shall be paid in the same manner as provided for under Section 57
(A) of this Code. The grossed-up monetary value of the fringe benefit shall be
determined by dividing the actual monetary value of the fringe benefit by sixty-six
percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January
1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter:
Provided, however, That fringe benefit furnished to employees and taxable under
Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates
imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit
shall be determined by dividing the actual monetary value of the fringe benefit by the
difference between one hundred percent (100%) and the applicable rates of income
tax under Subsections (B), (C), (D), and (E) of Section 25.
(B) Fringe Benefit defined.- For purposes of this Section, the term "fringe
benefit" means any good, service or other benefit furnished or granted in cash or in
kind by an employer to an individual employee (except rank and file employees as
defined herein) such as, but not limited to, the following:

PUP COLLEGE OF LAW
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between
the market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows.
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable
under this Section:
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a collective
bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by
the Secretary of Finance, upon recommendation of the Commissioner.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation

of the Commissioner, such rules and regulations as are necessary to carry out
efficiently and fairly the provisions of this Section, taking into account the peculiar
nature and special need of the trade, business or profession of the employer.
Section 33 speaks of managerial employee although this benefit is also given to the rank-and-file.
Please do not have the notion that a fringe benefits is only given to a managerial employee, it can
also be given to the rank-and-file.
Q: What is the definition of a managerial employee?

A: RR-98 merely copied the provisions of the implementing rules of the Labor Code. We have an
identical concept of managerial employee and a rank-and-file.
If fringe benefits were given to managerial employee, the income tax is FIT of 32%, and therefore
deductions and exemptions are not allowed; 25% to NRANE and 15% to Aliens employed in MOPs.
Take note that when it is given to a managerial employee, it is subject to FIT.
If it given to a rank-and-file, we do not say that it is exempt, Section 33C says The following fringe
benefits are exempt from this tax , but we have to continue reading, it says the following are
exempt from tax under this section only and one of them is no. 3 the one given to rank-and-file.
Q: Are rank and file exempt?

A: Yes. Only from FIT of Fringe benefits. But under RR3-98 a rank-and file receiving fringe benefits is
subject to NIT. Therefore, there are deductions and there are exemptions.

PUP COLLEGE OF LAW
There is a great difference between the fringe benefits received by managerial employees which are
subject to fit while the fringe benefits received by a rank-and-file which is subject to NIT.
2003 BAR
Q: Who is liable to pay the FIT on Fringe Benefits?
A: The one liable is the managerial employee not the employer. Notwithstanding the statement under
Section 33A because it says that the tax herein imposed is payable by the employer which tax shall
be paid in the same manner as provided for under Section 57A of this code.
Reading Section 57 and 58, the management of the employee is a mere final withholding agent to file
the return and remit the tax in behalf of the taxpayer, this time the managerial employee. Hence, the
employer is only acting as a mere withholding agent.
Section 33 does not say that it is the liability of the management but it says it is payable. To pay and
to be held liable are two different things. The liability falls upon the managerial employee but the
only obliged by law to file the return is the management. The management is a mere withholding
agent.
The rule now is that management is one liable to file the final ITR and remit the tax in behalf of the
managerial employee. But there are two instances where the managerial worker is exempt.
1. If it is for the convenience of the management; and

2. If it is necessary to the trade and business of the management.
This is now provided under RR3-98
Q: A worker enjoy a free housing. If that will be leased, the value would be P 10K per month, is the
rental exempt from income.
A: It depends. We have to distinguish if the worker is a managerial or rank-and-file. For rank-and-file,

RR 2-98 says that the free housing is exempt from income tax provided it is for the convenience of the
management. One example of for convenience of the management if the free housing is very near
to the premises of the management, that anytime he may be called for work.
For managerial employee, RR 3-98 says that the free housing is exempt provided;
1. It is for the convenience of the management;

2. And the free housing is located within 50 meters perimeter from the place of the
management.
There are two methods of multiplications in the revenue regulations:
1. Multiply 100% of the benefits; and

2. Multiply 50% of the benefits

PUP COLLEGE OF LAW
The management provides free housing but the management merely leased the house. Let see, if the value
of the lease is P 10K, the managerial employee is liable but only 50% or of the housing.
Section 33B enumerated the fringe benefits. Most of them are self explanatory but some are not.
Section 33B says about expense account.
Q: What do we mean by Expense Account?

A: These are the expenses incurred by managerial employee to be reimbursed by the management.
Section 33B5 says about interest Loan. This refers to interest in loan which is lower than the prevailing rate
in the market.
Q: If the managerial employee borrowed money from the management at the rate of 4%. What would be the
fringe benefits?
A: Since the prevailing rate was fixed by RR3-98 at the 12%, the difference between 12% and 4% is the fringe
benefits where the worker is liable.
Section 33B10 says about life or health insurance and other non-life insurance premiums. In relation to this
we have to study Section 36A4.
Q: If the management insures the life of the worker , can the management claim the premium it has paid to
the insurance as deductions?
A: it depends if the employee is a rank-and-file and managerial. If he is a rank-and-file worker, we have
Section 36A4, if he is managerial, Section 33B10 is applicable. The management can claim deduction for
premium if has paid for the life and health of the managerial employee provided it must be in excess of what
the law allows.
Q: What does it mean?

A: The GSIS and SSS laws are amended that there is now an obligation among the management to have
minimum insurance over the life of the worker. If the insurance paid by the management is more than what
is allowed by GSIS and SSS laws, then the difference is the fringe benefits.
Q: Can it be claimed as deduction by the management:

A: Yes. Under Section 34A1 a1 last phrase, the fringe benefits given by the management to the managerial
employee may be claimed as a deduction as business expense provided that the FIT has been already paid.
First it must be an insurance which is more than the laws allows. Second FIT on fringe benefits should have
been paid already.
Q: What if its a rank-and-file, may the employer claim the premium as a deduction?
A: Section 36A4 is worded in a qualified manner. The management cannot claim the premium as a deduction
if it is the beneficiary, directly or indirectly. Therefore, if it the company is not the beneficiary, directly or
indirectly, it could claim the premium as a deductions
Q: What do we mean by De Minimis Benefits?

A: These are benefits of minimal value which is exempt from payment of NIT and FIT.

PUP COLLEGE OF LAW
Contributions for the retirement plan and hospitalization by the employer is also exempt from FIT on fringe
benefits because as provided for under Section 33C, it says that the following are exempt from income tax
under this section
ALLOWABLE DEDUCTIONS
CODAL:
"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) and (C); and
28(A)(1), there shall be allowed the following deductions from gross income:
"(A) Expenses. -
"(1) Ordinary and Necessary Trade, Business or Professional Expenses. -
"(a) In General. - There shall be allowed as deduction from gross income

all the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on or which are directly attributable to, the
development, management, operation and/or conduct of the trade,
business or exercise of a profession, including: xxxx
Section 34 is the longest provision under the Philippine laws. These deductions from Section 34A to 34M
could only be availed if the income taxpayer is paying by way of the NET. The rule is absolute; this will not
apply to taxpayers paying by way of Gross.
Q: Why is it only applicable to taxpayer paying by way of the NET?

A: Section 34 refers to the taxable income subject to income tax under Section 24A, 25A1, 26 27ABC and
28A1. These provisions refer to the payment of the net because it all refers to the payment of the taxable
income.
These sections refer to RC, NRC, OCW, NRAE, DC, RFC and partners in GPP.
Q: If the taxpayer is a pure compensation income earner, what can it claim as a deduction?
A: If the taxpayer is a pure compensation income earner, the only deduction it can claim is the one
mentioned under Section 34M. Meaning, he can only claim deduction of the premium. Other than this, it
cannot claim deductions under section 34. Provided it is with regard to health and hospitalization insurance.
Provided further, that the premium incurred does not exceed P 2, 400 and the family has a gross income of
not more than P 250, 000.
However, do not mislead that it is the only one that he can claim as deduction, we have another one but
under Section 34 but Section 35; the personal as well as the additional exemption. That is the nature of a
deduction to be deducted from the gross income.
For pure compensation earner, he could claim a deduction of premium for insuring his health and
hospitalization. Take note, life insurance is not included in this deduction.
PUP COLLEGE OF LAW
A lot of things must be explained under this section because it has to be correlated to other provision. The
following are the elements under this deduction:
1. The deduction must be incurred within the taxable year;

2. It must be ordinary and necessary expense; and
3. It must be for the maintenance, development of the trade and business of the management.
th
Q: If the management awarded 14 Month pay of P75M, can it be allowed as business expense deduction?
A: No. The amount is too much. The law requires that it must be reasonable and 75M is not reasonable.
Q: If the taxpayer is an individual, what will be the deadline of filing of return of 2005?
A: On or before April 15, 2006.
Q: The deductions must be within the same taxable year. If that individual incurred expenses on February
2006, can he claim deductions for the said expense?
A: No, because that was incurred outside the taxable year. It must be incurred in any month of 2005.
Xxx
Q: What about corporations? Suppose the corporation using the fiscal year which ends on March 21, the
deadline here is July 15. Will it be allowed to claim the expense on February 2006 as deduction?
A: yes, because that is within the taxable year period ends on March 31, 2006.
For ordinary and necessary expenses, the taxpayer must prove that the expense is incurred within the
taxable period.
Unfortunately, the code did not define ordinary and necessary to the conduct of the business , but BIR
and CTA rulings define such term as those that are HELPFUL and USEFUL to the conduct of the business or
trade of the taxpayer.
"(i) A reasonable allowance for salaries, wages, and other forms of

compensation for personal services actually rendered, including the
grossed- up monetary value of fringe benefit furnished or granted by
the employer to the employee: Provided, That the final tax imposed
under Section 33 hereof has been paid;
First in the list to be claimed as business expense is REASONABLE WAGES AND SALARIES, amount of which
is not mentioned.. There are three important items here;
1. Reasonable allowance for salaries and wages;

2. Other forms of compensation;
3. Money grossed up value of the fringe benefits provided for the FIT has been paid already.

PUP COLLEGE OF LAW
Q: X is the representative of San Miguel and now in the office of the BIR. He is claiming deduction of salary
of Danny Seigle amounting to P 600,000 a month. Is the salary of Danny Seigle a reasonable one to be
claimed as deduction?
A: No. The average monthly salary of an employee nowadays is P 20K to P 30K. P 600,000 is way above
reasonable.
For other forms of compensation, the requirement is that of course, by virtue of BIR Ruling, it must be
reasonable. The one mentioned under the tax Code says for personal services actually rendered,
underscore the word actually.
AGUINALDO vs. CIR

112 SCRA 136
A DC was manufacturing fish nets, The management sold a parcel of land, But the sale was made through a
real estate broker. The management earned income on the said transaction and gave special bonus to its
employees. The Special bonus was claimed by the management as deduction.
The SC ruled that the special bonus cannot be claimed as business expense deduction. The worker did not
rendered actual service because it was proven that the sale was course through a real estate broker. The SC
merely invoked Section 43A1a1. The special bonus was disallowed as deduction.
Let us go to monetary grossed up value of fringe benefits provided the FIT has been paid already.
Q: What is the fringe benefit here?

A: It is the one received by the managerial employee. Otherwise, the law will not say the payment of FIT.
(ii) A reasonable allowance for travel expenses, here and abroad, while
away from home in the pursuit of trade, business or profession;
Let us go to the travelling expenses away from home in the pursuit of the trade or business.
Q: Suppose the management will provide travelling allowance to the employee because he is living in a
faraway place, maybe Fairview of Faranaque, Is this travelling expense referred in Section 34A1aii?
A: No. The one mentioned here are those travel in the pursuit of business away from home here and abroad,
for example in Singapore, Davao or Baguio.
Q: Is the travelling expense in a foreign travel a deduction although it has nothing to do with trade or
business?
A: Yes. We have section 33B7, the travelling expense for foreign travel. Under RR3-98, travelling expenses for
foreign travels by the managerial worker is only a fringe benefit if it is not in the pursuit of the trade or
business.
If that is the case, it is a fringe benefit and can be claimed as deduction nit under 34A1a11 but under Section
34A1ai last phrase, the monetary grossed up value of fringe benefits provided the FIT has been paid already.

PUP COLLEGE OF LAW
(iii) A reasonable allowance for rentals and/or other payments

which are required as a condition for the continued use or
possession, for purposes of the trade, business or profession, of
property to which the taxpayer has not taken or is not taking
title or in which he has no equity other than that of a lessee,
user or possessor;
We go to the reasonable rentals for the continued maintenance and development of the management.
Examples are payment to PLDT, NAWASA, MERALCO and other utilities. These are reasonable rentals for the
continued maintenance, development and existence of the management.
Q: Is there an amount mentioned here?

A: None. It only mentioned REASONABLE AMOUNT.
(iv) A reasonable allowance for entertainment, amusement

and recreation expenses during the taxable year, that are
directly connected to the development, management and
operation of the trade, business or profession of the taxpayer,
or that are directly related to or in furtherance of the conduct
of his or its trade, business or exercise of a profession not to
exceed such ceilings as the Secretary of Finance may, by rules
and regulations prescribe, upon recommendation of the
Commissioner, taking into account the needs as well as the
special circumstances, nature and character of the industry,
trade, business, or profession of the taxpayer: Provided, That
any expense incurred for entertainment, amusement or
recreation that is contrary to law, morals public policy or
public order shall in no case be allowed as a deduction.
Last entertainment expense provided it is not contrary to public morals.
It is limited by RR 1-2002.
1. If the taxpayer is selling goods or commodity, the entertainment expense should not exceed
0.01% of the gross receipts.
2. If the management is selling services, the entertainment expenses should not exceed 1% of the
gross receipt.
Here it requires that the entertainment should not be contrary to public morals, public policy or public
order. Hence, if the management present receipts from Pegastus, the BIR most probably deny without
thinking the deductions being claimed.
(b) Substantiation Requirements. - No deduction from gross income shall be

allowed under Subsection (A) hereof unless the taxpayer shall substantiate with
sufficient evidence, such as official receipts or other adequate records: (i) the
amount of the expense being deducted, and (ii) the direct connection or relation
of the expense being deducted to the development, management, operation
and/or conduct of the trade, business or profession of the taxpayer.

PUP COLLEGE OF LAW
(c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross
income shall be allowed under Subsection (A) hereof for any payment made,
directly or indirectly, to an official or employee of the national government, or
to an official or employee of any local government unit, or to an official or
employee of a government-owned or -controlled corporation, or to an official
or employee or representative of a foreign government, or to a private
corporation, general professional partnership, or a similar entity, if the
payment constitutes a bribe or kickback.
We go to Kickbacks, even assuming there are no statements here in the tax code regarding kickbacks, it is
still not possible because of the requirement that it should be ordinary and necessary.
(2) Expenses Allowable to Private Educational Institutions. - In

addition to the expenses allowable as deductions under this Chapter, a private
educational institution, referred to under Section 27 (B) of this Code, may at its
option elect either: (a) to deduct expenditures otherwise considered as capital
outlays of depreciable assets incurred during the taxable year for the expansion
of school facilities or (b) to deduct allowance for depreciation thereof under
Subsection (F) hereof.
We will notice that from all the taxpayer, it is only this one which mentioned under paragraph A of Section
34. But at this time, we have to correlate this to the provision of Section 27 which refers to private
educational institutions, But it should have been referred to Section 36A2 and A3. These are so called the
capital outlays. Ordinarily, these are not deductible because of the prohibition of Section 36A2 and A3.
Q: What are capital outlays?

A: 1. Expenses for construction of new buildings or permanent improvement or betterment to increase the
value of the property or estate.
2. Expenses for the improvement and restoration to enhance or improve equipment.
Q: What is the privilege granted to educational institution under this section?

A: They are given the option to claim it as business expense or depreciation.
For example during the typhoon, the equipment was destroyed. So the management will incur expense to
improve or restore the facility. The expenses incurred there are also known as capital outlays.
Q: What is the rationale to the option to be exercised by the school?

A: If the capital outlays are substantial, e.g. the gross income is 50M pesos and the capital outlay is 80M,
and it will be allowed as business expense, the 30M can no longer be claimed as business expense on the
following year because there is no carry over because business expense can only be claimed in one year.
The only entity allowed to claim this deduction is private educational institution paying by way of the net.
They could claim this either in the alternative business expenses or depreciation
Q: Why is the school being given an option to claim under paragraph A or F?

A: Because for instance, San Sebastian College, several years ago, the Recolletos Brothers incurred 77M to
erect the law building. If this will be claimed as a deduction under business expense, this might even more
than the gross income of the school. Let us the Gross income is 70M, the deduction is 77M. This is wrong,

PUP COLLEGE OF LAW
Claiming deductions depending upon the use whether in 5 years or in 10 years. Let us use the 10 year period
in depreciation. We will claim for every year 6M. SO gross income less 6M for a period of 10 years. This is the
reason why the law gives an option to schools.
INTEREST EXPENSE:
"(B) Interest. -
"(1) In General. - The amount of interest paid or incurred within a

taxable year on indebtedness in connection with the taxpayer's
profession, trade or business shall be allowed as deduction from
gross income: Provided, however, That the taxpayer's otherwise
allowable deduction for interest expense shall be reduced by forty-
two percent (42%) of the interest income subjected to final tax:
Provided, That effective January 1, 2009, the percentage shall be
thirty-three percent (33%).
(2) Exceptions. - No deduction shall be allowed in respect of interest under the succeeding
subparagraphs:
(a) If within the taxable year an individual taxpayer reporting income on the cash
basis incurs an indebtedness on which an interest is paid in advance through
discount or otherwise: Provided, That such interest shall be allowed a deduction
in the year the indebtedness is paid: Provided, further, That if the indebtedness is
payable in periodic amortizations, the amount of interest which corresponds to the
amount of the principal amortized or paid during the year shall be allowed as
deduction in such taxable year;
(b) If both the taxpayer and the person to whom the payment has been made or is to
be made are persons specified under Section 36 (B); or
Note: Related parties under Sec. 36 are the following;

1. Brothers and sisters (whether by whole or half blood)
2. Spouse
3. Ancestors
4. Lineal descendants
(c)If the indebtedness is incurred to finance petroleum exploration.
(3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest
incurred to acquire property used in trade business or exercise of a profession may be allowed
as a deduction or treated as a capital expenditure.
Q: What is the 38%, now 42%, as amended by RA9337 under this topic?
As explained by RR 13-200, when the taxpayer borrow money in January 2005 from a bank or financing
institution, let us say 1M and assuming the interest is 100K, upon the grant of loan in January 2005, the tax
payer did not immediately spend the money to the trade or business, instead, he deposited the money to a
bank in order to earn interest so that his liability to pay the interest from the creditor will be lessened.
Assuming after depositing the money to a bank, the money earned 50K pesos.

PUP COLLEGE OF LAW
Q: Considering the taxpayer pay the interest of one hundred thousand, is he authorized to claim the interest
of the entire one hundred thousand?
A: No. First we multiply the 42% with the 50 thousand bank interest, so the result will be 21 thousand. This
21, 000 should be deducted to the one hundred thousand so that the taxpayer will be allowed to claim an
interest of loan of only 79 thousand.
OTHER INTEREST:
What are these other interests this refers to Interest on rediscounting of papers, meaning, the taxpayer
will borrow money and the interest will be paid in advance.
For example, in January 2005, a taxpayer borrowed money by way of rediscounting of papers. Upon the
grant of the loan, instead of receiving one million, the interest of one hundred thousand shall be
automatically deducted so he will receive not one million but nine hundred thousand, That is rediscounting.
Q: Can he claim the interest as a deduction on April 2006?

A: Section 34B provides for the qualification.
1. If the taxpayer is an individual and
2. Using a cash basis method,
3. He may or may not be allowed depending on whether the principal obligation has been paid
already.
4. If the principal obligation has not been paid, the interest on loan by virtue of rediscounting
should not be allowed as deduction although it was incurred with the taxable year.
However if the taxpayer was already paid, he may be allowed to claim interest as deduction. If he pays the
obligation by way of installment, for example, only of the obligation, then only of the interest will be
allowed to be claimed as deductions.
Q: What are the interests which are not allowed?

A: Interest on related parties which is enumerated under Section 36B.
Q: Who are the relatives under the tax code?

A: includes corporations and those related by consanguinity.
For example Section 36B1, the related parties here are the brothers, sisters, whether full or half blood,
spouse, lineal descendants and ascendants.
Q: What if the taxpayer borrows money from his uncle and he pay interest, is that covered under the
allowable interest?
A: Yes. Because an uncle is not a related party under section 36B1 although he is a relative.
Correlating this section to Section 99B under donation. A relative includes those related by consanguinity
within the fourth civil degree. The following are not stranger to be entitled the rate of 30% ;
1. Those mentioned in 36B

th
2. Relative by consanguinity up to the 4 degree
PUP COLLEGE OF LAW
Q: aside from interest under this section, what else that cannot be claimed by related parties?
1. Losses on the sale of realty
2. Bad Debts
3. (Interest)
Interest incurred by oil drillings and mining corporations is not deductible, and lastly, when the law says
that the taxpayer has the option to claim that as a deduction of capital expenditure.
NOTE : under the following there are no deductions;
1. Interest in rediscounting
2. Between related parties; and
3. Interest incurred to finance petroleum explorations
CAPITALIZE:
Q: What do we mean by capitalize?

A: is the act of inclusion or adding the amount of interest in the cost of the purchase property subject to
depreciation.
For example, the taxpayer will buy a track worth P 500,000 if bought in cash. However, he bought it in
installment, and instead of paying five hundred thousand pesos, he paid six hundred thousand pesos. The
one hundred thousand pesos constitute as interest for purchasing that by way of installment.
The one hundred thousand he had paid for the purchase of the truck may be claimed as deductions here.
Provided it must be incurred within the taxable period or the law says we capitalize it.
Q: What do we mean by capitalize?

A: If the truck is now the subject matter of the itemized deduction of depreciation under Section 34F, if one
hundred thousand is going to be capitalized, we have to depreciate the truck not by virtue of the five
hundred thousand but by six hundred thousand pesos.
But if the interest is already claimed as interest in Section 34B as a deduction of interest, then the one that
should be depreciated should be the five hundred thousand.
So, it depends on the choice of the taxpayer.
Q: If you are a taxpayer, are you going to capitalize or you are going to claim the interest under Section 34B?
A: It is advisable to claim that under the depreciation because it can be claimed for several years.
Let us go to TAXES.
(1) In General. - Taxes paid or incurred within the taxable year in connection
with the taxpayer's profession, trade or business, shall be allowed as deduction,
except :

PUP COLLEGE OF LAW
(a) The income tax provided for under this Title;

(b) Income taxes imposed by authority of any foreign country; but this
deduction shall be allowed in the case of a taxpayer who does not signify in his
return his desire to have to any extent the benefits of paragraph (3) of this
subsection (relating to credits for taxes of foreign countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending to increase the value
of the property assessed.
Provided, That taxes allowed under this Subsection, when refunded or
credited, shall be included as part of gross income in the year of receipt to the
extent of the income tax benefit of said deduction.
(2) Limitations on Deductions. - In the case of a nonresident alien

individual engaged in trade or business in the Philippines and a resident
foreign corporation, the deductions for taxes provided in paragraph (1) of this
Subsection (C) shall be allowed only if and to the extent that they are connected
with income from sources within the Philippines.
(3) Credit Against Tax for Taxes of Foreign Countries. - If the

taxpayer signifies in his return his desire to have the benefits of this paragraph,
the tax imposed by this Title shall be credited with:
(a) Citizen and Domestic Corporation. - In the case of a citizen of the

Philippines and of a domestic corporation, the amount of income taxes paid or
incurred during the taxable year to any foreign country; and
(b) Partnerships and Estates. - In the case of any such individual who is a
member of a general professional partnership or a beneficiary of an estate or
trust, his proportionate share of such taxes of the general professional
partnership or the estate or trust paid or incurred during the taxable year to a
foreign country, if his distributive share of the income of such partnership or
trust is reported for taxation under this Title.
An alien individual and a foreign corporation shall not be allowed the credits
against the tax for the taxes of foreign countries allowed under this paragraph.
(4) Limitations on Credit. - The amount of the credit taken under this
Section shall be subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid or incurred to any
country shall not exceed the same proportion of the tax against which such
credit is taken, which the taxpayer's taxable income from sources within such
country under this Title bears to his entire taxable income for the same taxable
year; and
(b) The total amount of the credit shall not exceed the same proportion of the
tax against which such credit is taken, which the taxpayer's taxable income
from sources without the Philippines taxable under this Title bears to his entire
taxable income for the same taxable year.
(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when

paid differ from the amounts claimed as credits by the taxpayer, or if any tax
paid is refunded in whole or in part, the taxpayer shall notify the
Commissioner; who shall redetermine the amount of the tax for the year or
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years affected, and the amount of tax due upon such redetermination, if any,
shall be paid by the taxpayer upon notice and demand by the Commissioner, or
the amount of tax overpaid, if any, shall be credited or refunded to the
taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a
condition precedent to the allowance of this credit may require the taxpayer to
give a bond with sureties satisfactory to and to be approved by the
Commissioner in such sum as he may require, conditioned upon the payment
by the taxpayer of any amount of tax found due upon any such
redetermination. The bond herein prescribed shall contain such further
conditions as the Commissioner may require.
(6) Year in Which Credit Taken. - The credits provided for in Subsection
(C)(3) of this Section may, at the option of the taxpayer and irrespective of the
method of accounting employed in keeping his books, be taken in the year
which the taxes of the foreign country were incurred, subject, however, to the
conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects
to take such credits in the year in which the taxes of the foreign country
accrued, the credits for all subsequent years shall be taken upon the same basis
and no portion of any such taxes shall be allowed as a deduction in the same or
any succeeding year.
(7) Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall
be allowed only if the taxpayer establishes to the satisfaction of the
Commissioner the following:
(a) The total amount of income derived from sources without the Philippines;
(b) The amount of income derived from each country, the tax paid or incurred
to which is claimed as a credit under said paragraph, such amount to be
determined under rules and regulations prescribed by the Secretary of Finance;
and
(c) All other information necessary for the verification and computation of such
credits.
Section 34C is more controversial than A and B because the first two can only be minimize the payment of
income tax by way of deductions. Here it may be minimized into two ways: tax deduction under section34C1
and 2, and tax credit under 34C3 to 7. Under this, minimizing the income tax liability is not only by means
of a deduction; it can also be minimized by tax credit.
When we say tax deduction, these are the tax deduction incurred by the taxpayer in the pursuit of trade of
business and of course it must be incurred within the taxable period.
The classic example of this is the business tax. When we say deduction, it should be deducted, as a rule to
the gross income. When we say tax credit, it is to be deducted in the last step of the formula.
Under income tax law, we have numerous tax credits, the one discussed here, is the income tax paid to a
foreign country, is only one of those.
Q; At present, is it only tax credit, what are the other tax credits if any?
A: Of course not. The following are the tax credits under the income tax law;

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1. Input tax under VAT (Section 110B last phrase;)

2. Different creditable withholding tax and
3. Tax credit certificate under Section 204
NOTE: SENIOR CITIZENS TAX CREDIT is no longer a tax credit by virtue of RA 9257; it is now a deduction
only.
Going back to the income tax paid to the foreign country, this is only applicable if the taxpayer is a RC or
DC. Suppose the taxpayer paid income tax but he is a RC, here we hit three birds with one stone, we have
similar provision from the income tax paid to a foreign country under Donors tax, Section 101C, under
estate tax, we have Section 86E because the contents here are similar in procedure.
Q: what is the relevance of income tax paid to a foreign country?

A: If the taxpayer is paying by way of the net and he is a RC or DC, he can claim it as tax credit.
Q: For instance, the taxpayer paid income tax in the US. As converted to Philippine Currency, the income tax
paid in US is one hundred thousand pesos. Can he claim the entire one hundred thousand pesos?
A: No. we have to follow certain formula.
Taxable income within the Philippines

--------------------------------------------------- x rate of tax = Deductible Tax Credit
Taxable income in the entire world
The income in the entire world includes the income within the Philippines. For individuals, the rate of tax is
32%
If the result of the above formula is 7,000 pesos although the taxpayer One hundred thousand pesos, he will
only be allowed to claim seven thousand pesos.
This is the same procedure for donors tax paid in foreign country and estate paid in foreign country.
Q; Which is better to claim that at the beginning of the formula or at the bottom?
A:Of course it is better to deduct it at the tax due.
Under section 31C, if the taxpayer failed to avail the privilege of the tax credit system, that is the time
when he will be allowed to claim that as a deduction. This is very unique because the deduction is allowed
even if the taxpayer has no trade or business. Normally, in deduction, the taxpayer must have trade or
business.
Nonetheless, it is better to claim it as a tax credit because the payment of income tax will be minimize up
to the maximum because it will be minus from the bottom of the formula.
Losses. -
(1) In General.- Losses actually sustained during the taxable year and not
compensated for by insurance or other forms of indemnity shall be allowed
as deductions:

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(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or profession, if the loss
arises from fires, storms, shipwreck, or other casualties, or from robbery,
theft or embezzlement.
The Secretary of Finance, upon recommendation of the Commissioner, is
hereby authorized to promulgate rules and regulations prescribing, among
other things, the time and manner by which the taxpayer shall submit a
declaration of loss sustained from casualty or from robbery, theft or
embezzlement during the taxable year: Provided, however, That the time
limit to be so prescribed in the rules and regulations shall not be less than
thirty (30) days nor more than ninety (90) days from the date of discovery
of the casualty or robbery, theft or embezzlement giving rise to the loss.
(c) No loss shall be allowed as a deduction under this Subsection if at the

time of the filing of the return, such loss has been claimed as a deduction
for estate tax purposes in the estate tax return.
(2) Proof of Loss. - In the case of a nonresident alien individual or

foreign corporation, the losses deductible shall be those actually sustained
during the year incurred in business, trade or exercise of a profession
conducted within the Philippines, when such losses are not compensated
for by insurance or other forms of indemnity. The Secretary of Finance,
upon recommendation of the Commissioner, is hereby authorized to
promulgate rules and regulations prescribing, among other things, the time
and manner by which the taxpayer shall submit a declaration of loss
sustained from casualty or from robbery, theft or embezzlement during the
taxable year: Provided, That the time to be so prescribed in the rules and
regulations shall not be less than thirty (30) days nor more than ninety (90)
days from the date of discovery of the casualty or robbery, theft or
embezzlement giving rise to the loss; and
As a general rule, losses should be incurred in relation to the trade or business of the taxpayer. To certain
extent, this deduction sometime may not be connected to the business or trade.
Q: is there a loss which is not related to the business of the taxpayer?

A: Yes. Losses by virtue of natural calamity.
Q: Is there a loss which is required to be connected with the trade or business of the taxpayer?
A: Yes. Loss incurred in the operation of trade or business of the taxpayer.
Q: which of the two can be claimed under the estate tax?

A: Loss by virtue of natural calamity
There are two kinds of losses:

1. Losses in real sense of the word, meaning the taxpayer is a businessman, he purchased a commodity
for P100K but he was able to dispose that for only P 50K, there was a loss of forty-nine thousand.
this is the loss
2. The other losses refer to the losses by virtue of natural calamity. Of course, it is not directly related
to trade or business. Examples of losses by virtue of natural calamity are earthquake, typhoon and
other.
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Q: What are the requirements so that it may be deducted as losses?

A: 1. It must not be claimed as a deduction under the estate tax (86A1e).
2 .It must not be compensated by insurance or other forms of indemnification.
3. It must be claimed within the period of six months.
As a matter of fact, this is the only deduction under the income tax which may be claimed as deduction under
the estate tax. Nonetheless, the claim of this deduction simultaneously is not allowed.
Q: Suppose the loss was allowed by the BIR, and subsequently, the loss was compensated by insurance
company, what happen to the itemized deduction of the loss? Will it be cancelled?
A: Of course not. It will remain to be a deduction. However, the amount that was recovered is subject to
income tax.
(3) Net Operating Loss Carry-Over. - The net operating loss of the
business or enterprise for any taxable year immediately preceding the
current taxable year, which had not been previously offset as deduction
from gross income 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: Provided, however, That any net loss incurred in a
taxable year during which the taxpayer was exempt from income tax shall
not be allowed as a deduction under this Subsection: Provided, further,
That a net operating loss carry-over shall be allowed only if there has been
no substantial change in the ownership of the business or enterprise in that
-
(i) Not less than seventy-five percent (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
(ii) Not less than seventy-five percent (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 persons.
For purposes of this subsection, the term "not operating loss" shall mean
the excess of allowable deduction over gross income of the business in a
taxable year.
Provided, That for mines other than oil and gas wells, a net operating loss
without the benefit of incentives provided for under Executive Order No.
226, as amended, otherwise known as the Omnibus Investments Code of
1987, incurred in any of the first ten (10) years of operation may be carried
over as a deduction from taxable income for the next five (5) years
immediately following the year of such loss. The entire amount of the loss
shall be carried over to the first of the five (5) taxable years following the
loss, and any portion of such loss which exceeds, the taxable income of such
first year shall be deducted in like manner form the taxable income of the
next remaining four (4) years.
We have the net-operating loss carry-over rule (NOLCO), under Section 34D3. This was
discussed under Section 39D.
The ordinary loss claimed in the capital gain or ordinary gain, why is it there is a carry-over?
Meaning, in particular year, the taxpayer will not be allowed to carry-over.

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For example in 2000, the taxpayer will not be allowed to claim the ordinary loss because the
loss is more than the gross income, e.g. gross income is 10M and the ordinary loss is 25M.
Hence, there is a difference of 15M, under the carry over rule, it may be claimed in the
succeeding three (3) years. Hence if it is incurred in 2000, in 2001, the tax payer will be allowed
if there is a profit or gain. If there is none, the taxpayer may claim it on 2002. Still if there is
none, he will be allowed in 2003. If there is again no gain in2003, he will not be allowed to
claim that in 2004. That is beyond the three year period, with the exception of oil drilling
corporations and mining operations, It can be claimed within five years.
(4) Capital Losses. -
(a) Limitation. - Loss from sales or Exchanges of capital assets shall be

allowed only to the extent provided in Section 39.
(b) Securities Becoming Worthless. - If securities as defined in Section 22

(T) become worthless during the taxable year and are capital assets, the loss
resulting therefrom shall, for purposes of this Title, be considered as a loss
from the sale or exchange, on the last day of such taxable year, of capital
assets.
(5) Losses From Wash Sales of Stock or Securities. - Losses from

"wash sales" of stock or securities as provided in Section 38.
(6) Wagering Losses. - Losses from wagering transactions shall b

allowed only to the extent of the gains from such transactions.
(7) Abandonment Losses. -
(a) In the event a contract area where petroleum operations are undertaken
is partially or wholly abandoned, all accumulated exploration and
development expenditures pertaining thereto shall be allowed as a
deduction: Provided, That accumulated expenditures incurred in that area
prior to January 1, 1979 shall be allowed as a deduction only from any
income derived from the same contract area. In all cases, notices of
abandonment shall be filed with the Commissioner.
(b) In case a producing well is subsequently abandoned, the unamortized

costs thereof, as well as the undepreciated costs of equipment directly used
therein, shall be allowed as a deduction in the year such well, equipment or
facility is abandoned by the contractor: Provided, That if such abandoned
well is reentered and production is resumed, or if such equipment or facility
is restored into service, the said costs shall be included as part of gross
income in the year of resumption or restoration and shall be amortized or
depreciated, as the case may be.
Bad Debts. -
(1) In General. - Debts due to the taxpayer actually ascertained to be worthless

and charged off within the taxable year except those not connected with
profession, trade or business and those sustained in a transaction entered into
between parties mentioned under Section 36 (B) of this Code: Provided, That
recovery of bad debts previously allowed as deduction in the preceding years

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shall be included as part of the gross income in the year of recovery to the extent
of the income tax benefit of said deduction.
(2) Securities Becoming Worthless. - If securities, as defined in Section 22

(T), are ascertained to be worthless and charged off within the taxable year and
are capital assets, the loss resulting therefrom shall, in the case of a 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, for the
purpose of this Title, be considered as a loss from the sale or exchange, on the
last day of such taxable year, of capital assets.
This was asked in 2003 and 2005 bar
2003 BQ
Q. What is the tax-benefit rule?

A. The tax-benefit rule is Section 34E first paragraph. This means that bad debts written-off
but subsequently paid are subject to income tax to the extent of the income tax benefit of
such debts.
Debts due to the taxpayer actually ascertained to be worthless and charged off
within the taxable year; except:
1. those not connected with profession, trade or business and;

2. those sustained in a transaction entered into between parties mentioned
under Section 36 (B) of this Code:
Provided, That recovery of bad debts previously allowed as deduction

in the preceding years shall be included as part of the gross income in
the year of recovery to the extent of the income tax benefit of said
deduction.
20056 BQ
Q. What do you mean by up to the extent that the taxpayer had benefited?
For instance, the taxpayer is the creditor, so he has many account receivables. He failed to recover those
account receivables. The BIR might allow him to claim the itemized deduction of bad debts.
Supposed the bad debts were allowed and later on he was paid by the debtor, so the taxpayer was able to
recover the amount. What happen now to the deduction of the bad debts, will it be cancelled? No more. It
remained to be a deduction. Otherwise, the computation of income tax will be affected. The amount so
recovered, the bad debts, is subject to income tax up to the extent that the taxpayer had benefited.
Example, before the bad debts, the taxpayer paid ten thousand pesos tax due, but because the bad debt is
allowed, the taxpayer was able to claim the tax due of zero. Hence, he did not pay any tax. Subsequently, he
was able to recover the bad debts, so it, remains to a deduction. But the amount so recovered is subject to

PUP COLLEGE OF LAW
income tax up to the extent that the tax payer has been benefited. Meaning, the tax payer is only subject to
income tax of ten thousand pesos is the one included in the computation of the ITR subject to income tax
because that is the amount he has been benefited.
It must be claimed not in the year the deduction was incurred. In a contract of loan, the tax payer is the
creditor, was entered into in 2003. The deduction must be claimed on the year it was written off or
charged off, so that when the loan was entered into in 2003 but was only written off or charged off in 2006,
meaning to say, in the book of account, it was now cancelled, it is also in the year 2006 that the deduction
may be claimed. It should not be in year entered into but in the year it was cancelled after a certain effort to
recover the same but he failed to recover.
So under this deduction, although he incurred the bad debts in 2003 but he can only claim deduction in the
year it was written off or charged off, or finally determined worthless or cancelled.
Depreciation and Depletion
Depreciation. -
(1) General Rule. - There shall be allowed as a depreciation deduction a

reasonable allowance for the exhaustion, wear and tear (including reasonable
allowance for obsolescence) of property used in the trade or business. In the
case of property held by one person for life with remainder to another person,
the deduction shall be computed as if the life tenant were the absolute owner of
the property and shall be allowed to the life tenant. In the case of property held
in trust, the allowable deduction shall be apportioned between the income
beneficiaries and the trustees in accordance with the pertinent provisions of
the instrument creating the trust, or in the absence of such provisions, on the
basis of the trust income allowable to each.
(2) Use of Certain Methods and Rates. - The term "reasonable

allowance" as used in the preceding paragraph shall include, but not limited
to, an allowance computed in accordance with rules and regulations prescribed
by the Secretary of Finance, upon recommendation of the Commissioner,
under any of the following methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding twice the rate which
would have been used had the annual allowance been computed under the
method described in Subsection (F) (1);
(c) The sum-of-the-years-digit method; and
(d) any other method which may be prescribed by the Secretary of Finance
upon recommendation of the Commissioner.
(3) Agreement as to Useful Life on Which Depreciation Rate is

Based. - Where under rules and regulations prescribed by the Secretary of
Finance upon recommendation of the Commissioner, the taxpayer and the
Commissioner have entered into an agreement in writing specifically dealing
with the useful life and rate of depreciation of any property, the rate so agreed
upon shall be binding on both the taxpayer and the national Government in the

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absence of facts and circumstances not taken into consideration during the
adoption of such agreement. The responsibility of establishing the existence of
such facts and circumstances shall rest with the party initiating the
modification. Any change in the agreed rate and useful life of the depreciable
property as specified in the agreement shall not be effective for taxable years
prior to the taxable year in which notice in writing by certified mail or
registered mail is served by the party initiating such change to the other party
to the agreement:
Provided, however, that where the taxpayer has adopted such useful life and
depreciation rate for any depreciable and claimed the depreciation expenses as
deduction from his gross income, without any written objection on the part of
the Commissioner or his duly authorized representatives, the aforesaid useful
life and depreciation rate so adopted by the taxpayer for the aforesaid
depreciable asset shall be considered binding for purposes of this Subsection.
(4) Depreciation of Properties Used in Petroleum Operations. - An

allowance for depreciation in respect of all properties directly related to
production of petroleum initially placed in service in a taxable year shall be
allowed under the straight-line or declining-balance method of depreciation at
the option of the service contractor.
However, if the service contractor initially elects the declining-balance method,
it may at any subsequent date, shift to the straight-line method.
The useful life of properties used in or related to production of petroleum shall

be ten (10) years of such shorter life as may be permitted by the Commissioner.
Properties not used directly in the production of petroleum shall be
depreciated under the straight-line method on the basis of an estimated useful
life of five (5) years.
(5) Depreciation of Properties Used in Mining Operations. - an

allowance for depreciation in respect of all properties used in mining
operations other than petroleum operations, shall be computed as follows:
(a) At the normal rate of depreciation if the expected life is ten (10) years or
less; or
(b) Depreciated over any number of years between five (5) years and the
expected life if the latter is more than ten (10) years, and the depreciation
thereon allowed as deduction from taxable income: Provided, That the
contractor notifies the Commissioner at the beginning of the depreciation
period which depreciation rate allowed by this Section will be used.
(6) Depreciation Deductible by Nonresident Aliens Engaged in

Trade or Business or Resident Foreign Corporations. - In the case of a
nonresident alien individual engaged in trade or business or resident foreign
corporation, a reasonable allowance for the deterioration of Property arising
out of its use or employment or its non-use in the business trade or profession
shall be permitted only when such property is located in the Philippines.
Depreciation, -is a deduction that refers to ordinary wear and tear of the facilities, machine equipment, real
properties except parcel of land, which is used in the trade and business of the tax payer.
For example, delivery van, in factories, the machine; these are subject to depreciation.

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Among the deduction, this is unique because the tax payer can claim this, unlike in any other deduction, in
succeeding years, For example, business expense; the expense can only be claimed in the year it was
incurred. Unlike in depreciation, it can be claimed into several years depending upon the method and the
estimated life span of the property. That is why in capital outlays in private educational institution, it can be
claimed also in depreciation.
Depletion of Oil and Gas Wells and Mines. -
(1) In General. - In the case of oil and gas wells or mines, a reasonable
allowance for
depletion or amortization computed in accordance with the cost-depletion
method shall be granted under rules and regulations to be prescribed by the
Secretary of finance, upon recommendation of the Commissioner. Provided,
That when the allowance for depletion shall equal the capital invested no
further allowance shall be granted: Provided, further, That after production in
commercial quantities has commenced, certain intangible exploration and
development drilling costs: (a) shall be deductible in the year incurred if such
expenditures are incurred for non-producing wells and/or mines, or (b) shall
be deductible in full in the year paid or incurred or at the election of the
taxpayer, may be capitalized and amortized if such expenditures incurred are
for producing wells and/or mines in the same contract area.
"Intangible costs in petroleum operations" refers to any cost incurred in

petroleum operations which in itself has no salvage value and which is
incidental to and necessary for the drilling of wells and preparation of wells for
the production of petroleum: Provided, That said costs shall not pertain to the
acquisition or improvement of property of a character subject to the allowance
for depreciation except that the allowances for depreciation on such property
shall be deductible under this Subsection.
Any intangible exploration, drilling and development expenses allowed as a
deduction in computing taxable income during the year shall not be taken into
consideration in computing the adjusted cost basis for the purpose of
computing allowable cost depletion.
(2) Election to Deduct Exploration and Development Expenditures.

- In computing taxable income from mining operations, the taxpayer may at his
option, deduct exploration and development expenditures accumulated as cost
or adjusted basis for cost depletion as of date of prospecting, as well as
exploration and development expenditures paid or incurred during the taxable
year: Provided, That the amount deductible for exploration and development
expenditures shall not exceed twenty-five percent (25%) of the net income from
mining operations computed without the benefit of any tax incentives under
existing laws. The actual exploration and development expenditures minus
twenty-five percent (25%) of the net income from mining shall be carried
forward to the succeeding years until fully deducted.
The election by the taxpayer to deduct the exploration and development

expenditures is irrevocable and shall be binding in succeeding taxable years.
"Net income from mining operations", as used in this Subsection, shall mean
gross income from operations less "allowable deductions" which are necessary
or related to mining operations. "Allowable deductions" shall include mining,
milling and marketing expenses, and depreciation of properties directly used in
the mining operations. This paragraph shall not apply to expenditures for the
acquisition or improvement of property of a character which is subject to the
allowance for depreciation.

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In no case shall this paragraph apply with respect to amounts paid or incurred
for the exploration and development of oil and gas.
The term "exploration expenditures" means expenditures paid or incurred for

the purpose of ascertaining the existence, location, extent or quality of any
deposit of ore or other mineral, and paid or incurred before the beginning of
the development stage of the mine or deposit.
The term "development expenditures" means expenditures paid or incurred

during the development stage of the mine or other natural deposits. The
development stage of a mine or other natural deposit shall begin at the time
when deposits of ore or other minerals are shown to exist in sufficient
commercial quantity and quality and shall end upon commencement of actual
commercial extraction.
(3) Depletion of Oil and Gas Wells and Mines Deductible by a

Nonresident Alien individual or Foreign Corporation. - In the case of
a nonresident alien individual engaged in trade or business in the Philippines
or a resident foreign corporation, allowance for depletion of oil and gas wells or
mines under paragraph (1) of this Subsection shall be authorized only in
respect to oil and gas wells or mines located within the Philippines.
DEPLETION is a deduction arising from the exhaustion of natural resources as in mines, oil and gas wells.
Let us compare it with depletion. If depreciation is about the machine or properties to be used in the trade
or business, depletion in Section 34G refers to natural resources itself like mineral deposits, deposits of
coal, and deposits of silver.
Q. Do we use depreciation in the mining business and oil drilling operations?

A. The equipment being used in the drilling and mining operation is subject to depreciation.
Q. Can we use depletion in other business other than mining corporations and oil drilling operation?
A. No. This is only about the natural resources.
Depletion is one of the most unique provisions in Section 34 because this is the only subsection which is not
a self-executing provision where its implementation will depend upon the revenue regulations to be used
by the Secretary of Department of Finance after recommendation of CIR.
Corollarily, the Secretary issued the RR 12-76 in 1976 implementing the cost depletion method of depletion
which provides that amortization is computed in accordance with the cost-depletion method. When the
allowance for depletion shall equal the capital invested, no further allowance shall be granted.
Donation
(H) Charitable and Other Contributions. -

(1) In General. - Contributions or gifts actually paid or made within the
taxable year to, or for the use of the Government of the Philippines or any of its
agencies or any political subdivision thereof exclusively for public purposes, or
to accredited domestic corporation or associations organized and operated
exclusively for religious, charitable, scientific, youth and sports development,
cultural or educational purposes or for the rehabilitation of veterans, or to
social welfare institutions, or to non-government organizations, in accordance

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with rules and regulations promulgated by the Secretary of finance, upon

recommendation of the Commissioner, no part of the net income of which
inures to the benefit of any private stockholder or individual in an amount not
in excess of ten percent (10%) in the case of an individual, and five percent (%)
in the case of a corporation, of the taxpayer's taxable income derived from
trade, business or profession as computed without the benefit of this and the
following subparagraphs.
(2) Contributions Deductible in Full. - Notwithstanding the provisions of

the preceding subparagraph, donations to the following institutions or entities
shall be deductible in full;
(a) Donations to the Government. - Donations to the Government of the

Philippines or to any of its agencies or political subdivisions, including fully-
owned government corporations, exclusively to finance, to provide for, or to be
used in undertaking priority activities in education, health, youth and sports
development, human settlements, science and culture, and in economic
development according to a National Priority Plan determined by the National
Economic and Development Authority (NEDA), In consultation with
appropriate government agencies, including its regional development councils
and private philantrophic persons and institutions: Provided, That any
donation which is made to the Government or to any of its agencies or political
subdivisions not in accordance with the said annual priority plan shall be
subject to the limitations prescribed in paragraph (1) of this Subsection;
(b) Donations to Certain Foreign Institutions or International Organizations.

- Donations to foreign institutions or international organizations which are
fully deductible in pursuance of or in compliance with agreements, treaties, or
commitments entered into by the Government of the Philippines and the
foreign institutions or international organizations or in pursuance of special
laws;
(c) Donations to Accredited Nongovernment Organizations. - The term

"nongovernment organization" means a non profit domestic corporation:
(1) Organized and operated exclusively for scientific, research, educational,

character-building and youth and sports development, health, social welfare,
cultural or charitable purposes, or a combination thereof, no part of the net
income of which inures to the benefit of any private individual;
(2) Which, not later than the 15th day of the third month after the close of the
accredited nongovernment organizations taxable year in which contributions
are received, makes utilization directly for the active conduct of the activities
constituting the purpose or function for which it is organized and operated,
unless an extended period is granted by the Secretary of Finance in accordance
with the rules and regulations to be promulgated, upon recommendation of the
Commissioner;
(3) The level of administrative expense of which shall, on an annual basis,
conform with the rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, but in no case to exceed
thirty percent (30%) of the total expenses; and
(4) The assets of which, in the even of dissolution, would be distributed to

another nonprofit domestic corporation organized for similar purpose or
purposes, or to the state for public purpose, or would be distributed by a court
to another organization to be used in such manner as in the judgment of said

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court shall best accomplish the general purpose for which the dissolved
organization was organized.
Subject to such terms and conditions as may be prescribed by the Secretary of
Finance, the term "utilization" means:
(i) Any amount in cash or in kind (including administrative expenses) paid or

utilized to accomplish one or more purposes for which the accredited
nongovernment organization was created or organized.
(ii) Any amount paid to acquire an asset used (or held for use) directly in
carrying out one or more purposes for which the accredited nongovernment
organization was created or organized.
An amount set aside for a specific project which comes within one or more
purposes of the accredited nongovernment organization may be treated as a
utilization, but only if at the time such amount is set aside, the accredited
nongovernment organization has established to the satisfaction of the
Commissioner that the amount will be paid for the specific project within a
period to be prescribed in rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner, but not to
exceed five (5) years, and the project is one which can be better accomplished
by setting aside such amount than by immediate payment of funds.
(3) Valuation. - The amount of any charitable contribution of property other

than money shall be based on the acquisition cost of said property.
(4) Proof of Deductions. - Contributions or gifts shall be allowable as

deductions only if verified under the rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner.
1994 BQ
Q. The taxpayer donated a property. The donor claimed deduction from income tax. How do you deduct
the donation? Do we deduct it from the gross income?
A. No. This is the only deduction under the Philippines laws where the law refers to deduction and yet it will
not be deducted from the gross but from the second step of the formula; the net income or taxable income .
So this deduction will be deducted after the net income or the taxable income has been computed not in
the gross income. (
This is the only deduction which should not be deducted from gross income. Second, there two (2) kinds of
deduction, partial, that is the rule; the exception. It is total.
Q. What do we mean by partial deduction?

A. The donor can only claim 10% of the taxable income in case of individual and 5% in case of corporation.
Q. An individual donated one million; hence, there is a deduction of 10%. How do we deduct it?
A. The amount to be deducted is not based on the amount donated but on how much of 10% of the next
income. If it shows that the 10% is six hundred thousands, so the deduction is six hundred thousand pesos. If
fifty thousand so let it be. The basis is not the amount of the property donated but rather how much is the
10% of the net income after applying the deduction.

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If the 10% of the net income is one million, then one hundred thousand maybe claimed deduction. For
corporations, take note that it is only 5% of the net income.
Note: the rate here is to be applied of 10 or 5 % should not be based on the value of the property donated
but instead on the net income. Amount of donors tax depends on how much is 5 or 10% of the Net Income.
1994 BQ
Q. A Philanthropist, donated one million pesos to young lady suffering from a unique disease. Can the
donor claim deduction for the contribution or donation?
A. No. Because in the enumerations, whether for partial or total deductions , there is no donee under Section
34H who is an individual, all of them are entities, partnership, corporations or associations. There is no
donee under Section 34H which is an individual.
Therefore, the donor can only claim deduction under the income tax if the donee is one of those
enumerated under Section 34H. If the donee is not there or the donor is not a corporation, the donor
cannot claim this deduction.
Q: A taxpayer earning pure compensation made a donation; can he claim a donation as deduction?
A: No. Individuals earning pure compensation are not allowed to claim deduction except the one under
paragraph M. (first paragraph)
The first paragraph of Section 34H, notwithstanding, the long enumeration, it can be divided into two kinds
of donees: (Partial deductions)
1. First, the donee is the government and, For the government, the requirement is that the donee is
the Republic of the Philippines or any of its political subdivision, agencies and instrumentalities of the
government exclusively for public purpose
2. Second, accredited DC or Associations, the requirement is that no part of its net income shall inure
to the benefit of any private stock holder or individual. These are the social welfare, educational,
charitable, religious youth, sports development and rehabilitation of the veterans.
We have to take note that the requirement. If donee is not mentioned here, there can be no deduction.
Total deductions is under the last paragraph; donation to the government or other entities in accordance
with the priority plan of the National Economic Development Authority. If the purpose of the donation is
under the priority plan of the NEDA, the deduction here is the total.
We will notice that some of the donees under partial are also mentioned in total deduction. Is there a
conflict? None, because if the government is the donee and the purposes of the donation is under the
priority plan of the NEDA, then the deduction is total. If the purpose is only for public purpose, then the
deduction is only partial.
DC can also claim total deduction if they are accredited nongovernmental organization mentioned under
Section 34H2b and c.
Research and Development

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(1) In General. - a taxpayer may treat research or development

expenditures which are paid or incurred by him during the taxable year
in connection with his trade, business or profession as ordinary and
necessary expenses which are not chargeable to capital account. The
expenditures so treated shall be allowed as deduction during the
taxable year when paid or incurred.
(2) Amortization of Certain Research and Development

Expenditures. - At the election of the taxpayer and in accordance
with the rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, the following
research and development expenditures may be treated as deferred
expenses:
(a) Paid or incurred by the taxpayer in connection with his trade,

business or profession;
(b) Not treated as expenses under paragraph 91) hereof; and
(c) Chargeable to capital account but not chargeable to property of a

character which is subject to depreciation or depletion.
In computing taxable income, such deferred expenses shall be allowed
as deduction ratably distributed over a period of not less than sixty
(60) months as may be elected by the taxpayer (beginning with the
month in which the taxpayer first realizes benefits from such
expenditures).
The election provided by paragraph (2) hereof may be made for any
taxable year beginning after the effectivity of this Code, but only if
made not later than the time prescribed by law for filing the return for
such taxable year. The method so elected, and the period selected by
the taxpayer, shall be adhered to in computing taxable income for the
taxable year for which the election is made and for all subsequent
taxable years unless with the approval of the Commissioner, a change
to a different method is authorized with respect to a part or all of such
expenditures. The election shall not apply to any expenditure paid or
incurred during any taxable year for which the taxpayer makes the
election.
(3) Limitations on Deduction. - This Subsection shall not apply to:
(a) Any expenditure for the acquisition or improvement of land, or for

the improvement of property to be used in connection with research
and development of a character which is subject to depreciation and
depletion; and
(b) Any 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.
Among the deductions, this is the one which does not appear under the old law. This was introduced only in
1998. Formerly, taxpayers claimed this as business expense. But normally, the BIR deny this claim because
of the requirement that it is ordinary and necessary. Hence, when it was amended, the authors of the
amendment deemed it necessary to provide a separate paragraph. Nevertheless, there are expenses for the
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research and development which are not deductible even if it is for trade or business of the taxpayer under
the last portion of Section 341; expenses to locate a parcel of land . The expenses are not deductible. Also,
expenses to locate mineral deposits are also not deductible.
Amount deductible amount ratably distributed over a period of 60 months beginning the month,
taxpayer realized benefits from such expenditures.
These expenditures may be treated as:
1. Revenue expenditure
a. Ordinary and necessary expenses in connection with the trade or business of the taxpayer
b. Incurred within taxable year;
c. Not chargeable to capital account
2. Deferred expense (pre-operating expense)

a. Ordinary and necessary expenses in connection with the trade or business of the taxpayer
b. Not treated as expense
c. chargeable to capital account but not to property subject of depreciation
Non-deductible expenses under this category;
1. Incurred for the acquisition or improvement of land or improvement of the property to be used in
the busiess or trade of the taxpayer;
2. Incurred for the purpose of ascertaining the existence, location, extent or quality of any deposit of
ore, or other minerals including gas.
Pension or Retirement Pay
(J) Pension Trusts. - An employer establishing or maintaining a pension

trust to provide for the payment of reasonable pensions to his employees shall
be allowed as a deduction (in addition to the contributions to such trust during
the taxable year to cover the pension liability accruing during the year, allowed
as a deduction under Subsection (A) (1) of this Section ) a reasonable amount
transferred or paid into such trust during the taxable year in excess of such
contributions, but only if such amount (1) has not theretofore been allowed as a
deduction, and (2) is apportioned in equal parts over a period of ten (10)
consecutive years beginning with the year in which the transfer or payment is
made.
Q. Who is the one allowed to claim this deduction?

A. The contribution made by the management in the private retirement plan can be claimed as a deduction.
The management only has to prove that it was incurred within a taxable period
(M) Premium Payments on Health and/or Hospitalization

Insurance of an Individual Taxpayer. - The amount of premiums not to
exceed Two thousand four hundred pesos (P2,400) per family or Two hundred
pesos (P200) a month paid during the taxable year for health and/or
hospitalization insurance taken by the taxpayer for himself, including his

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family, shall be allowed as a deduction from his gross income: Provided, That
said family has a gross income of not more than Two hundred fifty thousand
pesos (P250,000) for the taxable year: Provided, finally, That in the case of
married taxpayers, only the spouse claiming the additional exemption for
dependents shall be entitled to this deduction.
Notwithstanding the provision of the preceding Subsections, The Secretary of

Finance, upon recommendation of the Commissioner, after a public hearing
shall have been held for this purpose, may prescribe by rules and regulations,
limitations or ceilings for any of the itemized deductions under Subsections (A)
to (J) of this Section: Provided, That for purposes of determining such ceilings
or limitations, the Secretary of Finance shall consider the following factors: (1)
adequacy of the prescribed limits on the actual expenditure requirements of
each particular industry; and (2) effects of inflation on expenditure levels:
Provided, further, That no ceilings shall further be imposed on items of
expense already subject to ceilings under present law.
Optional Standard Deduction
(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 nonresident alien, may elect a standard deduction in an amount
not exceeding ten percent (10%) of his gross income. 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 deduction
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 income during the taxable year, as may be required by
the rules and regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner. ( Amended by RA 9504)
Q. Is this in addition to the other deduction?

A. No. This is in lieu of other deduction and the taxpayer here must be INDIVIDUALS, DC or RFC except
NRA(NE).
This is first time that the law does not say if it is a NRAE or NRANE. However, this refers to NRANE
because they are not allowed to pay by way of the net.
Q. What is this deduction?

A. Formerly it is 10% of the gross income but nowadays it was increased to 40% by virtue of RA 9504 (para
to sa mga tamad!).
Do not confuse this under standard deduction under section 34, it is optional standard deduction; the one
under Section 86 says standard deduction.

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PERSONAL AND ADDITIONAL EXEMPTION
(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 as follows:
For single individual or married individual judicially decreed as legally

separated with no qualified dependents
P20,000
For Head of Family P25,000
For each married individual P32,000
In the case of married individuals where only one of the spouses is deriving
gross income, only such spouse shall be allowed the personal exemption.
For purposes of this paragraph, the term "head of family" means an unmarried
or legally separated man or woman with one or both parents, or with one or
more brothers or sisters, or with one or more legitimate, recognized natural or
legally adopted children living with and dependent upon him for their chief
support, where such brothers or sisters or children are not more than twenty-
one (21) years of age, unmarried and not gainfully employed or where such
children, brothers or sisters, regardless of age are incapable of self-support
because of mental or physical defect.
(B) Additional Exemption for Dependents. - There shall be allowed an

additional exemption of Eight thousand pesos (P8,000) for each dependent not
exceeding four (4).
The additional exemption for dependent 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 by 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.
(C) Change of Status. - If the taxpayer marries or should have additional

dependent(s) as defined above during the taxable year, the taxpayer may claim
the corresponding additional exemption, as the case may be, in full for such
year.
If the taxpayer dies during the taxable year, his estate may still claim the
personal and additional exemptions for himself and his dependent(s) as if he
died at the close of such year.

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If the spouse or any of the dependents dies or if any of such dependents

marries, becomes twenty-one (21) years old or becomes gainfully employed
during the taxable year, the taxpayer may still claim the same exemptions as if
the spouse or any of the dependents died, or as if such dependents married,
became twenty-one (21) years old or became gainfully employed at the close of
such year.
(D) Personal Exemption Allowable to Nonresident Alien

Individual. - A nonresident alien individual engaged in trade, business or in
the exercise of a profession in the Philippines shall be entitled to a personal
exemption in the amount equal to the exemptions allowed in the income tax
law in the country of which he is a subject - or citizen, to citizens of the
Philippines not residing in such country, not to exceed the amount fixed in this
Section as exemption for citizens or resident of the Philippines: Provided, That
said nonresident alien should file a true and accurate return of the total income
received by him from all sources in the Philippines, as required by this Title.
This provision has been amended by RA 9504. It provides a uniform rate of P 50,000 as personal exemption
to the 3 kinds of individuals provided in this section. Formerly it was P 32, 000.00
This personal as well as additional exemption can only be claimed if the taxpayer is paying by way of the net
income tax.
Under Section 35A talks about net income tax, in determining the income tax, it is being referred to Section
24A who are the taxpayers under Section 24A? There are only four: RC, NRC, OCW and RA. Take note that
the NRAE is also allowed to pay by way of the net.
Q. Does it mean that the NRAE is not mentioned in Section 24A he is not allowed to claim personal
exemption?
A. Not really. They can claim personal exemption not because of Section 35A but because of Section 35D.
Q. Why is it that he has to be separated from the rest?

A. Because they are not allowed to claim additional exemption. They are only allowed to claim personal
exemption.
Q. What are the personal exemptions?

A. Section 35A provided for three personal exemptions.
1. First, SINGLE, including legally married but judicially decreed as legally separated with no qualified
dependent For those legally separated, under the civil code, they are still legally married. But under
the tax code, those legally separated with no qualified dependent, Section 35B, second in the
enumeration, they are classified as head of the family. Hence, they are not considered as legally
married under the tax code. They can only be either head of the family or single.
Q. Who are the qualified dependents?

A. Section 35B last paragraph says it is the legitimate, illegitimate and adopted children of the taxpayer.
2. Second group is the HEAD OF THE FAMILY.

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There are so many kinds of head of the family. They are provided for in the last paragraph of Section 35A
and RR 2-98 and also in Section 35B, second in the enumeration.
a. First, we have the head of the family because we have a dependent father mother or both.
b. Second, the taxpayer is the head of the family because he has dependent brother or sister;
c. Third, because of the dependent children, not exceeding four; which is:
1. Not over 21
2. Not gainfully employed
3. If over 21 unable to support himself or physically or mentally incapacitated
d. Fourth, under RR2-98, because of the dependent senior citizen, whether a relative or not and
e. Fifth, because the taxpayer is legally married but judicially decreed with qualified dependent
referring to the children.
3. The third group is the legally married with the deduction of P32, 000.00 for each married
individual, meaning the wife and the husband. Underscore the word each.
We go to Section 35B.
Q. Who among the taxpayers are allowed to claim additional exemption?

A. First, when we say additional exemption, we are only talking of the children. The qualification is that the
children is below is below 21, unmarried, not gainfully employed or regardless of age, is incapable of self-
support because of mental or physical defect..
Under the law, the following are allowed to claim additional exemptions:
1. Legally married but judicially declared as legally separated with a qualified dependents ; and
2. Legally married individual only as far as the husband is concern according to revenue regulations.
If the other wants to claim deduction, he should execute a waiver or an affidavit renouncing in
favor of the wife.
2006 BQ
Q. Suppose the taxpayer is a widower, can he claim for a deduction?

A. Yes. He is also legally married although his spouse is dead.
Therefore, if the taxpayer is not legally married, he cannot claim for additional exemption.
FORMULA IN DETERMINING THE STATUS OF THE TAXPAYER:
GUIDE:
1. Legally Married
2. Head of the Family
3. Single with qualified dependents

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Rule:
1. Conflict between no. 1 and No. 2 = No. 1 prevails

2. Conflict between No. 2 and No. 3 = No. 2 prevails
ITEMS NOT DEDUCTIBLE
SEC. 36. Items Not Deductible.-
(A) General Rule. - In computing net income, no deduction shall in any case be allowed in respect to -
(1) Personal, living or family expenses;- Not allowed because it has nothing to do with the
business and trade of the taxpayer
(2) Any amount paid out for new buildings or for permanent improvements, or betterments
made to increase the value of any property or estate;
This Subsection shall not apply to intangible drilling and development costs incurred in
petroleum operations which are deductible under Subsection (G) (1) of Section 34 of this Code.
(3) Any amount expended in restoring property or in making good the exhaustion thereof for
which an allowance is or has been made; or
(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.
First, erase the last portion of Section 36B3 because we do not have personal holding companies nowadays.
The personal holding companies were abolished in 1987. EO no. 37 issued by Pres. Aquino has rendered the
income tax quite easy because the income tax on personal holding companies was abolished. 36B3 last
portion still speaks of personal holding companies. Consequently, cross out the last portion which provides
for the personal holding company.
LOSSES FROM SALES OR EXCHANGE OF PROPERTY:
(B) Losses from Sales or Exchanges of Property. - In

computing net income, no deductions shall in any case be allowed in
respect of losses from sales or exchanges of property directly or
indirectly -
We go to Section 36B1. (Related Parties)
(1) Between members of a family. For purposes of this paragraph, the

family of an individual shall include only his brothers and sisters
(whether by the whole or half-blood), spouse, ancestors,
and lineal descendants; or

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Take note that here, on related parties, it does not include relatives by consanguinity within the fourth
civil degree. Therefore, uncles and aunties are not included. Those included under this subsection are
brothers and sisters, whether full blood or half blood, spouses, ascendants and lineal descendants.
In other words, when the taxpayer sold properties to his brother and he incurred the loss, that loss is not
deductible.
Suppose instead of loss he derived profit or gain; that is subject to income tax. Hence, there is unwritten
law written under this subsection: if there is a profit, it is subject to income tax; if there is a loss it is not
subject to deduction.
We have to correlate this to Section 99B on donors tax. There, relatives shall include by consanguinity
within the fourth degree of relationship.
Q. The taxpayer sold personal property to his nephew. On that transaction he incurred a loss. Will he be
allowed to claim the loss as deduction?
A. Yes. A nephew is not a relative in view of the above section. It is only limited to brother, sister, spouse,
ascendants and descendants.
Q: Is it correct to say that this only pertains to relatives?

A: No, because the transaction does not only pertains to individuals but also to corporation. It is only in No. 1
Q: why is it important to know who are related parties?

A: Because if transactions made by related parties, the following are not deductible;
1. Losses from sale or exchange of real property
2. Bad Debts
3. Interest on Loans
(2) Except in the case of distributions in liquidation, between an

individual and corporation more than fifty percent (50%) in value of
the outstanding stock of which is owned, directly or indirectly, by or
for such individual; or
Section 36B2 refers to exchange or sale between individual and corporation where the individual owns at
least majority of the outstanding shares. Take note of the exemption, it says except in cases of
liquidation, meaning if a case of liquidation, the loss is deductible.
Q: who are the related parties under this?

A: Corporation and an individual owning at least majority of the outstanding shares.
Next is Section 36B3.

(3) Except in the case of distributions in liquidation, between two
corporations more than fifty percent (50%) in value of the
outstanding stock of 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

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exchange was under the law applicable to such taxable year, a

personal holding company or a foreign personal holding company;
This is a sale between two corporations and as a result, majority of the shares is now owned by the
individual.
We go to Section 36B4 and B6 (never B5).
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of
another trust if the same person is a grantor with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.
In a contract of trust, there are three parties: the trustor or grantor or creator, the trustee or fiduciary, and
beneficiary. Meaning there is a sale or exchange between these parties. Among the combinations, there
are only two where the loss is not deductible.
Section 36B4 speaks of exchange between a grantor and a fiduciary, in this two combinations, in sale or
exchange, losses are not deductible. To the remaining combination, those are deductible.
Section 36B5 speaks of another thing, it says there sale or exchange of a fiduciary of a trust and a fiduciary
of another trust if same person is the grantor to each trust.
Section 36B6 speaks of exchange between a grantor and a fiduciary and a beneficiary,
Wash Sale
SEC. 38. Losses from Wash Sales of Stock or Securities. -
(A) In the case of any loss claimed to have been sustained from any sale or other
disposition of shares of stock or securities where it appears that within a period
beginning thirty (30) days before the date of such sale or disposition and ending
thirty (30) days after such date, the taxpayer has acquired (by purchase or by
exchange upon which the entire amount of gain or loss was recognized by law),
or has entered into a contact or option so to acquire, substantially identical stock
or securities, then no deduction for the loss shall be allowed under Section 34
unless the claim is made by a dealer in stock or securities and with respect to a
transaction made in the ordinary course of the business of such dealer.
(B) If the amount of stock or securities acquired (or covered by the contract or
option to acquire) is less than the amount of stock or securities sold or otherwise
disposed of, then the particular shares of stock or securities, the loss form the
sale or other disposition of which is not deductible, shall be determined under
rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
(C) If the amount of stock or securities acquired (or covered by the contract or
option to acquire which) resulted in the non-deductibility of the loss, shall be

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determined under rules and regulations prescribed by the Secretary of Finance,

This was asked in 1985 bar.
Q. Why is it that losses in transaction and sale deemed wash sale are not deductible?
A. There are two reasons why loses from wash are not deductible:
1. first, to avoid too much speculation in the market, otherwise, there will be purchase and sale of
stock;
2. second, the taxpayer normally is not telling that truth that he incurred the loss.
Q. What is a wash sale?

A. It is the purchase of identical or substantially similar stock within 30 days and sale within the same period.
Note: Gains from wash sale are subject to income tax. What the law prohibits is the losses.
Let us illustrate, on January 20, 2006 a taxpayer purchased share of stock. On February 5, 2006 he sold it
again. That is a wash sale because the distance of the sale and purchase is only 16 days because to be
classified as such, it must be within the period of 30 days.
Q. What is the subject matter of the sale? Should it be same sale of share of stock?
A. No. It may be the same shares or it may be identical or substantially similar shares of stock. It does not
mean that it should be the same share of stock. When he incurred a loss; that is a wash sale. Hence, there
are two requirements; it must be done within the period selling the same or substantially similar share of
stocks.
Why is that he is not allowed to claim the deduction if he incurred a loss? Who knows if he is telling the
truth or not? Nonetheless, gain in wash sale is subject to income tax.
EXCEPTION: Losses in wash sale, even assuming it is a wash sale is deductible, the loss, and this about
dealers or brokers of shares of stock. They are allowed because normally they are telling the truth; they have
complete record, i.e. book of accounts and deed of sale. Therefore, normally, he is telling the truth.
DETERMINATION OF GAIN AND LOSS
SEC. 40. Determination of Amount and Recognition of Gain or Loss. -
(A) Computation of Gain or Loss. - The gain from the sale or other disposition of property shall be the
excess of the amount realized therefrom over the basis or adjusted basis for determining gain,
and the loss shall be the excess of the basis or adjusted basis for determining loss over the
amount realized. The amount realized from the sale or other disposition of property shall be the sum of
money received plus the fair market value of the property (other than money) received;
(B) Basis for Determining Gain or Loss from Sale or Disposition of Property. - The basis of
property shall be -
(1) The cost thereof in the case of property acquired on or after March 1, 1913, if such property
was acquired by purchase; or

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(2) The fair market price or value as of the date of acquisition, if the same was acquired by
inheritance; or
(3) If the property was acquired by gift, the basis shall be the same as if it would be in the hands
of the donor or the last preceding owner by whom it was not acquired by gift, except that if
such basis is greater than the fair market value of the property at the time of the gift then, for
the purpose of determining loss, the basis shall be such fair market value; or
(4) If the property was acquired for less than an adequate consideration in money or money's
worth, the basis of such property is the amount paid by the transferee for the property; or
(5) The basis as defined in paragraph (C)(5) of this Section, if the property was acquired in a
transaction where gain or loss is not recognized under paragraph (C)(2) of this Section.
Section 40 was already asked in 1986, 1987 and 1994 Bar.
1987 BQ
Q. Juan Dela Cruz, a RC, sold the jewelry for three hundred thousand. Is a there a gain or is there a loss?
Will your answer be the same if the subject matter of the sale is a parcel of land ?
A. There is a gain if the amount realized is in excess over the basis or adjusted basis. There is a loss if the
amount realized is not in excess over the basis or the adjusted basis.
This could be best illustrated by a contract of sale. In a contract of sale, the amount realized is the selling
price. If the selling price is more than the basis, those enumerated in Section 40B, there is a gain. We have
to determine on how the seller or transferor acquired the property.
In Section 40B1, if the property is acquired by virtue of purchase, the basis shall be the cost. It is the
purchase price when the seller purchased the property, maybe many years ago plus expense if any. So
selling price plus expenses shall be the cost.
Suppose, in our example, if the seller purchased the jewelry for one hundred fifty thousand plus expense of
two thousand many years ago, the one hundred fifty two thousand shall be the cost. Since the amount
realized is three hundred thousand pesos, which is more than the cost, there is an income of one hundred
forty eight thousand pesos. That is how to determine gain.
Section 40 applies only if the applicable income tax is the net income tax. We do not use this method if
the applicable tax is the GIT or the FIT except in the sale of shares.
Therefore, to NRANE and NRFC, Section 40 is totally irrelevant to them. This only applicable if the
taxpayer is liable by way of income tax.
Q. Is the entire one hundred forty eight thousand subject to income tax?
A. It depends. Assuming it is an ordinary asset, therefore, the gain is ordinary gain. 100% of the gain is
subject to income tax. It is a capital gain, assuming the property is a capital asset, it all depends on whether
the long-term or the short-term holding period will be applicable. If for long term, 100% of the profit is
subject to income tax; if short-term, 50% shall be subject to income tax, the remaining half will be exempt .
Q. What about the sale of realty? Do we apply cost in the sale of realty?
A. If the property is subject to FIT, we do not apply cost as a basis of determining as to whether there is a
gain or profit. If the sale of realty is subject to NIT, cost is applicable.

PUP COLLEGE OF LAW
Q. What if the property was obtained through crimes such as estafa, robbery etc., is there a gain? For
example the amount obtained is two hundred thousand.
A. There is a principle that an income from illegal resources is still subject to income tax. Under an old CTA
ruling, the entire amount of two hundred thousand pesos is deemed a profit. Unlike if it is acquired by
purchase, we have to determine how much the profit is.
We go to Section 40B2
For property acquired by virtue of inheritance, the basis shall be the fair market value at the time of
acquisition.
So if the taxpayer had sold a property by which he acquired that property by way of inheritance, and he sold
that for two hundred thousand, the basis of the cost is the fair market value of the property at the time he
had acquired the same. Let us say, if the fair market value of the property is only one hundred twenty
thousand, and he sold that for two thousand, then he obtained gain of eighty thousand.
In Section 40B1, the rules we have stated on whether the whole amount is subject to income tax,
depending if it an ordinary or capital gain and whether it is on the long-term or short-term, if it is a real
property whether it is subject to FIT or NIT, is also applicable here.
We go to Section 40B3. This is about the property acquired by virtue of donation.
To illustrate, a lady received a donation, perhaps jewelry in February 14, 2006, from her papa. Suppose she
sold the jewelry, how much is the profit there? The basis is under Section 40B3, the basis shall be the same
as if it would be in the hands of the donor who did not acquire that by virtue of donation.
Ordinarily, we have to ask the donor on how he acquired the jewelry. Suppose he acquired that by virtue of
purchase; the cost shall be the basis. If he acquired that by virtue of inheritance, the basis shall be the fair
market value at the time of the acquisition of inheritance.
If he acquired that by virtue of donation, there comes now the trouble because the codal says who did not
acquired by virtue of donation. Suppose her papa acquired the jewelry from his SM, sugar mommy, by way
of donation, we have to determine of how the sugar mommy did acquires the jewelry. If she purchased it,
the basis shall be the cost; if by inheritance, the fair market value. If the sugar mommy acquired the jewelry
from her DOM, delicious old man, wala ng katapusang procedure ito! So this codal provision has to be
amended.
Property which was acquired by virtue of adequate consideration, basis is the amount given by the
transferee. The property will be disposed for one hundred thousand. What is the amount given by the
transferee? Sixty five thousand, for example. What will be the basis? It will be the sixty five thousand pesos.
Using that as a basis, the profit there is thirty five thousand. Whatever we had said under Section 40B1,
depending if the asset is capital or ordinary and whether the property is real property, is applicable.
The next is Section 40B5.

PUP COLLEGE OF LAW
The trouble of Section 40B5, we must first understand Section 40C1-6.
(C) Exchange of Property. -
(4) Assumption of Liability. -

(a) If the taxpayer, in connection with the exchanges described in the foregoing
exceptions, receives stock or securities which would be permitted to be received
without the recognition of the gain if it were the sole consideration, and as part of the
consideration, another party to the exchange assumes a liability of the taxpayer, or
acquires from the taxpayer property, subject to a liability, then such assumption or
acquisition shall not be treated as money and/or other property, and shall not prevent
the exchange from being within the exceptions.
(b) If the amount of the liabilities assumed plus the amount of the liabilities to which
the property is subject exceed the total of the adjusted basis of the property
transferred pursuant to such exchange, then such excess shall be considered as a gain
from the sale or exchange of a capital asset or of property which is not a capital asset,
as the case may be.
(5) Basis -
(a) The basis of the stock or securities received by the transferor upon the exchange
specified in the above exception shall be the same as the basis of the property, stock or
securities exchanged, decreased by (1) the money received, and (2) the fair market
value of the other property received, and increased by (a) the amount treated as
dividend of the shareholder and (b) the amount of any gain that was recognized on the
exchange: Provided, That the property received as "boot" shall have as basis its fair
market value: Provided, further, That if as part of the consideration to the transferor,
the transferee of property assumes a liability of the transferor or acquires form the
latter property subject to a liability, such assumption or acquisition (in the amount of
the liability) shall, for purposes of this paragraph, be treated as money received by the
transferor on the exchange: Provided, finally, That if the transferor receives several
kinds of stock or securities, the Commissioner is hereby authorized to allocate the
basis among the several classes of stocks or securities.
(b) The basis of the property transferred in the hands of the transferee shall be the
same as it would be in the hands of the transferor increased by the amount of the gain
recognized to the transferor on the transfer.
(6) Definitions.
(a) The term "securities" means bonds and debentures but not "notes" of whatever
class or duration.
(b) The term "merger" or "consolidation", when used in this Section, shall be
understood to mean: (i) the ordinary merger or consolidation, or (ii) the acquisition
by one corporation of all or substantially all the properties of another corporation
solely for stock: Provided, That for a transaction to be regarded as a merger or
consolidation within the purview of this Section, it must be undertaken for a bona fide
business purpose and not solely for the purpose of escaping the burden of taxation:
Provided, further, That in determining whether a bona fide business purpose exists,
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: Provided, finally , That in
determining whether the property transferred constitutes a substantial portion of the
property of the transferor, the term 'property' shall be taken to include the cash assets
of the transferor.
(c) The term "control", when used in this Section, shall mean ownership of stocks in a
corporation possessing at least fifty-one percent (51%) of the total voting power of all
classes of stocks entitled to vote.

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(d) The Secretary of Finance, upon recommendation of the Commissioner, is hereby

authorized to issue rules and regulations for the purpose "substantially all" and for
the proper implementation of this Section.
C-1. The rule is gains are recognized; losses are recognized. When we say gains are recognized, gains are
subject to income tax. When losses recognized, losses are deductible.
(1) General Rule. - Except as herein provided, upon the sale or exchange or property, the
entire amount of the gain or loss, as the case may be, shall be recognized.
C-2. It says here the exception; gains are not recognized. Meaning, gains are not subject to income tax or
exempt from income tax. Losses are not recognize, losses are no deductible.
Q. What are the elements of this?
A. The elements are the following:
The contract is limited to contract of exchange;

The parties are members of merger or consolidation; and
The subject matter of exchange is only limited or confined to the one provided for in the law. This is the one
enumerated in Section 40C2abc. There is number four but there is no letter d, the last paragraph of Section
40C2.
We have to determine who among them is the transferor and who among them are the transferees. Why?
In the event that the subject matter of the exchange is not solely in kind, meaning, the subject matter of
the exchange is different than that provided for the law, we have to determine if he is the transferor. If he
is the transferor, the governing rule is Section 40C3b. if it is the transferee, the governing statute is Section
40c3a.
(3) Exchange Not Solely in Kind. -

40c3b (transferor) 40c3a (transferee)
(b) If, in connection with the exchange described in (a) If, in connection with an exchange described in the
the above exceptions, the transferor corporation above exceptions, an individual, a shareholder, a
receives not only stock permitted to be received security holder or a corporation receives not only
without the recognition of gain or loss but also money stock or securities permitted to be received without
and/or other property, then (i) if the corporation the recognition of gain or loss, but also money and/or
receiving such money and/or other property property, the gain, if any, but not the loss, shall be
distributes it in pursuance of the plan of merger or recognized but in an amount not in excess of the sum
consolidation, no gain to the corporation shall be of the money and fair market value of such other
recognized from the exchange, but (ii) if the property received: Provided, That as to the
corporation receiving such other property and/or shareholder, if the money and/or other property
money does not distribute it in pursuance of the plan received has the effect of a distribution of a taxable
of merger or consolidation, the gain, if any, but not dividend, there shall be taxed as dividend to the
the loss to the corporation shall be recognized but in shareholder an amount of the gain recognized not in
an amount not in excess of the sum of such money excess of his proportionate share of the undistributed
and the fair market value of such other property so earnings and profits of the corporation; the
received, which is not distributed. remainder, if any, of the gain recognized shall be
treated as a capital gain.

PUP COLLEGE OF LAW
Under Section 40C2abc, gain and losses are not recognized. But who among them now are the transferor? If
we are facing the book, all entities on the right side, those are the transferors and all of them are
corporation under Section 40C2abc and the last paragraph. Who are the transferees? All those on the left
side are the transferees.
(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or

consolidation -
(a) A corporation, which is a party to a merger or consolidation, exchanges property

solely for stock in a corporation, which is a party to the merger or consolidation; or
Under Section 40C2a, both of the parties are corporations. Which is the transferor, the on the right side, it
will transfer the shares of stock. The transferee is on the left side which will transfer property.
For example, if the transfer of shares of stock worth one million will be given to the transferee, the latter
will transfer a property worth one million and five hundred thousand. So between the two, apparently, the
income earner is the transferor because it received 1.5 M while it only gives 1M only. Here the law says the
gain is not recognized assuming the elements above are present. Meaning, it is exempt from income tax,
provided, it is a contract of exchange, the parties are members of merger or consolidation, and the subject
matter is limited to share and property. Who has the loss here? The transferee. Can it be claimed as
deduction? No, because the elements are present. That is the meaning of non-recognition of the gain or
loss. Let us say, the subject matter is not the one mentioned in the law. Now we have Section 40C3 entitle
exchange not solely in kind. Underscore the word not.
Going back to Section 40C2a, we have to take note of the elements above.
Assuming if the third element was not complied with, for instance, the transferee instead of receiving
shares of stock only, in addition it received other kind of property or cash money. Assuming the transferee
earned income, is it still covered by Section 40C2? No. It is covered by Section 40C3. It is a transferee, so it
is covered by Section 40C3a the gain is now recognized, meaning, the gain is now subject to the NIT.
Suppose the transferor corporation will only receive property but in addition it will receive cash money and
share of stocks and assuming it earns income, Section 40C3b applies. It all depends if it is pursuant to the
plan of merger or consolidation. The gain is still not recognized.
All those pattern applies to Section 40C2bc and the last paragraph.
(b) A shareholder exchanges stock in a corporation, which is a party to the merger or

consolidation, solely for the stock of another corporation also a party to the merger or
consolidation; or
In Section 40C2b, the transferee is a share holder and the transferor is a corporation. In both cases, the
subject matter of the exchange is shares of stocks; if the elements are present, whatever are not
recognized, whatever loss, the loss is not recognized.
(c) A security holder of a corporation, which is a party to the merger or consolidation,

exchanges his securities in such corporation, solely for stock or securities in such
corporation, a party to the merger or consolidation.

PUP COLLEGE OF LAW
In Section 40C2c, the transferee is security holder and the transferor is a corporation. The transferor will
gain share of stock or security, the security holder will transfer security. We have the same pattern section
40C2a.
We go to the most important, the last paragraph of Section 40C2.
No gain or loss shall also be recognized if property is transferred to a corporation by

a person in exchange for stock or unit of participation in such a corporation of which
as a result of such exchange said person, alone or together with others, not
exceeding four (4) persons, gains control of said corporation: Provided, That stocks
issued for services shall not be considered as issued in return for property.
Why is there is no letter d? Because the parties here are not members of merger or consolidation. Who is
the transferor here? Still a corporation. The transferee is the individual. What will the transferor corporation
transfer? Shares of stock. What will the individual give? Property. after the exchange, what happen to the
relationship between the corporation and the individual? This is a simple case of individual becoming a
stockholder of a corporation.
Instead of purchasing stocks by money to become stockholder, the individual wants to pay in kind, maybe
kamote, banana, talong or a parcel of land.
For instance, the parcel of land is only worth one million, but the shares given to him is worth one million
seven hundred thousand. What happen now who earned an income? Is the income of seven hundred
thousand subject to income tax? The law provides for a qualification in Section 40C2 last paragraph.
If he alone or together with another person , not exceeding four , gained control of the corporation, and
under Section C6, control means at least majority of standing shares of stock entitled to vote is now owned
by that person, meaning he alone himself, or together with other person not exceeding four persons, then
the gain is not recognized. If these are complied with, we have to ask for certification exemption from BIR
and state the income.
Let us say, the other way around. The individual will give a parcel of land worth one million seven hundred
and exchange it to shares of stock worth one million. The exemption under Section 40C2 is only temporary.
Why temporary? Suppose the individual is a shareholder of a corporation where he paid in kind, maybe
parcel of land, he has sold the shares, he is now liable to pay income tax. The recognition or non-recognition
is no longer applicable.
The same is true with the corporation, if it will sell the parcel of land; it is now subject to income tax. Section
40B5 says that it is Section 40C5 which is the governing statute. It is the other way around. Now the
exemption from income tax is no longer applicable.
We go to Section 40C4. if the party assumes the liability of any of the parties in Section 40C2, it shall not be
prevented from being within the exemption. Meaning, although the parties assumes the liability of any of
the parties there, nevertheless, if the elements are present, the non-recognition of the gain or loss is still
applicable although he is not a member or a party in a merger.
We go to Section 41; the change of inventory to reflect the true income. The law says the taxpayer is
prohibited to change the method of inventory more often than once in every three years.

PUP COLLEGE OF LAW
SEC. 41. Inventories. - Whenever in the judgment of the Commissioner, the

use of inventories is necessary in order to determine clearly the income of any
taxpayer, inventories shall be taken by such taxpayer upon such basis as the
Secretary of Finance, upon recommendation of the Commissioner, may, by
rules and regulations, prescribe as conforming as nearly as may be to the best
accounting practice in the trade or business and as most clearly reflecting the
income.
If a taxpayer, after having complied with the terms and a conditions prescribed
by the Commissioner, uses a particular method of valuing its inventory for any
taxable year, then such method shall be used in all subsequent taxable years
unless:
(i) with the approval of the Commissioner, a change to a different method is

authorized; or
(ii) the Commissioner finds that the nature of the stock on hand (e.g., its
scarcity, liquidity, marketability and price movements) is such that inventory
gains should be considered realized for tax purposes and, therefore, it is
necessary to modify the valuation method for purposes of ascertaining the
income, profit, or loss in a more realistic manner: Provided, however, That the
Commissioner shall not exercise his authority to require a change in inventory
method more often than once every three (3) years: Provided, further, That
any change in an inventory valuation method must be subject to approval by
the Secretary of Finance.
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING
We go to Section 43, the use of calendar method.
SEC. 43. General Rule. - The taxable income shall be computed upon the
basis of the taxpayer's annual accounting period (fiscal year or calendar year,
as the case may be) in accordance with the method of accounting regularly
employed in keeping the books of such taxpayer, but if no such method of
accounting has been so employed, or if the method employed does not clearly
reflect the income, the computation shall be made in accordance with such
method as in the opinion of the Commissioner clearly reflects the income. If
the taxpayer's annual accounting period is other than a fiscal year, as defined in
Section 22(Q), or if the taxpayer has no annual accounting period, or does not
keep books, or if the taxpayer is an individual, the taxable income shall be
computed on the basis of the calendar year.
Q. What are the instances where the taxpayer is allowed to use calendar year as compared to fiscal year?
A. Only corporations are allowed to use fiscal year. We do not talk fiscal year if the taxpayer is an individual
because he has no choice but to use the calendar year.
Section 44 and 45 talks of what should be included in the gross income. And what should be deducted from
the gross income. Even if these two provisions were not stated, of course, income shall be included in the
year it has been incurred; the same with deduction, as a rule it will be claimed in the year it has been
incurred.

PUP COLLEGE OF LAW
SEC. 44. Period in which Items of Gross Income Included. - The

amount of all items of gross income shall be included in the gross income for
the taxable year in which received by the taxpayer, unless, under methods of
accounting permitted under Section 43, any such amounts are to be properly
accounted for as of a different period. In the case of the death of a taxpayer,
there shall be included in computing taxable income for the taxable period in
which falls the date of his death, amounts accrued up to the date of his death if
not otherwise properly includible in respect of such period or a prior period.
SEC. 45. Period for which Deductions and Credits Taken. - The
deductions provided for in this Title shall be taken for the taxable year in which
"paid or accrued" or "paid or incurred", dependent upon the method of
accounting the basis of which the net income is computed, unless in order to
clearly reflect the income, the deductions should be taken as of a different
period. In the case of the death of a taxpayer, there shall be allowed as
deductions for the taxable period in which falls the date of his death, amounts
accrued up to the date of his death if not otherwise properly allowable in
respect of such period or a prior period.
Q. why it is still stated under those sections?

A. Because of the importance of the death of a person.
Normally, the period of inclusion of income and deduction is twelve months. But if a person dies, the
taxable period may be lesser than that.
For example, an individual died on July 2006 the taxable period for that individual will be lesser those 12
months.
Q. What about the period of August to December 2006, what is the taxable period?
A. that is the taxable period of an estate, the property of the decedent which is also an income taxpayer.
Section 46 refers to change of taxable period. When we say of changing the taxable period, we are talking
about corporations because individuals are not allowed.
SEC. 46. Change of Accounting Period. If a taxpayer, other than an

individual, changes his accounting period from fiscal year to calendar year,
from calendar year to fiscal year, or from one fiscal year to another, 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.
SEC. 47. Final or Adjustment Returns for a Period of Less than

Twelve (12) Months. -
(A) Returns for Short Period Resulting from Change of Accounting

Period. - If a taxpayer, other than an individual, with the approval of the
Commissioner, changes the basis of computing net income from fiscal year to
calendar year, a separate final or adjustment return shall be made for the
period between the close of the last fiscal year for which return was made and
the following December 31. If the change is from calendar year to fiscal year, a
separate final or adjustment return shall be made for the period between the
PUP COLLEGE OF LAW
close of the last calendar year for which return was made and the date
designated as the close of the fiscal year. If the change is from one fiscal year to
another fiscal year, a separate final or adjustment return shall be made for the
period between the close of the former fiscal year and the date designated as
the close of the new fiscal year.
(B) Income Computed on Basis of Short Period. - Where a separate

final or adjustment return is made under Subsection (A) on account of a
change in the accounting period, and in all other cases where a separate final or
adjustment return is required or permitted by rules and regulations prescribed
by the Secretary of Finance, upon recommendation of the Commissioner, to be
made for a fractional part of a year, then the income shall be computed on the
basis of the period for which separate final or adjustment return is made.
There are three changes here: fiscal year to calendar year; calendar year to fiscal year; and fiscal year to
fiscal year. In these three cases, the law says that the taxpayer has to file a separate return indicating the
date of changes.
We go to Section 48. This does not appear under the old law. This refers to method of reporting income
known as percentage of completion. Who are authorized? It is only applicable to architects and engineers
when the completion exceeds one year.
SEC. 48. Accounting for Long-Term Contracts. - Income from long-

term contracts shall be reported for tax purposes in the manner as provided in
this Section. As used herein, the term 'long-term contracts' means building,
installation or construction contracts covering a period in excess of one (1)
year. Persons whose gross income is derived in whole or in part from such
contracts shall report such income upon the basis of percentage of completion.
The return should be accompanied by a return certificate of architects or
engineers showing the percentage of completion during the taxable year of the
entire work performed under contract. There should be deducted from such
gross income all expenditures made during the taxable year on account of the
contract, account being taken of the material and supplies on hand at the
beginning and end of the taxable period for use in connection with the work
under the contract but not yet so applied. If upon completion of a contract, it is
found that the taxable net income arising thereunder has not been clearly
reflected for any year or years, the Commissioner may permit or require an
amended return.
Section 49 is the method of reporting income by virtue of the so-called installment basis or installment
method. The taxpayer here is disposing the property by way of installment.
SEC. 49. Installment Basis. -
(A) Sales of Dealers in Personal Property. - Under rules and regulations

prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, a person who regularly sells or otherwise disposes of personal
property on the installment plan may return as income therefrom in any
taxable year that proportion of the installment payments actually received in
that year, which the gross profit realized or to be realized when payment is
completed, bears to the total contract price.

PUP COLLEGE OF LAW
(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of
a casual sale or other casual disposition of personal property (other than
property of a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year), for a price exceeding One
thousand pesos (P1,000), or (2) of a sale or other disposition of real property, if
in either case the initial payments do not exceed twenty-five percent (25%) of
the selling price, the income may, under the rules and regulations prescribed
by the Secretary of Finance, upon recommendation of the Commissioner, be
returned on the basis and in the manner above prescribed in this Section. As
used in this Section, the term "initial payments" means the payments received
in cash or property other than evidences of indebtedness of the purchaser
during the taxable period in which the sale or other disposition is made.
(C) Sales of Real Property Considered as Capital Asset by

Individuals. - An individual who sells or disposes of real property,
considered as capital asset, and is otherwise qualified to report the gain
therefrom under Subsection (B) may pay the capital gains tax in installments
under rules and regulations to be promulgated by the Secretary of Finance,
(D) Change from Accrual to Installment Basis. - If a taxpayer entitled

to the benefits of Subsection (A) elects for any taxable year to report his taxable
income on the installment basis, then in computing his income for the year of
change or any subsequent year, amounts actually received during any such year
on account of sales or other dispositions of property made in any prior year
shall not be excluded.
Q. If he is selling property, is it relevant to know whether he is selling personal property or real property?
A. Yes. The rules vary if he is selling personal property or real property.
With regard to personal property or movable property, it is important to know whether the taxpayer is
selling that regularly or as Section 49A says dealer because there are requirements to be complied with if
the sale by installment of the personal property is a casual or isolated basis.
There are two requirements for a sale of personal property in isolate basis:
1. The selling price must exceed one thousand pesos;

2. The initial down payment should not exceed 25% of the selling price.
If the sale is by virtue of a regular sale, like what is being done by businessman, these two requirements are
not present; the taxpayer is now allowed to use the method of reporting of income known as installment
basis.
With regard to real property, it not important to know if the sale of real property is regular or casual
because there is only one rule whether the sale is regular or casual. The rule is that both are applicable for
regular and casual sale of real property and the rule is that the initial down payment should not exceed 25%
of the selling price.

PUP COLLEGE OF LAW
Suppose the initial down payment exceeds 25%, how do we call now that sale by installment?
It is now know as deferred sale, and the consequence of that, although the taxpayer is selling the real
property by installment, he will be held liable to pay the income tax as if already received the entire
purchase price if it exceeds 25%.
Q. What about the computation of the limitation of the 25%? Is it only limited to cash money? Suppose it
includes checks, bill of exchange and promissory notes?
A. The answer is now under SC ruling in Banas vs. CIR, 325 SCRA 259.
Banas vs. CIR

325 SCRA 259
There was a sale of parcel of land by way of installment. But the agreement was the initial down payment
shall be in cash money, the subsequent installment shall be simultaneously the cash money and other
installment shall be by virtue of post dated promissory notes. But in computing the cash money, it did not
exceed 25%. RR 2 enacted in 1949 says that in computing are limitation of the 25%, the one to be included
in the computation should only be the cash money. We do not consider the value of the post-dated
promissory notes checks and bill of exchange.
In this case, on the day of the delivery, the buyer exchange other post-dated promissory to cash. After the
exchange, the initial down payment including the second installment was converted to cash money.
The SC ruled that the taxpayer should not be allowed to use the installment because the initial down
payment consists of more than 25% of the selling price.
Although the ruling is like that, the rule under RR 2 that we do not have to count the checks and promissory
notes is still the rule.
We go to Section 50, the tremendous power of the CIR.
SEC. 50. 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.
Q. What do we mean by corporations with the same interest?

A. These are several corporations with practically the same stockholders, e. g. Ayala group of Companies.
Section 50 says the CIR is allowed to allocate the income and the deductions with different corporations
having the same interest. Take note that there is no limitation provided for even under the revenue
regulations. Hence, this is great source of corruption.

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RETURNS AND PAYMENT
SEC. 51. Individual Return. -
(A) Requirements. -
(1) Except as provided in paragraph (2) of this Subsection, the following

individuals are required to file an income tax return:
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines, on his income
from sources within the Philippines;
(c) Every alien residing in the Philippines, on income derived from sources
within the Philippines; and
(d) Every nonresident alien engaged in trade or business or in the exercise

of profession in the Philippines.
(2) The following individuals shall not be required to file an income tax return;
(a) An individual whose gross income does not exceed his total personal
and additional exemptions for dependents under Section 35: Provided,
That a citizen of the Philippines and any alien individual engaged in
business or practice of profession within the Philippine shall file an
income tax return, regardless of the amount of gross income;
(b) An individual with respect to pure compensation income, as defined

in Section 32 (A)(1), derived from 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: Provided, further,
That an individual whose compensation income derived from sources
within the Philippines exceeds Sixty thousand pesos (P60,000) shall also
file an income tax return;
(c) An individual whose sole income has been subjected to final

withholding tax pursuant to Section 57(A) of this Code; and
(d) An individual who is exempt from income tax pursuant to the
provisions of this Code and other laws, general or special.
(3) The forgoing notwithstanding, any individual not required to file an income
tax return may nevertheless be required to file an information return pursuant
to rules and regulations prescribed by the Secretary of Finance, upon
(4) The income tax return shall be filed in duplicate by the following persons:
(a) A resident citizen - on his income from all sources;
(b) A nonresident citizen - on his income derived from sources within the
Philippines;

PUP COLLEGE OF LAW
(c) A resident alien - on his income derived from sources within the
Philippines; and
(d) A nonresident alien engaged in trade or business in the Philippines -

on his income derived from sources within the Philippines.
Section 51A1, we are talking here of the NIT return. From the enumeration under Section 51A1, these are
the one obliged to pay by way of the net. But there is one omitted here, the OCW seaman.
Q. What is the general rule, do we file an income tax return if he is exempt?

A. No.
Q. What is the exemption?

A. Section 51A2, for citizens and aliens who are exercising trade or business or profession, they have to file
a return regardless of the amount of the gross income. Another one is the GPP under Section 55.
For the rest, they do not have to file the return if they are exempt.
Generally, if the taxpayers gross income does not exceed the personal as well as additional exemption, the
maximum is P96, 000.00; he does not file a return.
If the taxpayer is a businessman, even if the income is minimal, he has to file a return because the law says
regardless of amount of the gross income.
The following are not obliged to file the return also.
Those whose income is subject to FIT; and
Those whose income is exempt from income tax.
Now, the limitation of P60, 000.00 is removed. For pure compensation earner, regardless of the income, it is
the management who is obliged to file the return under RR 3-2002.
Place and Filing of Return
(B) Where to File. - Except in cases where the Commissioner otherwise

permits, the return shall be filed with an authorized agent bank, Revenue
District Officer, Collection Agent or duly authorized Treasurer of the city or
municipality in which such person has his legal residence or principal place of
business in the Philippines, or if there be no legal residence or place of business
in the Philippines, with the Office of the Commissioner.
Of course the filing should be made to the BIR to the RDO of the BIR; if none, to its authorized banks; if
none, to the municipal or city treasurer but they are using here the pay as you file system.
When to File

PUP COLLEGE OF LAW
(C) When to File. -
(1) The return of any individual specified above shall be filed on or before the
fifteenth (15th) day of April of each year covering income for the preceding
taxable year.
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock not traded thru a local stock
exchange as prescribed under Section 24(c) shall file a return within thirty (30)
days after each transaction and a final consolidated return on or before April 15
of each year covering all stock transactions of the preceding taxable year; and
(b) From the sale or disposition of real property under Section 24(D) shall file a
return within thirty (30) days following each sale or other disposition.
The filing of the annual ITR is on or before April 15 but that is only with regard to those using calendar year
because Section 77B says that for those using fiscal year, the deadline for filing of the annual ITR shall be on
the fifteen day of the fourth month following the close of the fiscal year.
The filing of the FIT return for the sale of share and sale of realty subject to FIT shall be filed within 30 days
from the date of the transaction. This is rather an exemption because the final income tax as well as the
creditable will be filed monthly under Section 58A third paragraph which was amended by RR 12-2001. The
filing of the FIT return and creditable withholding tax return shall be by month and under RR 12-2001
amending that paragraph, for small time taxpayer, within 25 days, for large scale taxpayer, within 10 days.
That is rather the general rule in Section 58A third paragraph; the exception is under Section 51C2 that the
final income tax return should be filed within 30 days from the date of the transaction.
For sale of the FIT return for sale of shares of stock, there must be the filing of the annual consolidated
return. For those using the calendar year, that will be on or before April 15.
Q. Why is it that in the sale of share subject to FIT there is a requirement of the filing of the annual
consolidated return?
A. In the sale of share subject to FIT, this is the only FIT where there must be determination of whether
there is an actual gain or loss because under Section 24C, the basis of the FIT will be on the capital gains. If it
is based on net capital gains, it presupposes that it undergoes the process of determining whether there is
an actual profit or loss.
For example, in January 2005, there was sale of share subject to FIT. The taxpayers pay the FIT. After several
months but within 2005, he had sold again shares of stock; he filed the return and paid the income tax. But
when those three transactions will be summed up, the taxpayer will incur loss instead of gain.
Q. Is he allowed to file an annual consolidation before the end of 2005?
A. He should wait on or before April 15, 2006, before it, on March, February or January.
That is why is there is a need to file an annual FIT return to determine in the ultimate analysis on whether
was a gain or loss.

PUP COLLEGE OF LAW
We go to Section 51D in relation to section 24A last paragraph. Not pure means it is a mixture of salary
and business income or in the alternative, it is purely business income.
(D) Husband and Wife. - Married individuals, whether citizens, resident or

nonresident aliens, who do not derive income purely from compensation, shall
file a return for the taxable year to include the income of both spouses, but
where it is impracticable for the spouses to file one return, each spouse may file
a separate return of income but the returns so filed shall be consolidated by the
Bureau for purposes of verification for the taxable year.
Q. How do the legally married individuals file their return, if that is a case?
A. It must be joint.
Q. If the income is pure compensation?
A. Section 24A last paragraph says it must be separate.
(E) Return of Parent to Include Income of Children. - The income of

unmarried minors derived from properly received from a living parent shall be
included in the return of the parent, except (1) when the donor's tax has been
paid on such property, or (2) when the transfer of such property is exempt
from donor's
Q. What happen to income of the minor? Do we include that in the income tax of the parent?
A. The law says it depends if the minor received an income pursuant to the property given by the parents or
not.
If the income is gain pursuant to the given by the parents, this income shall be included in the ITR of the
parents except that when the donors tax has been paid or the property is exempt from donors tax.
Supposed the minor earned an income by virtue of his own industry, like a child actor, the law says the
return of the minor shall be filed by the guardian or normally, it is also the parents.
We go to Section 52, the return to be filed by corporations.
SEC. 52. Corporation Returns. -
(A) Requirements. - Every corporation subject to the tax herein imposed,

except foreign corporations not engaged in trade or business in the Philippines,
shall render, in duplicate, a true and accurate quarterly income tax return and
final or adjustment return in accordance with the provisions of Chapter XII of
this Title. The return shall be 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.
(B) Taxable Year of Corporation. - A corporation may employ either

calendar year or fiscal year as a basis for filing its annual income tax return:
Provided, That the corporation shall not change the accounting period
employed without prior approval from the Commissioner in accordance with
the provisions of Section 47 of this Code.

PUP COLLEGE OF LAW
(C) Return of Corporation Contemplating Dissolution or

Reorganization. - Every corporation shall, within thirty (30) days after the
adoption by the corporation of a resolution or plan for its dissolution, or for the
liquidation of the whole or any part of its capital stock, including a corporation
which has been notified of possible involuntary dissolution by the Securities
and Exchange Commission, or for its reorganization, render a correct return to
the Commissioner, verified under oath, setting forth the terms of such
resolution or plan and such other information as the Secretary of Finance,
upon recommendation of the commissioner, shall, by rules and regulations,
prescribe.
The dissolving or reorganizing corporation shall, prior to the issuance by the

Securities and Exchange Commission of the Certificate of Dissolution or
Reorganization, as may be defined by rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, secure a
certificate of tax clearance from the Bureau of Internal Revenue which
certificate shall be submitted to the Securities and Exchange Commission.
(D) Return on Capital Gains Realized from Sale of Shares of Stock

not Traded in the Local Stock Exchange. - Every corporation deriving
capital gains from the sale or exchange of shares of stock not traded thru a local
stock exchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2),
28(A)(8)(c) and 28 (B)(5)(c), shall file a return within thirty (30) days after
each transactions and a final consolidated return of all transactions during the
taxable year on or before the fifteenth (15th) day of the fourth (4th) month
following the close of the taxable year.
2002 BQ
Q. What about corporations, is it obliged to file how many returns?

A. Five: four for each quarter plus one for the annual.
Q. Should the extension be allowed in filing the return?

A. Yes. But there is no period provided for by law. Section 53 merely says on meritorious grounds.
SEC. 53. Extension of Time to File Returns. - The Commissioner may, in

meritorious cases, grant a reasonable extension of time for filing returns of
income (or final and adjustment returns in case of corporations), subject to the
provisions of Section 56 of this Code.
Section 55 refers to return for GPP. Normally, GPP are exempt, why is it obliged to file a return? The
rationale there is to determine the share of the partner subject to NIT.
SEC. 55. Returns of General Professional Partnerships. - Every

general professional partnership shall file, in duplicate, a return of its income,
except income exempt under Section 32 (B) of this Title, setting forth the items
of gross income and of deductions allowed by this Title, and the names,
Taxpayer Identification Numbers (TIN), addresses and shares of each of the
partners.

PUP COLLEGE OF LAW
Section 56A1, the Bureau of Custom is authorized to prohibit the departure of a ship or vessel if the captain
of the ship or the owner who failed to pay the tax under the Revenue Code.
SEC. 56. Payment and Assessment of Income Tax for Individuals

and Corporation. -
(A) Payment of Tax. -
(1) In General. - The total amount of tax imposed by this Title shall be paid
by the person subject thereto at the time the return is filed. In the case of tramp
vessels, the shipping agents and/or the husbanding agents, and in their
absence, the captains thereof are required to file the return herein provided
and pay the tax due thereon before their departure. Upon failure of the said
agents or captains to file the return and pay the tax, the Bureau of Customs is
hereby authorized to hold the vessel and prevent its departure until proof of
payment of the tax is presented or a sufficient bond is filed to answer for the
tax due.
Section 56A2, installment payment of income tax is allowed if the amount of the income tax is more than
two thousand pesos and the second installment should not be later than July 15.
(2) Installment of Payment. - When the tax due is in excess of Two

thousand pesos (P2,000), the taxpayer other than a corporation may elect to
pay the tax in two (2) equal installments in which case, the first installment
shall be paid at the time the return is filed and the second installment, on or
before July 15 following the close of the calendar year. If any installment is not
paid on or before the date fixed for its payment, the whole amount of the tax
unpaid becomes due and payable, together with the delinquency penalties
Section 56A3, this is being referred to when the taxpayer is claiming exemption because he is going to use
the proceeds of the sale of real property for residential; the one mentioned under Section 24D2. here the
taxpayer is not yet ready to comply with the requirements. To avoid payment of interest and penalty, her
has to pay now the FIT of 6%. If his documents are now complete, and, therefore, his income is exempt, but
he paid it already, the law says, he is given 6 months to claim for a refund. If the taxpayer is using
installment of method of reporting income, within 30 days from the receipt of the installment, the taxpayers
has to pay the tax.
(3) Payment of Capital Gains Tax. - The total amount of tax imposed and
prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c)
shall be paid on the date the return prescribed therefor is filed by the person
liable thereto: Provided, That if the seller submits proof of his intention to avail
himself of the benefit of exemption of capital gains under existing special laws,
no such payments shall be required : Provided, further, That in case of failure
to qualify for exemption under such special laws and implementing rules and
regulations, the tax due on the gains realized from the original transaction shall
immediately become due and payable, subject to the penalties prescribed
under applicable provisions of this Code: Provided, finally, That if the seller,
having paid the tax, submits such proof of intent within six (6) months from
the registration of the document transferring the real property, he shall be
entitled to a refund of such tax upon verification of his compliance with the
requirements for such exemption.

PUP COLLEGE OF LAW
In case the taxpayer elects and is qualified to report the gain by installments
under Section 49 of this Code, the tax due from each installment payment shall
be paid within (30) days from the receipt of such payments.
No registration of any document transferring real property shall be effected by
the Register of Deeds unless the Commissioner or his duly authorized
representative has certified that such transfer has been reported, and the tax
herein imposed, if any, has been paid.
In Section 56B, here we hit three birds in one stone. This is also similar under the estate tax under Section
93 and donors tax under Section 104, last portion. Here, the rules are practically the same.
(B) Assessment and Payment of Deficiency Tax. - After the return is

filed, the Commissioner shall examine it and assess the correct amount of the
tax. The tax or deficiency income tax so discovered shall be paid upon notice
and demand from the Commissioner.
As used in this Chapter, in respect of a tax imposed by this Title, the term
"deficiency" means:
(1) The amount by which the tax imposed by this Title exceeds the amount
shown as the tax by the taxpayer upon his return; but the amount so shown on
the return shall be increased by the amounts previously assessed (or collected
without assessment) as a deficiency, and decreased by the amount previously
abated, credited, returned or otherwise repaid in respect of such tax; or
(2) If no amount is shown as the tax by the taxpayer upon this return, or if no
return is made by the taxpayer, then the amount by which the tax exceeds the
amounts previously assessed (or collected without assessment) as a deficiency;
but such amounts previously assessed or collected without assessment shall
first be decreased by the amounts previously abated, credited returned or
otherwise repaid in respect of such tax.
It would seem that there were only two paragraph but there are three instances there:
1. The taxpayer filed a return, he paid the tax but the tax is not enough.
2. The taxpayer might receive notice of deficiency assessment;
3. The taxpayer filed the return but he did not pay the tax; and
4. The taxpayer filed the return, and, therefore, he did not pay the tax.
SEC. 57. Withholding of Tax at Source. -
(A) Withholding of Final Tax on Certain Incomes. - Subject to rules

and regulations the Secretary of Finance may promulgate, upon the
recommendation of the Commissioner, requiring the filing of income tax
return by certain income payees, the tax imposed or prescribed by Sections
24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D),
25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a),
28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a),
28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income
shall be withheld by payor-corporation and/or person and paid in the same
manner and subject to the same conditions as provided in Section 58 of this
Code.
PUP COLLEGE OF LAW
Section 57A refers to the enumeration of codal provisions subject to FIT. There are two provisions here
which are not subject to FIT but to GIT like Section 25B, but it is justified because the last portion of this
section is about to FIT in the sales of shares and realty. Nonetheless, most of the provisions under Section
25B is about the GIT. The other one is Section 28B1; this refers to the gross income tax to be paid by NRFC.
Why is it included here? Because the withholding tax system under gross income tax is almost similar to the
withholding system under the FIT.
The minimum of the withholding is 1%; the maximum is 35% as amended by RA 9337.
Q. What is the maximum under the NIT?
A. 15%. Most of them are 10%.
For FIT and GIT, there is the rate o0f 35%but for creditable withholding under the net, the highest
withholding is 15%. It is written in the law that the maximum withholding is 35% because the maximum GIT
is 35%. This is not true in the NIT because of the deductions. Remember that in FIT and GIT, the amount of
withholding is totally equal with the rate of the income tax. That is not the case in NIT.
Take note that Section 57B was already amended to 35%.
(B) Withholding of Creditable Tax at Source. - The Secretary of Finance

may, upon the recommendation of the Commissioner, require the withholding
of a tax on the items of income payable to natural or juridical persons, residing
in the Philippines, by payor-corporation/persons as provided for by law, at the
rate of not less than one percent (1%) but not more than thirty-two percent
(32%) thereof, which shall be credited against the income tax liability of the
taxpayer for the taxable year.
Again, do not have the concept that the maximum withholding in NIT is 35%; as stated, the maximum is 15%
because of the deductions.
Section 57C refers to tax-free covenant bonds.
(C) Tax-free Covenant Bonds. In any case where bonds, mortgages, deeds
of trust or other similar obligations of domestic or resident foreign
corporations, contain a contract or provisions by which the obligor agrees to
pay any portion of the tax imposed in this Title upon the obligee or to
reimburse the obligee for any portion of the tax or to pay the interest without
deduction for any tax which the obligor may be required or permitted to pay
thereon or to retain therefrom under any law of the Philippines, or any state
or country, the obligor shall deduct bonds, mortgages, deeds of trust or other
obligations, whether the interest or other payments are payable annually or at
shorter or longer periods, and whether the bonds, securities or obligations
had been or will be issued or marketed, and the interest or other payment
thereon paid, within or without the Philippines, if the interest or other
payment is payable to a nonresident alien or to a citizen or resident of the
Philippines.
In a contract between an obligor and oblige, or maybe creditor or debtor, it is the creditor or the obligee
who is liable to pay the income tax. The tax liability maybe agreed upon that is now the debtor or the

PUP COLLEGE OF LAW
obligor who will shoulder the tax. That is why is it is called covenant, meaning, by virtue of agreement the
debtor might shoulder the income tax and if the tax has been paid by the creditor, he might reimburse it.
It is tax-free because it is the creditor who is normally liable to pay the income tax is now tax-free by virtue
of the agreement.
Section 58 refers to the filing of the FIT and the creditable withholding tax return, and, also, the register of
deeds might allow the taxpayer to transfer the property but upon payment of the income tax.
SEC. 58. Returns and Payment of Taxes Withheld at Source. -
(A) Quarterly Returns and Payments of Taxes Withheld. - Taxes

deducted and withheld under Section 57 by withholding agents shall be
covered by a return and paid to, except in cases where the Commissioner
otherwise permits, an authorized Treasurer of the city or municipality where
the withholding agent has his legal residence or principal place of business, or
where the withholding agent is a corporation, where the principal office is
located.
The taxes deducted and withheld by the withholding agent shall be held as a
special fund in trust for the government until paid to the collecting officers.
The return for final withholding tax shall be filed and the payment made within
twenty-five (25) days from the close of each calendar quarter, while the return
for creditable withholding taxes shall be filed and the payment made not later
than the last day of the month following the close of the quarter during which
withholding was made: Provided, That the Commissioner, with the approval of
the Secretary of Finance, may require these withholding agents to pay or
deposit the taxes deducted or withheld at more frequent intervals when
necessary to protect the interest of the government.
(B) Statement of Income Payments Made and Taxes Withheld. -

Every withholding agent required to deduct and withhold taxes under Section
57 shall furnish each recipient, in respect to his or its receipts during the
calendar quarter or year, a written statement showing the income or other
payments made by the withholding agent during such quarter or year, and the
amount of the tax deducted and withheld therefrom, simultaneously upon
payment at the request of the payee, but not late than the twentieth (20th) day
following the close of the quarter in the case of corporate payee, or not later
than March 1 of the following year in the case of individual payee for creditable
withholding taxes. For final withholding taxes, the statement should be given
to the payee on or before January 31 of the succeeding year.
(C) Annual Information Return. - Every withholding agent required to

deduct and withhold taxes under Section 57 shall submit to the Commissioner
an annual information return containing the list of payees and income
payments, amount of taxes withheld from each payee and such other pertinent
information as may be required by the Commissioner. In the case of final
withholding taxes, the return shall be filed on or before January 31 of the
succeeding year, and for creditable withholding taxes, not later than March 1 of
the year following the year for which the annual report is being submitted. This
return, if made and filed in accordance with the rules and regulations approved
PUP COLLEGE OF LAW
by the Secretary of Finance, upon recommendation of the Commissioner, shall

be sufficient compliance with the requirements of Section 68 of this Title in
respect to the income payments.
The Commissioner may, by rules and regulations, grant to any withholding

agent a reasonable extension of time to furnish and submit the return required
in this Subsection.
(D) Income of Recipient. - Income upon which any creditable tax is

required to be withheld at source under Section 57 shall be included in the
return of its recipient but the excess of the amount of tax so withheld over the
tax due on his return shall be refunded to him subject to the provisions of
Section 204; if the income tax collected at source is less than the tax due on his
return, the difference shall be paid in accordance with the provisions of Section
56.
All taxes withheld pursuant to the provisions of this Code and its implementing
rules and regulations are hereby considered trust funds and shall be
maintained in a separate account and not commingled with any other funds of
the withholding agent.
(E) Registration with Register of Deeds. - No registration of any

document transferring real property shall be effected by the Register of Deeds
unless the Commissioner or his duly authorized representative has certified
that such transfer has been reported, and the capital gains or creditable
withholding tax, if any, has been paid: Provided, however, That the
information as may be required by rules and regulations to be prescribed by
the Secretary of Finance, upon recommendation of the Commissioner, shall be
annotated by the Register of Deeds in the Transfer Certificate of Title or
Condominium Certificate of Title: Provided, further, That in cases of transfer
of property to a corporation, pursuant to a merger, consolidation or
reorganization, and where the law allows deferred recognition of income in
accordance with Section 40, the information as may be required by rules and
regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, shall be annotated by the Register of
Deeds at the back of the Transfer Certificate of Title or Condominium
Certificate of Title of the real property involved: Provided, finally, That any
violation of this provision by the Register of Deeds shall be subject to the
penalties imposed under Section 269 of this Code.
SEC. 59. Tax on Profits Collectible from Owner or Other Persons. -

The tax imposed under this Title upon gains, profits, and income not falling
under the foregoing and not returned and paid by virtue of the foregoing or as
otherwise provided by law shall be assessed by personal return under rules and
regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. The intent and purpose of the Title is
that all gains, profits and income of a taxable class, as defined in this Title,
shall be charged and assessed with the corresponding tax prescribed by this
Title, and said tax shall be paid by the owners of such gains, profits and
income, or the proper person having the receipt, custody, control or disposal of
the same. For purposes of this Title, ownership of such gains, profits and
income or liability to pay the tax shall be determined as of the year for which a
return is required to be rendered.

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TAX ON ESTATES AND TRUSTS
The status of estate shall depend upon the status of the decedent immediately before his death whether
he is a RC or any of the seven kinds of taxpayers. The same is true with trust; the status of the trust will
depend upon the status of the grantor, or trustor or creator of the trust.
We go to Estate.
CODAL:
SEC. 60. Imposition of Tax. -
(A) Application of Tax. - The tax imposed by this Title upon individuals shall apply to the
income of estates or of any kind of property held in trust, including:
(1) Income accumulated in trust for the benefit of unborn or unascertained

person or persons with contingent interests, and income accumulated or held for
future distribution under the terms of the will or trust;
(2) Income which is to be distributed currently by the fiduciary to the

beneficiaries, and income collected by a guardian of an infant which is to be held
or distributed as the court may direct;
(3) Income received by estates of deceased persons during the period of

administration or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be either distributed to
the beneficiaries or accumulated.
(B) Exception. - The tax imposed by this Title shall not apply to employee's trust
which forms part of a pension, stock bonus or profit-sharing plan of an employer
for the benefit of some or all of his employees ;
(1) if contributions are made to the trust by such employer, or employees, or both for the
purpose of distributing to such employees the earnings and principal of the fund accumulated
by the trust in accordance with such plan, and
(2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all
liabilities with respect to employees under the trust, for any part of the corpus or income to be
(within the taxable year or thereafter) used for, or diverted to, purposes other than for the
exclusive benefit of his employees:
Provided, That 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 it exceeds the amount
contributed by such employee or distributee.
(C) Computation and Payment. -

(1) In General. - The tax shall be computed upon the taxable income of the estate or trust and
shall be paid by the fiduciary, except as provided in Section 63 (relating to revocable trusts)
and Section 64 (relating to income for the benefit of the grantor).
(2) Consolidation of Income of Two or More Trusts. - Where, in the case of two or more
trusts, the creator of the trust in each instance is the same person, and the beneficiary in each
instance is the same, the taxable income of all the trusts shall be consolidated and the tax
PUP COLLEGE OF LAW
provided in this Section computed on such consolidated income, and such proportion of said
tax shall be assessed and collected from each trustee which the taxable income of the trust
administered by him bears to the consolidated income of the several trusts.
We are talking here if a person dies and he has properties. While the property is being partitioned
among the heirs, the property left is brief only; there is income tax to talk about! Here, we are
talking of a person who dies of substantial amount of property, e.g. a manila boy who has a
manufacturing company of hotdog, chorizo de bilbao, footlong and hotdog de ocho or maybe, he
died owning a bakery producing monay or maybe he owns a plantation of eggplant 12 inches long!
Before the property could be partitioned, it will take some time especially when there are
oppositors which are usually children outside the wedlock. Pending the settlement of the estate,
judicial, extrajudicial or settlement at all, the estate earns income managed by the administrator,
executor or the heirs.
While the property is being partitioned, it earns an income. Let us say, our example, the eggplant
plantation. The eggplant 12 inches long were being sold in Japan.
Q: if the estate earns income from the sale of the eggplant 12 inches long, does it mean that the
executor or administrator will pay the income tax?
A: Here we have a very unique rule. With regard to income of the estate, there are three
possibilities:
1. The income tax imposed on individual. It is as if the income earner is an individual;

2. The Corporate Income tax. It is as if the income earner is a corporation.
3. The income tax to be paid by the estate through the executor or administrator.
INCOME EARNED BY THE ESTATE- Let us say the estate shall be settled through judicial
proceedings. During the pendency of the judicial settlement, the applicable income tax should be
the one to be paid by the estate represented by the executor or administrator or the heirs. As a
matter of fact, it is the only income where the applicable income tax is the one to be imposed on
estate.
We have three instances where the tax is not imposed on the estate itself;
1. During extra-judicial settlements;

2. When there is no settlement at all;
3. When the judicial settlement is already final and executor, but the heirs did not
partition the property.
In these three instances, we have different rules. We do not apply here the income tax on estate.
There are 2 possibilities here, namely;
1. If there will be a creation of unregistered partnership; meaning the heirs contributed

money, property or industry with the intention to divide the profit, then there is a

PUP COLLEGE OF LAW
unregistered partnership and we will now apply the corporate income tax because under
Section 22B, a partnership is also a corporation.
2. The other instance is where there is no contribution of money, property or industry. The
heirs merely divide the profit. For instance, in the eggplant plantation, there are only 2
compulsory heirs, and they divide the profits among themselves, there is only a creation of
co-ownership. Since co-ownership cannot be deemed a corporation, the income tax shall
be imposed on different co-owners in their individual capacity. Therefore, the income
tax to be imposed is that of an individual.
These are supported by SC ruling;
1. For Creation of unregistered partnership ;

Evanglista vs. Cir, 102 P 114,
Reyes vs. CIR 24 S 198
Ona v. Bautista, 45 S 74 and
Afisco vs. CIR, 301 S2
2. For Creation of co-ownership;

Obillos v. CIR. 139S 436
Pascula v. CIR 160 S 566
We go to Section 61.
CODAL:
SEC. 61. Taxable Income. - The taxable income of the estate or trust shall be computed in the
same manner and on the same basis as in the case of an individual, except that:
(A) There shall be allowed as a deduction in computing the taxable income of the estate or trust the
amount of the income of the estate or trust for the taxable year which is to be distributed currently by
the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant
which is to be held or distributed as the court may direct, but the amount so allowed as a deduction
shall be included in computing the taxable income of the beneficiaries, whether distributed to them or
not. Any amount allowed as a deduction under this Subsection shall not be allowed as a deduction
under Subsection (B) of this Section in the same or any succeeding taxable year.
(B) In the case of income received by estates of deceased persons during the period of administration
or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be
either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction
in computing the taxable income of the estate or trust the amount of the income of the estate or trust
for its taxable year, which is properly paid or credited during such year to any legatee, heir or
beneficiary but the amount so allowed as a deduction shall be included in computing the taxable
income of the legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections
(A) and (B) of this Section shall not be allowed: Provided, That the amount of any income included in
the return of said trust shall not be included in computing the income of the beneficiaries.

PUP COLLEGE OF LAW
Note : If the income tax to be imposed shall be the one to be paid by the estate, meaning, this is
during the pendency of the judicial settlement, Section 61 says that it should be paid in the same
manner as that of an individual.
Q: Is it really the same with an individual?

A: It is similar but not identical. There are distinctions on the personal exemption.
INDIVIDUAL ESTATE
An individual may claim personal exemption If the estate is the one liable, Section 62 governs;
depending whether he is legally married, single or that personal exemption shall always be similar to a
head of the family single individual of P 20, 000, whether or not the
(prior to RA 9504) decedent is legally married or head of the family
CODAL:
SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of
the tax provided for in this Title, there shall be allowed an exemption of
Twenty thousand pesos (P20,000) from the income of the estate or
trust.
If the income of the estate is liable, there are special deductions as provided for in Section 61, which are the
following;
A. Distribution of profit to the heir; -
RULE :
1. The option of the administrator or the executor is to give partial distribution of the
income. If he does not distribute anything within the taxable year, he could not claim
special deduction of distribution.
2. If he gave all the profits to the heirs, he is not going to file income tax to be paid by the
estate because the gross income of the estate will become zero.
3. If he will give only partial, for example 30% of the income, this will constitute special
deductions from the gross income of the estate.
4. On the part of the heirs, they will be liable for the income received from the estate. With
more reason if all of the income were given to them. They have to pay income tax on their
individual capacity as individuals.
5. Suppose the administrator did not give any income to the heirs within the taxable year, he
could not claim special deductions for distribution but the heirs upon receipt of their
shares; they are no longer liable to pay income tax for that.
B. Payment made by the Administrator to the creditor of the decedent; and
C. Expense to preserve the estate of the decedent.

PUP COLLEGE OF LAW
NOTE : These special deductions with special personal exemption shall apply only to the income tax of the
estate (the income tax payer is the estate itself). If the corporate income tax or the income tax on
individual should be applied, these special exemption and deductions does not apply.
We go to the second one, the TRUST.
There are three parties in the contract of trust:

1. The grantor or trustor or creator;
2. The trustee or the fiduciary; and
3. Cest tui que trust or the beneficiary
Q: When can a trust be held liable to pay income tax

A: When the trust is irrevocable or for the benefit of the grantor. Here, the income tax to be paid by the trust
does not apply.
Q: If the trust is liable because it is irrevocable, who is the one obliged to file the return and pay the tax.
A: The one obliged to file the return and remit the tax is the trustee but not one on its own capacity but in
behalf of the trust itself.
If the trust is irrevocable, the provisions of Section 61 and 62 shall be applied on personal exemption and
special deductions. But if it is the liability of the grantor, he shall file the tax return on his own behalf, in his
own individual capacity or personal liability, not in behalf of the trust. Then there will be no deductions with
regard to Sections 61 and 62.
Q: The lessor lease a parcel of land to the lessee for free in the condition that any improvement introduced
by the lessee to the parcel of land shall be transferred to the lessor after the termination of the lease.
Assuming there is improvement introduced by the lessee and the lease is terminated, how will the lessor
report that income? Should he report that for only one year?
A: In RR 2 issued in 1949, it gives two options to the lessor. If the contract is for 25 years, the value of the
property will be spread in 25 years. Suppose the value of the land is 25M, for every year, he will report one
million. Second: he can choose to report that for only one year but he has to pay the income tax for that.
SEC. 63. Revocable Trusts. - Where at any time the power to revest in the
grantor title to any part of the corpus of the trust is vested (1) in the grantor
either alone or in conjunction with any person not having a substantial
adverse interest in the disposition of such part of the corpus or the income
therefrom, or (2) in any person not having a substantial adverse interest in
the disposition of such part of the corpus or the income therefrom, the income
of such part of the trust shall be included in computing the taxable income of
the grantor.
SEC. 64. Income for Benefit of Grantor.-
(A) Where any part of the income of a trust (1) is, or in the discretion of the
grantor or of any person not having a substantial adverse interest in the

PUP COLLEGE OF LAW
disposition of such part of the income may be held or accumulated for future
distribution to the grantor, or (2) may, or in the discretion of the grantor or of
any person not having a substantial adverse interest in the disposition of such
part of the income, be distributed to the grantor, or (3) is, or in the discretion
of the grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income may be applied to the payment of
premiums upon policies of insurance on the life of the grantor, such part of
the income of the trust shall be included in computing the taxable income of
the grantor.
(B) As used in this Section, the term 'in the discretion of the grantor' means in
the discretion of the grantor, either alone or in conjunction with any person
not having a substantial adverse interest in the disposition of the part of the
income in question.
SEC. 65. Fiduciary Returns. - Guardians, trustees, executors,

administrators, receivers, conservators and all persons or corporations, acting
in any fiduciary capacity, shall render, in duplicate, a return of the income of
the person, trust or estate for whom or which they act, and be subject to all
the provisions of this Title, which apply to individuals in case such person,
estate or trust has a gross income of Twenty thousand pesos (P20,000) or
over during the taxable year. Such fiduciary or person filing the return for him
or it, shall take oath that he has sufficient knowledge of the affairs of such
person, trust or estate to enable him to make such return and that the same is,
to the best of his knowledge and belief, true and correct, and be subject to all
the provisions of this Title which apply to individuals: Provided, That a return
made by or for one or two or more joint fiduciaries filed in the province where
such fiduciaries reside; under such rules and regulations as the Secretary of
Finance, upon recommendation of the Commissioner, shall prescribe, shall be
a sufficient compliance with the requirements of this Section.
SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. -

Trustees, executors, administrators and other fiduciaries are indemnified
against the claims or demands of every beneficiary for all payments of taxes
which they shall be required to make under the provisions of this Title, and
they shall have credit for the amount of such payments against the beneficiary
or principal in any accounting which they make as such trustees or other
fiduciaries.
Q. What are the transfer taxes nowadays?

A. The transfer taxes nowadays are the following:
Estate tax under Section 84 to 97;

Donors tax under Section 98 to 104;
The transfer tax for transfer of realty under Section 135 of LGU to be imposed by provinces and cities.
The estate tax is the oldest tax although many Filipinos are not paying this one . Before the CTRP, the rate
for estate tax is 60% and if the net estate, meaning after deductions, is more than 1.3 million, there is
another progressive rate. Therefore, practically, we have to give everything of what will be inherited.
However, in 1994, the Congress enacted RA 5499 saying that the rate of 60% will be lowered to 35%. On
January 1, 1998, by virtue of RA8424, the rate of 35% was lowered to 20%.
PUP COLLEGE OF LAW
Q. What is the proper scheme to distribute the money to the heirs of a taxpayer?
To create a family corporation.

Allow the taxpayer to die and pay the estate tax of the rate of 20%.
Execute a deed of donation in favor of his children so that he will only be liable for 15% donors tax.
Execute deed of sale so that income tax should be applied.
For family corporation, the trouble is that when the heirs cannot agree. In addition, the rate now is lowered
from 60% to 20%, it is no longer advisable .
For realty, it depends. If the realty is considered to be ordinary asset where the applicable income tax is the
5% to 32% because he is an individual, it is not advisable. It is better to execute deed of donation if the
donee is a relative because the rate shall only be 15%. If the donee is a relative because the rate strangers,
it is either of the two, NIT of 32% or donors tax of 30%.
If the real property is capital asset and within the Philippines, it is better to execute deed of sale because it
is lower than donation 15%, it is lower than estate tax of 20%; it is only a FIT of 6% plus documentary stamp
1%. It is very much lower than the NIT, estate tax or the donors tax.
If realty is all ordinary, it is better to execute deed of donation if the donees are relatives. If the donees are
not relatives, it is better to execute deed of donation or allow to taxpayer to die and pay the estate tax
because if the donees are strangers, the taxpayer will pay the flat rate of 30%.
Upon reaching Section 84, we have to correlate this with Section 104 because this covers the estate tax and
donors tax. Here we ought to know who are the taxpayers under estate tax and donors tax.
For estate tax we have four taxpayers; for donors tax we have six. By the way, we do not have inheritance
tax and donees tax. It was abolished in 1974. pres. Marcos issued a presidential decree, and of all the
numbers, he chooses the number 69 abolishing the inheritance tax and donees tax.
For estate tax the decedent may be classified as the following:

1. RC;
2. NRC;
3. RA; and
4. NRA
For donors tax, the status of the donor may be the following:
1. RC;
2. NRC;
3. RA;
4. NRA;
5. DC; and
6. FC.

PUP COLLEGE OF LAW
For donors we have taxpayer that is a corporation. For estate we do not have. Why? A corporation is not
capable of natural death. Nonetheless, a corporation may very well enter into a contract of donation.
Q. What is the relevance of the knowing status of the decedent and donor?
A. With regard to estate tax, the NRA and with regard to donors tax, the NRA and FC, their liability is only
property deemed located in the Philippines.
They are exempt on property located abroad. The remaining taxpayers, their liability shall be on property
located inside and outside the Philippines. That is the relevance of knowing them.
Section 104 first paragraph, speaks of the tangible property deemed located in the Philippines.
SEC. 104. Definitions. - For purposes of this Title, the terms "gross estate" and
"gifts" include real and personal property, whether tangible or intangible, or mixed,
wherever situated: Provided, however, That where the decedent or donor was a
nonresident alien at the time of his death or donation, as the case may be, his real
and personal property so transferred but which are situated outside the Philippines
shall not be included as part of his "gross estate" or "gross gift": Provided, further,
That franchise which must be exercised in the Philippines; shares, obligations or
bonds issued by any corporation or sociedad anonima organized or constituted in the
Philippines in accordance with its laws; shares, obligations or bonds by any foreign
corporation eighty-five percent (85%) of the business of which is located in the
Philippines; shares, obligations or bonds issued by any foreign corporation if such
shares, obligations or bonds have acquired a business situs in the Philippines; shares
or rights in any partnership, business or industry established in the Philippines, shall
be considered as situated in the Philippines: Provided, still further, that no tax shall
be collected under this Title in respect of intangible personal property: (a) if the
decedent at the time of his death or the donor at the time of the donation was a
citizen and resident of a foreign country which at the time of his death or donation
did not impose a transfer tax of any character, in respect of intangible personal
property of citizens of the Philippines not residing in that foreign country, or (b) if
the laws of the foreign country of which the decedent or donor was a citizen and
resident at the time of his death or donation allows a similar exemption from
transfer or death taxes of every character or description in respect of intangible
personal property owned by citizens of the Philippines not residing in that foreign
country.
The term "deficiency" means: (a) the amount by which tax imposed by this Chapter
exceeds the amount shown as the tax by the donor upon his return; but the amount
so shown on the return shall first be increased by the amount previously assessed (or
collected without assessment) as a deficiency, and decreased by the amounts
previously abated, refunded or otherwise repaid in respect of such tax, or (b) if no
amount is shown as the tax by the donor, then the amount by which the tax exceeds
the amounts previously assessed, (or collected without assessment) as a deficiency,
but such amounts previously assessed, or collected without assessment, shall first be
decreased by the amount previously abated, refunded or otherwise repaid in respect
of such tax.
Q. Is Section 104 relevant to all taxpayers?

PUP COLLEGE OF LAW
A. No. it is relevant to NRA under estate tax and FC and NRA under donors tax; to the rest, Section 104 is
totally irrelevant because whether the property is located within or without, they are still liable to pay the
tax.
But for NRA and FC, Section 104 is very material because if they can prove that the property is outside the
Philippines, then they are exempt from tax.
The following are property deemed located within the Philippines under Section 104 first paragraph:
1. Franchise a legislative enactment authorizing a person to engage in trade of Business. If the

franchise is to be exercised in the Philippines that is a property deemed located in the Philippines;
2. Shares, obligation and bonds issued by a corporation or sociedad anonima which is established
under Philippines laws. In others, these are shares obligations and bonds issued by DC. This is going
to be automatic source from within;
3. Shares, obligation and bonds of FC provided at least 85% of the business of the FC is located in
the Philippines. With regard to shares, obligation and bonds issued by FC, it is not automatic, there
is a qualification. Normally, it is property without the Philippines. However, if at least 85% of the
business is located in the Philippines, it will become a property deemed located in the Philippines;
4. Shares, obligation and bonds issued by FC whose shares obligations and bonds
. have acquired business situs in the Philippines.
With regard to shares and obligation and bonds of FC, it can only be property deemed located in the
Philippines if at 85% of the business of which is located in the Philippines or in alternative, the shares,
obligation and bonds of the FC have acquired business situs in the Philippines.
1. Shares of right in any partnership, industry established n the Philippines.
These are deemed located in the Philippines, and if the taxpayer under estate tax is NRA, and under donors
tax the taxpayer is NRA and FC, they are liable because their liability shall only be on properties deemed
located in the Philippines.
We have to remember that with regard to NRA under estate tax and NRA and FC under donors tax, their
liability shall only be on properties deemed located in the Philippines.
While is it true that the liability of NRA under estate tax and NRA and FC under donors tax is only for those
property deemed located in the Philippines, for purposes of filing the estate tax return, Section 86B says
that with regard to NRA, take note this does not apply to donors tax, the administrator or executor of the
NRA shall include the in the return all properties whether located in the Philippines or abroad.
Q. What is the purpose?

PUP COLLEGE OF LAW
A. In order to allow deductions.
But in the payment of estate tax, NRA shall only be liable for properties located in the Philippines. But only
for the purpose of filing the return, all the properties should be included.
Going back to Section 104, there is exception there: the property of a NRA and a FC is located in the
Philippines.
There is an exception that they will be exempt. Normally, a NRA which a donor or a decedent ( including FC)
it that is personal property located in the Philippines, they are liable. However, Section 104, in the middle
portion of the first paragraph says that if the country of the NRA or the domicile of the FC do not impose or
provide for exemption on intangible personal property owned by Filipinos who are not residing in that
foreign country, the NRA or the FC is not liable to pay estate tax or donors tax as the case may be. Provided,
that the foreigner or the alien is a citizen or national of that foreign country and he must be residing there.
So that if a decedent is a foreigner but a resident alien of the Philippines, this exemption do not apply. What
are the requisites? First, the foreign country of the alien or the foreign country of the FC do not imposed or
exempt from transfer tax in intangible personal properties owned who are not residing there. Second the
foreigner or the alien must be a resident and the same time a citizen or national of that foreign country. If
this two elements are present, the property located in the Philippines, the donor or decedent is exempt
from transfer tax.
1996 BQ
Q. A German national donated shares of stock in a FC to his Filipina girlfriend. Is that donation subject to
donors tax in the Philippines?
A. No. the donors tax can only be applied if the shares of stock donated by the NRA have acquired a
business situs in the Philippines or in alternative, the FC where the shares of stock came from, at least 85%
of the business of that FC is located in the Philippines. Otherwise, the donor is exempt.
2005 BQ
Q. The decedent is RA. He has properties here in the Philippines, USA and Europe. To which of the
foregoing properties are subject to estate tax?
A. All of the properties are subject to estate tax because the decedent is a RA.
CAMPOS RUEDA vs. CIR

42 SCRA 283
The decedent is NRA. The decedent is from Spain who married a national of Morocco. She has so many
properties and all of them are intangibles properties but most of them are shares of stocks in a DC. They are

PUP COLLEGE OF LAW
being obliged to pay the tax. The executor, Campos Rueda claim exemption from payment of estate tax and
inheritance tax claiming the provision Section 104 that in the country, in Morocco, it provides therein that
intangible personal properties owned by Filipinos, where this Filipinos are not residing in Morocco is exempt
from estate tax. The petitioner is claiming exemption by virtue of this provision. However, the BIR contends
that Morocco is not yet a country because it is not applicable.
The SC agreed with Campos Rueda to the issue that Morocco is not yet a country is immaterial. What
matters here is that the foreign laws of Morocco provides for an exemption. Since the elements, are
present, Campos Rueda was allowed to claim exemptions from the payment of inheritance and estate tax.
We have to know the payment of estate tax. The formula is also similar with that of NIT.
Formula:
Gross Estate [ Sec 85]

- Deductions [Sec 86]
st
Net Estate [Exemptions{1 P200,000.00 Sec 84}]
x Rate [Sec 84]__________
Estate Tax Due
- Tax Credit if any {Sec 86, 110B, 204]
The estate tax shall be applied to the transfer of the property after the death of the transferor. This is the
general rule which is subject to so many exceptions.
Normally, if the property is transferred during the lifetime of the transferor, we apply the donors tax. There
are exceptions. Although it was transferred during the lifetime of the donor, yet we do not apply the
donors tax but the estate tax. But when the transfer was made after the death of the transferor, the rule is
absolute; we have to apply estate tax.
Q. What is estate tax?
A. Estate tax is a transfer tax imposed on the transfer of the net estate of the decedent to the heirs or
beneficiaries who are not his heirs.
We go to Section 85A; decedents interest.
Included in this paragraph are properties owned by the decedent at the time of his death. Why is it entitled
property owned by the decedent at the time of his death? Instead it says decedents interest.
The intention of the law is to include all properties, not only at the time owned by a decedent at the time of
his death but also those not owned by the decedent but he has interest on such property. For example, in a
contract of lease, when the decedent is a lease, when the decedent is a lessee, the contract of lease is
terminated.

PUP COLLEGE OF LAW
Suppose the lease is for 5 years, after 2 years, the lessee died. That could be inherited by the heirs. Hence,
the value of the lease shall be included in the gross estate of the decedent. Is he the owner of that? No. He
only has interest has over the property.
With regard to a usufruct, normally a contract of a usufruct is terminated upon the death of either of the
parties. If the usufructuary died, then the contract is terminated. Section 87A says the merger of the
usufruct to the naked owner is exempt from estate tax.
Q. Suppose if it is for a fixed period of time, for example five years. After two years, one of the parties
died, will the use of the property be returned to the naked owner?
A. No. That will be inherited by the heir.
That is supported by Section 88A where it says that the value of the usufruct shall be determined because it
is subject to estate tax.
Therefore, there is no conflict between Section 87A and 88A. Section 87A provides for exemption while
Section 88 provides for the imposition of the estate tax indirectly. Section 87A presupposes a situation
where the contract is determined upon the death of usufructor. Hence, the property will be returned to the
naked owner, and under Section 87A, that is exempt.
If the usufruct is fixed in a certain period of time, it will not be returned to the naked owner if the
usufructuary died. It will be inherited by the heirs and we have to determine the value for the purpose of
imposition of estate tax. Suppose the one who died is the naked owner, Section 85A applies. That is subject
to estate tax.
Hence, the estate does not only include properties owned by the decedent but also properties wherein he
only has interest a stated under Section 85A.
We go to Section 85A.
(A) Decedent's Interest. - To the extent of the interest therein of the

decedent at the time of his death;
There are two kinds of transfer in contemplation of death:
1. The technical transfer in contemplation of death under SC ruling in Vda. De Roces vs. Posadas
58 Phil 108, Dizon vs. Posadas 57 Phil 465; and
2. The one provided for in the Tax Code is only a technical transfer in contemplation of death. It is
deemed a transfer in contemplation of death because of the technical provision because it
does not refer anything about death.
The SC ruling speaks about death

PUP COLLEGE OF LAW
.Vda. De Roces vs. Posadas, 58 Phil; 108
A taxpayer executed a deed of donation. Almost simultaneously with the execution of the donation, she also
executed the last will and testament. When she died the donee tried to pay only donors tax but the
government insist the payment of estate tax and donors tax because the government reasons out that these
two documents were executed at almost the same time; and second, the donees in the deed of donation,
were also the same persons in the last will. The BIR concludes that it is a transfer in contemplation of death.
The SC agreed with the BIR that it is the transfer in contemplation of death because the execution of the
deed of donation was executed almost simultaneously with the last will and testament. Also, the instituted
heirs were also the same persons, the donees in the deed of donation.
Dizon vs. Posadas, 57 Phil 465
The father of the family donated parcels of land to his one and only son. After several days from the
execution of the deed of donation, the father died. When the father died, the son paid the donors tax. The
BIR claimed inheritance as well as estate tax.
The SC, again, agreed with Posadas stating that since the death of the donor is very near to the execution of
the deed of donation. Then that is transfer in contemplation of death.
In these two cases, it is talking indirectly about death.
B) Transfer in Contemplation of Death. - To the extent of any interest therein

of which the decedent has at any time made a transfer, by trust or otherwise, in
contemplation of or intended to take effect in possession or enjoyment at or after
death, or of which he has at any time made a transfer, by trust or otherwise, under
which he has retained for his life or for any period which does not in fact end before
his death (1) the possession or enjoyment of, or the right to the income from the
property, or (2) the right, either alone or in conjunction with any person, to
designate the person who shall possess or enjoy the property or the income
therefrom; except in case of a bonafide sale for an adequate and full consideration
in money or money's worth.
Q. what about the one in the tax code under Section 85B?
A. This is only a technical provision about the transfer in contemplation of death. Take note of the last two
enumerations at the bottom of the paragraph; upon transfer of his property, he still posses or he still
receives the fruits or income of the property. Third, the transferor, he himself alone, or together with other
persons, designates who will receive the income of the property and who will posses. Those are the
technical rules on transfer in contemplation of death.
We go to Section 85C; revocable transfer.

PUP COLLEGE OF LAW
(C) Revocable Transfer. -
(1) To the extent of any interest therein, of which the decedent has at any time
made a transfer (except in case of a bona fide sale for an adequate and full
consideration in money or money's worth) 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 exerciseable) by the decedent alone or
by the decedent in conjunction with any other person (without regard to when
or from what source the decedent acquired such power), t o alter, amend,
revoke, or terminate, or where any such power is relinquished in contemplation
of the decedent's death.
(2) For the purpose of this Subsection, the power to alter, amend or revoke shall
be considered to exist on the date of the decedent's death even though the
exercise of the power is subject to a precedent giving of notice or even though
the alteration, amendment or revocation takes effect only on the expiration of a
stated period after the exercise of the power, whether or not on or before the
date of the decedent's death notice has been given or the power has been
exercised. In such cases, proper adjustment shall be made representing the
interests which would have been excluded from the power if the decedent had
lived, and for such purpose if the 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.
Take note that the transfer of property, the rule is that it is irrevocable, if the transfer is silent. If that is
irrevocable, it is not subject to estate tax. Meaning, the transferor upon his death or after his death that will
not be included in the gross estate because it is exempt for the reason that the one included in the gross
estate is the revocable.
Q. Why?
A. That is because of the tremendous power that in any time he can revoke, change or modify the transfer.
For example, the taxpayer made a conditional transfer to his son. Whether or not the condition was
performed, or whether or not there is prior notice, upon the death of the taxpayer, that will be included in
the gross estate.
The remedy is to remove the condition so that it will become irrevocable. Therefore, exempt from estate
tax.
(D) Property Passing Under General Power of Appointment. - To the

extent of any property passing under a general power of appointment exercised by
the decedent: (1) by will, or (2) by deed executed in contemplation of, or intended to
take effect in possession or enjoyment at, or after his death, or (3) 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 (a) the
possession or enjoyment of, or the right to the income from, the property, or (b) the
right, either alone or in conjunction with any person, to designate the persons who
shall possess or enjoy the property or the income therefrom; except in case of a
bona fide sale for an adequate and full consideration in money or money's worth.

PUP COLLEGE OF LAW
We go to property passing under general power of appointment under Section 85D.
If we read the provision, it is only similar to Section 85B for transfer in contemplation of death. But we have
to understand her that the property here is under the general power of appointment this was never asked
in the bar because this is common in United States. We seldom practice here in the Philippines. Here, we
practice the opposite, the fideicommissary substitution.
The general power of appointment, we can understand it by remembering Article 863 of the Civil Code on
the fideicommissory constitution. There are three parties: the testator, first heir and the second heir.
According to Section 87D, if the first heir dies, the property now is transferred to the second heir, the estate
of the first heir is exempt from estate tax.
Q. Why is it exempt?
A. It is exempt because the first heir did not choose on who will be the second heir. It was the privilege of
the testator. That is why upon the death of the first heir and the property was transferred to the second
heir, the estate of the first heir is exempt from estate tax.
In general power of appointment, there are three parties: testator, first heir and second heir. If the first heir
dies, the property was transferred to the second heir. The estate of the first heir under general power of
appointment is subject to estate tax for that property because under American law, the first heir has the
power to choose the second heir. Because of that, it is only logical that his estate is subject to estate tax.
What is subject matter of transaction? The one we had discussed under Section 85B.
We go to Section 85E. this was asked in 1999, 2000, 2001, 2002, 2003, 2004, 2005 at nagsawa din nung
2006, hinde na tinanong; the proceeds of life insurance.
(E) Proceeds of Life Insurance. - To the extent of the amount receivable by the
estate of the deceased, his executor, or administrator, as insurance under policies
taken out by the decedent upon his own life, irrespective of whether or not the
insured retained the power of revocation, or to the extent of the amount receivable
by any beneficiary designated in the policy of insurance, except when it is expressly
stipulated that the designation of the beneficiary is irrevocable.
Q. Are proceeds of life insurance subject to income tax? Estate tax under Section 85E?
A. There are requirements. First, a person who ensured himself, Section 85E will apply. If the taxpayer
ensures the life of another, the rule does not apply. Second, if the appointed beneficiary is the estate,
represented by the executor or administrator, the proceeds of life insurance, assuming the first requirement
is present, shall be included in the gross estate regardless of whether the appointment of the estate is
revocable.
If the appointed beneficiary is other that the estate, maybe a relative or a friend, it depends if the
appointment of such beneficiary is revocable or irrevocable. If it is revocable designation of the beneficiary

PUP COLLEGE OF LAW
other than the estate, assuming the first requirement has been complied with, the proceeds shall be
included in the gross estate. Therefore, subject to estate tax. If beneficiary is other than the estate and it is
irrevocable, having the same assumption, it is not subject to estate tax because it should not be included in
the computation of the gross estate.
Q. Why?
A. It is because if the appointment is revocable , insured has tremendous power, control and influence to
modify, change or alter the beneficiary. Because of that tremendous power of control, the law is only
logical that when he die , his estate will be liable to pay estate tax.
When the appointment is irrevocable where the beneficiary is other than the estate, because if it is the
estate, it does not matter, the estate will be liable whether it is revocable or irrevocable assuming the first
requirement has been complied with the losses control to change, modify or alter the beneficiary. The law
is only reasonable that when he died, his estate is not liable to pay estate tax.
Q. Is it subject to income tax?
A. The governing rule is Section 32B1 and B2.
Section 32B1 speaks of where it is payable upon the death of the insured. Section 32B2 says that it is
payable whether the insured is still alive.
When it is payable upon the death of the insured, the only requirement to be exempt from income tax
because that is an exclusion under Section 32B1, it is payable upon the death of the insured regardless of
who is the beneficiary and regardless of whether the appointment of the beneficiary is revocable or
irrevocable, regardless of the payment must be lump sum, amortization or installment. That does not
matter. The only requirement is that it is payable upon the death.
Q: If it is payable within the specific period of time like ten years after the ten years the contract matures,
the insured will be paid now but he is still alive kicking, is the proceed of the life insurance exempt?
A: The one to be exempt here is only the equivalent of the return of the premium, which means to say if the
premium paid is one hundred thousand and he received one million after ten years, what should be exempt
is up to one hundred thousand. The remaining one hundred thousand is subject to income tax.
Suppose it is under Section 32B1, when it is payable upon the death, the entire one million is exempt.
However in Section 32B1 there is a proviso which says if the insurer held the proceeds and earned interest,
that interest is no longer exempt.
Q: Is it subject to VAT? Percentage tax?
A: According to section 108A, if it is subject to VAT if it is non-life insurance because if it is a life insurance, it
is subject to percentage under Sec. 123 of the tax code.

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As a rule, if a business is subject to VAT, it is exempt from percentage tax or vice versa.
In one BIR ruling, the BIR prompted to impose VAT to movie houses claiming it is sale of services. However,
the BIR failed to see the old law and the new law that IF A BUSINESS IS SUBJECT TO PERCENTAGE TAX, IT IS
NO LONGER SUBJECT TO VAT or vice versa. Movie houses are subject now to amusement tax under Section
125 but that is a percentage tax because it is under Title V of the tax Code.
We go Section 85 F; prior interest.
(F) Prior Interests. - Except as otherwise specifically provided therein,

Subsections (B), (C) and (E) of this Section shall apply to the transfers, trusts,
estates, interests, rights, powers and relinquishment of powers, as severally
enumerated and described therein, whether made, created, arising, existing,
exercised or relinquished before or after the effectivity of this Code.
This is no longer important. This is about the codification in 1939 when our parents were not yet born! If
today is is 1941, that is important. It says that item about paragraph B, C, and E transfer in contemplation
of death, revocable transfer and proceeds of life insurance whether it happened before and after the
codification of this law in 1939 we have to include that in the gross estate. However, today is 2006, it is not
material anymore.
We go to Section 85G.
(G) Transfers of Insufficient Consideration. - If any one of the transfers,

trusts, interests, rights or powers enumerated and described in Subsections (B),
(C) and (D) of this Section is made, created, exercised or relinquished for a
consideration in money or money's worth, but is not a bona fide sale for an
adequate and full consideration in money or money's worth, there shall be
included in the gross estate only the excess of the fair market value, at the time of
death, of the property otherwise to be included on account of such transaction,
over the value of the consideration received therefor by the decedent.
We have to correlate with Section 100. Both provisions are entitled transfer for less than the adequate
consideration What about Section 100? The value is subject to donors tax. For instance, a property was
transferred for 600K the value of which is 1 Million. There is a difference of four hundred thousand is
subject to donors tax under section 100. This was asked in 1999 bar.
Section 85G is entitled for less than the adequate consideration, using the same example, the balance of
four hundred thousand is subject to estate tax.
Q: Do we apply simultaneously the estate and donors tax for transfer for less than the adequate
consideration?
A: No. we dont impose estate tax and donors tax for transfer less than the adequate consideration.

PUP COLLEGE OF LAW
We have to determine the motive of the transfer of property for less than the adequate consideration. If the
motive of the transfer is impending death, the balance of four hundred thousand shall be subject to estate
tax. If the motive of the transferor is to donate the property, then it will be subject to donors tax.
1999 BAR
Q: A parcel of land located in Manila worth one million was transferred by the owner, seller for seven
hundred thousand because the buyer is a relative. Do we impose the donors tax in the above mentioned
fact?
A: we do not say it depends because the facts say that the buyer is a relative. Under Section 100, the
donors tax will be applied for transfer less than adequate consideration but it must be other than the real
property mentioned in Section 24D1` (there is no section 24D, it immediately started with 24D1).
Section 24D1 mentioned about a real property located in the Philippines which is a capital asset.
We have to determine whether it is a capital asset or not because if it is a capital asset and located in the
Philippines, Section 100 says that the donors tax do not apply. If the realty is one mentioned in 24D1, the
tax under the NIRC to be applied is the FIT of 6% as erroneously known as capital gains tax. Section 24D1
says this tax is applicable to the sale, barter or exchange or other modes of acquisition, which includes this
one.
Q: Will the answer be the same if the subject matter of the sale is not a parcel of land but shares of stock?
A: Under Section100, it could be any kind of property; real personal, tangible or intangible, movable or
immovable so long it is not the one mentioned under Section 24D1, meaning it is not a real property located
in the Philippines which is a capital asset.
Q: Do we apply if the property is a real property?
A: Yes. If it is an ordinary asset.
Q: What are the properties subject of the donors tax under Section 100?
A: Any kind of property, personal, immovable, provided it is not the one mentioned under Section 24D1.
Q: What about Section 85G?
A: We have the same rule. Any kind of property, real or personal, tangible or intangible provided it is the
one mentioned under Section 85B, C and D.
Q: Suppose the transaction for transfer of a property for less than the consideration is a sale in good faith
or a bona fide sale, does estate tax apply?
A: The estate tax do not apply although it is a transfer for less than the consideration because of Section
85G says. Except in bonafide sale, meaning sale in good faith.
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Q: In Section 100, is that a defense?
A: No. The phrase except in bonafide sale is not present. Even if it is in good faith, the doors tax shall be
applied
We go to Section 85H. We have to correlate this Section to 86C.
(H) Capital of the Surviving Spouse. - The capital of the surviving

spouse of a decedent shall not, for the purpose of this Chapter, be deemed a
part of his or her gross estate.
This section violates the rules of literature in paragraphing because Section 85 says the following are
included yet paragraph H says not included!
First we must correct certain misconception here. We must make an annotation that the capital here is used
in its generic sense to include paraphernal property.
This provision and Section 86C applies only to legally married. Suppose the decedent is a single, this section
has nothing to do with him. Also if the decedent is not legally married, this proviso also not applies.
Section 85H speaks of separate property of the surviving spouses which could be either paraphernal or
capital. Section 86C speaks of the shares of the surviving spouse if the absolute community of property or
any forms of marriage settlement.
Q: In these properties, separate property of the surviving spouse and shares in the marriage settlement
are these properties subject to estate tax?
A: In both cases. These are exempt. In Section 85H, it is exempt because it will not be included in the gross
estate. The second one, under 86C, it is also exempt. Although it is included in the gross estate, later on it
will be deducted. Hence, gross minus deduction, ultimately it is also exempt.
Q: What is the relevance in including these sections in the enumerations?
A: The relevance are the following:
1. To determine if the estate is exempt under Section 86B1a; the Two Hundred pesos and the 5%.
The basis here is the gross value, meaning, before deduction, hence it is before deduction, it
should be included.
2. For informing the BIR the net of a person under Section 89, the gross value but below 20K,
hence it must be included.
3. Under Section 90A, the minimum requirement for filing the return is the gross value of the
estate which should be at least 200K pesos;

PUP COLLEGE OF LAW
4. The certification of the CPA where the gross value of the estate exceeds two million pesos.
Remembering all these provisions, all of these speak of the gross value, meaning it is before deduction the
shares inherited already included unlike the shares of separate property of the surviving spouse is
automatically not included in the state.
Section 86A, B. C,D and E are deductions, we have to determine whether the decedent is taxpayer
belongs to Section 86A or belongs to Section 86b, We speak only four individual here.
We have three under A, First the RC because he is not only a citizen but also a resident. Second the NRC
because he is a citizen, the RA because he is a resident.
Under B, we only have one; the NRA.
Q: What is the relevance of determining the same?
A: If the decedent taxpayers belong to Section 86B, the deductions provided in section 86A4,5, 6 and 7,
the family homes, standard deductions, hospitalization and the medical expenses and retirement pay
under RA 4917 are not allowed to be claimed as deduction.
SEC. 86. Computation of Net Estate. - For the purpose of the tax imposed in this
Chapter, the value of the net estate shall be determined:
(A) Deductions Allowed to the Estate of Citizen or a Resident. - In the case of a

citizen or resident of the Philippines, by deducting from the value of the gross estate -
(1) Expenses, Losses, Indebtedness, and taxes. - Such amounts:
(a) For actual funeral expenses or in an amount equal to five percent (5%) of
the gross estate, whichever is lower, but in no case to exceed Two hundred
thousand pesos (P200,000);
We start with Section 86A1a-e, expenses, losses and indebtedness.
The first one is funeral expense; actual funeral expense not exceeding 200K pesos or 5% of the gross value of the
estate. It is possible that actual expenses value is one hundred thirty thousand pesos, yet it may be disallowed if it
exceeds 5% of the gross value of the estate the die now pay later scheme.
Q: What are funeral expenses under RR 2-2003?
A; Wearing apparel, food and drinks lodges expenses to communicate to their friends and relatives
Q: Is the deduction for death anniversary included in the expense?
A: No. under RR 2-2003, all funeral expenses must be incurred before the burial. Expenses for death
anniversary, it necessary follows that THE DECEDENT WAS ALREADY BURRIED,
(b) For judicial expenses of the testamentary or intestate proceedings;

PUP COLLEGE OF LAW
The requirement is under the tax code is that it must be under judicial proceeding. Under RR it is also a
judicial settlement
FAJUNAR V. CIR, 358 SCRA 666
The administrator was trying to claim extrajudicial expenses for the settlement of estate before the RDO in
Dumaguete City. Under section 86A1b under RR 2-2003, with regard to settlement for extra judicial
settlement of estate, the requirement both under the tax Code and the RR is that it must be pursuant to
judicial settlement. When the case reached the SC, the court sustained the contention of Fajunar. It must
be allowed, because this law was copied from US, in which it allows claim.
Hence, the rule now is that claims of expenses under both cases, it should ne allowed. Under judicial
settlement invoke the provision of tax law, for extra-judicial, invoke the Fajunar case.
(c) For claims against the estate: Provided, That at the time the indebtedness
was incurred the debt instrument was duly notarized and, if the loan was
contracted within three (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;
Q: who is the decedent under D and under C?

A: Under C, the decedent is the debtor; in letter D it is the creditor.
Q: Are the requirements the same?

A: No. in the contract of loan (Letter C), the requirements must be;
1. The contract of loan must be evidence by a written instrument duly notarized;
2. If the decedent dies within 3 years, it is necessary that the administrator or executor submit a
statement showing the disposition of the proceeds of the loan, presupposing that the loan is
included in the gross estate to be deductible;
3. Under RR 2-2003, the additional requirement if the decedent is the debtor the creditor,
whether a corporation, partnership or individual, shall execute a certification certifying to the
effect that indeed the decedent debtor is the debtor of the creditor.
(d) For claims of the deceased against insolvent persons where the value of
decedent's interest therein is included in the value of the gross estate; and
Decedent is the creditor. No further requirement under RR and the tax code, only requirement is
that the amount of claim must be included in the gross estate.
(e) For unpaid mortgages upon, or any indebtedness in respect to, property
where the value of decedent's interest therein, undiminished by such mortgage
or indebtedness, is included in the value of the gross estate, but not including
any income tax upon income received after the death of the decedent, or
property taxes not accrued before his death, or any estate tax. The deduction
herein allowed in the case of claims against the estate, unpaid mortgages or any
indebtedness shall, when founded upon a promise or agreement, be limited to
the extent that they were contracted bona fide and for an adequate and full
consideration in money or money's worth. There shall also be deducted losses
incurred during the settlement of the estate arising from fires, storms,
PUP COLLEGE OF LAW
shipwreck, or other casualties, or from robbery, theft or embezzlement, when

such losses are not compensated for by insurance or otherwise, and if at the
time of the filing of the return such losses have not been claimed as a deduction
for the income tax purposes in an income tax return, and provided that such
losses were incurred not later than the last day for the payment of the estate tax
as prescribed in Subsection (A) of Section 91.
Under this, there are three (30 deductions, namely;
1. Mortgage indebtedness; - decedent here is the mortgagor

2. Accrued taxes; and
3. Losses by virtue of natural calamity
DISCUSSIONS:
1. Mortgage indebtedness; - decedent here is the mortgagor who happens to be in the

ordinary parlance, the debtor, but the requirements for the debtor under letter C do not
apply here. The only requirement is that the value of the mortgage property must be
included in the gross estate undiminished of the mortgage. So if the property is valued at
1M and mortgage by 400K, what should be included in the gross estate in order to claim
deduction is the entire 1M, because the law says undiminished meaning without
deducting the mortgage indebtedness.
Should the decedent is the mortgagee, because not in all cases, the decedent or the
mortgagee is always a bank, sometimes it is also an individual. There is no SC ruling yet.
But can it be claimed under letter B because he is also a creditor? Perhaps, but applying
the strict interpretation of tax exempting statute, Balbas thought that it will not be
allowed here, because exemption should be strictly construed. Since there is no provision
that if the decedent is a mortgagee, the indebtedness should also be a deduction. No
there is no such thing. However, although we are saying that, that should not be allowed.
In applying liberal interpretation of the law that can be allowed. Hence, the issue is
debatable depending on your argument.
2. Accrued taxes
Q: is estate tax the one referred here?

A: No. These are taxes that accrued before the death of the decedent. Example of which
is a Real property tax which accrues every January.
3. Losses by virtue of natural calamity Under section 34D, there 2 kinds of losses there.
But not all of them could be deducted under estate tax. What can be deducted under
estate tax is losses by virtue of natural calamity. However before it can be claimed, there
are requirements, such as;
1. It must not be claimed as a deduction under income tax;

2. It must not be compensated by any insurance or any other forms of indemnification;
and\
3. Losses by virtue of natural calamity must be claimed within the period of six (6)
months from the death of the decedent. ( sec 91 par. A)
PUP COLLEGE OF LAW
VANISHING DEDUCTIONS:
(2) Property Previously Taxed. - An amount equal to the value specified below of any
property forming a part of the gross estate situated in the Philippines of any person who died
within five (5) years prior to the death of the decedent, or transferred to the decedent by gift
within five (5) years prior to his death, where such property can be identified as having been
received by the decedent from the donor by gift, or from such prior decedent by gift, bequest,
devise or inheritance, or which can be identified as having been acquired in exchange for
property so received:
One hundred percent (100%) of the value, if the prior decedent died within one (1) year prior
to the death of the decedent, or if the property was transferred to him by gift within the same
period prior to his death;
Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not
more than two (2) years prior to the death of the decedent, or if the property was transferred
to him by gift within the same period prior to his death;
Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not
more than three (3) years prior to the death of the decedent, or if the property was
transferred to him by gift within the same period prior to his death;
Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not
more than four (4) years prior to the death of the decedent, or if the property was transferred
Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but
not more than five (5) years prior to the death of the decedent, or if the property was
transferred to him by gift within the same period prior to his death;
These deductions shall be allowed only where a donor's tax or estate tax imposed under this
Title was finally determined and paid by or on behalf of such donor, or the estate of such
prior decedent, as the case may be, and 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 only to the extent that the value of such property is included in the decedent's gross
estate, and only if in determining the value of the estate of the prior decedent, no deduction
was allowable under paragraph (2) in respect of the property or properties given in exchange
therefor. Where a deduction was allowed of any mortgage or other lien in determining the
donor's tax, or the estate tax of the prior decedent, which was paid in whole or in part prior
to the decedent's death, then the deduction allowable under said Subsection 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 allowed as deductions under paragraphs (1) and (3) of this
Subsection as the amount otherwise deductible under said paragraph (2) bears to the value
of the decedent's 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.

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Q: Is vanishing deduction return a deduction under?

A: Gross estate
Q: What is a vanishing deduction return?

A: Elements:
1. It is an instance where the tax payer acquired a property by virtue of inheritance or donation
(ONLY!)
2. Tax payer must be an individual (ONLY !)
3. Person who acquires the property must die within a period of 5 years. ( If he did not die vanishing
deduction return is not applicable)
th
If he die during the 5 year - 20% of the property is deduction
th
If he die during the 4 year - 40%
rd
nd
st
Provided all the elements are present and provided further that the estate or donors tax is already
paid, otherwise, this will not be allowed.
Q: Suppose the person who inherited the property died and the property was inherited by the son
and subsequently he died, is vanishing deduction return allowed?
A: No. It is no longer a deduction.
(3) Transfers for Public Use. - The amount of all the bequests, legacies, devises or transfers to or for the
use of the Government of the Republic of the Philippines, or any political subdivision thereof, for
exclusively public purposes.
Where the transferee is the Republic of the Philippines or any political subdivision thereof, the
requirement must be for PUBLIC PURPOSE to be a deduction.
(4) The Family Home. - An amount equivalent to the current fair market value of the decedent's
family home: Provided, however, That if the said current fair market value exceeds One million pesos
(P1,000,000), the excess shall be subject to estate tax. As a sine qua non condition for the exemption or
deduction, said family home must have been the decedent's family home as certified by the barangay
captain of the locality.
The requirement for family home to be a deduction under Revenue Regulation is that it must be
the actual residence of the decedent. The Principle under election law is not applicable (animus
revertendi). Hence, it follows that Non-resident are included but since they do not have permanent
residence here, this deduction is not allowed. This deduction is married individual only. To single
individuals this is not allowed except if he is a head of the family.
(5) Standard Deduction. - An amount equivalent to One million pesos (P1,000,000).
Dont mistake this as optional standard. Standard deduction both under the tax code and revenue
regulation do not require any element at all. This deduction is automatic.

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(6) Medical Expenses. - Medical Expenses incurred by the decedent within one (1) year prior to
his death which shall be duly substantiated with receipts: Provided, That in no case shall the deductible
medical expenses exceed Five Hundred Thousand Pesos (P500,000).
Q: A person was hospitalized for 2 years. After 2 years he died. The family spent P 400, 000. If you
were the administrator, will you allow the P 400K to be claimed?
A: No. because it was incurred after 2 years prior to the death of the decedent.
(7) Amount Received by Heirs Under Republic Act No. 4917. - Any amount received by the heirs
from the decedent - employee as a consequence of the death of the decedent-employee in accordance
with Republic Act No. 4917: Provided, That such amount is included in the gross estate of the decedent.
Here, we refer to the retirement benefit granted by private corporations with benefit plan
approved by BIR. Do not have the notion that all retirement pay is included. Only under RA No.
4917 is allowed.
(B) Deductions Allowed to Nonresident Estates. - In the case of a nonresident not a citizen of the
Philippines, by deducting from the value of that part of his gross estate which at the time of his death is
situated in the Philippines:
(1) Expenses, Losses, Indebtedness and Taxes. - That proportion of the deductions specified in
paragraph (1) of Subsection (A) of this Section which the value of such part bears to the value
of his entire gross estate wherever situated;
(2) Property Previously Taxed. - An amount equal to the value specified below of any
property forming part of the gross estate situated in the Philippines of any person who died
within five (5) years prior to the death of the decedent, or transferred to the decedent by gift
within five (5) years prior to his death, where such property can be identified as having been
received by the decedent from the donor by gift, or from such prior decedent by gift, bequest,
devise or inheritance, or which can be identified as having been acquired in exchange for
property so received:
One hundred percent (100%) of the value if the prior decedent died within one (1) year prior
to the death of the decedent, or if the property was transferred to him by gift, within the same
period prior to his death;
Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not
more than two (2) years prior to the death of the decedent, or if the property was transferred
Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not
more than three (3) years prior to the death of the decedent, or if the property was transferred
Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not
more than four (4) years prior to the death of the decedent, or if the property was transferred
to him by gift within the same period prior to his death; and
Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not
more than five (5) years prior to the death of the decedent, or if the property was transferred
to him by gift within the same period prior to his death.
These deductions shall be allowed only where a donor's tax, or estate tax imposed under this
Title is finally determined and paid by or on behalf of such donor, or the estate of such prior

PUP COLLEGE OF LAW
decedent, as the case may be, and 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
only to the extent that the value of such property is included in that part of the decedent's
gross estate which at the time of his death is situated in the Philippines; and only if, in
determining the value of the net estate of the prior decedent, no deduction is allowable under
paragraph (2) of Subsection (B) of this Section, in respect of the property or properties given
in exchange therefore. Where a deduction was allowed of any mortgage or other lien in
determining the donor's tax, or the estate tax of the prior decedent, which was paid in whole
or in part prior to the decedent's death, then the deduction allowable under said paragraph
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 allowed as deductions under paragraphs
(1) and (3) of this Subsection as the amount otherwise deductible under paragraph (2) bears to
the value of that part of the decedent's gross estate which at the time of his death is situated in
the Philippines. Where the property referred to consists of two (2) or more items, the
aggregate value of such items shall be used for the purpose of computing the deduction.
(3) Transfers for Public Use. - The amount of all bequests, legacies, devises or transfers to or
for the use of the Government of the Republic of the Philippines or any political subdivision
thereof, for exclusively public purposes.
NOTE. If the decedent taxpayers belong to Section 86B, the deductions provided in section 86A4,5, 6 and
7, the family homes, standard deductions, hospitalization and the medical expenses and retirement pay
under RA 4917 are not allowed to be claimed as deduction.
Deduction under deductions specified in paragraph (1) of Subsection (A) are also allowed to Non-
residents.
(C) Share in the Conjugal Property. - the net share of the surviving spouse in the conjugal
partnership property as diminished by the obligations properly chargeable to such property shall, for the
purpose of this Section, be deducted from the net estate of the decedent.
We are through with section 86C when we discussed Section 85F.
We go Section 86 D.
(D) Miscellaneous Provisions. - No deduction shall be allowed in the case of a

nonresident not a citizen of the Philippines, unless the executor, administrator, or anyone of
the heirs, as the case may be, includes in the return required to be filed under Section 90 the
value at the time of his death of that part of the gross estate of the nonresident not situated
in the Philippines.
This is very important. With respect to non-resident alien, the decedent, under section 85 and 105, his
estate is only liable with regard to property deemed located in the Philippines. For property outside the
Philippines, the estate is exempt.
Remember the rule about non resident alien decedent; only the property deemed located in the Philippines
shall be subject to tax.
However, under Section 86D, in the filing of the estate tax return all of his property anywhere located shall
be included in the state tax return to be allowed only of a deductions because it says that non-resident and
not citizens of the Philippines, hence, they must be non-resident alien.
PUP COLLEGE OF LAW
Q: The decedent is a non-resident alien, if you will be the administrator, are you going to include all
properties of the decedent including those outside the Philippines in filing the estate tax return? Are all of
these properties subject to estate tax?
A: Yes. All of the properties anywhere located shall be included in the filing of the return. However, only
those located in the Philippines are subject to estate tax.
We do not say that only those properties located in the Philippines are those included in the Filing of estate
tax return. This rule applies only to estate tax but not in FIT, income tax, donors tax or any other tax.
Remember that under the estate tax, the question as to whether the property is included in the filing of
return or it is subject to estate tax, the rule is different because of Section 86D.
We go to Section 86E.
(E) Tax Credit for Estate Taxes paid to a Foreign Country.
(1) In General. - The tax imposed by this Title shall be credited with the amounts of
any estate tax imposed by the authority of a foreign country.
(2) Limitations on Credit. - The amount of the credit taken under this Section shall
be subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid to any country shall not
exceed the same proportion of the tax against which such credit is taken, which the
decedent's net estate situated within such country taxable under this Title bears to
his entire net estate; and
(b) The total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken, which the decedent's net estate situated outside
the Philippines taxable under this Title bears to his entire net estate.
When we reached 34C4, this is the estate tax paid in a foreign country. It will constitute under the formula
as a tax credit. Hence, this shall be deducted at the bottom of the formula.
We go Section 87; Deductions;
SEC. 87. Exemption of Certain Acquisitions and Transmissions. - The following

shall not be taxed:
(A) The merger of usufruct in the owner of the naked title;
This refers to contract of usufruct terminated by death. There is no conflict with Section 88 because
that refers to contract of usufruct with fixed period, in which case the value must be determined
because it will be inherited by the heirs.
Under section 87A, when the usufructuary, the use of the property should be returned to the naked owner
and it is exempt from estate tax.

PUP COLLEGE OF LAW
Q: Is there a conflict with these provisions?
None. Section 88A is about us usufruct with fixed period of time.
For example the usufruct is for 2 years and before 2 years the usufructuary die, the use of the property will
not be returned to the naked owner but to the heirs of the decedent and the controlling provision is Section
88A. WE HAVE TO DETERMINE THE VALUE OF THE USUFRCUT BECAUSE IT WILL BE INHERITED BY THE HEIR
AND IT WILL BE SUBJECT TO ESTATE TAX.
(B) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee
to the fideicommissary;
(C) The transmission from the first heir, legatee or donee in favor of another beneficiary, in
accordance with the desire of the predecessor; and (still a transfer similar to a
fideicommisary)
(D) All bequests, devises, legacies or transfers to social welfare, cultural and charitable
institutions, no part of the net income of which insures to the benefit of any individual:
Provided, however, That not more than thirty percent (30%) of the said
bequests, devises, legacies or transfers shall be used by such institutions for
administration purposes.
SEC. 88. Determination of the Value of the Estate. -
(A) Usufruct. - To determine the value of the right of usufruct, use or habitation, as well as
that of annuity, there shall be taken into account the probable life of the beneficiary in
accordance with the latest Basic Standard Mortality Table, to be approved by the
Secretary of Finance, upon recommendation of the Insurance Commissioner.
We go to section 88B.
(B) Properties. - The estate shall be appraised at its fair market value as of the time of death.
However, the appraised value of real property as of the time of death shall be, whichever is
higher of:
(1) The fair market value as determined by the Commissioner, or

(2) The fair market value as shown in the schedule of values fixed by the Provincial and City
Assessors.
The first sentence is about personal property because the subsequent paragraph discusses about the real
property. It is the fair market value of the estate at the time of the decedent. Underscore the word at the
time of death
In addition, we have RR 2-2003; we have the value of the shares of stock. We have to determine whether
the stock is listed or not in the local stock exchange. For Not listed, unlisted preferred share- basis shall be
the book value for preferred common share it shall be the par value.
Q: The decedent died in 1995. In 2001, the BIR assessed the estate where the personal property, maybe
jewelries and shares of stock, is worth ten million pesos but at the time of death of the decedent it is only
three million. Is the assessment of the BIR correct?

PUP COLLEGE OF LAW
A: No. The assessment is wrong; It should be assessed at the time of the decedent.
Underscore the word at the time of death under this section.
Q: How do we determine the value of the real property for purposes of estate tax?
A: The value is determined by the CIR or the provincial or the city assessor whichever is higher.
We have to remember that because we have the same rule for estate and donors tax under Section 102
and his provision is only being referred to Section 88B and this refers to the determination of the value of
the property.
We go to Section 89; notice of death.
SEC. 89. Notice of Death to be Filed. - In all cases of transfers subject to tax, or where,
though exempt from tax, the gross value of the estate exceeds Twenty thousand
pesos (P20,000), the executor, administrator or any of the legal heirs, as the case may be,
within two (2) months after the decedent's death, or within a like period after
qualifying as such executor or administrator, shall give a written notice thereof
to the Commissioner.
Q: If we are the administrator, executor or the heir, do we always notify the BIR of the death o f the
person?
A: No. The law says the gross value, meaning before deductions, of the estate exceeds 20K pesos and within
2 months, we have to inform the BIR.
Q: Suppose the net estate is 11K, do you notify the BIR is writing?
A: Yes, if the net estate is 11K, it follows necessary that the gross value is several millions because of so
many deductions, like family home, funeral expense, standard deduction and etc
We go to Section 90.
SEC. 90. Estate Tax Returns.
(A) Requirements. - In all cases of transfers subject to the tax imposed herein, or where,
though exempt from tax, the gross value of the estate exceeds Two hundred thousand pesos
(P200,000), or regardless of the gross value of the estate, where the said estate consists of
registered or registrable property such as real property, motor vehicle, shares of stock or other
similar property for which a clearance from the Bureau of Internal Revenue is required as a
condition precedent for the transfer of ownership thereof in the name of the transferee, the
executor, or the administrator, or any of the legal heirs, as the case may be, shall file a return
under oath in duplicate, setting forth:
(1) The value of the gross estate of the decedent at the time of his death, or in case of a
nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the
Philippines;
(2) The deductions allowed from gross estate in determining the estate as defined in Section
86; and

PUP COLLEGE OF LAW
(3) Such part of such information as may at the time be ascertainable and such supplemental
data as may be necessary to establish the correct taxes.
Provided, however, That estate tax returns showing a gross value exceeding Two million pesos
(P2,000,000) shall be supported with a statement duly certified to by a Certified Public
Accountant containing the following:
(a) Itemized assets of the decedent with their corresponding gross value at the time of his
death, or in the case of a nonresident, not a citizen of the Philippines, of that part of his
gross estate situated in the Philippines;
(b) Itemized deductions from gross estate allowed in Section 86; and
(c) The amount of tax due whether paid or still due and outstanding.
Q: If you are the executor, do you always file a return? What are the requirements?
A: The law says the gross value of the estate should exceed 200, 000 pesos. The administrator should file a
return.
Q: If the gross estate is 200 Hundred thousand pesos, is the estate liable for tax?
A: No, because of so many deductions, most probably the net estate will be zero.
RULE :
1. If the gross value is less than 200K, as a rule, we do not have to file a return except if the property
consists of registrable property like shares of stock, parcel of land or motor vehicle.
NOTE : If the gross value of the estate is Less than 200K but it consists of registrable properties, a
return is necessary.
2. In addition if the gross value of the estate exceeds 2M, it needs a certification of the CPA.
We will notice whether it is 20 thousand, 200 thousand or 2 million, it is always the gross estate, meaning
before deductions.
Q: What if the gross estate is 2M pesos, is the estate liable to pay estate tax especially if the estate
belongs to section 86A?
A: No. we have the same reason because of too many deductions. Standard deduction is already 1M, if
other deductions will be included, most probably the estate will be zero.
Q: Where do we file estate tax return and pay the tax?
A: We pay and file the return to the RDO, if there is none, to the authorized banks, if there is none to the
City or Municipal Treasurer.
Q: Suppose the decedent is not staying in the Philippines, where does the administrator file the return?

PUP COLLEGE OF LAW
A: It will be to the Office of the CIR in Diliman, Quezon City
Q: Can file an extension for filing the return?
A: Yes. But not more than 30 days.
We go to section 91.
SEC. 91. Payment of Tax.
(A) Time of Payment. - The estate tax imposed by Section 84 shall be paid at the time the
return is filed by the executor, administrator or the heirs.
(B) Extension of Time. - When the Commissioner finds that the payment on the due date of
the estate tax or of any part thereof would impose undue hardship upon the estate or any of the
heirs, he may extend the time for payment of such tax or any part thereof not to exceed five (5)
years, in case the estate is settled through the courts, or two (2) years in case the estate is
settled extrajudicially. In such case, the amount in respect of which the extension is granted
shall be paid on or before the date of the expiration of the period of the extension, and the
running of the Statute of Limitations for assessment as provided in Section 203 of this Code
shall be suspended for the period of any such extension.
Where the taxes are assessed by reason of negligence, intentional disregard of rules and
regulations, or fraud on the part of the taxpayer, no extension will be granted by the
Commissioner.
If an extension is granted, the Commissioner may require the executor, or administrator, or

beneficiary, as the case may be, to furnish a bond in such amount, not exceeding double the
amount of the tax and with such sureties as the Commissioner deems necessary, conditioned
upon the payment of the said tax in accordance with the terms of the extension.
(C) Liability for Payment. - The estate tax imposed by Section 84 shall be paid by the
executor or administrator before delivery to any beneficiary of his distributive share of the
estate. Such beneficiary shall to the extent of his distributive share of the estate, be
subsidiarily liable for the payment of such portion of the estate tax as his distributive share
bears to the value of the total net estate.
For the purpose of this Chapter, the term "executor" or "administrator" means the executor or
administrator of the decedent, or if there is no executor or administrator appointed, qualified,
and acting within the Philippines, then any person in actual or constructive possession of any
property of the decedent.
We follow here the pay as you file system, meaning. We file the return and pay at the same time. We will
notice here that the date of the payment of tax is also within 6 months. That is the same with Section 90C.
Q: What about the payment of estate tax, can it be extended?
A: It depends, if the partition is judicial or extrajudicial.
1. For judicial, it should not exceed 5 years;

2. For extra judicial, it should not exceed two years.

PUP COLLEGE OF LAW
In the event that the extension to pay the tax is granted, the law requires that the executor or
administrator should file a bond not more than twice the value of the estate tax.
The primary liability to pay the tax devolves upon the executor or the administrator, but please takes note
that it is not in his personal capacity, it is in behalf of the estate. Hence, he must be reimbursed.
The subsidiary liability to pay the tax falls upon the heirs. Take note that the law is very clear about it,
meaning if the administrator fails to pay, the heir is now liable.
2001 BQ
Q: Is the liability of the heir joint or solidary?
A: It is joint; section 91C says the liability of the heir to pay the tax is only up to the extent of their shares.
Because of that, the liability of the heir should be considered joint.
We go to Section 92; discharge.
SEC. 92. Discharge of Executor or Administrator from Personal Liability. - If the

executor or administrator makes a written application to the Commissioner for determination
of the amount of the estate tax and discharge from personal liability therefore, the
Commissioner (as soon as possible, and in any event within one (1) year after the making of
such application, or if the application is made before the return is filed, then within one (1)
year after the return is filed, but not after the expiration of the period prescribed for the
assessment of the tax in Section 203 shall not notify the executor or administrator of the
amount of the tax. The executor or administrator, upon payment of the amount of which he is
notified, shall be discharged from personal liability for any deficiency in the tax thereafter
found to be due and shall be entitled to a receipt or writing showing such discharge.
If we are an executor or administrator and we want to be relieved of the liability to pay the estate tax, the
proper procedure is to write the BIR in writing asking him to determine now the estate tax so that we are
going to pay the estate tax as an executor or administrator. We have to do that in one year from the filing
of the return; if there is no return yet; one year from the application.
We go to Section 93; deficiency assessment. We are through here when we reached Section56B.
SEC. 93. Definition of Deficiency. - As used in this Chapter, the term "deficiency"
means:
(a) The amount by which the tax imposed by this Chapter exceeds the amount shown as the
tax by the executor, administrator or any of the heirs upon his return; but the amounts so
shown on the return shall first be increased by the amounts previously assessed (or collected
without assessment) as a deficiency and decreased by the amount previously abated,
refunded or otherwise repaid in respect of such tax; or
(b) If no amount is shown as the tax by the executor, administrator or any of the heirs upon
his return, or if no return is made by the executor, administrator, or any heir, then the
amount by which the tax exceeds the amounts previously assessed (or collected without
assessment) as a deficiency; but such amounts previously assessed or collected without
assessment shall first be decreased by the amounts previously abated, refunded or otherwise
repaid in respect of such tax.

PUP COLLEGE OF LAW
We go to section 94. In this section, if the judgment will distribute the properties to the heir, the judge
holding the settlement of the estate. The requirement is that the judge should require the presentation of
the certificate of payment of the estate tax. We dont present the receipt only. In addition, we have to
present a certification in the nature of an affidavit signed by the BIR that in reality the estate tax has been
paid already plus the receipt of payment. That is the certificate of payment.
SEC. 94. Payment Before Delivery by Executor or Administrator. - No

judge shall authorize the executor or judicial administrator to deliver a distributive
share to any party interested in the estate unless a certification from the
Commissioner that the estate tax has been paid is shown.
MARCOS V. SANDIGANBAYAN, 273 SCRA 47
The issue is whether or not the consent of the judge holding the settlement of the estate necessary before
the Bir could claim the payment of estate tax.
The SC said the consent of the judge is not necessary for the simple reason that the function of the judge is
different from that of a BIR .
SEC. 95. Duties of Certain Officers and Debtors. - Registers of Deeds shall not register
in the Registry of Property any document transferring real property or real rights therein or
any chattel mortgage, by way of gifts inter vivos or mortis causa, legacy or inheritance, unless
a certification from the Commissioner that the tax fixed in this Title and actually due thereon
had been paid is show, and they shall immediately notify the Commissioner, Regional
Director, Revenue District Officer, or Revenue Collection Officer or Treasurer of the city or
municipality where their offices are located, of the non payment of the tax discovered by them.
Any lawyer, notary public, or any government officer who, by reason of his official duties,
intervenes in the preparation or acknowledgment of documents regarding partition or
disposal of 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 the place where he may have his principal office, with copies of such
documents and any information whatsoever which may facilitate the collection of the
aforementioned tax. Neither shall a debtor of the deceased pay his debts to the heirs, legatee,
executor or administrator of his creditor, unless the certification of the Commissioner that the
tax fixed in this Chapter had 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.
We go to Section 95; persons who are obliged to inform of the BIR of certain acts or execution of the
documents which tends to prove the payment of the estate tax. For instance, we are a notary public who
notarized the extra judicial partition, an attorney who filed a pleading for the settlement of the estate, a
cadastral surveyor who partitioned the property. We have to inform the BIR.
We go to Section 97; it speaks of a decedent who has a bank accounts.
SEC. 97. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights.
- There shall not be transferred to any new owner in the books of any corporation, sociedad
anonima, partnership, business, or industry organized or established in the Philippines any
share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or
inheritance, unless a certification from the Commissioner that the taxes fixed in this Title and
due thereon have been paid is shown.

PUP COLLEGE OF LAW
If a bank has knowledge of the death of a person, who maintained a bank deposit account
alone, or jointly with another, it shall not allow any withdrawal from the said deposit account,
unless the Commissioner has certified that the taxes imposed thereon by this Title have been
paid: Provided, however, 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. For this purpose, all
withdrawal slips shall contain a statement to the effect that all of the joint depositors are still
living at the time of withdrawal by any one of the joint depositors and such statement shall be
under oath by the said depositors.
The requirement that the executor, administrator or the heir must be allowed to withdraw the money, they
have to present again the certification of payment of estate tax, not only the receipt, but also the
certification from the BIR officer that in reality the estate tax has been paid. It is same requirement under
Section 94.
There is an exception here. The banks, even without payment of estate tax or presentation of certificate of
payment, they allow the withdrawal of not exceeding 20K. Of course, that it is not enough to cover the
funeral expenses.
However, if the bank account is checking account, there is a remedy, but this is illegal and also immoral. Text
me if you want to know.
DONORS TAX
SEC. 98. Imposition of Tax.
(A) There shall be levied, assessed, collected and paid upon the transfer by any person,
resident or nonresident, of the property by gift, a tax, computed as provided in Section
99.
(B) 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.
In donors tax, we say that there are six (6) kinds of taxpayers. Section 104 is applicable also in this section.
This is governed by sections 98 to 104. With regard to classification of taxpayers under donors tax there
six. We ought to know the formula for appreciation and easy understanding.
FORMULA:
Gross Gift (section 98B)

- Deductions (Section 101A, B)
------------------------------------------------------
Net gift (taxable gift) ( do not include the first 200,000 exempt)
X rate ( 2 kinds of rates : 2-15% for relatives and flat rate of 30 for strangers )
------------------------------------------------------
Donors Tax
- Tax Credit (if any)

PUP COLLEGE OF LAW
However, we dont impose donors tax, if the net estate is 100 thousand pesos net gift; under the estate tax,
it is P 200,000. This time is only one hundred thousand. Take note, after deductions and tax credit if
any.
Tax credits are found under Section 101C which reefers to donors tax paid to a foreign country; under
Section 110B, the input tax under VAT; and Section 204, and the tax credit certificate.
Gross Gift may be real or personal, tangible or intangible.
SEC. 99. Rates of Tax Payable by Donor.
(A) In General. - The tax for each calendar year shall be computed on the basis of the total
net gifts made during the calendar year in accordance with the following schedule:
If the net gift is:
OVER BUT NOT OVER THE TAX SHALL BE PLUS OF THE EXCESS OVER
P 100,000 Exempt
P 100,000 200,000 0 2% P100,000
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
10,000,000 1,004,000 15% 10,000,000
(B) Tax Payable by Donor if Donee is a Stranger. - When the donee or beneficiary is
stranger, the tax payable by the donor shall be thirty percent (30%) of the net gifts. For the
purpose of this tax, a "stranger", is a person who is not a:
(1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant;
or
(2) Relative by consanguinity in the collateral line within the fourth degree of relationship.
Section 99 speaks of cumulative way of donating property. Cumulative means the total net gift under one
calendar year. In the Revenue regulations 2-2003, there is another way of donating property Splitting.
Hence, there are now 3 modes of donating property, to wit;
1. Donating for just once;

2. Splitting; and
3. Cumulative.
Before we explain the thing, we have to determine why there is such a thing. Under estate tax, which is
transfer tax, there is no such thing. The reason is that there are two rates of taxes under Section 99. For

PUP COLLEGE OF LAW
donees who are relatives of the donors, the rate is a progressive rate of 2% to 15%. When the donees are
strangers, meaning not a relative, the rate is flat rate of 30%.
RATIONALE:
If the rate is flat rate of 30%, you divide the donation into 2,3,4,5 up to 10 donations, the rate will always be
30. Where the done is a relative, you divide the donations into 2,3,4,5, will the rate be always be 15%? No. If
after dividing the donations, the total net gift will not exceed 10M, then splitting is now relevant because
the rate there will be either, depending on the deductions, it may be 4, 6, 8 or 10.
Q: Who are relatives here?
A: Relatives here are the brothers and sisters, whether whole or half blood, the spouse, ascendants,
th
descendants. This is the first group. The second group is the relative of consanguinity within the 4 civil
degree of relationships. These are the uncles, aunties and the nephews and nieces.
Please be reminded under Section 36B1, the second group shall not be considered a member of the family.
Although a person is a relative but he is not included in the first or second group, he is considered a
stranger. That is very important because the rate is 30%
Q: Are you allowed to use the splitting, the cumulative if the donees are relatives or not.
A: Yes, you are allowed. But, it is not relevant. The matter of splitting or cumulative is only relevant if the
donee is a relative.
Q: Why?
A: Because the rate varies depending upon the net gift and other deductions. But for a donee, which is a
stranger, it is not relevant, because the rate shall always be flat rate of 30%.
Illustrations:
RR 2-2003 explains cumulative and splitting .When we say cumulative, several donations were made in one
calendar year. One was in January 20026 and the other is May 2006 and the last is August 6. THE METHOD
OF FILING RETURN HERE IS CUMULATIVE BECAUSE GIFTS ARE MADE WITHIN A CALENDAR YEAR.
How? Under Section 103 we have to pay within 30 days, pay as you file. For May and august, we have to
include only the value of the property donated on May and August, but also those on January although the
tax was already paid there.
In splitting, two or more donations were made. In two different calendar years.
Q: if a person donated properties, one is December 2005 and the other on January 2006 should the value
of the property donated in December 2005 be included in the return covering the calendar year 0f 2006.

PUP COLLEGE OF LAW
A: No because that is splitting.
We will notice that if the donee is a stranger, we would like to clarify that splitting and cumulative applies to
both strangers and relatives. But only to the matter of splitting, cumulative or donating property only
once. It does not matter if the donee is a stranger,THE RATE OF THE TAX IS ALWAYS 30%.
To illustrate, the donation was made in January 2005, after computing the tax, it is P 7,000. The same
amount was also donated I May 2006 to a relative. But in filing of the return, the value of the property shall
not only the one donated in May but also those made in January where the tax is paid already only for the
purpose of increasing the rate.
For example, the BIR said that the tax is 17 thousand pesos for donation made in may, the taxpayer will pay
only ten thousand pesos because he has paid seven thousand.
If that is the method used, it follows that the rate of the tax will be increased because it is in a cumulative
because the computation is not only the property made in may but also those made in January where the
tax has been paid already.
Suppose using the same example using the splitting, let us say, December 2005, he pays seven thousand. In
January 2006, he again made a donation. This time it is not cumulative because it is not made in the same
calendar year. Using the same example, the tax to be paid by the taxpayer is only 14K, seven thousand for
December and seven thousand for January.
1995 BQ
Q: The donor donated a property on December 27, 1993. The second donation was made in January 1994.
The BIR said he should file a return for the cumulative because the donation is only within several days;
hence, those donated in December should be included. Is the BIR correct?
A: NO because cumulative cannot be applied simply because the donations were made in different years;
one in 1993 and the other in 1994.
2001 BQ
Q: Same facts as above. But after filing, the net gift is less than 100K because of the deductions. The other
one is below 100K pesos. This is splitting. Do we say now that the tax payer will pay less?
A: No because he is exempt from donors tax because the net gift for each donation is below one hundred
thousand pesos net gift.
Q: The donor donated to the Catholic Church 30K pesos, is it subject to donors tax?
A: No. The net gift which is less than 100K is exempt from donors tax, with more reason if the gross gift is
less than 100K pesos.

PUP COLLEGE OF LAW
Q: He donated 70K, is it subject to donors tax?
A: No. Same reason.
Q: he donated 90K to hospicio de San Jose, is it subject to donors tax?
A: No same reason.
We go to section 99C.
(C) Any contribution in cash or in kind to any candidate, political party or coalition of parties
for campaign purposes shall be governed by the Election Code, as amended.
Q: Is the donation to a political party exempt from donors tax?
A: Yes. While it is true that Section 99C did not say that whether or not it is exempt. Take note that it is
being referred in the election code. In the election code as amended in 1992, under RA 7166 Section 13, if
the donee is a candidate or a coalition of political party, the donation shall be exempt from donors tax.
Provided that it must be properly reported to the COMELEC. We have a statute that it is exempt provided
that it is duly reported to the COMELEC.
SEC. 100. Transfer for Less Than Adequate and Full Consideration. -
Where property, other than real property referred to in Section 24(D), is
transferred for less than an adequate and full consideration in money or money's
worth, then the amount by which the fair market value of the property exceeded the
value of the consideration shall, for the purpose of the tax imposed by this Chapter,
be deemed a gift, and shall be included in computing the amount of gifts made
during the calendar year.
Section 100 was discussed in Section 85G.
Note: It is wrong to say that when a property is a capital asset located in the Philippines donors tax could
not apply. Thats wrong. The prohibition applies only where the transfer is for less than an adequate
consideration. Suppose the contract is a real deed of donation, can a real property, which is a capital asset
located in the Philippines be donated? Well, Yes. What is prohibited is only for transfer less than the
adequate consideration or what we called bentahan kuno. ( Hence, capital asset located in the
Philippines can be donated and the donors tax is applicable here.)
Q: Can the donors tax be applied on the difference?
A: Of course no. it is the one mention in 24D1.
We go to 101, deductions.
SEC. 101. Exemption of Certain Gifts. - The following gifts or donations shall be
exempt from the tax provided for in this Chapter:
(A) In the Case of Gifts Made by a Resident. - (RC, RA , DC and NRC)

PUP COLLEGE OF LAW
We have to determine whether the donor belongs to Section 101 paragraph A or B. But first, we have to
determine who the six persons liable for donors tax are.
It would seem that paragraph A speaks only of one, it says resident But there are four there, only that
no. 4 is debatable and the first three is clear. First RC, RA and the DC because they are resident and the
domicile of the corporation is the Philippines, hence, they are all resident. Number 4 is NRC, he is a non
resident. However, following pattern in Section 86A, it says that NRC should also be classified under A
because under this section, it speaks of citizens and residents.
Under B, we have two: NRA and FC.
Q: what is the importance of determining whether the tax payer belongs to A or B ?
A: The requirement of deductibility where the donee is classified under Section 103A3, there are five
requirements. But if the donor is under B, the requirement is reduced to one.
(1) Dowries or gifts made on account of marriage and before its celebration or within one
year thereafter by parents to each of their legitimate, recognized natural, or adopted children
to the extent of the first Ten thousand pesos (P10,000):
Requirements for deductibility;
1. Donated at the time of the celebration of the marriage or within 1 year thereafter;
2. Must not be more than 10K;
3. Donee are the children (legitimate, recognized natural, or adopted children)
4. Donor, father mother or both
Q: A Chinese, a RA who lives in manila. He entered into a marriage contract, during the celebration of the
marriage, the father who is a permanent resident of Taiwan donated to the newlywed couple and assuming
it is 200K pesos. Is a dowry to be deemed a deduction?
A: No. the donor is NRA because the fact says he is a permanent resident of Taiwan. Since the taxpayer
belongs to B, dowry is not deductible.
Going back to section 1001A1, we have a bar question in 1989.

Q: The father of the family died. The surviving spouse entered into a marriage contract after several years
because she could no longer endure the cold mornings of November. During the celebration of the
marriage, one of the children donated a property to the mother and stepfather. Is the dowry a deductible?
A: No. Under Section 101A1, the donor should be the father or the mother or both. In the given facts, the
donor is the daughter. Hence it is not deductible.
(2) Gifts made to or for the use of the National Government or any entity
created by any of its agencies which is not conducted for profit, or to any political subdivision
of the said Government; and
We go to Section 101A2; Donation to the national government, political subdivision, agencies and
instrumentalities of the government, not conducted for profit.

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Take note of this because under section 86A3 donation to the government must be exclusively for public
purpose. Now, it says here it is not conducted for profit.
We go to section 101A3.
organization or research institution or organization: Provided, however, That not more
than thirty percent (30%) of said gifts shall be used by such donee for administration
purposes. For the purpose of the exemption, a 'non-profit educational and/or charitable
organization and/or research institution or organization' is a school, college or university
and/or charitable corporation, accredited nongovernment organization, trust or
philanthropic organization and/or research institution or organization, incorporated as a
nonstock entity, paying no dividends, governed by trustees who receive no compensation,
and devoting all its income, whether students' fees or gifts, donation, subsidies or other
forms of philanthropy, to the accomplishment and promotion of the purposes enumerated
in its Articles of Incorporation.
Q: What are the requirements in order that the donor to an educational or religious entity can claim a
deduction?
A: Section 101A3 provides for the following;
1. Not more than 30% of the property donated should be used for administrative purposes;
2. It must be non-stock and non-profit;
3. It must be governed by trustees who does not receive any compensation;
4. The school does not pay dividends;
5. The income shall be used in accordance with the purposes embodied in the articles of
incorporation.
The donee here is not limited to educational institutions or religious institutions. The donee may be social
welfare, charitable institution, educational, religious, including organization for the rehabilitation of
veterans.
The above requisites apply to all of them, when the question is is it a deduction, When it belong to B,
these five requirements are down to only one which is not more than 30% of the property donated should
not be used for administrative purposes.
Q: Why is it that the law requires that not more than 30% of the property donated should not be used for
administrative purposes?
A; If 30% of the donated property will be used by the donee for administrative purposes, the very purpose
for which the donation was made will be rendered meaningless.
(B) In the Case of Gifts Made by a Nonresident Not a Citizen of the Philippines.
(NRA and FC)

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(1) Gifts made to or for the use of the National Government or any entity created by any of
its agencies which is not conducted for profit, or to any political subdivision of the said
Government.
corporation, institution, foundation, trust or philanthropic organization or research
institution or organization: Provided, however, That not more than thirty percent (30%)
of said gifts shall be used by such donee for administration purposes.
(C) Tax Credit for Donor's Taxes Paid to a Foreign Country. -
(1) In General. - The tax imposed by this Title upon a donor who was a citizen or a
resident at the time of donation shall be credited with the amount of any donor's tax of any
character and description imposed by the authority of a foreign country.
(2) Limitations on Credit. - The amount of the credit taken under this Section shall be
subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid to any country shall not exceed the
same proportion of the tax against which such credit is taken, which the net gifts situated
within such country taxable under this Title bears to his entire net gifts; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against
which such credit is taken, which the donor's net gifts situated outside the Philippines
taxable under this title bears to his entire net gifts.
We go to section 102.
SEC. 102. Valuation of Gifts Made in Property. - If the gift is made in

property, the fair market value thereof at the time of the gift shall be considered
the amount of the gift. In case of real property, the provisions of Section 88(B)
shall apply to the valuation thereof.
In determining the value of the property donated, for purposes of the imposition of the donors tax, both
estate tax and donors tax provides for the same procedure for personal as well as real property. They also
have common rule for shares of stock under RR. Even under the imposition of the FIT of 6%, we also apply
the same rule.
When we say value determined by the CIR and the one determined by the City assessor, whichever is
higher, normally, the one higher is the one chosen by the Commissioner. In BIR it is known as the zonal
value
(Same rule as provided under 88B)
We have the last provision, Section 103.
SEC. 103. Filing of Return and Payment of Tax. -
(A) Requirements. - any individual who makes any transfer by gift (except those which,
under Section 101, are exempt from the tax provided for in this Chapter) shall, for the
purpose of the said tax, make a return under oath in duplicate. The return shall set forth:

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(1) Each gift made during the calendar year which is to be included in computing net gifts;
(2) The deductions claimed and allowable;
(3) Any previous net gifts made during the same calendar year;
(4) The name of the donee; and
(5) Such further information as may be required by rules and regulations made pursuant to
law.
(B) Time and Place of Filing and Payment. - The return of the donor required in this
Section shall be filed within thirty (30) days after the date the gift is made and the tax due
thereon shall be paid at the time of filing. Except in cases where the Commissioner otherwise
permits, the return shall be filed and the tax paid to an authorized agent bank, the Revenue
District Officer, Revenue Collection Officer or duly authorized Treasurer of the city or
municipality where the donor was domiciled at the time of the transfer, or if there be no legal
residence in the Philippines, with the Office of the Commissioner. In the case of gifts made
by a nonresident, the return may be filed with the Philippine Embassy or Consulate in the
country where he is domiciled at the time of the transfer, or directly with the Office of the
Commissioner.
The law says now the filing of the ITR. But what should be noted here is the date of payment of the tax. Tax
should be paid within 30 days and the return should be filed within 30 days. Hence, we have pay as you
file system
Q: is there an extension in Filing the return.
A: None. The extension was abolished already by the RA 88CTRP.
RENOUNCIATION OF INHERITANCE:
Let us say, you are entitled to inheritance and you renounce it or you waive it . Sec. 11 of RR 2-2003, it all
depends on what you are renouncing. If you renounce your share in the Marriage Settlement or ACP, it is
subject to donors tax. But if you renounce not your share in the marriage settlement or ACP, let us say,
your inheritance from your parents or relatives, it will now depend whether it is to the disadvantage of the
other co-heirs. For example, you inherit from your parents and you have 3 siblings and you renounce it in
favor of only one of your sibling, you have to pay donors tax because that is to the disadvantage of the other
heirs but if you renounce it in favor of all of the co-heirs, you are now exempt from donors tax.

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ALUE-ADDED TAX AS AMENDED BY REPUBLIC ACT 9337
We have to know first the formula in order to help us understand the law of VAT:
FORMULA = OUTPUT TAX INPUT TAX = VAT
Note : taxpayer is only liable to pay VAT if the output is more than the input tax.
Illustration:
A manufacturer of a commodity subject to VAT. What is the output tax there, it is the rate of the vat (12%) x
gross selling price ( sale of manufactured commodities). For instance, selling price is P 100.00 x 12% = P
112.00. Is the result the amount to be paid to the BIR? Well, not really. We have to determine if you could
avail of the input tax. What is the input tax in the example? For instance, the manufacturer purchase raw
materials, the value added tax paid by the seller of the raw materials as far as the manufacturer is concern
that is the input tax. Example, Input tax P 60.00, less output tax of P112.00 = P 52.00, this is now the amount
to be paid to the government. Is that the only result? There are 3 possibilities:
1. You have to pay VAT only if the output is more than the input
2. If there are no input than the output, you will not pay theVAT and instead entitled to tax credit
or refund
3. If the input is totally equal to the output, you do not pay VAT also.
The 70% limitation provided under Section 110, it was now abolished by RA 9361, because normally the
taxpayer will end paying the VAT, what was that limitation? If you claim input tax of P 10,000, you will be
allowed only to claim, P 7,000, and that was abolished. So nowadays, 100% of the input tax could be claim
by the taxpayer.
Q: Is the formula always like that?
A: Not really, sometimes, if the seller of the raw materials is exempt, unless in the case of presumptive input
tax, or he is not exempt but not registered under VAT, the manufacturer in the example cannot claim tax
credit. So this VAT is only the output.
SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells
barters, exchanges, leases goods or properties, renders services, and any person who
imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to
108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on
to the buyer, transferee or lessee of the goods, properties or services. This rule shall
likewise apply to existing contracts of sale or lease of goods, properties or services at the
time of the effectivity of Republic Act No. 7716.

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The phrase "in the course of trade or business" means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any
person regardless of whether or not the person engaged therein is a nonstock, nonprofit
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.
The rule of regularity, to the contrary notwithstanding, services as defined in this Code
rendered in the Philippines by nonresident foreign persons shall be considered as
being course of trade or business.
For a person to be liable to pay the VAT a taxpayer must be engaged in the trade or business, exceptions
are found under 105 and 106.
Taxes under NIRC superseded by VAT;

1. Compensating tax - tax on imported commodity where the importer is not engaged in trade or
business
2. Advance sales tax tax on imported commodity where the importer is engaged in trade or
business
Sec. 105, under the following, even if the taxpayer is not engage in business or trade, he is still liable for the
payment of VAT;
1. If the taxpayer is engaged in importation
2. If its incidental to a primary purpose - i.e. if taxpayer engaged in a bakery, in the course of the
operation of you accumulated thousands of sacks of flour, and you sold it, you are now liable to pay
VAT although you are not engaged in the selling of sacks.
3. Services rendered by non-residents persons this includes foreign technicians, engineers and
foreign entertainers, though their services in the Philippines are just once, they are deemed to be
engage in trade or business
Q. VAT is applicable to what kinds of transactions?

A. VAT is applicable in the following transactions:
1. Sale of commodities or goods:
2. Sale of services:
3. Exportation: and
4. Importation
Sec. 106(B) TRANSACTIONS DEEMED SALE ( An exemption to the rule that the Taxpayer must engage in
the business or trade to be liable for VAT) - In reality there is no sale.
B1
Q. What transactions are considered deemed sale?
A.
1. Transfer use or consumption not in the course of trade or business of goods or properties
originally intended
for sale or for use in the course of business;

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2. Distribution or transfer to:

(a) shareholders or investors as share in the profits of the VAT-registered persons; and
(b) creditors in the payment of debt
3. Consignment of goods if actual sale is not made within 60 days following the date such goods
were
consigned; and
4. Retirement from or cessation or business, with respect to inventories of taxable goods existing as
such
retirement or cessation.
"(1) Transfer, use or consumption not in the course of business of goods or properties originally
intended for sale or for use in the course of business;
Q. What is the first transaction that is deemed sale?

A. Transfer, use or consumption not in the course of trade or business of goods or properties originally
intended for sale or for use in the course of business.
Q. Give an example for consumption?

A. For example a bakery will have an anniversary wherein the owner will give libre pandesal. This giving of
libre pandesal should be considered a transaction deemed sale hence should be subject to VAT.
Q. Give an example for use?

A. You are a car dealer wherein you found a car that you like hence you use it for your own.
"(2) Distribution or transfer to:
"(a) Shareholders or investors as share in the profits of the VAT-registered persons: or
"(b) Creditors in payment of debt;
B2
Q. What does this talk about?
A. This is about the distribution or transfer to shareholders or investors as shore in the profits of the VAT-
registered persons or creditors in payment of debt.
In the words, the first part talks about corporations declaring dividends. Note that n case of declaration of
dividends of dividends, the same shall not only be subject to VAT but also for NIT.
Q. The second part is also known as?

A. Dacion en pago wherein payment is in kind and not in cash otherwise it is not a transaction deemed sale.
"(3) Consignment of goods if actual sale is not made within sixty (60) days following the date such
goods, were consigned; and
Note in B3 the 60-day period, if returned within the 60-day period, it is not a transaction deemed sale.

PUP COLLEGE OF LAW
"(4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of
such retirement or cessation.
A business man retiring from business after several years of operation, but there are still stocks left, on the
remaining stocks, the taxpayer is still subject to VAT.
"(C) Changes in or Cessation of Status of a VAT-registered Person. - The tax imposed in Subsection (A)
of this Section shall also apply to goods disposed of or existing as of a certain date if under
circumstances to be prescribed in rules and regulations to be promulgated by the Secretary of Finance,
upon recommendation of the Commissioner, the status of a person as a VAT-registered person changes
or is terminated.
"(D) Sales Returns, Allowances and Sales Discounts. - The value of goods or properties sold and
subsequently returned or for which allowances were granted by a VAT-registered person may be
deducted from the gross sales or receipts for the quarter in which a refund is made or a credit
memorandum or refund is issued. Sales discount granted and indicated in the invoice at the time of sale
and the grant of which does not depend upon the happening of a future event may be excluded from the
gross sales within the same quarter it was given.
"(E) Authority of the Commissioner to Determine the Appropriate Tax Base. - The Commissioner shall,
by rules and regulations prescribed by the Secretary of Finance, determine the appropriate tax base in
cases where a transaction is deemed a sale, barter or exchange of goods or properties under Subsection
(B) hereof, or where the gross selling price is unreasonably lower than the actual market value."
Discussion: under Sec. 105, for VAT to apply to the sale of commodities and securities as well as to
exportation, the transaction must be conducted in the course of trade or business of the taxpayer.
Hence, even if a commodity is ordinarily subject to VAT, if not for trade or business, VAT inapplicable.
The services rendered in the Philippines by a NRA is always deemed to be pursuant to trade or business,
hence VAT applicable.
On the matter of importation, on the other hand the rule is different, VAT is always applicable.
Importation irrespective whether or not the same is conducted in the course of trade or business.
Q: For VAT to apply what are the requisites?

A: To apply:
1. Transactions must be those mentioned in 1-4
2. Generally must be done in the course of trade or business
3. provided that the gross receipts do not exceed 1.5 Million
Q: Instances where VAT applies although such sale is not made in the regular course of trade or business.
A. 1. Importation
2. Incident to the business
3. Transaction deemed sale although isolated one
4. Services in the Philippines by NRA
SEC. 106. Value-Added Tax on Sale of Goods or Properties. -
"(A) Rate and Base of Tax. - There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, a value-added tax equivalent to ten percent (10%) 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: Provided, That the President, upon the recommendation of the Secretary of

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Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after
any of the following conditions has been satisfied:
"(i) Value-added tax collection as a percentage of Gross Domestic product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%); or
"(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 1/2%).
"(1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of
pecuniary estimation and shall include:
"(a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade
or business;
"(b) The right or the privilege to use patent, copyright, design or model, plan secret formula or process,
goodwill, trademark, trade brand or other like property or right;
"(c) The right or the privilege to use in the Philippines of any industrial, commercial or scientific
equipment;
"(d) The right or the privilege to use motion picture films, films, tapes and discs; and
"(e) Radio, television, satellite transmission and cable television time.
"The term 'gross selling price' means the total amount of money or its equivalent which the purchaser
pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or
properties, excluding the value-added tax. The excise tax, if any, on such goods or properties shall form
part of the gross selling price.
"(2) The following sales by VAT-registered persons shall be subject to zero percent (0%)
rate:
"(a) Export Sales. - The term 'export sales' means:
"(1) The sale and actual shipment of goods from the Philippines to a foreign country,
irrespective of any shipping arrangement that may be agreed upon which may influence
or determine the transfer of ownership of the goods so exported and paid for in
acceptable foreign currency or its equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas,(BSP);
"(2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a
resident local export-oriented enterprise to be used in manufacturing, processing,
packing or repacking in the Philippines of the said buyer's goods and paid for in
acceptable foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP):
"(3) Sale of raw materials or packaging materials to export-oriented enterprise whose

export sales exceed seventy percent (70%) of total annual production;
"(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP);
"(5) Those considered export sales under Executive Order No. 226, otherwise known as
the Omnibus Investment Code of 1987, and other special laws; and

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"(6) The sale of goods, supplies, equipment and fuel to persons engaged in international
shipping or international air transport operations.
SEC. 106 VALUE-ADDED TAX ON SALE OF GOODS OR PROPERTIES
Let us go to, Lease of Realty, 106, par. A, No. 1
You will notice that in this number, there are 2 transactions here, namely;
1. Sale of real property; and

2. Lease of real property
Q: Is the sale of realty like parcel of land or a building, subject to VAT?
A: There is a VAT for the sale of realty or lease in the ordinary course of business, meaning if the seller is a
realtor, then it is subject to VAT because the provision provides sale or (lease), therefore if the seller is a
realtor, whether corporation or individual, it is subject to VAT. If therefore you inherit from your relatives or
parents a parcel of land, you are not subject to VAT because you are not holding the property for sale to
customers in the ordinary course of business and trade.
However, in Section 109, (No. 1 and 2, meaning all of those exempt transactions, there is now an optional
registration under VAT unlike before. ) Now, for the sale of realty, as a rule the seller is subject to VAT if he
is a realtor, however, there are exceptions, meaning the realtor is not always subject to VAT. The
exceptions are provided under Sec. 109, No. 1 par. B. The exceptions are the following;
1. When the seller does not hold the property for sale in the ordinary course of business;
2. Low Cost Housing;
3. Socialized Housing;
4. Sale of Parcel of land for residential purpose; if its a parcel of land the selling price does not
exceed 1.5M, if it is house in lot not exceeding 2.5M;
So, even if the seller is a realtor, if he is engage in the abovementioned activities, he is exempt from VAT.
Now, let us go to lease of real property:
The law says, the real property held by the tax payer for sale or lease in the ordinary course of trade or
business. For the lessors of real property, there are several requirements for them to be liable for VAT, to
wit;
1. The lessor , it must be his trade or business;
2. Under par. Q, the lease should exceed 10K or more;
3. Under RR 16-2005, the gross receipts of the lessor must be more than 1.5M
If any of these requirements is absent, the lease is exempt from VAT.
Note: Under RR, if the lessor keeps on issuing receipts , subjecting the lease to VAT although it is exempt. In
this instance VAT is now applicable by virtue of the principle of estoppel. The taxpayer lessor is not only
subject to VAT but only to percentage Tax. Ordinarily, if a taxpayer is subject to VAT he is not liable for
PUP COLLEGE OF LAW
Percentage tax and vice versa. However, as a sanction, you cannot invoke that principle. Aside from the
sanction, the lessor cannot claim input tax.
Sec. 106 par A1 C, D and E:
"(1) The term 'goods or properties' shall mean all tangible and intangible objects
which are capable of pecuniary estimation and shall include:
"(a) Real properties held primarily for sale to customers or held for lease in the ordinary
course of trade or business;
"(b) The right or the privilege to use patent, copyright, design or model, plan secret
formula or process, goodwill, trademark, trade brand or other like property or right;
"(c) The right or the privilege to use in the Philippines of any industrial, commercial or
scientific equipment;
"(d) The right or the privilege to use motion picture films, films, tapes and discs; and
"(e) Radio, television, satellite transmission and cable television time.
"The term 'gross selling price' means the total amount of money or its equivalent
which the purchaser pays or is obligated to pay to the seller in consideration of the sale,
barter or exchange of the goods or properties, excluding the value-added tax. The excise
tax, if any, on such goods or properties shall form part of the gross selling price.
Take note class, this was only copied from Section 42 par. A4, of the NIRC, the privilege to use or the right
to use in the Philippines of patent, copyright, secret formula, goodwill, trade brands and other like
property. In these enumerations, except in the sale of realty, the multiplication of the rate of the VAT is
always on the gross selling price. Why is that so in the sale of realty? Under RR 7-95, if the subject matter of
the VAT is a parcel of land, the multiplication shall be with the gross selling price or the fair market value,
whichever is higher. With regard to all other enumerations from A to E, the multiplication is on the gross
receipts.
Q. what shall be the formula in computing for the VAT on sale of goods or properties?
A. value-added tax equivalent to 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.
Q. Who pays for the VAT?

A. The burden is paid by the purchase so the VAT is not really paid by the taxpayer.
Q. What does the term goods or properties mean? / What are the goods or properties subject to 12% VAT?
A. It shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall
include;
(a) Real properties hold primarily for sale to customers or hold for lease in the ordinary course of
trade or business:
(b) 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.
PUP COLLEGE OF LAW
(c) The right or the privilege to use in the Philippines Of any industrial, commercial or scientific
equipment:
(d) The right or the privilege to use motion picture films, tapes and discs and
(e) Radio, television, satellite transmission and cable television time.
Q. What does gross selling price mean?

A. The total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller
in consideration of the sale, barter, or exchange of goods or properties, excluding the VAT including the
excise tax if any.
RATES OF THE VAT: (106, par. B)
- There are 2 tax rates for VAT is either 12% or 0%

12% applies to sales of commodities, sales of services, and importation
0% applies to exportation.
Q. How is the 12% rate of the VAT computed?

A. 1. For the sale of commodities : 12% x GSP (Sec. 106)
2. For the sale or services : 12% x gross receipts (Sec. 108)
3. For importation 12% x rate by the value used by the BOC in the imposition of custom duties. If
the Bureau used measurement as the basis, the rate of the VAT shall be multiplied to the Total
landing cost, which is the purchase price of the imported commodity plus freight and insurance
4. For exportation, its 0% FOR VAT registered, if not it is exempt.
Q. When does zero percent rate apply?

A. It applies to the ff. transactions:
1. Export Sales
2. Foreign currency denominated sale
3. Sale to persons or entities whose exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects such sales to zero percent rate: and
4. Transactions subject to zero percent rate as provided for In Sec 108 (b)
ZERO RATED TRANSACTIONS (EXPORT SALES) (Sec. 106(A)(2)(a))
Q. To be subject to zero percent rates, what is the requirement?

A. Sales must be by VAT-registered persons
Q. What are the sales subject to zero percent rate?

A.
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1. Export sales with an enumeration of 1 to 6;
2. Foreign currency denominated sale;
3. Sales to persons or entitles whose exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects such sales to zero rate; and
4. Transactions under 108(B). or sale of services other than those mention in the succeeding
paragraph and payable in an acceptable foreign currency remitted to the BSP ( subject to zero rate
with an enumeration of 1 to 7) (Note: Discussion under 108B)
Discussions:
Q. What do the term export sales mean?

A.
1. The sale and actual shipment of goods from the Philippines To a foreign country irrespective of
any shipping arrangement that may be agreed upon which may influence or determine the transfer
of ownership of the goods so exported and paid in acceptable foreign currency or its equivalent in
goods or services (Note: payment must be in acceptable foreign currency)
2. Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident
local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in
the Philippines of the said buyers goods and paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP;
3. Sale of raw materials or packaging materials to export-oriented enterprise whose export sales
exceed 70% of total annual production;
4. Sale of gold to the BSP; and
5. Export sales under Omnibus Investment Code; and
6. Sale of goods, supplies, equipment and fuel to persons engaged in international shipping or
international air transport operations.
Q. What about the requirement of acceptable foreign currency, is it a requirement in all of the six
transactions?
A. No. It is only on nos. 1 and 2, because in nos. 3 to 6, it is not a requirement because in reality there is no
real export transaction.
Q. When does the requirement that payment be made in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP apply?
A. the requirement only applies to the first two types of exportation as mentioned under the codal. In the
remaining there is no requirement of such because in realty these are not considered exportation. They are
only considered exportation by virtue of the technical provision of the law.
Q. Compare Sec. 106(A)(2)(a)(2) with Sec. 106(2)(b)?

PUP COLLEGE OF LAW
A. In the former, the sale is to a nonresident buyer for delivery to a resident local export-oriented
enterprise, while in the latter; sale of goods is to a nonresident for delivery to a resident in the Philippines.
Q. Why is the distinction between Sec. 106(2)(a)(1) & (2) on one hand, and (3)(6) on the other hand?
A. In the latter, the commodities do not actually go out of the country therefore the requirement that it
must be paid in acceptable foreign currency is not present.
Q. Sec. 106(A)(2)(a)(3) refers to export sales by VAT-registered persons. What is the effect where the person
is not VAT-registered?
A. The sale will be exempt as provided for in Sec. 109(T), as amended.
Q. Distinguish Sec. 106(2)(a)(6) with Sec. 109(T).

A. The former the export sale is 0%-rated while in the latter, it is exempt.
Q. Differentiate 0%-rated from exempt transactions.

A. In exempt transactions, there can be no clam for tax credit which is allowed in 0%-rated transactions.
Q. What are the observations as to the third and fourth type of transaction?
A. Both are unusual because in the third type of transaction, this involves a sale to a local entity. Under the
law, the seller is an exporter and subject to zero percent if VAT-registered or exempt if not VAT-registered.
This applies to both.
Q. What is the effect of any person fails to register under the VAT system?
A. As a general rule, failure of any person to register under the VAT system is subject to the penalty of
temporary closure of the establishment for not less than 5 days. (Section 115 (b)
Q. Does this rule apply to exporter?

A. No. when the exporter fails to register under the VAT-system his transaction is merely classified as
exempt transaction (Section 109(V)) instead of zero rated in both cases, he is not liable for VAT.
Q. So what is the distinction?

A. Tax credit (input-tax) is available to zero rated transactions but not to exempt transactions.
Q. Distinguish & between foreign currency denominated sale under Section 106(A)(2)(b) and the second
type of exportation under Section 106(A)(2(a)2.
Foreign currency denominated Second type of exportation under

Category sale under Section 106(A)(2)( Section 106(A)(2(a)2.
As type of transaction: it is sale of goods sale of raw materials or packaging
materials
As to whom delivery shall Made to a nonresident Made to a nonresident buyer for

be made: delivery to a resident local
export-oriented enterprise.
Q. What are the similarities?

A. 1. Both are 0-rated transactions

PUP COLLEGE OF LAW
2. Paid in acceptance foreign currency

3. Buyers are nonresident
SALE OF RAW MATERIALS . . . WHOSE EXPORT SALES EXCEED 70% OF ITS TOTAL ANNUAL PRODUCTION.
This transaction is unusual because it involves a transaction to a local entity. Under the law, the
SELLER of the raw materials is an EXPORTER and subject to O% rate if VAT-registered or exempt if not VAT-
registered.
Case Problem:
You are living in the City of Mandaluyong. You are going to sell raw materials to a factory in Taguig,
70% or more of the output is exported. That transaction under the law is exportation even if it did not cross
or did not sell your product to a foreign country because theres no requirement on the acceptable foreign
currency.
SALE OF GOLD TO BSP
Under the law, the local seller is an EXPORTER and subject to O rate in VAT-registered or exempt if
not VAT-registered. An example is that if you are a miner and you sold gold to CB. It is considered
exportation hence subject to the rate of 0%
As a general rule, failure of any person to register under the VAT system is subject to the penalty of
temporary closure of 5 days.
An exception thereof is when an exporter who fails to register, his transaction is merely classified
as an EXEMPT transaction instead of 0 rated. In both cases, he is not liable for the payment of VAT. The
distinction, however, is this tax credit (input tax) is available to zero rated transaction but not to exempt
transactions.
Sec. 107 Value-Added Tax on Importation of Goods
Sec. 107(A) In General
Q. How do you compute for the VAT on Importation of Goods?

A.
1. VAT rate x value used by the Bureau in imposing tariff & customs, or
2. VAT rate x total landed cost plus excise tax
Q. Landed cost?
A. It is the cost of commodity as shown as shown in the bill of loading plus freight & insurance.
Sec. 107 (B) Transfers of Goods by Tax-exempt Persons

Q. Who are these tax-exempt importers?
A. Refer to Sec. 109.
Q. If the Importer is exempt, is the sale subject to VAT?

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A. No.
Q. Who pays for the tax in case of tax-free importation of goods into Philippines Who are exempt from tax
wherein there is a subsequent sale?
A. If shall be paid by non-exempt persons or entities, the purchaser, transferees or recipients shall be
considered the importers thereof.
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. -
(A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to
ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or
lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 1/2%).
"The phrase 'sale or exchange of services' means the performance of all kinds of services
in the Philippines for others for a fee, remuneration or consideration, including those
performed or rendered by construction and service contractors; stock, real estate, commercial,
customs and immigration brokers; lessors of property, whether personal or real; warehousing
services; lessors or distributors of cinematographic films; persons engaged in milling,
processing, manufacturing or repacking goods for others; proprietors, operators or keepers of
hotels, motels, rest-houses, pension houses, inns, resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers;
dealers in securities; lending investors; transportation contractors on their transport of goods
or cargoes, including persons who transport goods or cargoes for hire and other domestic
common carriers by land relative to their transport of goods or cargoes; common carriers by
air and sea relative to their transport of passengers, goods or cargoes from one place in the
Philippines to another place in the Philippines; sales of electricity by generation companies,
transmission, and distribution companies; services of franchise grantees of electric utilities,
telephone and telegraph, radio and television broadcasting and all other franchise grantees
except those under Section 119 of this Code and non-life insurance companies (except their
crop insurances), including surety, fidelity, indemnity and bonding companies; and similar
services regardless of whether or not the performance thereof calls for the exercise or use of
the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise
include:
"(1) The lease or the use of or the right or privilege to use any copyright, patent,
design or model plan, secret formula or process, goodwill, trademark, trade brand
or other like property or right;
"(2) The lease or the use of, or the right to use of any industrial, commercial or,
scientific equipment;
"(3) The supply of scientific, technical, industrial or commercial knowledge or

information;
"(4) The supply of any assistance that is ancillary and subsidiary to and is furnished
as a means of enabling the application or enjoyment of any such property, or right
as is mentioned in subparagraph (2) or any such knowledge or information as is
mentioned in subparagraph (3);

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"(5) The supply of services by a nonresident person or his employee in connection

with the use of property or rights belonging to, or the installation or operation of
any brand, machinery or other apparatus purchased from such nonresident person;
"(6) The supply of technicai advice, assistance or services rendered in connection

with technical management or administration of any scientific, industrial or
commercial undertaking, venture, project or scheme;
"(7) The lease of motion picture films, films, tapes and discs; and
"(8) The lease or the use of or the right to use radio, television, satellite
transmission and cable television time.
"Lease of properties shall be subject to the tax herein imposed irrespective of the place where
the contract of lease or licensing agreement was executed if the property is leased or used in
the Philippines.
"The term 'gross receipts' means the total amount of money or its equivalent representing
the contract price, compensation, service fee, rental or royalty, including the amount charged
for materials supplied with the services and deposits and advanced payments actually or
constructively received during the taxable quarter for the services performed or to be
performed for another person, excluding value-added tax.
Sec. 108 : VALUE-ADDED TAX ON SALE OR EXCHANGE OF SERVICES
Q. Does this include personal services?

A. Yes.
Q. What is the Formula 44?

A. Gross receipts x 12% = VAT
Q. Any exceptions?
A.
1. Those mentioned in Sec. 108(B)
2. Sec. 109(I)
Note : Overseas recruiters are VAT exempt, however the placement fee paid by the workers are not zero
rated, it is subject to VAT.
Q. What does the sale or exchange of services mean?

A. Means the performance of all kinds or services in the Philippines for others for a fee remuneration or
consideration, including those performed or rendered by:
1. Construction and service contractors

2. Stock, real estate, commercial, customs and immigration brokers
3. Lessors of property, whether personal or real
4. Warehousing services
5. Lessors or distributors of cinematographic films
6. Persons engaging in mining processing, manufacturing or repacking goods for others.
7. Proprietors operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts.

PUP COLLEGE OF LAW
8. Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers:
9. Dealers in securities, lending investors;
10. Transportation contractors on their transport of goods or cargoes, including persons who
transport goods
or cargoes for hire and other domestic common carriers by land relative to their transport of
goods and cargoes.
11. Common carriers by air and sea relative to their transport of passengers, goods or cargoes
from one place
in the Philippines to another place in the Philippines
12. Sales of electricity by generation companies, transmission, and distribution companies.
13. Services of franchise grantees of electric utilities, telephone and telegraph radio and television
broadcasting and all other franchise grantees except of those under Section 119 and non-life
insurance companies (except their crop insurance), including surely, fidelity, indemnity and
bonding companies.
14. Similar services regardless of whether or not the performance thereof calls for the exercise or
use of the physical or mental faculties.
Q. Compare 108(A) with respect to common carriers by air or sea . . . with respect to (B)(4).
A. With respect to the former, it is with respect to domestic transportation in the latter, it speaks of
international transportation
Q. The phrase sale or exchange of services shall likewise include:
"(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model plan, secret formula or
process, goodwill, trademark, trade brand or other like property or right;
"(2) The lease or the use of, or the right to use of any industrial, commercial or, scientific equipment;
"(3) The supply of scientific, technical, industrial or commercial knowledge or information;
"(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application
or enjoyment of any such property, or right as is mentioned in subparagraph (2) or any such knowledge or information as
is mentioned in subparagraph (3);
"(5) The supply of services by a nonresident person or his employee in connection with the use of property or rights
belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such
nonresident person;
"(6) The supply of technicai advice, assistance or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking, venture, project or scheme;
"(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time.
Q. Are leases of properties subject to VAT even if contract of lease was executed outside the Philippines?

PUP COLLEGE OF LAW
A. Yes. A provided in a par in Sec. 108(A). lease of properties shall be subject to the tax imposed irrespective
of the place where the contract of lease or licensing agreement was executed if the property is leased or
used in the Philippines
"(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:
"(1) Processing, manufacturing or repacking goods for other persons doing business outside
the Philippines which goods are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);
"(2) Services other than those mentioned in the preceding paragraph rendered to a person
engaged in business conducted outside the Philippines or to a nonresident person not engaged
in business who is outside the Philippines when the services are performed, the consideration
for which is paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
"(3) 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 zero percent (0%) rate;
"(4) Services rendered to persons engaged in international shipping or international air

transport operations, including leases of property for use thereof;
"(5) Services performed by subcontractors and/or contractors in processing, converting, or

manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of
total annual production;
"(6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign
country; and
"(7) Sale of power or fuel generated through renewable sources of energy such as, but not
limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging
energy sources using technologies such as fuel cells and hydrogen fuels.
Q. What do VAT-exempt transactions refer to?

A. It refers to sale of goods/properties/services and the use/lease of property that is not subject to VAT
(output tax) and the seller is not subject to VAT(input tax) an purchase.
N.B.: General question: What transactions are covered in each enumeration?

What is the scope/subject matter in each enumeration?
Q. What transactions are subject to Zero Percent Rate?

A.
1. Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptance
foreign currency and accounted for in accordance with the rules and regulations of the BSP;
2. Services other than those mentioned in the preceding paragraph rendered to a person engaged
in business conducted outside the Philippines or to a nonresident person not engaged in business
that is outside the Philippines when the services are performed, the consideration for which is paid

PUP COLLEGE OF LAW
for in acceptable foreign currency and accounted for in accordance with the rules and regulations
of the BSP;
3. Services rendered to person 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 zero percent (0%) rate;
4. Services rendered to persons or international air transport operations, including leases of

properly for use thereof;
5. Services of performed by subcontractors and/or contractors in processing, converting, or

manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total
annual production;
6. Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country
and:
Note: The fare of the passengers from Philippines to foreign country is also zero rated.
However the fare of the passengers in the Philippines ( within the Philippines.), in this case, we
have to distinguished if its by air or land.
If its by land, it is not subject to VAT, what are subject are carriage of commodities, like the
tracking business.
If its transport by air and sea, it is subject to VAT.
The fare of the passenger from Philippines to foreign country, it is zero rated.
7. Sale of power or fuel generate through renewable sources of energy such as, but not limited to,
biomass, solar wind, hydropower, geothermal, ocean energy, and other emerging energy sources
using technologies such as fuel cells and hydrogen fuels.
Q. What if the transaction is not for export? Will Sec. 108(B)(1) apply?
A. If not export, Sec. 105(A) applies wherein the rate shall be 12%
Q. Under Sec. 108(B) (7), does it extend to sale of services?

A. No. it does not extend to the sale of services related to the maintenance or operation of plants
generating said power.
Sec. 109 : EXEMPT TRANSACTIONS:

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"SEC. 109. Exempt Transactions. - (1) Subject to the provisions of subsection (2) hereof, the following transactions
shall be exempt from the value-added tax:
The proper way to read this section is to begin reading subsection two, then no. 1 and Section 116 and
also paragraph V of Sec. 109B.
Q: What is provided in subsection No. 2?

A. It provides the option of the taxpayer, who is a VAT registered, to abandon the one that is provided
under no. 1. When we say abandon, the tax payer is exempt from VAT however, he is given the option to
abandon or disregard his exemption and pay the VAT of 12%.
Q: What is the rationale of the option? Is it a stupid law, because taxpayer has the option to be exempt from
paying the VAT and yet, he is allowed to pay?
A: No. The law is not stupid because, in the exercise of the taxpayers option to abandon, he has to consider
whether he has substantial input tax. If the taxpayer has substantial input tax, it is better to abandon the
exception and pay the VAT of 12 because if the input is more than the output he will not pay any tax or VAT
or maybe because of the input tax he will pay indirectly a vat rate of 1 or 2%. But if there is no substantial
input tax, it is better to claim exemption, because exemption is better than payment.
Let us go Par. V of Sec. 109B:
Q: What is the limitation under Par. V, Sec. 109B?

A: Not exceeding 1.5 Million
Q. Is the limitation of 1.5 million applicable to those enumerated under No. 1 a,b,c,d,e,f,g.
A. No. it is only applicable to paragraphs p, q and V, because the law says in the sale of commodities,
services or goods, other than those mentioned in the preceding paragraphs.
Illustration: 98 Bar
Q. Seller of agricultural products (vegetables) and the gross receipts exceeded 1.5 Million. Is he still exempt
because it exceeded the limitation? No.
A. The limitation of 1.5 Million does not apply to most of the enumerated exemptions. Meaning, whether
the gross receipts exceeded 1.5 Million or way below, they are always exempt, except pars. p. q and v,
provided the taxpayer chooses to abandon exemption and pay the VAT of 12%. If it did not exceed 1.5
Million it is not subject to VAT also.
Q: If these limitations do not apply to most of the enumerated exemption, when is this applicable?
A. This is applicable to transactions, when it is supposedly subject to vat if where if not because of this
qualifications that it does not exceed 1.5 Million.
Q. Assuming you are exempt under VAT law, what is your tax liability under the NIRC?
A. You are liable for percentage tax of 3%
Note : If person availing is a VAT-registered it is exempt from VAT and does not pay percentage tax: if
person availing is not VAT-registered., it is exempt from VAT but is liable to pay 3% percentage tax.
(correlate this to the option to abandon hence the option is to pay 12 VAT or 3% percentage if your
business belongs to B)
PUP COLLEGE OF LAW
Q. Hence, what is the better option?

A. It depends on whether or not, if the taxpayer could secure substantial amount of input tax. If there is no
input tax or it is only minimal, it is better to claim exemption from VAT and pay percentage tax of 3% ,
because 3 is lower than 12.
Let us go to the enumeration one by one:
"(A) Sale or importation of agricultural and marine food products in their original state,
livestock and poultry of a kind generally used as, or yielding or producing foods for human
consumption; and breeding stock and genetic materials therefor.
"Products classified under this paragraph shall be considered in their original state even if they have
undergone the simple processes of preparation or preservation for the market, such as freezing, drying,
salting, broiling, roasting, smoking or stripping. Polished and/or husked rice, corn grits, raw cane sugar
and molasses, ordinary salt, and copra shall be considered in their original state;
Sec. 109(1)(A)
Q. What does this provision include?
A. It includes sale or importation of agricultural and marine food products in their original state, livestock
and poultry of a kind generally used as, or yielding or producing foods for human consumption; and
breeding stock and genetic materials therefore.
Q. What are exempted in (A)?

A. Food products that is no longer in their original state. If food products are no longer in their original state,
it is subsection (L) that will apply.
Q. What do you mean by original state?

A. Products classified under this par, shall be considered in their original state even if they have undergone
the simple processes of preparation or preservation for the market, such as freezing drying, salting, broiling,
toasting, smoking, or stripping.
Polished and/or husked coconuts, corn grits, raw sugar, can and molasses, ordinary salt, and copra (N.B.-
copra is nonfood dib a?) shall be considered in their original state.
Q. Suppose the agricultural products subject matter of the transaction are no longer in their original state, is
it still possible to claim exemption from VAT?
A. Yes. Under Sec. 109(1)(L), provided the same are sold by cooperatives duly registered with the
Cooperative Development Authority.
Bigote: Agricultural & marine non-food products are no longer exempt, therefore the misamis case is no
longer controlling.
Q. When are nonfood products exempt?

A.
1. Where the transaction is a sale
2. When in their original state and
PUP COLLEGE OF LAW
3. When sold by the primary producer or owner of the land where the same are produced
Q. When is food exempt?

A.
1. Where the transaction is sale or importation; and
2. When sold in their original state.
Note : There is no requirement as to the seller.
Q. What is their common requirement?

A. They must be sold in their original state.
Q. Suppose the agricultural products subject matter of the transaction is no longer in their original state. Is it
possible to claim exemption from VAT?
A. Yes in the old section 109(r), provided the same are sold by agricultural cooperatives duly registered with
Cooperative Development Authority.
"(B) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry
feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished
feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other
animals generally considered as pets);
Sec. 109(1)(B)
Q. What are the transactions involved In par. (B)?
A. 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.
Q. What is excepted in this paragraph ?

A. Specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally
considered as pets
"(C) Importation of personal and household effects belonging to the residents of the Philippines
returning from abroad and nonresident citizens coming to resettle in the Philippines: Provided, That
such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines;
Sec. 109(1)(c)
Q. What transactions are covered in par. C?
A. Importation of personal and household effects belonging to the residents of the Philippines returning
from abroad and nonresident citizens coming to resettle in the Philippines
Q. What is the limitation/qualification so that such personal and household effects are exempt?
A. Such goods are exempt from custom duties
"(D) Importation of professional instruments and implements, wearing apparel, domestic animals, and
personal household effects (except any vehicle, vessel, aircraft, machinery, other goods for use in the
manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to
settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such
persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence
satisfactory to the Commissioner, that such persons are actually coming to settle in the Philippines and
that the change of residence is bona fide;

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Sec. 109(1)(D)
Q. Should the instruments accompany the professional?

A. Not necessarily. It may arrive before, during or after, but it must be within the 90 days period after the
arrival of the professional.
Q. What transaction is covered?

A. Importation of professional instruments and implements, wearing apparel, domestic animals, and
personal household effects belonging to persons coming in settle in the Philippines
Q. What is accepted in this par.?

A. Any vehicle, vessel, aircraft, machinery, other goods for use in the manufacture and merchandise of any
commercial quantity.
Q. What are the requisites to be exempt?

A. These are:
1. Such persons are actually coming to settle in the Philippines
2. For their own use and not for sale, barter or exchange
3. Accompanying such persons or arriving within 90 days before or after their arrival
4. Change of residence is bonafide
"(E) Services subject to percentage tax under Title V of NIRC;
Sec. 109(1)(E)
Q. Transaction involved?
A. Services subject to percentage tax 3% under Title V.
Bigote: Note services mentioned in RR 16-2005, 116-120,122-125 and 127 of the Tax Code. If a transaction
is subject to VAT, it is no longer subject to percentage tax and vice-versa.
"(F) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and
sugar cane into raw sugar;
Sec. 109(1)(F)
Q. Transaction Involved?
A. Services by agricultural contract growers and milling for others of palay into rice, corn into grits, and
sugar cane into raw sugar.
Q. What is agricultural contract grower?

A. This is common in the tagalong region. For example, SMC will enter into a contract with a farmer. They
will be given with a day old chicks to be grown within 45 days. The farmer will be paid by SMC for the
services rendered in growing chicken. This is what we call agricultural contract grower. Whatever money
earned by farmer in that contract that is exempt from VAT.
"(G) Medical, dental, hospital and veterinary services except those rendered by professionals;
Sec. 109(1)(G)
Q. What services are VAT-exempt under this par.?
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A. Medical dental hospital and veterinary services.
Q. What are not included?

A. Those rendered by professionals because nowadays, all professionals are subject to VAT, provided their
gross receipts for a period of one year exceed 1.5 Million.
Q. Are professionals entitled of exemption from VAT?

A. Yes. This under subsection (1), or in subsection (V) if its gross receipts do not exceed P1.5M.
"(H) Educational services rendered by private educational institutions, duly accredited by the
Department of Education (DEPED), the Commission on Higher Education (CHED), the Technical
Education And Skills Development Authority (TESDA) and those rendered by government educational
institutions;
Sec. 109(1)(H)
Q. What educational services are VAT-exempt?
A.
1. Those rendered by private educational institutions if duly accredited to DEPED, CHED, & TESDA.
2. Those rendered by government educational institutions without any further qualification.
Q. Does it matter if it is private or public?

A. Yes, if it is public, it is always exempt.
Q. What if it is private?
A. To be exempt, it must be duly accredited by the DEPED, CHED and TESDA.
Q. With respect to private educational institutions and government educational institutions, are there any
distinction?
A. In case of the former, it must be accredited by the DECS, CHED, and TESDA (applying RA 9337), in the
latter, it is exempt from VAT without any qualification.
"(I) Services rendered by individuals pursuant to an employer-employee relationship;
Sec. 109(1)(1)
Q. What services included in this subsection involve?
A. Services rendered by individuals pursuant to an employer-employee relationship. (hence the element of
employer-employee relationship should be present.)
Note: If professionals are receiving salary as an employee, he is VAT exempt under this paragraph.
"(J) Services rendered by regional or area headquarters established in the Philippines by multinational
corporations which act as supervisory, communications and coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the
Philippines;
Q. Are services of Regional or Area Headquarters exempt from VAT?

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A. Yes. Provided it is established by multi-national corporation in the Philippines and it does not earn
income and only act as as supervisory, communications and coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific Region
(N.B. This is now the new paragraph as provided for in RA 9337)
Sec. 109(1)(J)
Q. What services are involved in this subsection?
A. Services rendered by regional or area headquarters.
Q. What are the limitations to be exempt from VAT?

A. They are:
1. RAH established in the Philippines by MNC
2. Act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches
3. Do not earn or derive income from the Philippines
Bigote: Note Sec. 28(A)(a) and Sec. 22 (DD). RAH is also exempt from income tax.
"(K) 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;
Sec. 109(1)(K)
Q. Transaction?
A. Those which are exempt under international agreements to which the Philippines is a signatory or under
special laws.
Q. Except?
A. PD 529 Petroleum Exploration Concessionaries under the Petroleum Act of 1949.
"(L) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to
their members as well as sale of their produce, whether in its original state or processed form, to non-
members; their importation of direct farm inputs, machineries and equipment, including spare parts
thereof, to be used directly and exclusively in the production and/or processing of their produce;
Sec. 109(1) (L)

Q. Transaction?
A. sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their
members as well as sale of their produce, whether in its original state or processed from to non-members
their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be
used directly and exclusively in the production and/or processing of their produce.
Q. What is exempted here?

A. What is exempted is not only the sale of agricultural products but also 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.
Q. Does this subsection refer to food and nonfood or food only?

A. Covers Both

PUP COLLEGE OF LAW
Q. Does this cover only those in the original state?

A. No. it covers both processed & those in the original state.
Q. what is the limitation?

A. Used directly and exclusively in the production and/or processing of their produce.
"(M) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with
the Cooperative Development Authority;
Sec. 109(1)(M)
Q. Gross receipts from?
A. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the
CDA.
"(N) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the
Cooperative Development Authority: Provided, That the share capital contribution of each member does
not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus
ratably distributed among the members;
Sec. 109(1)(N)
Q. What is the coverage in the subsection?
A. Non-agricultural, non-electric, non-credit cooperatives duly registered with the CDA.
Q. What are the limitations/qualifications?

Q. 1. Must be duly registered with the CDA
2. The share capital contribution of each member does not exceed P15,000 and regardless of the aggregate
capital and net surplus tot ably distributed among the members.
Bigote: Importation by them of machineries & equipment including spare parts thereof to be used by them
are subject to VAT.
"(O) Export sales by persons who are not VAT-registered;
Sec. 109(1)(O)
Q. Transaction covered?
A. Export sales by persons who are not VAT-registered
Q. What is the effect if the taxpayer is not VAT-registered?

A. Taxpayer cannot avail tax credit.
Q. if VAT-registered?
A. 0% VAT and can avail of tax credit under Sec. 115(B)
Q. What is the rule?

A. General Rule: If persons require to be registered does not register, he is subject to liabilities.
Exception: If that person is an exporter.
((Old notes discussion: This subsection is unusual where the exporter fails to register under the VAT system,
his export sales are simply converted to exempt transactions instead of 0%-rated. In either case he is not

PUP COLLEGE OF LAW
liable for payment of AT. The difference is that if he is VAT-registered, he is entitled to tax credit; otherwise,
he is not. The sanctions under Section 115(b) are not impossible in the export who fails to register under the
VAT system.)
Q. In case exporter falls to register under the VAT system, will he be subject to VAT?
A. No. Where an exporter falls to register under the VAT system, his export sales are simply converted to
exempt transactions instead of zero-rated, in either case he is not liable for the payment of VAT.
Q. What is the difference then?

A. The difference, though, is that if he is VAT-registered, he is entitled to tax credit, otherwise, not. The
sanctions under Section 115(b) are not imposable on the exporter who fails to register under the VAT
system.
"(P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary
course of trade or business, or real property utilized for low-cost and socialized housing as defined by
Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other
related laws, residential lot valued at One million five hundred thousand pesos (P1,500,000) and below,
house and lot, and other residential dwellings valued at Two million five hundred thousand pesos
(P2,500,000) and below: Provided, That not later than January 31, 2009 and every three (3) years
thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price
Index, as published by the National Statistics Office (NSO);
Sec. 109(1)(P)
Q. what does this subsection cover?
A. Sale of real properties.
Q. What are the real properties covered?

A. These are:
1. Real property not primarily held for sale to customers: or held for lease in the ordinary course of
trade or business in the ordinary course of business or trade.
2. Real property utilized for low-cost housing
3. Real property utilized for socialized housing (2 & 3 being covered under RA 7279, Urban
Development and Housing Act of 1992.)
4. Residential lot valued at P1,500.000 and below
5. House and lot, and other residential dwellings valued at P2.5M and below.
Q. Relate this Sec. 106(A)(1)(a).

A. Sec. 106(A)(1)(a) is sale or lease of real property n the ordinary course of trade or business wherein such
sale is subject to 12% VAT. This subsection under Sec. 109 is an exception to the sale being subject to VAT.
Bigote: If not residential lot subject to VAT, unless for low cost housing or socialized housing.
"(Q) Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos
(P10,000) Provided, That not later than January 31, 2009 and every three (3) years thereafter, the

PUP COLLEGE OF LAW
amount herein stated shall be adjusted to its present value using the Consumer Price Index as published
by the National Statistics Office (NSO);
Q. Is the sale or lease of real property subject to VAT?

A. Under Sec. 106(A)(I)(a), for the sale or lease of real property to come under the coverage of Vat, the
transaction must be conducted in the ordinary course of trade or business, hence, in Section 109(w) now (P)
states that the sale or lease of real property is exempt from VAT where the transaction is conducted NOT in
the ordinary course of trade or business.
Q. What are the instances where the sale or lease of real properly in the ordinary course of trade or
business is still exempt from VAT under this part?
A.
1. Low-cost housing
2. Socialized dwelling
Q. Is lease of a residential unit subject to VAT?

A. It is exempt where the monthly rental does not exceed 10,000 pesos. (as amended by RA 9337 par Q)
Sec. 109 (1)(Q)
Q. What are the transactions involved?
A. Lease of a residential unit with a monthly rental not exceeding P10,000 regardless of the annual rentals
received as provided by RR 16-2005 (This is not absolute, note the next question.)
Q. Other transactions exempt under RR 16-2005?

A. 1. If it is not in the ordinary course of trade or business
2. If monthly rental exceeds P10,000 but the annual gross income does not exceed P1.5M
Bigote:
Value of Gross Receipts VAT exempt?
Gross receipts/mo < P10,000 VAT exempt under Sec.109
Gross receipts/mo > or = P10,000 and Aggregate annual 12% VAT on gross receipts/mo/unit under Sec. 108
gross receipts > or = P1.5M
Gross receipts/mo > P10,000 and Aggregate annual gross Exempt as provided under RR 16-2005
receipts < P1,500.000
"(R) 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;
Sec. 109(1)(R)
A. Sale importation, printing or publication of books and any newspaper, magazine, review or bulletin.
Q. What are the requisites?

A.
1. Appears at regular intervals
2. Fixed price
3. Not devoted principally to the publication of paid advertisements
4. Subscription and sale
=certification of exemption
=e.g. Phil. Daily Inquirer, MB, etc. exempt
PUP COLLEGE OF LAW
Q. Is Buy and Sell exempt?

A. No!
"(S) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment
and spare parts thereof for domestic or international transport operations;
Sec. 109(1)(S)- - -> new!

A. Sale, importation, or lease of passenger or cargo vessels and aircraft, including engine, equipment, and
spare parts thereof for domestic or international transport operations.
"(T) Importation of fuel, goods and supplies by persons engaged in international shipping or air
transport operations;
Sec. 109(1)(T) - - > new!

A. Importation of fuel, goods and supplies by persons engaged in international shipping or air transport
operations.
Bigote: Must be exclusively used and pertains to transport of goods/persons from Philippines port to a
foreign port without stopping to any other part in the Philippines
Q. What if used for other purpose other than shipping and transporting?
A. If fuel, good and supplies are used for other purpose it shall be subject to 12% VAT.
"(U) Services of banks, non-bank financial intermediaries performing quasi-banking functions, and
other non-bank financial intermediaries; and
Sec.109(1)(U) - -> new!

A. Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-
bank financial intermediaries
Bigote: Note under Sec.121-122 of the Tax Code such as money charges and pawnshops
"(V) 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 One million five hundred thousand pesos (P1,500,000): Provided, That not later than
January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its
present value using the Consumer Price Index as published by the National Statistics Office (NSO);
Sec. 109 (1)(V)

Q. Transaction involves?
A. 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 P1, 500.000.
Bigote: In other words, gross annual sales/receipts other than subsection A to T < P1.5M will be exempt
from VAT, if not mentioned, note Sec. 109(1), services pursuant to employer-employee relationship and

PUP COLLEGE OF LAW
gross receipts do not exceed P1.5M, then still exempt. If its gross receipts exceed P1.5M, then it will be
subject to VAT.
Sec. 109 (1)(V), P1.5M threshold applies only to subsections (P) (Q) & (V) but not to those enumerated in
subsections (A to (P) and subsections to (U).
Meaning, all the exempt transaction enumerated herein, whether or not it exceeded 1.5Million they are
still exempt, except paragraphs P, Q and V.
Q. if you are exempt from VAT because of the limitation of 1.5M, what is the applicable tax to be paid?
A. If the tax payer is exempt because of the 1.5 Million limitations, he is liable to pay the 3% percentage tax
(Sec. 116). However under paragraph V of Sec. 109, the taxpayer has 2 options, namely;
1. Claim exemption from VAT and Pay the 3% Percentage tax; and
2. Abandon exemption and Pay the 12% VAT.
Q. Which is better? Option 1 or 2?

A. It depends whether or not the taxpayer has accumulated substantial sum of input tax. If there is
substantial input tax, it is better to abandon exemption and pay the 12% because of the input and output
tax, you will pay the VAT lower than 3%;
So if a businessman has a gross selling price of P2M and his business is one enumerated in subsection (I),
(except P, Q and V) Is still exempt notwithstanding the P1.5M limitation in subsection (V).
Q. When can you therefore apply the P1.5M?

A. Those transactions which are supposedly subject to VAT where if not the limitation of 1.5 Million.
The P1.5M limitation applies only to subsection P, Q and V and inapplicable to other subsections
enumerated. It also applies to those transactions which are otherwise subject to VAT but the gross
receipts of P1.5M are within a period of 1 year.
Q. What about transactions not covered under Sec.109 & have a gross receipt of less than P1.5M?
A. Not liable for VAT but subject to percentage tax provided that taxpayer is not VAT registered.
"(2) A VAT-registered person may elect that Subsection (1) not apply to its sale of goods or properties or services:
Provided, That an election made under this Subsection shall be irrevocable for a period of three (3) years from the
quarter the election was made."
Sec. 109 (2)

Q. What is the limitation by a VAT-registered person who chooses to elect that subsection (1) does not apply
to its sale of goods or properties or services?
A. That such election shall be irrevocable for a period of three years from the quarter the election was
made.
"(2) A VAT-registered person may elect that Subsection (1) not apply to its sale of goods or properties or services:
Provided, That an election made under this Subsection shall be irrevocable for a period of three (3) years from the
quarter the election was made."
Note: see discussion at the beginning of this section.

PUP COLLEGE OF LAW
Sec. 110. Tax Credits. -
(A) Creditable Input Tax. -
"(1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance
with Section 113 hereof on the following transactions shall be creditable against the
output tax:
"(a) Purchase or importation of goods:
"(i) For sale; or
"(ii) For conversion into or intended to form part of a finished product for sale including
packaging materials; or
"(iii) For use as supplies in the course of business; or
"(iv) For use as materials supplied in the sale of service; or
"(v) For use in trade or business for which deduction for depreciation or amortization is
allowed under this Code.
"(b) Purchase of services on which a value-added tax has actually been paid.
Sec. 110. Tax Credits
Note :
1. Output more than the input only instance where the taxpayer will pay the VAT;
2. If the input is more than the output; or taxpayer not liable
3. The input it totally equal to output - taxpayer not liable to pay the VAT
Sec. 110. A. Credited Input Tax
Sec.110.A(1)
Q. What may be credited against output tax?
A. Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Sec. 113 hereof on
the transactions mentioned in Sec.110A(1).
Q. What are these transactions?

A. They are as follows:
(a) Purchase or importation of goods:
(i) For sale; or
(ii) For conversion into or intended to form part of a finished product for sale including
packaging materials; or
(iii) For use as supplies in the course of business: or
(iv) For use as materials supplied in the sale of service; or

PUP COLLEGE OF LAW
(v) For use in trade or business for which deduction for depreciation or amortization is
allowed under this code.
(b) Purchase of services on which VAT has been actually paid.

(c) Purchase of real properties for which VAT has been actually paid.
(d) Transactionsdeemed sale under Sec. 106(B)
(e) Transitional input tax: allowed under Sec. 4 III. (a) of RR 16-2005
(f) Presumptive input tax allowed under Sec. 4 III. (b) of RR 16-2005
(g) Transitional input tax credit under transitory provisions of RR 16-2005
"(2) The input tax on domestic purchase or importation of goods or properties by a VAT-
registered person shall be creditable:
"(a) To the purchaser upon consummation of sale and on importation of goods or

properties; and
"(b) To the importer upon payment of the value-added tax prior to the release of the
goods from the custody of the Bureau of Customs.
"Provided, That the input tax on goods purchased or imported in a calendar month for
use in trade or business for which deduction for depreciation is allowed under this Code,
shall be spread evenly over the month of acquisition and the fifty-nine (59) succeeding
months if the aggregate acquisition cost for such goods, excluding the VAT component
thereof, exceeds One million pesos (P1,000,000): Provided, however, That if the
estimated useful life of the capital good is less than five (5) years, as used for depreciation
purposes, then the input VAT shall be spread over such a shorter period:Provided,
finally, that in the case of purchase of services, lease or use of properties, the input tax
shall be creditable to the purchaser, lessee or licensee upon payment of the
compensation, rental, royalty or fee.
Sec. 110.A. (2)

Q. Who can avail of input tax credit?
A. The input tax on domestic purchase or importation of goods or properties by a VAT-registered person
shall be creditable:
(a) To the purchaser upon consumption of sale and on importation of goods or properties; and
(b) To the importer upon payment of the VAT prior to the release of the goods from the custody of
the Bureau of Customs
(c) To the purchaser of services or the lessee or license upon payment of a compensation, rental,
royalty, or fee
( please read the new paragraph inserted below Sec. 110A(2)(b))
"(3) A VAT-registered person who is also engaged in transactions not subject to the
value-added tax shall be allowed tax credit as follows:
"(a) Total input tax which, can be directly attributed to transactions subject to value-add
tax; and

PUP COLLEGE OF LAW
"(b) A ratable portion of any input tax which cannot be directly attributed to either
activity.
"The term 'input tax' means the value-added tax due from or paid by a VAT-registered
person in the course of his trade or business on importation of goods or local purchase of
goods or services, including lease or use of property, from a VAT-registered person. It
shall also include the transitional input tax determined in accordance with Section 111 of
this Code.
"The term 'output tax' means the value-added tax due on the sale or lease of taxable
goods or properties or services by any person registered or required to register under
Section 236 of this Code.
Sec. 110A(3)
Q. How shall a VAT-registered person who is also engaged in transactions not subject to VAT be allowed tax
credit?
A. (a) Total input tax which can be directly attributed to transactions subject to VAT; and
(b) A ratable portion of any input tax which cannot be directly attributed to either activity.
Input tax VAT due from or paid by a VAT-registered person in the course of his trade or business on
importation of goods or local purchase of goods or services including lease or use of property, from a VAT-
registered person including the transitional input tax.
Output Tax VAT due on the sale or lease of taxable goods or properties or services by any person
registered or required to register under Sec. 236 of his Code.
"(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax
exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input
tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or
quarters: Provided, That the input tax inclusive of input VAT carried over from the
previous quarter that may be credited in every quarter shall not exceed seventy percent
(70%) of the output VAT: Provided, however, That any input tax attributable to
zero-rated sales by a VAT-registered person may at his option be refunded
or credited against other internal revenue taxes, subject to the provisions of
Section 112.
Q: What are the taxes that may be claimed as a credit under the above paragraph( whaaaaat?)
A: any input tax attributable to zero-rated sales by a VAT-registered person may at his option
be refunded or credited against other internal revenue taxes, subject to the provisions of
Section 112.
Sec. 110 (B) Excess Output or Input Tax

Bigote: output tax > input tax - -> excess paid by VAT registered person input tax >output tax - - > carryover
of excess (not exceed 70% of the output tax, any input tax attributable to a VAT-registered person may at
his option be refunded or credited against other internal revenue taxes.
"(C) Determination of Creditable Input Tax. - The sum of the excess input tax carried
over from the preceeding month or quarter and the input tax creditable to a VAT-
registered person during the taxable month or quarter shall be reduced by the amount of
claim for refund or tax credit for value-added tax and other adjustments, such as
purchase returns or allowances and input tax attributable to exempt sale.

PUP COLLEGE OF LAW
"The claim for tax credit referred to in the foregoing paragraph shall include not only
those filed with the Bureau of Internal Revenue but also those filed with other
government agencies, such as the Board of Investments and the Bureau of Customs."
Sec. 110(C) Determination of Creditable Input Tax

Bigote: Note the portion: xxx reduced by the amount of claim for refund or tax credit for VAT and other
adjustments xxx
SEC. 111. Transitional/ Presumptive Input Tax Credits. -
"(A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person
who elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules
and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be
allowed input tax on his beginning inventory of goods, materials and supplies equivalent to two percent
(2%) of the value of such inventory or the actual value-added tax paid on such goods, materials and
supplies, whichever is higher, which shall be creditable against the output tax
Sec. 111 (A) Transitional Input Tax Credits
Q. What is transitional input tax?
A. A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person
shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of
goods, materials and supplies equivalent to two percent (2%) of the value of such inventory or the actual
value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable
against the output tax.
Q. Who is covered under this Section?

A. 1. Person who becomes liable to VAT; or
2. Person who elects to be a VAT-registered person
Q. Any other requirement?

A. Subject to the filing of the inventory
Q. What shall be the basis of the input tax which shall be creditable against the output tax?
A. either:
1. 2% of the value of the inventory of the goods, materials, and supplies or
2. The actual VAT paid on such goods; materials and supplies whichever is higher
"(B) Presumptive Input Tax Credits. -
"Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar,
cooking oil and packed noodle based instant meals, shall be allowed a presumptive input tax, creditable against the
output tax, equivalent to four percent (4%) of the gross value in money of their purchases of primary agricultural
products which are used as inputs to their production.

PUP COLLEGE OF LAW
"As used in this Subsection, the term 'processing' shall mean pasteurization, canning and activities which
through physical or chemical process alter the exterior texture or form or inner substance of a product in such
manner as to prepare it for special use to which it could not have been put in its original form or condition."
Sec. 111(B) Presumptive Input Tax Credits:

PRESUMPTIVE INPUT TAX CREDIT:
"Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing
refined sugar, cooking oil and packed noodle based instant meals, shall be allowed a presumptive
input tax, creditable against the output tax, equivalent to four percent (4%) of the gross value in
money of their purchases of primary agricultural products which are used as inputs to their
production.
"As used in this Subsection, the term 'processing' shall mean pasteurization, canning and
activities which through physical or chemical process alter the exterior texture or form or inner
substance of a product in such manner as to prepare it for special use to which it could not have
been put in its original form or condition."
Q. When we say presumptive input tax, in reality is there an input?

A. None. This is only by virtue of the technical provision of the law.
Q. How do you determine the presumptive input tax credit?

A. It is equivalent to 4% of the gross value in money of their purchases of primary agricultural products
which are used as inputs to their production is available to persons or firms engaged in:
1. Processing of sardines, mackerel, and milk:
2. Manufacturing of refined sugar:
3. Cooking oil:
4. Packed noodle based instant meals:
Q. The seller of the raw materials, normally are they liable or exempt?
A. They are exempt.
General Rule: if the seller is exempt from VAT, the buyer cannot claim input tax and consequently, tax credit
is not available to him.
Q. Is there a situation where the buyer/manufacturer can claim input tax and tax credit despite the fact that
the seller of raw materials is VAT-exempt?
A. This situation is provided for in Sec. 111(B) presumptive input tax credit.
Without this provision in the Code, the foregoing taxpayers could not claim input tax credit because their
suppliers of raw materials are VAT-exempt.
Bigote: In reality theres no input tax. If the seller is exempt from VAT, the buyer cannot claim input tax and
consequently, tax credit. Tax credit is not available to them. Under Sec.111(B), the law has created a
situation where the buyer/manufacturer can claim input tax and tax credit despite the fact that the seller of
raw materials is VAT exempt. This happens through the so-called presumptive input tax credit equivalent
to 4% of the gross value in money of their purchases of primary agricultural products which are used as
inputs to their production is engaged in transactions mentioned.

PUP COLLEGE OF LAW
Without this provision in the Code, the foregoing taxpayers could not claim input tax credit because the
manufacturer or suppliers of raw materials are VAT-exempt))
General Rule: If the seller is VAT-exempt, the buyer cannot claim input tax and consequently tax credit is not
available to him.
Exception: Presumptive Input Tax Credit where the buyer/manufacturer can claim input tax & tax credit
despite the fact that the seller of raw materials is Vat-exempt.
Q. Who shall be allowed presumptive input tax creditable against the output tax?
A.
1. Persons or firms engaged in the processing of sardines, mackerel and milk
2. Manufacturing refined sugar
3. Cooking oil
4. Packed noodles based instant meals
Processing pasteurization, canning and activities which through physical or chemical process alter the
exterior texture or form or inner substance of a product in such manner as to prepare it for special use to
which it could not have been put in its original form or condition.
3 kinds of Input tax;
1. Actual input tax;

2. Transitional input tax and;
3. Presumptive
SEC. 112. Refunds or Tax Credits of Input Tax. -
"(A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-registered person, whose sales are zero-
rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or
paid attributable to such sales, except transitional input tax, to the extent that such input tax has not
been applied against output tax: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (b) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange
proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP):Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of goods of properties or services, and the
amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis of the volume of sales: Provided,
finally, That for a person making sales that are zero-rated under Section 108 (B)(6), the input taxes shall
be allocated ratably between his zero-rated and non-zero-rated sales.
Sec.112. Refunds or Tax Credits of Input Tax:
Q. Who are entitled to claim tax refund?

A. Any VAT-registered person whose transaction is zero-rated. This section applies only to VAT-registered
entities
Sec. 112(A) Zero-rated or Effectively Zero-rated sales

PUP COLLEGE OF LAW
Bigote: Under Sec. 112(a), a taxpayer is entitled to tax credit has two options:
1. To claim for refund

2. To claim for credit
In both cases, the written claim must be filed within 2 years later the close of the taxable quarter when
the sales were made for the issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales provided that it must be pursuant to the zero-rated sales under
Sec.106(A)(2)(a)(1),(2) and (B) and Sec. 108(B)(1) and(2) provided further that the same must be in
acceptable foreign currency remitted through banking system in accordance with the rules of the BSP.
Do not confuse this with the claim for refund under Sec. 229, The written claim for refund under Sec. 112 is
applicable ONLY to claims for tax credit or tax refund under the VAT system whereas the claim for refund
under Sec. 229 is applicable to ALL internal revenue taxes.
In proper cases, the Commissioner within 120 days from the date of submission of complete documents in
support of the application, shall grant a refund or issue the tax credit certificate for creditable input taxes.
In case of full/partial denial, or failure of the Commissioner to act on the application within the prescribed
period, the taxpayer may, within 30 days from receipt of decision denying the claim or after the expiration
of the 120-day period appeal the decision with the CTA.))
Q. What is the procedure for refund/credit of input taxes?

A.
1. File a written claim for tax credit/refund or a written application for tax credit certificate (within
2 years after the close of taxable quarter when sales were made before the BIR);
2. The Commissioner must act on the written application within 120 days
3. Appeal within 30 days with the CTA sitting in division
-upon receipt of the decision denying partially o, fully the claim for tax refund or tax credit
-after the expiration of the 120-day period without the written claim having been acted upon.
Q. Within what period should the claim for refund/credit be filed?

A. Within two years after the close of the taxable quarter when the sales were made.
Q. What may the taxpayer avail?

A.
1. Issuance of a tax credit certificate
2. Refund of creditable input tax due or paid attributable to such sales, except transitional input
tax, to the extent that such input tax, has not been applied against the output tax.
Q. How is Sec. 112 distinguished with Sec. 229?

A. Sec. 229 refers to refund which is applicable to all internal revenue taxes.
Sec. 112 refers to refund tax credit under the VAT-system.
Q. How shall input taxes be allocated ratably?

PUP COLLEGE OF LAW
A. Where input tax is greater than the output tax resulting to tax credit up to 70% of the output tax, the rest
are carried over until the next quarter
"(B) Cancellation of VAT Registration. - A person whose registration has been cancelled due to
retirement from or cessation of business, or due to changes in or cessation of status under Section
106(C) of this Code may, within two (2) years from the date of cancellation, apply for the issuance of a
tax credit certificate for any unused input tax which may be used in payment of his other internal
revenue taxes.
Sec. 112(B) Cancellation of VAT Registration
Two (2) years from cancellation, taxpayer may apply for the Issuance of a tax credit certificate for any
unused input tax which may be used in payment of his other internal revenue taxes.
"(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsection (A) hereof.
"In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the
one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.
Sec. 112 (C) Period within which Refund or Tax Credit of input. Taxes shall be Made.
Q. Within what time should the BIR grant a refund/Issue the tax credit certificate?
A. 120 days from the date of submission of complete documents in support of the application.
Q. In case of full or partial denial or failure on the part of the Commissioner to act, what is the period of
appeal?
A. Within 30 days from the receipt of the decision denying the claim or after the expiration of the 120-day
period
"(D) Manner of Giving Refund. - Refunds shall be made upon warrants drawn by the Commissioner or
by his duly authorized representative without the necessity of being countersigned by the Chairman,
Commission on Audit, the provisions of the Administrative Code of 1987 to the contrary
notwithstanding: Provided, That refunds under this paragraph shall be subject to post audit by the
Commission on Audit."
Sec. 112(D) Manner of Giving Refund
Q. How shall refunds be made?

A. Upon warrants drawn by the Commissioner or by his duly authorized representative without the
necessity of being countersigned by the Chairman, Commission on Audit subject to post audit by
Commission o Audit.
Q. What is the period of filing of the VAT RETURN?

A. It is by the quarter
Q. What about the Payment of VAT?

PUP COLLEGE OF LAW
A. it is by the month
Q. Do we have withholding tax system here?

A. Yes. If the buyer is the government. The rate is not 0 or 12 but 5%. (Sec. 114 C)
Q. Why is it 5%
A. Because it is similar to creditable withholding in the sense
CHAPTER II COMPLIANCE REQUIREMENTS
SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. -
"(A) Invoicing Requirements. - A VAT-registered person shall issue:
"(1) A VAT invoice for every sale, barter or exchange of goods or properties; and
"(2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of
services.
Sec.113(A) Invoicing Requirements
Q. What shall a VAT-registered person issue?

A. 1. A VAT invoice for every sale barter or exchange of goods or properties: and
2. A VAT official receipt for every lease of goods or properties, and for levy sale, barter or exchange
of services.
"(B) Information Contained in the VAT Invoice or VAT Official Receipt. - The following information
shall be indicated in the VAT invoice or VAT official receipt:
"(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification
number (TIN);
"(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication
that such amount includes the value-added tax: Provided, That:
"(a) The amount of the tax shall be shown as a separate item in the invoice or receipt;
"(b) If the sale is exempt from value-added tax, the term "VAT-exempt sale" shall be written or
printed prominently on the invoice or receipt;
"(c) If the sale is subject to zero percent (0%) value-added tax, the term "zero-rated sale" shall be
written or printed prominently on the invoice or receipt;
"(d) If the sale involves goods, properties or services some of which are subject to and some of which are
VAT zero-rated or VAT-exempt, the invoice or receipt shall clearly indicate the breakdown of the sale
price between its taxable, exempt and zero-rated components, and the calculation of the value-added tax
on each portion of the sale shall be shown on the invoice or receipt: "Provided, That the seller may issue
separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale.

PUP COLLEGE OF LAW
"(3) The date of transaction, quantity, unit cost and description of the goods or properties or nature of
the service; and
"(4) In the case of sales in the amount of one thousand pesos (P1,000) or more where the sale or transfer
is made to a VAT-registered person, the name, business style, if any, address and taxpayer identification
number (TIN) of the purchaser, customer or client.
Sec. 113(B) Information Contained in the VAT invoice or VAT Official Receipt.
Q. What shall be indicated in the VAT Invoice or VAT official receipt?
A.
1. Statement that the seller is a VAT-registered person with TIN: and
2. Total amount which the purchaser pays or is obligated to pay the seller with the indication that
such amount includes the VAT Provided:
(a) The amount of the tax shall be shown as a separate item in the invoice or receipt
(b) If the sale is exempt from VAT, the term VAT-exempt sale shall be written or printed.
(c) If the sale is subject to zero percent (0)% VAT the term zero-rated sale shall be
written or printed
(d) If the sale involves goods, properties or services some of which are subject to and
some of which are VAT zero-rated or VAT-exempt indicated breakdown
(3) The date of transaction, quantity, unit cost and description of the goods or properties of nature
of the service: and
(4) In the case of sales in the amount of 1,000 or move where the sale or transfer is made to a VAT-
registered person, the name, business style, if any address and TIN of the purchaser, customer or
client.
"(C) Accounting Requirements. - Notwithstanding the provisions of Section 233, all persons subject to
the value-added tax under Sections 106 and 108 shall, in addition to the regular accounting records
required, maintain a subsidiary sales journal and subsidiary purchase journal on which the daily sales
and purchases are recorded. The subsidiary journals shall contain such information as may be required
by the Secretary of Finance.
Sec. 113(C) Accounting Requirements

Maintain a subsidiary sales journal and subsidiary purchase journal
"(D) Consequence of Issuing Erroneous Vat Invoice or Vat Official Receipt. -
"(1) If a person who is not a VAT-registered person issues an invoice or receipt showing his Taxpayer
Identification Number (TIN), followed by the word "VAT":
"(a) The issuer shall, in addition to any liability to other percentage taxes, be liable to:
"(i) The tax imposed in Section 106 or 108 without the benefit of any input tax credit; and
"(ii) A 50% surcharge under Section 248 (B) of this code;

PUP COLLEGE OF LAW
"(b) The VAT shall, if the other requisite information required under Subsection (B) hereof is shown on
the invoice or receipt, be recognized as an input tax credit to the purchaser under Section 110 of this
Code.
"(2) If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt
transaction, but fails to display prominently on the invoice or receipt the term "VAT-exempt Sale", the
issuer shall be liable to account for the tax imposed in Section 106 or 108 as if Section 109 did not apply.
"(E) Transitional Period. - Notwithstanding Subsection (B) hereof, taxpayers may continue to issue VAT
invoices and VAT official receipts for the period July 1, 2005 to December 31, 2005, in accordance with
Bureau of Internal Revenue administrative practices that existed as of December 31, 2004."
Sec. 113(D) Consequence of Issuing Erroneous Vat Invoice or Vat Official Receipt:
If not VAT-registered the issues an invoice or receipt showing TIN, followed by word VAT
The issuer shall, in addition to any liability to other percentage taxes, be liable to:
I. The tax imposed in Sec. 106 or 108 without the benefit of any input tax credit: and
II. A 50% surcharge
The VAT shall be recognized as an input tax credit to the purchaser

If a VAT-registered person fails to display prominently VAT-exempt sale, the issuer shall be liable to
account for the tax imposed in Sec. 106 or 108 as if Sec. 109 did not apply.
SEC. 114. Return and Payment of Value-Added Tax. -
"(A) In General. - Every person liable to pay the value-added tax imposed under this Title shall file a
quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the
close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered
persons shall pay the value-added tax on a monthly basis.
"Any person, whose registration has been cancelled in accordance with Section 236, shall file a return
and pay the tax due thereon within twenty-five (25) days from the date of cancellation of
registration: Provided, That only one consolidated return shall be filed by the taxpayer for his principal
place of business or head office and all branches.
Sec. 114 Return and Payment of VAT

Sec. 114(A) In General
Q. When is the filling of the return under VAT?

A. The filing must be made within 10 days from the close of the taxable quarter the pay as you file system
does not apply.
Bigote: RR 12-2001 changed 25 days to 10 days of each month.
Q. When is payment made?

A. VAT-registered persons shall pay on a monthly basis.
Q. In case registration being cancelled?

A. File return and pay tax due within 10 days from the date of cancellation of registration in one
consolidated return

PUP COLLEGE OF LAW
"(B) Where to File the Return and Pay the Tax. - Except as the Commissioner otherwise permits, the
return shall be filed with and the tax paid to an authorized agent bank, Reveenue Collection Officer or
duly authorized city or municipal Treasurer in the Philippines located within the revenue district where
the taxpayer is registered or required to register.
Sec. 114(B) Where to file the Return and Pay the Tax
Q. Where?
A. see Codal
"(C) Withholding of Value-Added Tax. - The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or -controlled corporations (GOCCs) shall,
before making payment on account of each purchase of goods and services which are subject to the
value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added
tax at the rate of five percent (5%) of the gross payment thereof: Provided, That the payment for lease or
use of properties or property rights to nonresident owners shall be subject to ten percent (10%)
withholding tax at the time of payment. For purposes of this Section, the payor or person in control of
the payment shall be considered as the withholding agent.
"The value-added tax withheld under this Section shall be remitted within ten (10) days following the
end of the month the withholding was made."
Sec. 115(C) Withholding of VAT (answers the questions, is there a withholding tax under the VAT?)
Purchaser Government
Seller subject to VAT under Sec. 106 and 108.
Q. To whom shall the withholding apply?

A. 1. Where the buyer is the government -5% withholding tax
2. Where the buyer is a non-resident owner -10% withholding tax
The Government before making payment on account of each purchase deduct and withhold final VAT due at
the rate of 5% of gross payment.
The payment for lease or use of properties or property rights to NONRESIDENT OWNERS shall be subject to
10% withholding at the time of payment. The payor or person in control shall be the withholding agent.
Q. When shall the tax withheld in this provision be remitted?

A. Within 10 days following the end of the month the withholding was made.
Sec. 115. Power of the Commissioner to Suspend the Business Operations of a Taxpayer
Q. Such power of the Commissioner to suspend business operations is arising from what violations?
A.
(a) In the case of a VAT-registered Person
1. Failure to issue receipts or invoices:
2. Failure to file a VAT return as required under Sec. 114: or
3. Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or
receipts for the taxable quarter
(b) Failure of any Person to register as required under Sec. 236
The temporary closure of the establishment for not less than 5 days lifted only upon compliance with
whatever requirements prescribed by the Commissioner in the closure order.
PUP COLLEGE OF LAW
Q. Does the temporary closure apply to exporter who fails to register?

A. No. if registered, zero-rated, if not registered, exempt.
Q. What is the significance of the registration?

A. Tax credit (input tax) is available to zero-rated transaction, but not to exempt transactions.
TITLE V OTHER PERCENTAGE TAXES

Sec. 116 Tax on Persons Exempt from VAT
Q. Who shall be liable to pay a tax equivalent to 3% of his gross quarterly sales or receipts?
A. Those person who are not liable to pay VAT under paragraph V of Sec. 109
REMEDIES UNDER THE INTERNAL REVENUE CODE

1. Remedies of the Government
Normal/Ordinary assessment and collection - Sec. Abnormal/Extraordinary assessment and collection

203, NIRC Sec. 222, NIRC
2. Remedies of the Taxpayer
Remedies of the Government:
1. Assessment - it is a notice from the government obliging the taxpayer to pay his tax. It is given
in the following instances;
a. Taxpayer filed but did not pay
b. Filed but the payment is not enough
c. He did not file a return and did not pay
2. Collection

PUP COLLEGE OF LAW
There was a return filed and it is not fraudulent and There was:
not false 1. An omission or failure to file the return;
2. If there was a return filed, it was
fraudulent, or;
3. The return was false
Under the NIRC, assessment and collection have 2 kinds:
Q: Is a false and fraudulent return presumed?
A: NO, false and fraudulent return is not presumed. The burden of proof to prove that the return was false
and fraudulent lies against the government through the BIR.
Q: Why is it important to know whether the assessment is under normal or abnormal condition?
A: It is important to know because the prescriptive period between normal and abnormal assessment differ.
PRESCRIPTIVE PERIODS:
CATEGORY NORMAL/ORDINAR ABNORMAL/EXTRAORDINARY

Y (Government has 2 options :)
(No options; only to
collect and assess)
Assess and collect Collect without Assessment
st
(1 Option) only through judicial action
nd
3 years from the time (2 Option)
Assessmen the return has been 10 years from the date of - Since there is no
filed (not the payment discovery of none filing of assessment there is no
t return or false or fraudulent prescriptive period for
of the tax) (Sec. 203,
return. assessment.

PUP COLLEGE OF LAW
NIRC)
10 years from the date of

5 years from the date of final discovery of none filing of
assessment return or false or fraudulent
return.
Collection 5 years from the final Note: the code is silent,
assessment however, it is safe to assume These options are available
that the prescriptive period is only if the Assessment is
similar to the prescriptive under the
provided under normal Abnormal/Extraordinary
considering the intention of Conditions.
the author of the law.
These are not available under
Normal/Ordinary Assessment
3 Ways of filing the return under Sec. 203, NIRC:
1. Filed before the deadline (for any tax under NIRC)

2. Filed on the date of deadline
3. Filed after the deadline
2 Ways of counting the 3 year period of Assessment:
1. If return is filed before or on the day of the deadline, the prescriptive period starts on the
date of the deadline;
2. If returned is filed after the deadline, the prescriptive period starts on the date the return
has been filed.
- For the calendar year of 2004, a return must be filed and paid for Net Income
Tax on or before April 15, 2005. Since he was not able to meet the deadline,
the taxpayer is now being assessed for tax due for 2004. To minimize interest
and surcharges. It has been suggested by the BIR that the taxpayer file a late
return. Supposed he filed his return covering 2004 on April 1, 2006. In this
example, the reckoning point is the deadline of April 15, 2005. The starting

PUP COLLEGE OF LAW
point of the counting the 3 year period is on the date the return is filed which
is April 1, 2006.
- Supposed it is not a late filing of return, the counting of the period is on the
date of the deadline which is April 15.
Q: How to apply these periods?
A: Annual net income tax return filed by individual using a calendar year. The return should be on
or before April 15, 2000. It was filed on April 15, 2000.
Q: Without stating the date of final assessment, can it be collected in 2007?
A: Under normal condition, first determine the date of final assessment. If the BIR finally assessed
the tax in November 2001, then 2007 is way beyond the 5 year period to collect. Count the
prescriptive period for collection from the date of final assessment.
Q: (same facts) Supposed it was finally assessed on March 2003, can it be collected in 2007?
A: Yes, because it is within the prescriptive period of 5 years.
Q: What is the relevance of saying false return and fraudulent return?
A: Because the fraudulent return there is a surcharge of 50%. That does not apply to false return.
Q: if the return was amended, how do you count the period?
A: It depends on the nature of the amendment. If its substantial, it shall be reckoned on the date it
was amended, otherwise it shall be on the date of the original date of filing. (Phoenix vs.
Commissioner)
Q: Suppose the taxpayer received the assessment beyond the 3 year prescriptive period. Assuming
it was sent via registered mail within the period of 3 years? Is the assessment still valid?
A. Yes provided it was sent via registered mail within the 3 year period. Because when the BIR sent
the notice, the prescriptive period was suspended.
BASILAN v. COMMISSIONER (2) SCRA 17)

PUP COLLEGE OF LAW
F: Supposed the notice of assessment was given within the period but it was received by the
taxpayer outside the period.
I: Whether or not the assessment is within the period of 3 years.
H: Yes. It is within the period. If the notice is sent through registered mail, the running of the
prescriptive period is stopped. What matter is the sending of the notice is made within the
period of prescription. It is the sending of the notice and not the receipt that tolls the prescriptive
period.
Q: What if the return has been amended, how would you compute the period of assessment?
A: NIRC is silent.
PHOENIX v. COMMISSIONER (14 SCRA 52)
If the amendment of the return is substantial as distinguished from superficial, the

counting of the prescriptive period is also amended. The prescriptive period shall be reckoned on
the date the substantial amendment was made. If the amendment is superficial, the counting of
the prescriptive period is still the original period.
Procedure for Assessment (Sec. 228, NIRC; RR 12-99)
Under NIRC ( 2 steps) Sec. 228 RR 12-99 (3 steps)
1. Notice of informal conference

1. Pre-assessment notice which should be done before pre-
2. Final assessment notice assessment;
2. Preliminary assessment notice

which is equivalent of pre-
assessment; and
3. Formal letter of demand and

notice to pay the tax, which is the
synonym of the final assessment

PUP COLLEGE OF LAW
3 Steps under RR 12-99:
STAGES DUTIES OF THE TAXPAYER DUTIES OF THE BIR
1. Notice of informal Reply If taxpayer did not file; it may;

conference which within 15 days upon receipt 1. Issue another notice;
should be done before or
pre-assessment; 2. Go to the second
stage
2. Preliminary Reply If taxpayer did not file; it may;

assessment notice within 15 days upon receipt 1. Issue another notice
which is equivalent of of Preliminary notice;
pre-assessment; and or
2. Declare taxpayer in
default, hence
taxpayer will now
receive formal letter
of demand or final
assessment
File a protest 60 days from the date of filing
3. Formal letter of within 30 days at the office of of protest, given to the
demand and notice to the BIR ; if did not file a taxpayer to submit all the
pay the tax, which is protest, notice of assessment docus in support of the
the synonym of the will become final and protest (in case of Motion for
final assessment executor re
(also known as disputing final reinvestigation)
assessment; Motion for Re-
investigation or reconsideration)
180 days after the date the
taxpayer submitted the
docus to support his protest
or after the lapse of the 60
days; given to the NOTE: 180 days shall be
commissioner to decide on reckon from;
the merits of the protest; (in
case of reinvestigation) 1. If Motion of recon
Within 30 days, appeal with recon from the day
the CTA sitting in division; the protest has been
filed)
MR within 15 days after
receipt of the adverse 2. Motion for
reinvestigation- on
decision;
the date the necessary

PUP COLLEGE OF LAW
documents was filed.

Within 15 days appeal with
the CTA sitting in division
Appeal with the SC within 15

days in case of :
(Rule 45) Questions of Law
(Rule 65) Grave abuse of
Discretion
Q: What happen after the lapse of 180 days and the BIR did not decide on your protest?
A. The notice is deemed denied and the taxpayer may file an appeal within 30 days from the receipt of the
decision or if there is no decision, upon the lapse of 180 days but within 30 days , with the CTA sitting in
division.
Q. What If the CTA in division decided not in favor of the tax payer, what is the remedy?
A. He may file a Motion for recon within 15 days on the same CTA division who decided the case?
Q: Suppose, the CTA denied the MR, what is the remedy?

A. He has to file an appeal within 15 days from receipt of the decision to file an appeal with the CTA sitting
in Banc
Q: From the ruling of the CTA en banc, suppose, the decision is still not favorable to the taxpayer? What is
his remedy?
A: As a rule the decision of CTA enbanc is final. However, it can still be elevated to the Supreme court via:
Rule 45 on questions of law and;
Rule 65- if there is grave abuse of discretion amounting to lack or excess of jurisdiction
Q: If the taxpayer did not receive a decision for a protest he filed with the Commissioner, instead he
received a notice of collection either for destraint or levy, what will happen?
A. We have two cases here.
YABES VS. ROJO, 115 SCRA 278
In this case, the taxpayer filed an appeal to CTA allegedly because the BIR deemed denied the protest
because instead of making a decision it sends a notice of Levy. But, almost simultaneously with the appeal
filed by the taxpayer, the BIR filed an ordinary civil action in the CFI.
When the court made a hearing, the taxpayer filed an injunction arguing that 2 similar causes of action is
pending on two different courts. The SC was convinced by the taxpayer so the SC issued an injunction
ordering the CFI to desist from conducting a hearing and turnover the case to the CTA because the remedy
availed by the taxpayer of filing an appeal before the CTA is a proper remedy because he did not receive the
decision over his protest filed and instead he received a notice of collection.

PUP COLLEGE OF LAW
The SC also decided that this appeal is filed on time because the counting of the period on which to file an
appeal was reckoned on the day the BIR filed an ordinary civil action in the regular court, because on that
day the proetest filed by the taxpayer is deemed denied.
UNION SHIPPING LINES VS. CIR, 185 SCAR 547
The taxpayer was waiting for the decision of his protest; however, he did not receive the same instead, he
received a notice of collection. He files a motion for reconsideration or clarification to the BIR asking the BIR
of whether or not his protest is deemed denied. The BIR did not reply on his MR.
When he received the notice of summons, instead of answering, he filed an appeal with the CTA, stating
that the tax is now being collected in the regular courts.
Issue: is the filing of an appeal to the CTA the correct remedy? Was it filed on time?
Ruling : The SC ruled that the filing of an appeal to the CTA is the correct remedy and it is filed on the time,
but this time the SC did not rule on the counting of the period within which to file an appeal from the day
the BIR filed a collection suit with the regular court because if we are going to count on the period on that
day, the appeal would appear to be beyond that period. To justify that it was filed on time, the SC ruled that
we have to count it from the day the taxpayer received the notice or summons.
Q. While the case is pending on appeal, can the BIR amend the final assessment?
A: There are two schools of thought because the tax code is totally silent.
1. In the case of Guerrero vs. Cir, 19SCRA 25 It can no longer be amended because it is no
longer the disputed one. The disputed assessment was the one subject of the protest to the
office of commissioner;
2. In the case of Batangas vs. Collector, 102 Phil. 322 It can still be amended in order to avoid
multiplicity of suits.
With these two opinions, Justice Vitug is saying that the second one is better opinion.
COMPROMISE (Sec. 204, NIRC)
3 Questions asked in 2004 BAR:
1. May the Government compromise criminal cases and civil cases?

2. Supposed the corporation is already dissolved, can the stockholder be obliged to pay?
3. Suppose the civil case filed by the BIR is final and executor, can it be subject to compromise?
CAN THERE BE COPMPROMISE IN:
1. CIVIL CASES?
- YES, IN ANY STAGE OF THE PROCEEDING
PUP COLLEGE OF LAW
- EXCEPT; WHEN THE CIVIL CASE IS ALREADY FINAL AND EXECUTORY BECAUSE
IT WILL VIOLATE THE SEPARATION OF POWERS
2. CRIMINAL CASES?
- YES, EXCEPT:
a. IF ALREADY FILED IN COURT (RTC) OR;
b. IF IT INVOLVES FRAUD
3. IF THE CORPORATION IS ALREADY DISSOLVED, CAN THE STOCKHOLDER BE HELD LIABLE TO PAY
TAX?
- GENERAL RULE: NO
- EXCEPT:
a. IF IT IS PROVEN THAT THE ASSETS OF THE CORPORATION IS
TAKEN BY ONE STOCKHOLDER OR;
b. IF THE STOCKHOLDER DID NOT PAY HIS UNPAID SUBSCRIPTION
Minimum Amount to be Compromised (Sec. 204)
1. If the ground is financial incapacity of the taxpayer, the minimum shall not be less than 10% of
the original assessment inclusive of the penalties and surcharges.
2. If based on other grounds, the minimum amount shall not be lower than 40% of the original
assessment.
Q: Can it be lower than that prescribed by law?
A: As a rule, no. EXCEPT, if allowed by the evaluation board consisting of the:
a) Commissioner; and
b) Four Deputy commissioner.
Instances when the Final Assessment becomes final and executory:
1. If the taxpayer did not file the protest on time

2. Failure to submit the supporting documents within the 60-day period
3. After the lapse of the 180-day period, you did not file an appeal within the 30-day period to
the CTA
4. An appeal was filed but made beyond the reglementary period to appeal
Q: If the taxpayer received a final notice to pay tax from the BIR and he did not pay the tax on the date
stated in the notice, what will happen?
A: The BIR will execute judicial or administrative remedies.

PUP COLLEGE OF LAW
Q: Can the BIR exercise the abovementioned remedies following a certain order or system
A: No. the BIR can either execute the remedies either simultaneous or together in no particular order or
sequence.
METHODS OF COLLECTION (SEC. 205)
1. Judicial Action
a. Civil
b. Criminal
2. Administrative Action
a. Distraint
b. Levy
c. Tax lien
Q: Why is it important to know whether the final assessment is under normal or abnormal conditions?
A: It is important because of the requirement under 222. If the final assessment becomes final and
executory, the government (BIR) can exercise the remedies under 205 in any order or simultaneously
(207). But it is not always the case, because the right of the government to collect is limited in case of
abnormal assessment/collection under 222. Under the second option, the right of the government is
limited to judicial action either civil or criminal. Administrative remedies such as distraint, levy, or tax lien
is not available under such condition.
Q: In distraint, levy or tax lien, is the 10 year period of collection applicable?
A: No, only the 5 year period should apply.
Distraint is a remedy whereby collection of the tax is enforced on the goods chattel or effects of the
taxpayer including other personal property of whatever character as well as stocks and other securities
debts, credits, bank accounts, interest in and rights to personal property
Kinds:
1. Constructive (Sec. 206)

2. Distraint of Intangible (Sec. 208)
3. Actual (Sec. 207, par. A, and Sec. 209)
1. Constructive Distraint
Grounds for Constructive Distraint (Sec. 206):
1. The taxpayer is retiring from his business

PUP COLLEGE OF LAW
2. The taxpayer intends to leave the Philippines or is about to leave the Philippines
3. The taxpayer hides or conceals his property
4. The taxpayer obstructs the collection of the tax.
- THESE GROUNDS ALSO ANSWER THE QUESTION: WHAT ARE THE TAXABLE PERIODS LESSER THAN
12 MONTHS?
Q. How is Constructive destraint effected?

A. 1. The distraining officer shall make a list of the personal property of the taxpayer in the
presence of the owner of the property or the person in possession of the property.
2. and obligate himself to preserve the same intact and unaltered and not to dispose of
the same in any manner without the express authority of the Commissioner;
2. The owner shall be requested to sign the receipt.
Q: What if the owner refuses to sign the receipt?
A: Sec. 206: The distraining officer shall require 2 individuals within the neighborhood with the
warning that they should not allow the taxpayer to dispose, transfer, or sell the property subject of
distraint.
2. Distraint of Intangible Property
Limited to 3 Intangible Properties:
1. Shares of stocks
2. Bank accounts
3. Credits and debts
Share of stocks
- Warrant of distraint furnished to the taxpayer and the officer to the corporation with
the warning that the property is subject of distraint and it should not dispose of it.
Bank Accounts
- Warrant of distraint furnished to the taxpayer and the officer of the bank with the
warming that the taxpayer should not be allowed to withdraw.
Debits and Credits

PUP COLLEGE OF LAW
- Warrant or distraint furnished to the debtor and creditor
3. Actual Distraint - is resorted to upon the failure of person owing any delinquent tax or
delinquent revenue to pay the same at the time required. It consists of the seizure of the goods,
chattel, or effects and personal property, including stocks and other securities, debts, credits, bank
accounts, and interest in and rights to personal property of such person in sufficient quantity to
satisfy the tax, or charge together with any increment thereto incident to delinquency, and the
expenses of the destraint and the cost of the subsequent sale. (Section 207).
- Personal property shall be physically or actually taken by the distraining officer.
- Within 10 days from the receipt of the warrant, a report of the distraint shall be submitted to the
BIR (Sec. 207, par a last par.)
- The property subjects of distraint shall be sold at a public auction EXCEPT bank accounts and
debits and credits.
- Notice of sale shall be by posting in 2 conspicuous places, stating the date and the place of the
sale (No publication requirement)
- Sec. 211: after the sale and within 2 days, a report shall be made to the BIR
Q: If the property sold is a personal property, is there a right of redemption?

A: NO. The rule is absolute.
Q: If the property is a personal property, is there a right of preemption?

A: SEC. 210: Before the scheduled sale, the taxpayer is allowed to recover the property by paying all
the property by paying all the property by paying all the proper charges as well as the interest, cost
and penalties.
During the Scheduled Auction Sale, 2 Things may happen:
1. There is bidder and the bid is enough

2. There is no bidder or there is a bidder but the bid is not enough
Q: What is the relevance of knowing the difference?
A: 1. If there is a bidder or the bid is not enough
- In case of insufficiency, there shall be further distraint to cover the liability. (217)
- In case of excess, the excess shall be returned to the taxpayer.
2. if there is no bidder or the bid is not enough.
- It will be purchased by the government and the later sold in a public auction again (212)
- In case of insufficiency, no further distraint, 217 applies only if there was a bidder.
PUP COLLEGE OF LAW
- In case of excess, the excess shall not be returned to the taxpayer but shall be remitted
to the national treasury.
Bigote: Since this a mode of collection, aside from the period within which to pay the tax, it is also
necessary to consider the period whether or not the right to Collect by the government has
prescribed. In this case, (destraint) the period to collect is within 5 years from the date of final
notice of assessment.
Q: is the prescriptive period of 10 years for collection applicable here?
A: No. it is only in judicial remedies. Because Sec. 232 first paragraph says.
Q: Can the government exercise distraint if it is under normal or abnormal.
A: with respect to normal yes, and under abnormal, only under the first option of assessment and
collection.
Note:
Distraint and Levy are summary in nature and either may be pursued in the discretion of the
authorities charged with the collection of tax independently or simultaneously with civil and
criminal action once the assessment becomes final and demandable.
The remedy of distraint and levy is not available where the amount of the tax involved is not
more than 100 pesos.
Distraint shall be instituted by;
1. the Commissioner or his duly authorized representative if the amount involved is in

excess of 1Million Pesos or;
2. The Revenue District Officer if the amount involved is 1 Million Pesos or less
Levy refers to the seizure of real properties and interest in or rights to such property for the satisfaction
of the taxes due from the delinquent taxpayers. Levy can be made before, simultaneously, or after the
distraint of personal property.
- Other than the delinquent taxpayer, warrant of levy is served to the register of deeds having
jurisdiction over the real property (Sec. 213)
-Within 10 days from the receipt of the warrant, a report of the levy shall be submitted to the BIR
(Sec. 207 (b) last par)
Notice of sale in Public Auction:
1. Posting in 2 conspicuous places

PUP COLLEGE OF LAW
2. Publication in newspaper of general circulation once a week for 3 consecutive weeks.
Q: Is there a right of pre emption?
A: Yes. 213.
Q: Is there a right of redemption?
A: Yes.
2 Things may happen in a Public Auction:
1. There is a bidder and the bid is enough

2. There is no bidder or the bid is not enough
Q: What if there is no bidder or the bid is not enough?
A: Forfeiture shall be made (215)
3 Definitions of Forfeiture under the Internal Revenue Code
1. Violation of Excise Tax Law (Sec. 224)

2. If there is no bidder or the bid is not enough (Sec. 215)
3. The order of the Collector to confiscate imported commodities (Sec. 2313, TCC)
Relevance of the Choice of Words:
- Under Sec. 212, the law says purchase
- Under Sec. 215, the law says forfeiture
- Under 215: the real property shall be automatically registered in the name of
the Government (purchase)
Q: If sold at a private sale, what is the requirement?
A: There must be an approval of the Secretary of Finance (216)
Q: After sale, if there was deficiency?
A: There shall be no further levy, because 215 says that it shall be to the total satisfaction of the
taxpayer.
Q: After sale, if there was an excess?
A: It shall not be returned to the taxpayer but shall be remitted to the national treasury.

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Sec. 217: this is only true if there was no bidder or the bid was not enough because of the provisions of
the Secs. 212, 215, and 216
Sec. 218: no court shall issue an injunction to restrain the collection of tax under this code
Determine what kind of injunction is referred to here:
1. Prohibitory referred in Sec. 218 because it restrains the collection of tax.

2. Mandatory
Q: Is the provision limited to tax under this code?
A: Limited to internal revenue taxes. EXCEPT: CTA (Regular Court) RA 1125 and 9282: CTA is
authorized to issue injunction to restrain the collection of taxes or fees collected under other code.
Q: Can the RTC (Regular Trial Courts) issue prohibitory injunction to restrain the collection of a tax?
A: Yes. For taxes or fees collected under Other Code
Q: Is the rule of distraint or levy the same under local taxation?
A: Yes, local tax.
- 175 for DISTRAINT
-176 for LEVY
Q: How about real property tax?
A: No, distraint is not authorized (256. LGC), because the remedy is only Judicial Action and Levy.
Tax Lien
Q: What is a Tax Lien?

A: Nonpayment of tax, the government has the right to claim a lien over the property of the taxpayer
NIRC Sec. 219, NIRC
Local Tax Sec. 173, NIRC
Real Property Tax Sec. 257, NIRC
Q: Supposed a parcel of land is about to be levied by the government, but the same is being foreclosed by
the mortgagee, which of the 2 obligee, the government or the mortgagee shall be preferred?
A: 219, last portion: The government is the preferred one if the lien is annotated and recorded in the
registry of deed. In the absence of annotation in the registry of deeds, the mortgagee is preferred.
Q: Do we have the same rule under Local Tax and Real Property Tax?

PUP COLLEGE OF LAW
A: NO. Both 173 and 257, the government is always the preferred one. The lien can only be removed by
payment of tax, interest and penalty.
Sec. 220: approving of filing an ordinary civil action for violation of the internal revenue code
- The approval must be made by the Commissioner of Internal Revenue
HIZON v. REPUBLIC (320 SCRA 574)
F: An ordinary civil action for violation of the tax code was filed in the city of San Fernando. But the filing
was only approved by the Revenue Regional Director of Central Luzon. The plaintiff opposed the filing in the
court on the ground that it should be approved by the Commissioner and the Revenue RD.
H: Sec. 220 should be read with Sec. 7 of the NIRC
- General Rule: powers and functions of the commissioner may be delegated but not to a position
lower than a Division Chief
- Under Sec. 7, there are powers which cannot be delegated
a) Power to recommend to the Secretary of Finance to issue rules and regulation
b) Power to decide a case of first impression
c) Power to enter into a compromise agreement
d) Power to assign BIR officer in the place of production subject to income tax
- Since the case does not fall under the prohibited delegation, the filing of the case is legal and
tenable.
- Decision of the Commissioner of Internal Revenue (CIR) is appealable to CTA.
Q: When is the decision of the CIR appealable to the Secretary of Finance?
A: 4 . On matters of interpretation of tax laws.
SEC. 223; SUSPENSION OF THE RUNNING OF THE PRESCRIPTIVE PERIOD:
Q: A Filipino taxpayer went to Canada, after 15 years he went back, he is being assessed by BIR under
normal assessment. Has the right of the government to assessed tax already prescribed?
A: No. When he went to Canada, the running of the prescriptive period is suspended.

PUP COLLEGE OF LAW
Q: What if the change of address is within the Philippines, say only from Manila to Pasay, is the running of
the prescriptive period suspended?
A: In order that the running of the period will not be suspended, especially if the change is district office,
223 provide that the taxpayer must send a notice of change of address to the BIR. In the absence of written
notice, the period will (not )be suspended.
Q: change of address is from Philippines to abroad?
A; The period will be suspended.
Other grounds for suspension;
1. During collection if there is no property found;

2. If the BIR is prohibited from making assessment such when the subject property is under litigation;
and
3. In distraint or levy, the BIR officer cannot locate the property.
NOTE: See also the codal provision for grounds enumerated under NIRC.
CLAIM FOR REFUND (Sec. 229)
Written claim for refund:
1. Sec. 229, NIRC

2. Sec. 112, VAT
3. Sec. 136 Local tax
4. Sec. 253, Real Property Tax
5. None except Sec. 1603, TCC
Written Claim for Refund under the Input Tax (Sec. 112)
Period is also 2 years from the close of the taxable quarter when the transaction was made.
Q: Ca we apply 229 to VAT?
A: Yes. Because there is no conflict. 112 is refund under input tax system and 229 is refund for:
Errors in payment or;

Collected without authority; and
Assessment without authority

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The period to claim refund is 2 years.
DOCTRINE OF EQUITABLE RECOUPMENT:
If the taxpayer is entitled to a written claim for refund but the prescriptive period to claim has
lapsed. The taxpayer is allowed to credit his written claim for refund which he failed to recover to
his existing tax liability.
Computed from :
A. individual counted on the day the tax has been paid.
1. Paying by way of withholding tax system, the reckoning point is the end of the taxable year.
2. paying by way of installment, reckoning point is the date of the last installment is paid.
3. If sold to public auction through distraint or levy, the date of proceeds is applied to the
satisfaction of the tax liability.
B. Corporation :
1. Existing/Operating
1992, ____________v. commissioner , 205 SCRA 184
1995, Commissioner V. Philam life ( 244 SCRA 446)
1998, Commissioner v. CTA (301 SCRA 840)
2. Dissolved /about to be dissolved:

2001, BPI v. Commissioner , 363 SCRA 840
1. Existing the counting of the prescriptive is 2 years on the day the annual adjusted return is filed,
because it is that day that the tax liability is known.
2. Non-Existing - The counting of the prescriptive period should also be reckoned on the day the
annual return is filed. But the corporation is no longer required to wait till the taxable period is over
to file the return. Upon receipt of the notice from the SEC to dissolve, the corporation, within 30
days thereafter, a return is filed.
Q: Suppose there is a supervening event, and the taxpayer was not able to file a written claim or refund
within the period?
A: Regardless of the supervening event, a written claim for refund must be filed within 2 years.
Q: Suppose the two year period is about to expire and there is no decision yet on the refund?
A: Remedy is to file an appeal before the CTA (deemed a denial).

PUP COLLEGE OF LAW
Q: suppose the BIR decided within 2 years against the refund?
A: Appeal within 30 days from the decision, provided it is still within 2 year period.
Q: Suppose there is only 21 days remaining after receiving the decision, when to file an appeal?
A: Within 21 days before the end of 2 year period.
a written claim for refund should be filed within 2 years.

Sec. 204 C last phrase: in case of over payment a written claim is not necessary because a return
constitutes a written claim for refund.
Q: May the Commissioner open the bank account of the taxpayer?
A: General Rule : NO. , except:
1. to determine the gross value of the estate; and

2. to enter into a compromise agreement under 204A( ground: Financial incapacity)
The written claim for refund to determine the gross value of the estate because taxpayer is already
dead. (consent can no longer obtain)
PROTEST UNDER TARIFF AND CUSTOMS CODE:
Situation : Importer of Chemical, under the TCC, the custom duties is only P27 but the collector
says it should be P52. The importer will then file a protest with the Office of the Collector.
In the old days, there is an automatic appeal from the decision of the collector under protest. But
under RA 7651, the remedy of automatic appeal is applicable to both protest and forfeiture.
I. In both cases of protest and forfeiture, if the importer loses the case and the government
wins, the remedy is to file an appeal within 15 days before the Office of the Commissioner.
From the ruling of the Commissioner, the importer should file an appeal
within 30 days before the CTA, sitting in division.
From the ruling of the CTA in division, the importer should file an MR within
15 days before the same division hearing the case.
From the ruling of the CTA in division, deciding on the MR, the importer
should file an appeal within 15 days before the CTA sitting en banc.
From the CTA en banc, appeal to SC within 15 days.

PUP COLLEGE OF LAW
II. If the importer-taxpayer wins the case, the government loses the case, Sec. 2313 of TCC as
amended by RA 7651, there shall be an automatic review within 15 days.
Q: Where should the automatic review made?
A. It depends. Publish the value of commodity.

1. IF 5 MILLION OR MORE AUTOMATIC REVIEW SHALL BE BEFORE THE SECRETARY OF THE
DEPARTMENT OF FINANCE.
2. IF LESS THAN 5 MILLION AUTOMATIC REVIEW SHALL BE BEFORE THE OFFICE OF THE
COMMISSIONE.
Q: Suppose the commissioner decide or did not decide within 30 days. What happen?
A: If the commissioner reverses the ruling of the collector, the ruling is final and executor.
If the commissioner affirms or did not decide within 30 days, there shall be an automatic
appeal before the Sec. of finance.
Q: Between the two which will be appealed to the CTA?
A: The decision of the secretary which passes through the office of the commissioner (RA 9282)
But not all decision of the Secretary which passes the office of the commissioner affirms or
did not decide within 30 days and appealed before the secretary of finance will appeal to the CTA
be allowed.
There are 3 instances when the Secretary of Finance renders a decision appealable to the CTA:
1. Decision of the Secretary by virtue of automatic review passing through the commissioner
2. Cases of anti-dumping duty, where the anti-dumping duty was ordered by the Secretary
3. Decision of the Secretary of Finance on countervening duty.
LOCAL GOVERNMENT TAXATION

GENERAL PRINCIPLES:
Art. X, Sec. 3. The Congress shall enact a local government code which shall provide for a more
responsive and accountable local government structure instituted through a system of decentralization
with effective mechanisms of recall, initiative, and referendum, allocate among the different local
government units their powers, responsibilities, and resources, and provide for the qualifications,

PUP COLLEGE OF LAW
elections, appointment and removal, term, salaries, powers and functions and duties of local officials, and
all other matters relating to the organization and operation of the local units.
Art. X, Sec. 5. 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 Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively
to the local governments.
Id., Sec. 6. Local government units shall have a just share, as determined by law, in the national taxes
which shall be automatically released to them.
The principle of Local autonomy under the 1987 constitution simply means decentralization. It does not
make local governments sovereign within the state or an imperium in imperio. In a unitary system or
government, where local government can only be an intra sovereign nation, local government can only mean
a measure of decentralization of the function of the government.
Q: May LGU exercise the power to tax without any antecedent legislation?
A: This question has been settled by the SC where it declared that The power to tax is vested primarily in
congress; however in our jurisdiction, it may be exercised by the local legislative bodies, No longer by virtue
of delegation as before, but pursuant to DIRECT AUTHORITY conferred by Section 5, Article X of the
Constitution, under this congress may provide which, however, must be consistent with the basic policy of
local autonomy.
General Provisions
Section 128. Scope. - The provisions herein shall govern the exercise by provinces, cities, municipalities, and
barangays of their taxing and other revenue-raising powers.
Section 129. Power to Create Sources of Revenue. - Each local government unit shall exercise its power to
create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions herein,
consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to
the local government units.
All local governments units are granted general tax powers as well as other revenue raising powers like the
imposition of service fees and charges. The requisites for the enactment to be valid are:
1. Public Hearing must be held prior to the enactment of the ordinance

2. The Levy must not be unjust, exclusive , oppressive, confiscatory or contrary to a declared policy
Section 130. Fundamental Principles. - The following fundamental principles shall govern the exercise of the
taxing and other revenue-raising powers of local government units:

PUP COLLEGE OF LAW
(a) Taxation shall be uniform in each local government unit;
(b) Taxes, fees, charges and other impositions shall:
(1) be equitable and based as far as practicable on the taxpayer's ability to pay;
(2) be levied and collected only for public purposes;
(3) not be unjust, excessive, oppressive, or confiscatory;
(4) not be contrary to law, public policy, national economic policy, or in the restraint of
trade;
(c) The collection of local taxes, fees, charges and other impositions shall in no case be let to any
private person;
(d) The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit
of, and be subject to the disposition by, the local government unit levying the tax, fee, charge or
other imposition unless otherwise specifically provided herein; and,
(e) Each local government unit shall, as far as practicable, evolve a progressive system of taxation.
The local government code has made explicit that a tax, fee or charge or to generate revenue under this
code shall be exercised by the local Sanggunian of the LGU concerned through an appropriate ordinance.
Local taxation like national taxation is legislative in nature and the said nature of taxation was held not
violated when a tax ordinance, created a market committee that would formulate, recommend and adopt,
subject to the ratifications of the municipal board, and approval of the mayor, policies and rules and
regulations in the operation of its markets stalls and market stall fees.
UNIFORMITY:
Equality and uniformity in local taxation means that all taxable articles or kinds of property of the same
class shall be taxed at the same rate within the territorial jurisdiction of the taxing authority or LGU and
not necessarily in comparison with other units although belonging to same political subdivisdion.
A tax is considered uniform when it operates with the same force and effect in every place where the subject
may be found. Where the statute or ordinance applies equally to all persons firms and corporations placed in
similar situations, there is no infringement of the rule on equality.

PUP COLLEGE OF LAW
It is true that the uniformity essential to the valid exercise of the power of taxation does not require identity
or equality under all circumstances or negate the authority to classify the object of taxation. The
classification made in the exercise of this authority, to be valid, must be reasonable and this requirement
is not deemed satisfied unless:
1. It is based upon substantial distinction, which makes the real differences;

2. It is germane to the purpose of the law or ordinance
3. Classification applies not only to present condition but also to future conditions
4. Classification applies equally to all those who belong to the same class.
Public purpose requires that the proceeds of the taxation be used to support the existence of the local
government or to the pursuit of its governmental objectives.
PROVINCE OF BULACAN VS. COURT OF APPEALS (299 scra 442)
The former Gov. Obet Pagdanganan together with the Board Members wanted to impose tax on quarry
being done by Republic Cement in the Province of Bulacan. However, the tax on quarry under the LGC, Sec.
138 speaks that the land must be public land. Lawyer of Gov. Pagdanganan said that they couldnt invoke
the tax under Sec. 138 because Republic Cement is quarrying on private land. Nonetheless, the provincial
government pushed through the imposition of the tax under Sec. 138 of the LGC. Republic Cement objected
on several grounds (1) The tax on quarrying must be imposed only on public land, (2) and that it is in the
nature of an excise tax, section 133H provides that local government units cannot levy excise tax.
The SC disagreed with the province of Bulacan declaring that ordinance invalid. In addition to Sec. 133H, Sc
has another argument, Sec. 151 of the NIRC on the tax on quarrying as a form of excise tax. The tax on this
section does not distinguish whether it is a public or private land. But if the LGC already says that it is
quarrying on public land, quarrying therefore on private land shall be the jurisdiction of the national
government.
JUST COMPENSATION:
Municipal corporations are allowed a wide latitude in determining the rates of imposable taxes, licenses and
fees. Avoiding of ordinances by courts is taken only when the rates imposed are shown to be oppressive,
excessive and prohibitive.
Courts will go slow in writing off an ordinance but it will not hesitate to declare the tax ordinance void when
it is excessive or confiscatory.

PUP COLLEGE OF LAW
Section 132. Local Taxing Authority. - The power to impose a tax, fee, or charge or to
generate revenue under this Code shall be exercised by the sanggunian of the local
government unit concerned through an appropriate ordinance.
Section 133. Common Limitations on the Taxing Powers of Local Government Units. -
Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:
(a) Income tax, except when levied on banks and other financial institutions;
Banks and other financial institutions" include non-bank financial intermediaries, lending investors,
finance and investment companies, pawnshops, money shops, insurance companies, stock markets,
stock brokers and dealers in securities and foreign exchange, as defined under applicable laws, or
rules and regulations thereunder;
The following incomes of the bank are also exempted:
1. Interest on Expanded Foreign Currency Deposits

2. Interest from mortgages insured under the Home Financing Act
Rationale: already subject to Gross receipts tax by the national government up to 35% of their
lending activities, 5% on the amount of royalties of their real or personal property, 35% corporate
income tax and 20% withholding tax on their Philippine Currency deposit income.
(b) Documentary stamp tax; (absolute prohibition)
(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as
otherwise provided herein;
Exception: of 1% tax on transfers of real property ownership that may be imposed by the
provinces and cities, in case of adequate consideration FMV of the property whichever is higher
(d) Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all
other kinds of customs fees, charges and dues
Except wharfage on wharves constructed and maintained by the local government unit concerned;
(e) Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing
through, the territorial jurisdictions of local government units in the guise of charges for
wharfage, tolls for bridges or otherwise, or other taxes, fees, or charges in any form whatsoever
upon such goods or merchandise;
Except wharfage on wharves constructed and maintained by the local government unit concerned;
PUP COLLEGE OF LAW
Wharfage customs imposed on the cargo of the vessel engaged in foreign/domestic trade under
Sec. 131.
(f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or
fishermen;
Marginal farmers refers to individual engaged in subsistence farming or fishing which shall be
limited to the sale, barter, or exchange of products produced by himself or his immediate family.
Taxable if :
1. Sold by Agri-business enterprises in commercial quantities;

2. Transformed into manufactured articles or already undergo processing
3. Sold by persons other that the farmer, or producers, even if processed.
(g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-
pioneer for a period of six (6) and four (4) years, respectively from the date of registration;
Includes barangay business enterprise.
Exemption is only up to the period of 4 and 6 years to be counted from registration to BOI, if period
already lapsed, it is not exempt anymore.
Exemption does not extends to permit, regulatory fees and service charges. Exempt on local taxes
(h) Excise taxes on articles enumerated under the national Internal Revenue Code, as amended,
and taxes, fees or charges on petroleum products;
Prohibition to levy excise tax on articles, including fees or charges on petroleum products. So the
prohibition here refers to excise tax and also excise tax in all kinds of petroleum products.
PILILIA VS. PETRON, 188 SCRA 83
The cause of action arose under the old law, however, the ruling in this case is still relevant because
what was chagedis only the section number. Sec 5 under the old law is now Sec. 133 and Sec. 19 is
now Sec. 143. The municipal council of Pililia passed a tax ordinance imposing or levying tax on the
manufacture of petroleum products being done by petron. Petron objected because the tax
imposed is in the nature of excise tax. Petron says that Pililia has no authority. However the SC did
not agree with petron. The SC said that undere Section 19 of the Local Tax Code now section 143(a),
the Municipal council has the authority to impose business tax on the manufacture of petroleum
products. While it is true that the municipality cannot impose excise tax on petroleum products, the

PUP COLLEGE OF LAW
tax imposed in this case is in the nature of business tax imposed on the manufacturing of petroleum
products.
Note: LGUsare authorized to impose business tax of not more than 2% of the gross receipts for the
preceeding year of said entities.
(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on
goods or services except as otherwise provided herein;
Exception: Section 143(H). The commodity subject to excise tax, if the LGU is authorized under said
section, it may levy the tax only that it should not exceed 2% of the gross receipts.
PEPSI COLA VS. TANAUAN, 69 SCRA 460
In the old days, there was a prohibition to impose sales tax, but we don not apply this tax now,
instead we have the VAT.
In this case, a business tax was imposed for every gallon of softdrinks. The SC is saying that the tax
imposed is not a sales tax because the imposition of the tax is on the production of softdrinks,
whether sold or not. If the basis of the tax is the softdrinks which was sold, then it is a sales tax
(now VAT). Hence, if the basis of the tax is production and not the quantity of commodity sold, the
tax is not prohibited. A VAT cannot be levied by a local government unit. However, under Sec
143(H), if it is a business tax, than it may be imposed.
(j) Taxes on the gross receipts of transportation contractors and persons engaged in the
transportation of passengers or freight by hire and common carriers by air, land or water, except as
provided in this Code;
Exceptions:
1. Sec 141 (on motor vehicles)

2. delivery vans
3. Sec. 154 on public utility,
4. Tricycles
5. Business tax on transportation contractors
FIRST HOLDING CO. VS. BATANGAS
This case refers to the oil pipeline from Batangas to Pandaca, Manila and from Batangas to Bicutan,
Taguig. Petroleum products are transported to Pandacan and Bicutan through these oil pipelines.
The LG of Batangas passed a tax ordinance imposing tax on the pipeline. Issue here is WON oil
pipeline is a Common carrier. The SC says that the provision of the common carrier under the civil

PUP COLLEGE OF LAW
code is copied from the US (Pajunar v. Commissioner, 328 SCRA 666). In the US a common carrier
is not only carrying passengers, but also commodities. So the SC concluded that oil pipeline is a
common carrier. Because of this, under Sec 133(j) of the LGC, an LGU is prohibited from imposing
tax on gross receipt of the common carrier whether by land, air, or water. Also under Sec. 117 of the
NIRC, the right or jurisdiction to levy a tax on common carrier is vested in the national government
or the BIR. Hence, tax ordinance was held to be invalid.
(k) Taxes on premiums paid by way or reinsurance or retrocession; absolute prohibition
Retrocession premiums refunded on account of rejection of risk.
(l) Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of
licenses or permits for the driving thereof, except tricycles;
BUTUAN CITY VS. LTO 322 SCRA 805
We have two agencies of the government one is the LTO and the other is the LTFR. The function of
the LTO is to register and license motor vehicles. The Function of the LTFRB is to grant franchise and
regulate the operation of the common carriers. The issue in this case is which of these 2 functions
have been delegated to the local government unit. The SC held that in sec 133 (l), the one
prohibited is the function of the LTO, registration of motor vehicles. Hence, what is delegated to the
LGU is the function of the LTFRB.
(m) Taxes, fees, or other charges on Philippine products actually exported, except as otherwise
provided herein;
Exception:
1. If levied on the business of exporting

2. Raw materials exported to foreign countries
(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives
duly registered under R.A. No. 6810 and Republic Act Numbered Sixty-nine hundred thirty-eight
(R.A. No. 6938) otherwise known as the "Cooperative Code of the Philippines" respectively; and
Exemption does not include payment of service, charges, or rentals for the use of property and
equipment or public utilities owned by the LGUs (such as water, electric, tollfees)

PUP COLLEGE OF LAW
(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units.
Exceptions: LGU may tax GOCCs but not;
1. Local Water District;

2. Duly registered cooperatives
3. Non-stock non-profits hospitals and educational institutions
CASES :
Basco v. pagcor, 197 SCRA 52
Cebu VS. Mactan , 261 SCRA 667
LRT vs. City of Manila, 342 SCRA 692
FACTS: The City Government of Manila tried to collect real property tax but the management said no
since it is exclusively for public use
HELD: No. you are not exclusively for public purpose since every time a person wants use the LRT, he has to
pay.
Q: Why not interpose the defense that it is owned by the government?

A: Because in real estate tax, it is not a defense. In LGC, Sec. 199 par. B and in Sec. 217, both provisions say
that the basis for the imposition of real estate tax is the ACTUAL USE of anybody who is using that (maybe in
the concept of a usufructuary, or lessee or owner); the basis not the ownership.
In Sec. 134, taxes enumerated from Sec 131 to 141, are not only applicable to the province but it can be
imposed also by cities in line with Sec. 151.
Specific Provisions on the Taxing and

Other Revenue-Raising Powers of Local Government Units
PROVINCES
Section 134. Scope of Taxing Powers. - Except as otherwise provided in this Code,
the province may levy only the taxes, fees, and charges as provided in this Article.
Section 135. Tax on Transfer of Real Property Ownership.
Tax on the sale, , donation, barter, or on any other mode of transferring ownership
or title of real property at the rate of not more than fifty percent (50%) of the one
percent (1%) of the total consideration involved in the acquisition of the property or
of the fair market value in case the monetary consideration involved in the transfer
is not substantial, whichever is higher.

PUP COLLEGE OF LAW
The sale, transfer or other disposition of real property pursuant to R.A. No. 6657
shall be exempt from this tax.
For this purpose, the Register of Deeds of the province concerned shall, before
registering any deed, require the presentation of the evidence of payment of this
tax. The provincial assessor shall likewise make the same requirement before
cancelling an old tax declaration and issuing a new one in place thereof, Notaries
public shall furnish the provincial treasurer with a copy of any deed transferring
ownership or title to any real property within thirty (30) days from the date of
notarization.
It shall be the duty of the seller, donor, transferor, executor or administrator to pay
the tax herein imposed within sixty (60) days from the date of the execution of the
deed or from the date of the decedent's death.
This is not a real estate tax, this is a local tax because it is not provided under the topic of real estate
tax ( Sec. 198-280).
The law says that it should not exceed the of the 1% of the consideration ( Note: Do not use zonal value
since this is used only under the NIRC and not the LGC)
Q: Since all provinces and cities must follow the limitation of the rate, is it violative of the Constitution?
A: No, because the sanggunian will fix the rate considering the status of the province.
Q: How come he City of Makati fix the rate of 75% or % of 1%?

A: Because cities are authorized to increase the rate of 50% of the maximum that is 50% of is 25 ( 50 +25 =
75%)
Note: Do not apply this provision if the transfer is under RA 6657 (CARP), that is exempt.
Section 136. Tax on Business of Printing and Publication. - The

province may impose a tax on the business of persons engaged in the
printing and/or publication of books, cards, posters, leaflets,
handbills, certificates, receipts, pamphlets, and others of similar
nature, at a rate not exceeding fifty percent (50%) of one percent (1%)
of the gross annual receipts for the preceding calendar year.
In the case of a newly started business, the tax shall not exceed one-
twentieth (1/20) of one percent (1%) of the capital investment. In the
succeeding calendar year, regardless of when the business started to
operate, the tax shall be based on the gross receipts for the preceding
calendar year, or any fraction thereof, as provided herein.
The receipts from the printing and/or publishing of books or other

reading materials prescribed by the Department of Education, Culture
and Sports as school texts or references shall be exempt from the tax
herein imposed.

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Normally, a province cannot impose this because the tax on business can only be
imposed by city or municipality, except this one, printing and publication of
magazines and periodicals.
Section 137. Franchise Tax. - Notwithstanding any exemption granted

by any law or other special law, the province may impose a tax on
businesses enjoying a franchise, at the rate not exceeding fifty percent
(50%) of one percent (1%) of the gross annual receipts for the preceding
calendar year based on the incoming receipt, or realized, within its
territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed one-
twentieth (1/20) of one percent (1%) of the capital investment. In the
succeeding calendar year, regardless of when the business started to
operate, the tax shall be based on the gross receipts for the preceding
calendar year, or any fraction thereon, as provided herein.
The old national franchise tax under the old tax code already abolished. We still have franchise other than
this one, known as the national franchise tax provided for in the republic act granting franchise.
2 Kinds of Franchise Tax:
1. Local Franchise tax ( under LGC, Sec. 137)

2. National Franchise Tax (provided for in the statute or RA authorizing the franchise)
Q: May LGUs impose local franchise tax?

A: We have to consider here many SC Decisions and Sec. 193 of the LGC.
Under Sec. 193, it says there unless especially provided for in this code, exemptions granted to natural
juridical persons are hereby withdrawn (abolished) except:
1. Local Water Districts;

2. Cooperative registered under the cooperative code (RA 6938)
3. Non-profit and non-stock educational institution
BASCO VS. PAGCOR (197 SCRA 52)
FACTS: THE City Council passed a tax ordinance imposing on PAGCOR, an agency of the government.
PAGCOR objected saying that the Local government is prohibited under the old local authority act to impose
tax on the agency of the government.
HELD: The SC declared null and void the tax ordinance saying manila cannot do that.
CEBU V. MACTAN, 261 SCRA 667

PUP COLLEGE OF LAW
FACTS: Cebu government was trying to collect real estate tax from the Mactan Airport (Note: Real property
tax is a territorial tax, meaning it should only b collected within the territorial jurisdiction) lawyers of Mactan
Airport argued that under Sec. 133(O), Cebu an LGU, cannot imposed tax on an agency of the government,
and they also invoke the ruling in BASCO.
HELD: The lawyer of the Mactan Airport is devoid of any merit at all, it is 100% erroneous, since the real
estate tax is not a local tax, hence, why invoke a SC ruling and codal provision which can only be applied to
local tax. Therefore, Mactan Airport should pay Real Property tax.
Before the codification in 1991 (to take effect, January 1, 1992) local taxation was embodied in a
separate book known as Local tax Code (PD 231) while real property tax was provided in a separate
book known as real property tax code.
Section 138. Tax on Sand, Gravel and Other Quarry Resources. - The
province may levy and collect not more than ten percent (10%) of fair market
value in the locality per cubic meter of ordinary stones, sand, gravel, earth, and
other quarry resources, as defined under the National Internal Revenue Code, as
amended, extracted from public lands or from the beds of seas, lakes, rivers,
streams, creeks, and other public waters within its territorial jurisdiction.
The permit to extract sand, gravel and other quarry resources shall be issued
exclusively by the provincial governor, pursuant to the ordinance of the
sangguniang panlalawigan.
The proceeds of the tax on sand, gravel and other quarry resources shall be
distributed as follows:
(1) Province - Thirty percent (30%);
(2) Component City or Municipality where the sand, gravel, and other quarry
resources are extracted - Thirty percent (30%); and
(3) Barangay where the sand, gravel, and other quarry resources are extracted -
Forty percent (40%).
We are through with this in the case of province of Bulacan vs. CA, 299 SCRA 442
Section 139. Professional Tax. -
(a) The province may levy an annual professional tax on each person engaged in
the exercise or practice of his profession requiring government examination at
such amount and reasonable classification as the sangguniang panlalawigan
may determine but shall in no case exceed Three hundred pesos (P300.00).

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(b) Every person legally authorized to practice his profession shall pay the
professional tax to the province where he practices his profession or where he
maintains his principal office in case he practices his profession in several
places: Provided, however, That such 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 other national or local tax, license, or
fee for the practice of such profession.
(c) Any individual or corporation employing a person subject to professional tax

shall require payment by that person of the tax on his profession before
employment and annually thereafter.
(d) The professional tax shall be payable annually, on or before the thirty-first
(31st) day of January. Any person first beginning to practice a profession after
the month of January must, however, pay the full tax before engaging therein. A
line of profession does not become exempt even if conducted with some other
profession for which the tax has been paid. Professionals exclusively employed
in the government shall be exempt from the payment of this tax.
(e) Any person subject to the professional tax shall write in deeds, receipts,
prescriptions, reports, books of account, plans and designs, surveys and maps,
as the case may be, the number of the official receipt issued to him.
This must be correlated with the tax under Sec. 147.
Both 139 and 147 are taxes imposed on persons exercising professional calling.
Section 139 Section 147

Are to be imposed by provinces and cities To be imposed by municipalities and cities
Applicable to workers who must pass a government Persons who are working but are not required to
examination take government licensure exams
There is a maximum amount (P300) Does not provide for any amount, only requirement
that it must be reasonable.
Section 140. Amusement Tax. -
(a) The province may levy an amusement tax to be collected from the
proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses,
boxing stadia, and other places of amusement at a rate of not more than thirty
percent (30%) of the gross receipts from admission fees.
(b) In the case of theaters or cinemas, the tax shall first be deducted and
withheld by their proprietors, lessees, or operators and paid to the provincial
treasurer before the gross receipts are divided between said proprietors, lessees,
or operators and the distributors of the cinematographic films.

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(c) The holding of operas, concerts, dramas, recitals, painting and art
exhibitions, flower shows, musical programs, literary and oratorical
presentations, except pop, rock, or similar concerts shall be exempt from the
payment of the tax hereon imposed.
(d) The sangguniang panlalawigan may prescribe the time, manner, terms and
conditions for the payment of tax. In case of fraud or failure to pay the tax, the
sangguniang panlalawigan may impose such surcharges, interest and penalties
as it may deem appropriate.
(e) The proceeds from the amusement tax shall be shared equally by the
province and the municipality where such amusement places are located.
Under the NIRC, there is also an amusement tax under Section 125.
PBA VS. QC, 137 SCRA 358
FACTS ; City Government of QC enacted an ordinance trying to collect amusement tax, including
amusement tax on PBA (Held in Areneta, Cubao); PBA refused because they are already paying amusement
tax to the national government through the BIR because of Section 125 of the NIRC
HELD: QC Government cannot collect on the ground that it is being collected by the national government
and secondly, in the enumerations of amusements under Sec. 140 of the LGC, you will never see
Professional basketball. Most of all, it is the intention of the author that it is only the national government
Nak ng putang katangahan yan! Local tax code, PD 231 was enacted in 1974 when we still dont
have professional basketball, since it was born in 1975.
Ano ba dapt tama dyan? Both the national and the local government can collect. There is no
violation of prohibited double taxation becausethere are different taxing power and not only that
Sec. 140 speaks of amusement tax on admissions fee while sec. 12d, it pertains to gross receipts.
Section 141. Annual Fixed Tax For Every Delivery Truck or Van of
Manufacturers or Producers, Wholesalers of, Dealers, or Retailers in, Certain
Products. -
(a) The province may levy an annual fixed tax for every truck, van or any vehicle
used by manufacturers, producers, wholesalers, dealers or retailers in the
delivery or distribution of distilled spirits, fermented liquors, soft drinks, cigars
and cigarettes, and other products as may be determined by the sangguniang
panlalawigan, to sales outlets, or consumers, whether directly or indirectly,
within the province in an amount not exceeding Five hundred pesos (P500.00).
(b) The manufacturers, producers, wholesalers, dealers and retailers referred to

in the immediately foregoing paragraph shall be exempt from the tax on peddlers
prescribed elsewhere in this Code.

PUP COLLEGE OF LAW
Q: What if not delivery van, only sako?

A: The applicable tax is peddlers tax imposed by municipalities and cities. If may dalang sasakyan, yari siya
sa province, may tax.
Note: Sec. 135-141, these are taxes imposed by provinces and cities ; Sec. 143 -150 are taxes
to be imposed by municipalities as well as cities;
Municipalities
Section 142. Scope of Taxing Powers. - Except as otherwise provided in this

Code, municipalities may levy taxes, fees, and charges not otherwise levied by
provinces.
Section 143. Tax on Business. - The municipality may impose taxes on the
following businesses:
(a) On manufacturers, assemblers, repackers, processors, brewers, distillers,

rectifiers, and compounders of liquors, distilled spirits, and wines or
manufacturers of any article of commerce of whatever kind or nature.
This is a graduated annual fixed tax , the rate of which is based on the
taxpayers gross sales or receipts for the preceding calendar year. However
when the gross sales or receipts amount to 6.5M or more for the preceding
calendar year, the tax ceases to be a fixed tax. A percentage tax of P37.5 of I%
is imposed instead.
(b) On wholesalers, distributors, or dealers in any article of commerce of

whatever kind or nature
This is also a graduated annual fixed tax the rate of which is based on the gross
sales or receipt for the preceding calendar year, Where the gross sales or
receipts however amounts to 2M or more, the tax become a percentage tax
levied at a rate not exceeding 50% of 1%
(c) On exporters, and on manufacturers , millers, producers, wholesalers,

distributors, dealers or retailers of essential commodities enumerated
hereunder at a rate not exceeding one-half () of the rates prescribed under
subsection (a), (b) above
(d) On retailers.
The tax on retailers is not a graduated annual fixed tax but annual percentage
tax imposed on the following rates;

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P400,000.00 2%
or less
more than 1%
P400,000.00
Provided, however, That barangays shall have the exclusive power to levy taxes,
as provided under Section 152 hereof, on gross sales or receipts of the preceding
calendar year of Fifty thousand pesos (P50,000.00) or less, in the case of cities,
and Thirty thousand pesos (P30,000.00) or less, in the case of municipalities.
(e) On contractors and other independent contractors, in accordance with the

following schedule:
This tax is also graduated annual fixed tax based on the gross receipts for the
preceeding calendar year. However, when the gross receipts amount to 2M or
more, the contractors tax become a percentage tax. The tax rate is 50% of 1%
(f) On banks and other financial institutions, at a rate not exceeding fifty percent
(50%) of one percent (1%) on the gross receipts of the preceding calendar year
derived from interest, commissions and discounts from lending activities,
income from financial leasing, dividends, rentals on property and profit from
exchange or sale of property, insurance premium.
(g) On peddlers engaged in the sale of any merchandise or article of commerce,

at a rate not exceeding Fifty pesos (P50.00) per peddler annually.
(h) On any business, not otherwise specified in the preceding paragraphs, which
the sanggunian concerned may deem proper to tax: Provided, That on any
business subject to the excise, value-added or percentage tax under the National
Internal Revenue Code, as amended, the rate of tax shall not exceed two percent
(2%) of gross sales or receipts of the preceding calendar year.
The sanggunian concerned may prescribe a schedule of graduated tax rates but
in no case to exceed the rates prescribed herein.
Taxes that can be imposed by Municipalities or Cities:
1. Manufacturing, repacking, processing, including the manufacturer or permitted liquor and also
its dealer;
2. Wholesaling;
3. Exportation;
4. Retailing;
5. Contractors tax;
6. Tax on banking institution and financing institution;

PUP COLLEGE OF LAW
7. Peddlers tax
8. Exemption under Sec. 133 (i)
Q: If you have two branches, how many business taxes do you have to pay?
A: You Pay only one business tax ( Sec. 146)
ILO-ILO BOTTLERS V. ILO-ILO CITY, 164 SCRA 607)
FACTS: Ilo-ilo Bottlers was already paying business tax on manufacturing under 143(A) to the city
government by virtue of a tax ordinance. Later on they are obliged to pay by virtue of another tax ordinance
imposing business tax on wholesaling. Ilo-ilo Bottlers argued How could it be if you manufacture, it is
necessary follows that you sell your commodity so, with the payment of the business tax on manufacturing,
it carries with it the business of wholesaling.
HEL: No. you have to determine the marketing system of the company. If wholesaling is also being done in
the place of manufacturing, business tax on wholesaling should no longer be paid it should only be the
business tax. But if the marketing system of the company provides that wholesaling shall be done in a
separate place, the manufacturer must still pay the business tax on wholesale because now it could be
argued that they gave the separate business of wholesaling.
Q: On the business of retailing, should the business tax on retailing be imposed by the city or by the
municipality or by the Barangay in the city or the barrio in the municipality?
A: Sec. 143 (D) must be correlated with 152, the tax to be imposed by the Barangay.
It depends.
A. City:
If the gross receipts of the retailer exceed 50K in a minimum of one year, it is the right or privilege of
the city to impose the business tax on retailing.
B. Barangay:
If the gross receipts of the retailer did not exceed 50K in a minimum of one year, it is the right or
privilege of the barangay council to impose the business tax on retailing.
C. Municipality :
If the gross receipts of the retailer exceed 30K in a minimum of one year.
D. Barrio:
If the gross receipts of the retailer did not exceed 30K in a minimum of one year,
NOTE: These distinctions do not apply in wholesaling. These are only for retailing.
Paragraph H: for the imposition of excise tax, percentage tax and value added tax, the municipality may
impose a tax not exceeding 2% of the gross receipt (with regard to a city, it may go as far as 3%)

PUP COLLEGE OF LAW
Section 144. Rates of Tax within the Metropolitan Manila Area. - The
municipalities within the Metropolitan Manila Area may levy taxes at
rates which shall not exceed by fifty percent (50%) the maximum rates
prescribed in the preceding Section.
Municipalities in Metro Manila who can increase their rate. Right now only one Municipality - Pateros
Section 146. Payment of Business Taxes. -
(a) The taxes imposed under Section 143 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. The tax on a business must be paid by the person conducting the same.
(b) In cases where a person conducts or operates two (2) or more of the businesses mentioned in
Section 143 of this Code 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 two (2) or more related businesses.
(c) In cases where a person conducts or operates two (2) or more businesses mentioned in Section
143 of this Code 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.
Section 145. Retirement of Business. - A business subject to tax pursuant to

the preceding sections 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.
Section 146. See Sec 143
Section 147. Fees and Charges. - The municipality may impose and collect
such reasonable fees and charges on business and occupation and, except as
reserved to the province in Section 139 of this Code, on the practice of any
profession or calling, commensurate with the cost of regulation, inspection and
licensing before any person may engage in such business or occupation, or
practice such profession or calling.
Section 148. Fees for Sealing and Licensing of Weights and Measures. -
(a) The municipality may levy fees for the sealing and licensing of weights and
measures at such reasonable rates as shall be prescribed by the sangguniang
bayan.

PUP COLLEGE OF LAW
(b) The sangguniang bayan shall prescribe the necessary regulations for the use
of such weights and measures, subject to such guidelines as shall be prescribed
by the Department of Science and Technology. The sanggunian concerned shall,
by appropriate ordinance, penalize fraudulent practices and unlawful possession
or use of instruments of weights and measures and prescribe the criminal
penalty therefor in accordance with the provisions of this Code. Provided,
however, That the sanggunian concerned may authorize the municipal treasurer
to settle an offense not involving the commission of fraud before a case therefor
is filed in court, upon payment of a compromise penalty of not less than Two
hundred pesos (P200.00).
Section 149. Fishery Rentals, Fees and Charges. -
(a) Municipalities shall have the exclusive authority to grant fishery privileges in
the municipal waters and impose rentals, fees or charges therefor in accordance
with the provisions of this Section.
(b) The sangguniang bayan may:
(1) Grant fishery privileges to erect fish corrals, oysters, mussels or other aquatic
beds or bangus fry areas, within a definite zone of the municipal waters, as
determined by it: Provided, however, That duly registered organizations and
cooperatives of marginal fishermen shall have the preferential right to such
fishery privileges: Provided, further, That the sangguniang bayan may require a
public bidding in conformity with and pursuant to an ordinance for the grant of
such privileges: Provided, finally, That in the absence of such organizations and
cooperatives or their failure to exercise their preferential right, other parties
may participate in the public bidding in conformity with the above cited
procedure.
(2) Grant the privilege to gather, take or catch bangus fry, prawn fry or kawag-
kawag or fry of other species and fish from the municipal waters by nets, traps
or other fishing gears to marginal fishermen free of any rental, fee, charge or any
other imposition whatsoever.
(3) Issue licenses for the operation of fishing vessels of three (3) tons or less for
which purpose the sangguniang bayan shall promulgate rules and regulations
regarding the issuances of such licenses to qualified applicants under existing
laws.
Provided, however, That the sanggunian concerned shall, by appropriate

ordinance, penalize the use of explosives, noxious or poisonous substances,
electricity, muro-ami, and other deleterious methods of fishing and prescribe a
criminal penalty therefor in accordance with the provisions of this Code:
Provided, finally, That the sanggunian concerned shall have the authority to
prosecute any violation of the provisions of applicable fishery laws.
Section 150. Situs of the Tax. -

PUP COLLEGE OF LAW
(a) For purposes of collection of the taxes under Section 143 of this Code,
manufacturers, assemblers, repackers, brewers, distillers, rectifiers and
compounders of liquor, distilled spirits and wines, millers, producers,
exporters, wholesalers, distributors, dealers, contractors, banks and other
financial institutions, and other businesses, maintaining or operating branch
or sales outlet elsewhere shall record the sale in the branch or sales outlet
making the sale or transaction, and the tax thereon shall accrue and shall be
paid to the municipality where such branch or sales outlet is located. In cases
where there is no such branch or sales outlet in the city or 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.
(b) The following sales allocation shall apply to manufacturers, assemblers,

contractors, producers, and exporters with factories, project offices, plants, and
plantations in the pursuit of their business:
(1) Thirty percent (30%) of all sales recorded in the principal office shall be
taxable by the city or municipality where the principal office is located; and
(2) Seventy percent (70%) of all sales recorded in the principal office shall be
taxable by the city or municipality where the factory, project office, plant, or
plantation is located.
(c) In case of a plantation located at a place other than the place where the
factory is located, said seventy percent (70%) mentioned in subparagraph (b)
of subsection (2) above shall be divided as follows:
(1) Sixty percent (60%) to the city or municipality where the factory is located;
and
(2) Forty percent (40%) to the city or municipality where the plantation is
located.
(d) In cases where a manufacturer, assembler, producer, exporter or contractor

has two (2) or more factories, project offices, plants, or plantations located in
different localities, the seventy percent (70%) sales allocation mentioned in
subparagraph (b) of subsection (2) 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.
(e) The foregoing sales allocation shall be applied irrespective of whether or not
sales are made in the locality where the factory, project office, plant, or
plantation is located.
The tax referred to in here is the business tax on wholesaling and retailing.

PUP COLLEGE OF LAW
Q: RFM is manufacturing commodities, one of them is Swift Hotdogs, this is being sold not only
in Mandaluyong, Metro Manila, but also to the inter-country from Batanes to Tawi-tawi. Where
should business tax of retailing be paid? it should be in the principal office (Mandaluyong) or
the place where commodities are sold?
A: It will be paid in the place where it had been sold, provided there is a branch office or a sales outlet (150
A)
If it so happens that the company has a factory different from the place where the principal office is
located 30% should be paid in the principal office and 70% in the municipality or city where the
branch is located.
PHILIPPINE MATCHES V. CEBU ( 81 SCRA 99)
FACTS: Phil. Matches were produced in Nagtahan, Manila. In Cebu City, there was a warehouse where the
matches were stored. Many of the customers, by way of wholesale in warehouse in Cebu City. They came
from different towns of the Visayan Region. May the business tax ordinance of Cebu be imposed on on
those transactions even if the buyers did not come from the territorial jurisdiction of Cebu?
HELD: Since this case, the contract booked and paid, meaning, it was negotiated, consummated and
perfected in the warehouse where it was located in the Cebu City, the Cebu City government has the right
to collect business tax.
Q: What if there is an agreement that commodities would be delivered and that the buyer would be waiting
in some other town, is the answer still the same?
A: Yes. The answer is still the same because delivery to the carrier is delivery to the buyer, where delivery has
been termed within territorial jurisdiction of Cebu.
SHELL V. SIPOCOT, 105 PHIL 603
Facts : The petroleum products were purchased at the motor vehicle traversing the neighboring towns of
Sipocot like bason, Dimalaon, all towns of Camarines Norte. The contract of sale was negotiated and
perfected in different municipalities where the motor vehicle of shell was travelling.
Held: Although the oil depot was located in Sipocot, the said municipality cannot impose tax on that because
the contract of sale was negotiated and perfected in the different nearby towns of Camarines.
Q: Is there a conflict with the Shell and Phil matches?
A: None, as a matter of fact, these two decisions complement each other.

PUP COLLEGE OF LAW
Cities
Section 151. Scope of Taxing Powers. - Except as otherwise provided in this

Code, the city, may levy the taxes, fees, and charges which the province or
municipality may impose: Provided, however, That the taxes, fees and charges
levied and collected by highly urbanized and independent component cities shall
accrue to them and distributed in accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed
for the province or municipality by not more than fifty percent (50%) except the
rates of professional and amusement taxes.
Barangays
Section 152. Scope of Taxing Powers. - The barangays may levy taxes, fees,
and charges, as provided in this Article, which shall exclusively accrue to them:
(a) Taxes - On stores or retailers with fixed business establishments with gross
sales of receipts of the preceding calendar year of Fifty thousand pesos
(P50,000.00) or less, in the case of cities and Thirty thousand pesos
(P30,000.00) or less, in the case of municipalities, at a rate not exceeding one
percent (1%) on such gross sales or receipts.
(b) Service Fees or Charges. - Barangays may collect reasonable fees or charges
for services rendered in connection with the regulations or the use of barangay-
owned properties or service facilities such as palay, copra, or tobacco dryers.
(c) Barangay Clearance. - No city or municipality may issue any license or

permit for any business or activity unless a clearance is first obtained from the
barangay where such business or activity is located or conducted. For such
clearance, the sangguniang barangay may impose a reasonable fee. 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.
(d) Other fees and Charges. - The barangay may levy reasonable fees and
charges:
(1) On commercial breeding of fighting cocks, cockfights and cockpits;
(2) On places of recreation which charge admission fees; and

PUP COLLEGE OF LAW
(3) On billboards, signboards, neon signs, and outdoor advertisements.
Only a minimal sum ( fair and reasonable)
1. On Commercial breeding of fighting cocks, cockfights and cockpits. must be for commercial
purposes.
2. On places of recreations which charge administration fee
3. On billboards, signboards, neon signs and outdoor advertisements especially for the barrios and
Barangay along the highways
4. For Barangay Clearance

If you want to engage in business of retailing and wholesaling if the Barangay captain will not
approve that within 7 days, go to the city hall for approval
5. For the use of Barangay property for instance the Barangay has a plaza.
Common Revenue-Raising Powers
Section 153. Service Fees and Charges. - Local government units may impose
and collect such reasonable fees and charges for services rendered.
Section 154. Public Utility Charges. - Local government units may fix the rates
for the operation of public utilities owned, operated and maintained by them
within their jurisdiction.
Section 155. Toll Fees or Charges. - The sanggunian concerned may prescribe
the terms and conditions and fix the rates for the imposition of toll fees or
charges for the use of any public road, pier, or wharf, waterway, bridge, ferry or
telecommunication system funded and constructed by the local government unit
concerned: Provided, That no such toll fees or charges shall be collected from
officers and enlisted men of the Armed Forces of the Philippines and members
of the Philippine National Police on mission, post office personnel delivering
mail, physically-handicapped, and disabled citizens who are sixty-five (65) years
or older.
When public safety and welfare so requires, the sanggunian concerned may
discontinue the collection of the tolls, and thereafter the said facility shall be
free and open for public use.
Q: Why common?
A: All the LGU could impose the same. But it does not follow that all provinces, cities, municipalities cold
impose the same. Only the LGU which operate, establish, maintain and entity.

PUP COLLEGE OF LAW
If established by the province, it should only be the province.
These are:
1. Service Fee and charges for services rendered

2. Public utility charges provided owned, operated and maintained by the LGU concern;
3. Toll fees and charges tax or toll for the use of a bridge or a street
Case:
Padua filed a civil action in the RTC Makati, trying to stop the government from collecting a toll fee
in the Sosuth Expressway including north expressway alleging that he is affected as a taxpayer because he is
from Paraaque. He argued that if you use the property of the government like a street or a public plaza,
you do not pay. He made the analogy, that if you go to Luneta, you do not pay the city government of
Manila.
The Makati RTC, the CA and SC had a uniform ruling that the operator should be pro habited from
collecting further toll fees because if the operator had already recovered his investment and earned an
income already, he should be stopped. As argued by the SC, it copied the argument of the lawyer ( re:
Luneta)
Note: Res Judicata does not apply here.
When the ruling became final and executor in 1993, the North and South Expressway were totally
dismantled and totally destroyed by the DPWH to give way to the final and executor decision of the court,
that it should no longer collect.
After several months, the government announced in the radio that the party in the case of Padua
mutually agreed that the collection shall be resumed in order to have money for the maintenance and
repair of the highway.
Exceptions to 155 (collection of toll fees)
1. Members of the AFP

2. Members of the PMP
3. Post office personnel delivering mail
4. Physically handicapped
5. Disabled citizens 65 years and older
Community Tax

PUP COLLEGE OF LAW
Section 156. Community Tax. - Cities or municipalities may levy a community

tax in accordance with the provisions of this Article.
Section 157. Individuals Liable to Community Tax. - Every inhabitant of the

Philippines eighteen (18) years of age or over who has been regularly employed
on a wage or salary basis for at least thirty (30) consecutive working days during
any calendar year, or who is engaged in business or occupation, or who owns
real property with an aggregate assessed value of One thousand pesos
(P1,000.00) or more, or who is required by law to file an income tax return shall
pay an annual additional tax of Five pesos (P5.00) and an annual additional tax
of One peso (P1.00) for every One thousand pesos (P1,000.00) of income
regardless of whether from business, exercise of profession or from property
which in no case shall exceed Five thousand pesos (P5,000.00).
In the case of husband and wife, the additional tax herein imposed shall be
based upon the total property owned by them and the total gross receipts or
earnings derived by them.
Section 158. Juridical Persons Liable to Community Tax. - Every corporation

no matter how created or organized, whether domestic or resident foreign,
engaged in or doing business in the Philippines shall pay an annual community
tax of Five hundred pesos (P500.00) and an annual additional tax, which, in no
case, shall exceed Ten thousand pesos (P10,000.00) in accordance with the
following schedule:
(1) For every Five thousand pesos (P5,000.00) worth of real property in the
Philippines owned by it during the preceding year based on the valuation used
for the payment of real property tax under existing laws, found in the
assessment rolls of the city or municipality where the real property is situated -
Two pesos (P2.00); and
(2) For every Five thousand pesos (P5,000.00) of gross receipts or earnings
derived by it from its business in the Philippines during the preceding year -
Two pesos (P2.00).
The dividends received by a corporation from another corporation however

shall, for the purpose of the additional tax, be considered as part of the gross
receipts or earnings of said corporation.
Section 159. Exemptions. - The following are exempt from the community tax:
(1) Diplomatic and consular representatives; and
(2) Transient visitors when their stay in the Philippines does not exceed three
(3) months.

PUP COLLEGE OF LAW
Section 160. Place of Payment. - The community tax shall be paid in the place
of residence of the individual, or in the place where the principal office of the
juridical entity is located.
Section 161. Time for Payment; Penalties for Delinquency. -
(a) The community tax shall accrue on the first (1st) day of January of each year
which shall be paid not later than the last day of February of each year. If a
person reaches the age of eighteen (18) years or otherwise loses the benefit of
exemption on or before the last day of June, he shall be liable for the community
tax on the day he reaches such age or upon the day the exemption ends.
However, if a person reaches the age of eighteen (18) years or loses the benefit of
exemption on or before the last day of March, he shall have twenty (20) days to
pay the community tax without becoming delinquent.
Persons who come to reside in the Philippines or reach the age of eighteen (18)
years on or after the first (1st) day of July of any year, or who cease to belong to
an exempt class or after the same date, shall not be subject to the community tax
for that year.
(b) Corporations established and organized on or before the last day of June
shall be liable for the community tax for that year. But corporations established
and organized on or before the last day of March shall have twenty (20) days
within which to pay the community tax without becoming delinquent.
Corporations established and organized on or after the first day of July shall not
be subject to the community tax for that year.
If the tax is not paid within the time prescribed above, there shall be added to
the unpaid amount an interest of twenty-four percent (24%) per annum from
the due date until it is paid.
Section 162. Community Tax Certificate. - A community tax certificate shall

be issued to every person or corporation upon payment of the community tax. A
community tax certificate may also be issued to any person or corporation not
subject to the community tax upon payment of One peso (P1.00).
Section 163. Presentation of Community Tax Certificate On Certain

Occasions.
(a) When an individual subject to the community tax acknowledges any

document before a notary public, takes the oath of office upon election or
appointment to any position in the government service; receives any license,
certificate. or permit from any public authority; pays any tax or free; receives
any money from any public fund; transacts other official business; or receives
any salary or wage from any person or corporation with whom such transaction
is made or business done or from whom any salary or wage is received to require
such individual to exhibit the community tax certificate.

PUP COLLEGE OF LAW
The presentation of community tax certificate shall not be required in

connection with the registration of a voter.
(b) When, through its authorized officers, any corporation subject to the
community tax receives any license, certificate, or permit from any public
authority, pays any tax or fee, receives money from public funds, or transacts
other official business, it shall be the duty of the public official with whom such
transaction is made or business done, to require such corporation to exhibit the
community tax certificate.
(c) The community tax certificate required in the two preceding paragraphs
shall be the one issued for the current year, except for the period from January
until the fifteenth (15th) of April each year, in which case, the certificate issued
for the preceding year shall suffice.
In the old days, known as residence tax certificate
Q: If the Filipino is a resident of a FOREIGN Country (NRC), is he liable to pay the community tax certificate?
A: No. because the basis of the imposition of this tax is whether or not you are an inhabitant of the
Philippines, meaning you are a resident of the Philippines.
Q: What about a foreigner residing in the Philippines (RA)? A: Yes. Yo have to pay unless the foreigner is a
trans-investor for not more than 3 months.
This is applied to both natural and juridical persons.
Requirements:
1. For natural persons- at least 18 years of age
2. For corporations upon registration with SEC
Q: What if you become 18 in the month of January or November or December?

A: For those who celebrated birthday before July 1 (that is up to June 30), they are liable to pay the tax for
this year. For those who celebrated their birthdays on or after July 1, they are not yet liable to pay this year,
but have to wait until next year.
Q: Is there a difference for those who reached 18 in the months of Jan-Feb-march and those who reached 18
in the months of April-May-June?
th
A: Yes. For those who celebrated their 18 birthdays in the month of Jan-Feb-march, they have the grace
th
period of 20 days within which to pay, while those who celebrated their 18 birthdays in the month of April-
may-June, they do not have the grace period at , they have to pay the tax immediately. l
Q: If you have community tax certificate this year, can it be used only until December 31, 2006
A: No, it shall be valid up to April 15, 2007 (163C)
Collection of Taxes

PUP COLLEGE OF LAW
Section 165. Tax Period and Manner of Payment. - Unless otherwise

provided in this Code, the tax period of all local taxes, fees and charges shall be
the calendar year. Such taxes, fees and charges may be paid in quarterly
installments.
Section 166. Accrual of Tax. - Unless otherwise provided in this Code, all
local taxes, fees, and charges shall accrue on the first (1st) day of January of
each year. However, new taxes, fees or charges, or changes in the rates thereof,
shall accrue on the first (1st) day of the quarter next following the effectivity of
the ordinance imposing such new levies or rates.
January 1 is the accrual of tax. Meaning every year you have to pay that. However with regard to local tax
ordinance enacte dinthe middle year, the tax will be collected in the following quarter.
Q: What if the tax was only approved in the month of May 2006, do you have to wait until January 2007>
A: No, you have the right to collect that in July 1, because the laws says that it should be collected in the
next succeeding quarter
Mayor Binay had a tax ordinace in May, sabi ng mga bata niya Bossing, collect tayo ng June.
Binay: Hindi pwede, hintay tayo ng July 1.
Q: What if the atx ordinance had been existing for several years already?
A: The time of accrual will always be January 1.
Section 167. Time of Payment. - Unless otherwise provided in this Code, all
local taxes, fees, and charges shall be paid within the first twenty (20) days of
January or of each subsequent quarter, as the case may be. The sanggunian
concerned may, for a justifiable reason or cause, extend the time for payment
of such taxes, fees, or charges without surcharges or penalties, but only for a
period not exceeding six (6) months.
Section 168. Surcharges and Penalties on Unpaid Taxes, Fees, or Charges. -

The sanggunian may impose a surcharge not exceeding twenty-five (25%) of
the amount of taxes, fees or charges not paid on time and an interest at the rate
not exceeding two percent (2%) per month of the unpaid taxes, fees or charges
including surcharges, until such amount is fully paid but in no case shall the
total thirty-six (36%) months.
Section 169. Interests on Other Unpaid Revenues. - Where the amount of

any other revenue due a local government unit, except voluntary contributions
or donations, is not paid on the date fixed in the ordinance, or in the contract,
expressed or implied, or upon the occurrence of the event which has given rise
to its collection, there shall be collected as part of that amount an interest
thereon at the rate not exceeding two percent (2%) per month from the date it
is due until it is paid, but in no case shall the total interest on the unpaid
amount or a portion thereof exceed thirty-six (36) months.

PUP COLLEGE OF LAW
Section 170. Collection of Local Revenue by Treasurer. - All local taxes, fees,
and charges shall be collected by the provincial, city, municipal, or barangay
treasurer, or their duly authorized deputies.
The provincial, city or municipal treasurer may designate the barangay

treasurer as his deputy to collect local taxes, fees, or charges. In case a bond is
required for the purpose, the provincial, city or municipal government shall
pay the premiums thereon in addition to the premiums of bond that may be
required under this Code.
Section 171. Examination of Books of Accounts and Pertinent Records of

Businessmen by Local Treasurer. - The provincial, city, municipal or barangay
treasurer may, by himself or through any of his deputies duly authorized in
writing, examine the books, accounts, and other pertinent records of any
person, partnership, corporation, or association subject to local taxes, fees and
charges in order to ascertain. assess, and collect the correct amount of the tax,
fee, or charge. Such examination shall be made during regular business hours,
only once for every tax period, and shall be certified to by the examining
official. Such certificate shall be made of record in the books of accounts of the
taxpayer examined.
In case the examination herein authorized is made by a duly authorized deputy

of the local treasurer, the written authority of the deputy concerned shall
specifically state the name, address, and business of the taxpayer whose books,
accounts, and pertinent records are to be examined, the date and place of such
examination and the procedure to be followed in conducting the same.
For this purpose, the records of the revenue district office of the Bureau of
Internal Revenue shall be made available to the local treasurer, his deputy or
duly authorized representative.
Civil Remedies for Collection of Revenues
Section 172. Application of Chapter. - The provisions of this Chapter and the
remedies provided hereon may be availed of for the collection of any
delinquent local tax, fee, charge, or other revenue.
Section 173. Local Government's 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 appropriate administrative or judicial
action, not only upon any property or rights therein which may be subject to
the lien but also upon property used in business, occupation, practice of
profession or calling, or exercise of privilege with respect to which the lien is
imposed. The lien may only be extinguished upon full payment of the
delinquent local taxes fees and charges including related surcharges and
interest.

PUP COLLEGE OF LAW
Section 174. Civil Remedies. - The civil remedies for the collection of local
taxes, fees, or charges, and related surcharges and interest resulting from
delinquency shall be:
(a) By administrative action thru distraint of goods, chattels, or effects, and

other personal property of whatever character, including stocks and other
securities, debts, credits, bank accounts, and interest in and rights to personal
property, and by levy upon real property and interest in or rights to real
property;
(b) By judicial action.
Either of these remedies or all may be pursued concurrently or simultaneously

at the discretion of the local government unit concerned.
Section 175. Distraint of Personal Property. - The remedy by distraint shall

proceed as follows:
(a) Seizure - Upon failure of the person owing any local tax, fee, or charge to
pay the same at the time required, the local treasurer or his deputy may, upon
written notice, seize or confiscate any personal property belonging to that
person or any personal property subject to the lien in sufficient quantity to
satisfy the tax, fee, or charge in question, together with any increment thereto
incident to delinquency and the expenses of seizure. In such case, the local
treasurer or his deputy shall issue a duly authenticated certificate based upon
the records of his office showing the fact of delinquency and the amounts of the
tax, fee, or charge and penalty due. Such certificate shall serve as sufficient
warrant for the distraint of personal property aforementioned, subject to the
taxpayer's right to claim exemption under the provisions of existing laws.
Distrained personal property shall be sold at public auction in the manner
hereon provided for.
(b) Accounting of distrained goods. - The officer executing the distraint shall
make or cause to be made an account of the goods, chattels or effects
distrained, a copy of which signed by himself shall be left either with the owner
or person from whose possession the goods, chattels or effects are taken, or at
the dwelling or place or business of that person and with someone of suitable
age and discretion, to which list shall be added a statement of the sum
demanded and a note of the time and place of sale.
(c) Publication - The officer shall forthwith cause a notification to be exhibited

in not less than three (3) public and conspicuous places in the territory of the
local government unit where the distraint is made, specifying the time and
place of sale, and the articles distrained. The time of sale shall not be less than
twenty (20) days after the notice to the owner or possessor of the property as
above specified and the publication or posting of the notice. One place for the
posting of the notice shall be at the office of the chief executive of the local
government unit in which the property is distrained.

PUP COLLEGE OF LAW
(d) Release of distrained property upon payment prior to sale - If at any time
prior to the consummation of the sale, all the proper charges are paid to the
officer conducting the sale, the goods or effects distrained shall be restored to
the owner.
(e) Procedure of sale - At the time and place fixed in the notice, the officer
conducting the sale shall sell the goods or effects so distrained at public auction
to the highest bidder for cash. Within five (5) days after the sale, the local
treasurer shall make a report of the proceedings in writing to the local chief
executive concerned.
Should the property distrained be not disposed of within one hundred and
twenty (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 on Appraisal and to the extent of the same
amount, the tax delinquencies shall be cancelled.
Said Committee on Appraisal shall be composed of the city or municipal

treasurer as chairman, with a representative of the Commission on Audit and
the city or municipal assessor as members.
(f) Disposition of proceeds - The proceeds of the sale shall be applied to satisfy
the tax, including the surcharges, interest, and other penalties incident to
delinquency, and the expenses of the distraint and sale. The balance over and
above what is required to pay the entire claim shall be returned to the owner of
the property sold. The expenses chargeable upon the seizure and sale shall
embrace only the actual expenses of seizure and preservation of the property
pending the sale, and no charge shall be imposed for the services of the local
officer or his deputy. Where the proceeds of the sale are insufficient to satisfy
the claim, other property may, in like manner, be distrained until the full
amount due, including all expenses, is collected.
Section 176. Levy on Real Property. - After the expiration of the time
required to pay the delinquent tax, fee, or charge, real property may be levied
on before, simultaneously, or after the distraint of personal property belonging
to the delinquent taxpayer. To this end, the provincial, city or municipal
treasurer, as the case may be, shall prepare a duly authenticated certificate
showing the name of the taxpayer and the amount of the tax, fee, or charge,
and penalty due from him. Said certificate shall operate with the force of a legal
execution throughout the Philippines. Levy shall be effected by writing upon
said certificate the description of the property upon which levy is made. At the
same time, written notice of the levy shall be mailed to or served upon the
assessor and the Register of Deeds of the province or city where the property is
located who shall annotate the levy on the tax declaration and certificate of title
of the property, respectively, and the delinquent taxpayer or, if he be 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, to the occupant of the property in
question.

PUP COLLEGE OF LAW
In case the levy on real property is not issued before or simultaneously with the
warrant of distraint on personal property, and the personal property of the
taxpayer is not sufficient to satisfy his delinquency, the provincial, city or
municipal treasurer, as the case may be, shall within thirty (30) days after
execution of the distraint, proceed with the levy on the taxpayer's real property.
A report on any levy shall, within ten (10) days after receipt of the warrant, be
submitted by the levying officer to the sanggunian concerned.
Section 177. Penalty for Failure to Issue and Execute Warrant. - Without
prejudice to criminal prosecution under the Revised Penal Code and other
applicable laws, any local treasurer who fails to issue or execute the warrant of
distraint or levy after the expiration of the time prescribed, or who is found
guilty of abusing the exercise thereof by competent authority shall be
automatically dismissed from the service after due notice and hearing.
Section 178. Advertisement and Sale. - Within thirty (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 cost of sale; and such advertisement shall cover a period of at least thirty
(30) days. It 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
barangay where the real property is located, and by publication once a week for
three (3) weeks in a newspaper of general circulation in the province, city or
municipality where the property is located. The advertisement shall contain the
amount of taxes, fees or charges, and penalties due thereon, and the time and
place of sale, the name of the taxpayer against whom the taxes, fees, or charges
are levied, and a short description of the property to be sold. At any time before
the date fixed for the sale, the taxpayer may stay they proceedings by paying
the taxes, fees, charges, penalties and interests. If he fails to do so, the sale
shall proceed and shall be held either at the main entrance of the provincial,
city or municipal building, or on the property to be sold, or at any other place
as determined by the local treasurer conducting the sale and specified in the
notice of sale.
Within thirty (30) days after the sale, the local treasurer or his deputy shall
make a report of the sale to the sanggunian concerned, and which shall form
part of his records. After consultation with the sanggunian, the local treasurer
shall make and deliver to the purchaser a certificate of sale, showing the
proceeding of the sale, describing the property sold, stating the name of the
purchaser and setting out the exact amount of all taxes, fees, charges, and
related surcharges, interests, or penalties: Provided, however, That any excess
in the proceeds of the sale over the claim and cost of sales shall be turned over
to the owner of the property.
The local treasurer may, by ordinance duly approved, advance an amount

sufficient to defray the costs of collection by means of the remedies provided
for in this Title, including the preservation or transportation in case of personal

PUP COLLEGE OF LAW
property, and the advertisement and subsequent sale, in cases of personal and
real property including improvements thereon.
Section 179. Redemption of Property Sold. - Within one (1) year from the
date of sale, the delinquent taxpayer or his representative shall have the right
to redeem the property upon payment to the local treasurer of the total amount
of taxes, fees, or charges, and related surcharges, interests or penalties from
the date of delinquency to the date of sale, plus interest of not more than two
percent (2%) per month on the purchase price from the date of purchase to the
date of redemption. Such payment shall invalidate the certificate of sale issued
to the purchaser and the owner shall be entitled to a certificate of redemption
from the provincial, city or municipal treasurer or his deputy.
The provincial, city or municipal treasurer or his deputy, upon surrender by

the purchaser of the certificate of sale previously issued to him, shall forthwith
return to the latter the entire purchase price paid by him plus the interest of
not more than two percent (2%) per month herein provided for, the portion of
the cost of sale and other legitimate expenses incurred by him, and said
property thereafter shall be free from the lien of such taxes, fees, or charges,
related surcharges, interests, and penalties.
The owner shall not, however, be deprived of the possession of said property
and shall be entitled to the rentals and other income thereof until the
expiration of the time allowed for its redemption.
Section 180. Final Deed to Purchaser. - In case the taxpayer fails to redeem
the property as provided herein, the local treasurer shall execute a deed
conveying to the purchaser so much of the property as has been sold, free from
liens of any taxes, fees, charges, related surcharges, interests, and penalties.
The deed shall succinctly recite all the proceedings upon which the validity of
the sale depends.
Section 181. Purchase of Property By the Local Government Units for Want
of Bidder. - In case there is no bidder for the real property advertised for sale
as provided herein, or if the highest bid is for an amount insufficient to pay the
taxes, fees, or charges, related surcharges, interests, penalties and costs, the
local treasurer conducting the sale shall purchase the property in behalf of the
local government unit concerned to satisfy the claim and within two (2) days
thereafter shall make a report of his proceedings which shall be reflected upon
the records of his office. It shall be the duty of the Registrar of Deeds
concerned upon registration with his office of any such declaration of forfeiture
to transfer the title of the forfeited property to the local government unit
concerned without the necessity of an order from a competent court.
Within one (1) year from the date of such forfeiture, the taxpayer or any of his
representative, may redeem the property by paying to the local treasurer the
full amount of the taxes, fees, charges, and related surcharges, interests, or
penalties, and the costs of sale. If the property is not redeemed as provided

PUP COLLEGE OF LAW
herein, the ownership thereof shall be fully vested on the local government unit
concerned.
Section 182. Resale of Real Estate Taken for Taxes, Fees, or Charges. - The
sanggunian concerned may, by ordinance duly approved, and upon notice of
not less than twenty (20) days, sell and dispose of the real property acquired
under the preceding section at public auction. The proceeds of the sale shall
accrue to the general fund of the local government unit concerned.
Section 183. Collection of Delinquent Taxes, Fees, Charges or other

Revenues through 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. The civil action shall be filed
by the local treasurer within the period prescribed in Section 194 of this Code.
Section 184. Further Distraint or Levy. - The remedies by distraint and levy
may be repeated if necessary until the full amount due, including all expenses,
is collected.
Section 185. Personal Property Exempt from Distraint or Levy. - The

following property shall be exempt from distraint and the levy, attachment or
execution thereof for delinquency in the payment of any local tax, fee or
charge, including the related surcharge and interest:
(a) Tools and implements necessarily used by the delinquent taxpayer in his
trade or employment;
(b) One (1) horse, cow, carabao, or other beast of burden, such as the
delinquent taxpayer may select, and necessarily used by him in his ordinary
occupation;
(c) His necessary clothing, and that of all his family;
(d) Household furniture and utensils necessary for housekeeping and used for
that purpose by the delinquent taxpayer, such as he may select, of a value not
exceeding Ten thousand pesos (P10,000.00);
(e) Provisions, including crops, actually provided for individual or family use
sufficient for four (4) months;
(f) The professional libraries of doctors, engineers, lawyers and judges;
(g) One fishing boat and net, not exceeding the total value of Ten thousand
pesos (P10,000.00), by the lawful use of which a fisherman earns his
livelihood; and

PUP COLLEGE OF LAW
(h) Any material or article forming part of a house or improvement of any real
property.
Miscellaneous Provisions
Section 186. Power To Levy Other Taxes, Fees or Charges. - Local

government units may exercise the power to levy taxes, fees or charges on any
base or subject not otherwise specifically enumerated herein or taxed under the
provisions of the National Internal Revenue Code, as amended, or other
applicable laws: Provided, That the taxes, fees, or charges shall not be unjust,
excessive, oppressive, confiscatory or contrary to declared national policy:
Provided, further, That the ordinance levying such taxes, fees or charges shall
not be enacted without any prior public hearing conducted for the purpose.
This means that LGU can also impose those taxes, fees and charges which do not fall within the
scope of taxes which are enumerated under the LGC, as well as those levied on subjects or bases
which are not taxed under the NIRC or other applicable laws. _ this is also known as RESIDUAL
TAXING POWERS OF LOCAL GOVERNMENT CODE.
Q: Why is it there should be a tax ordinance as required by Sec. 186?

A: The rationale is not mentioned in Sec. 186 but if you will read the other provisions of the LGC, you will
come to conclusions of the reasons of why there must be a tax ordinance, in most of these provisions, it
always say, one half if the town or municipality shall collect a tax of not exceeding 1% of the gross receipts
(take note there is no exact amount, hence it is the tax ordinance which will fix the exact amount.
Public hearing, in congress the requirement is not absolute ( by discretion only),under local taxation (last
phrase of Section 186), the requirement is absolute
REYES V. SECRETARY, 320 SCRA 486
Facts: In the Municipality of San Juan (just beside Mandaluyong) there was a tax ordinance passed. Reyes, a
resident claims that there was no public hearing conducted, he maintains that under the last paragraph of
Sec 186, there should always be a public hearing.
Held: The SC said Yes. The requirement is absolute one, but since the petitioner failed to produce evidence
to support his allegation, ifthere is no proof to support his allegation other than his own statement, we
hereby rule that the ordinance passed in accordance to the procedure mandated by law While it is true that
public hearing is an absolute requirement, he who alleges must prove the same.
Section 187. Procedure for Approval and Effectivity of Tax, Ordinances and
Revenue Measures; Mandatory Public Hearings. - The procedure for approval
of local tax ordinances and revenue measures shall be in accordance with the
provisions of this Code:

PUP COLLEGE OF LAW
Provided, That public hearings shall be conducted for the purpose prior to the
enactment thereof:
Provided, further, That any question on the constitutionality or legality of tax

ordinances or revenue measures may be raised on appeal within thirty (30)
days from the effectivity thereof to the Secretary of Justice who shall render a
decision within sixty (60) days from the date of receipt of the appeal:
Provided, however, That such appeal shall not have the effect of suspending the
effectivity of the ordinance and the accrual and payment of the tax, fee, or
charge levied therein:
Provided, finally, That within thirty (30) days after receipt of the decision or the lapse of the sixty-day period
without the Secretary of Justice acting upon the appeal, the aggrieved party may file appropriate
proceedings with a court of competent jurisdiction.
Q: if you dont agree with the validity or constitutionality of the tax ordinance, what will be your remedy?
A: Within 30 days from the effectivity of the ordinance, the taxpayer should file an appeal with the Office of
the Secretary of Justice.
REYES V. SECRETARY, 320 SCRA 486
Facts: Reyes assailed the validity of a tax ordinance only after the lapse of the 30 day period (perhaps his
lawyer thinks that an ordinary statute may be contested anytime with the RTC, CA or SC)
Held: With regard to tax ordinance, we have specific rule, failure to assail the validity of the tax ordinance
within the specific period is fatal to the taxpayer, since it was filed beyond the 30 days, we do not disturb the
validity of the ordinance.
Q: What time should the Secretary of Justice Decide?

A: Within 60 days from the time the appeal is filed. Failure to decide within the said period, the taxpayer has
a remedy to file an action with the regular courts.
Q: If the decision was made within the period and he receives the decision,
A: the remedy is to file an appeal within 30 days from the receipt of the decision to court of competent
jurisdiction (RTC)
Beginning April 23, 2004 from the ruling of the RTC, pursuant to RA 9282 (Law uplifting the status of
CTA)- the ruling of the RTC on local tax cases is appealable to CTA en banc.
2 appeals decided by CTA Enbanc:
1. Decisions of the RTC involving local tax cases;

2. Decisions of the Central Board of Assessment Appeals

PUP COLLEGE OF LAW
Section 188. Publication of Tax Ordinances and Revenue Measures. - Within

ten (10) days after their approval, certified true copies of all provincial, city,
and municipal tax ordinances or revenue measures shall be published in full
for three (3) consecutive days in a newspaper of local circulation:
Provided, however, That in provinces, cities and municipalities where there are
no newspapers of local circulation, the same may be posted in at least two (2)
conspicuous and publicly accessible places.
Section 189. Furnishing of Copies of Tax Ordinances and Revenue

Measures. - Copies of all provincial, city, and municipal and barangay tax
ordinances and revenue measures shall be furnished the respective local
treasurers for public dissemination.
Section 190. Attempt to Enforce Void or Suspended Tax Ordinances and

revenue measures. - The enforcement of any tax ordinance or revenue measure
after due notice of the disapproval or suspension thereof shall be sufficient
ground for administrative disciplinary action against the local officials and
employees responsible therefor.
Section 191. Authority of Local Government Units to Adjust Rates of Tax

Ordinances. - Local government units shall have the authority to adjust the tax
rates as prescribed herein not oftener than once every five (5) years, but in no
case shall such adjustment exceed ten percent (10%) of the rates fixed under
this Code.
Section 192. Authority to Grant Tax Exemption Privileges. - Local

government units may, through ordinances duly approved, grant tax
exemptions, incentives or reliefs under such terms and conditions as they may
deem necessary.
Rules on the granting of tax exemptions and reliefs;
1. Sangguniang may grant such in cases of natural calamities, civil

disturbances, general failure of crops, or adverse economic
conditions such as substantial decrease in prices of agricultural or
agri based product;
2. It must be through an ordinance
3. Apply to all businesses similarly situated;
4. Take effect only during next calendar year for a period not
exceeding 12 months as may be provided in the ordinance.
5. In case of shared revenue, the exemption or relief shall only be

extend to the LGU granting such relief

PUP COLLEGE OF LAW
Rules on the grant of tax incentives:
1. Granted only to new investments in the locality
2. Ordinance shall prescribe the terms and conditions therefor, it

shall be passed prior to the 1st day of January of any year;
3. For a definite period not exceeding one (1) calendar year;
4. Applicable to all businesses similarly situated
Section 193. Withdrawal of Tax Exemption Privileges. - , 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 this Code.
Exceptions:
1. Local water districts,

2. Cooperatives duly registered under R.A. No. 6938,
3. Non-stock and non-profit hospitals and educational institutions
Taxpayer's Remedies
Section 194. Periods of Assessment and Collection. -
(a) Local taxes, fees, or charges shall be assessed within five (5) years from the
date they became due. No action for the collection of such taxes, fees, or
charges, whether administrative or judicial, shall be instituted after the
expiration of such period:
Provided, That. taxes, fees or charges which have accrued before the effectivity
of this Code may be assessed within a period of three (3) years from the date
they became due.
(b) In case of fraud or intent to evade the payment of taxes, fees, or charges, the
same may be assessed within ten (10) years from discovery of the fraud or
intent to evade payment.
(c) 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 said period: Provided, however, That, taxes,
fees or charges assessed before the effectivity of this Code may be collected
within a period of three (3) years from the date of assessment.

PUP COLLEGE OF LAW
(d) The running of the periods of prescription provided in the preceding

paragraphs shall be suspended for the time during which:
(1) The treasurer is legally prevented from making the assessment of collection;
(2) The taxpayer requests for a reinvestigation and executes a waiver in writing
before expiration of the period within which to assess or collect; and
(3) The taxpayer is out of the country or otherwise cannot be located.
NON PAYMENT OF TAX:
Under this section, it is subject to a prescriptive period of 5 years. The prescriptive period of
assessment is 5 years from the time that the tax become is due.
Section 195. Protest of Assessment. - When the local treasurer or his duly
authorized representative finds that correct taxes, fees, or charges have not
been paid, he shall issue a notice of assessment stating the nature of the tax,
fee, or charge, the amount of deficiency, the surcharges, interests and
penalties. Within sixty (60) days from the receipt of the notice of assessment,
the taxpayer may file a written protest with the local treasurer contesting the
assessment; otherwise, the assessment shall become final and executory. The
local treasurer shall decide the protest within sixty (60) days from the time of
its filing. If the local treasurer finds the protest to be wholly or partly
meritorious, he shall issue a notice cancelling wholly or partially the
assessment. However, if the local treasurer finds the assessment to be wholly
or partly correct, he shall deny the protest wholly or partly with notice to the
taxpayer. The taxpayer shall have thirty (30) days from the receipt of the denial
of the protest or from the lapse of the sixty (60) day period prescribed herein
within which to appeal with the court of competent jurisdiction otherwise the
assessment becomes conclusive and unappealable.
If you dont agree with the assessor, you will file a protest with the office of the treasurer of the LGU
concern. From the ruling of the treasurer you have to file an appeal within 30 days from the receipt of the
decision with the court of competent jurisdiction. But what are the prescriptive periods provided for under
Sec. 195.
1. With the treasurer, it is within 60 days after the lapse of 60 days from the time you file the
protest you file an appeal with the RTC or;
2. If the treasurer decides within the period of 60 days, you file an appeal with the RTC within 30
days upon the receipt of the decision.
Section 196. Claim for Refund of Tax Credit. - No case or proceeding

shall be maintained in any court for the recovery of any tax, fee, or
charge erroneously or illegally collected until a written claim for refund
or credit has been filed with the local treasurer. No case or proceeding
PUP COLLEGE OF LAW
shall be entertained in any court after the expiration of two (2) years
from the date of the payment of such tax, fee, or charge, or from the
date the taxpayer is entitled to a refund or credit.
REAL PROPERTY TAXATION
Section 198 to Section 218 of the LGC.
Different kinds of real property tax under the law:
1. Real Estate Tax proper (Sec. 233)

2. Special Levy on education fund Sec. 235)
3. Special Levy on idle lands (Sec. 236)
4. Special Levy on Public Works (Sec. 40)
Among the 4, there is one real property tax, where the rate of the tax is already fixed by LGC
the special levy on educational fund 1% of the assessed value.
Ordinarily, a taxpayer pays 2 out of 4 real property tax;
1. Real estate tax proper;

2. Special Levy on educational fund
Accordingly this is a national tax, but the fixing of the rate is left to the sanggunian ( except special levy on
educational fund where the rate is fixed already by the LGC)
Q: Which of the LGU is authorized to fix the rate?
1. Real estate proper only provinces, cities including municipality in Metro manila (Do not
confuse this tax to transfer tax under Sec. 135). Municipalities outside MM are not authorized ,
however they can collect in behalf of the province;
2. Special Levy on educational fund the rate is fixed already by the LGC
3. Special Levy on Idle lands (only on land) only provinces and cities including municipalities in
MM)
4. Special Levy on Public Works provinces, cities or municipalities whether inside or outside
Metro Manila
Formula for the Computation of the Real Property Tax :
1. Real Property Tax Proper

PUP COLLEGE OF LAW
A. Determine the FMV (same as commercial law and civil law)

The Selling Price price where the seller is willing to sell but is not obliged to sell, and the
buyer who is willing to buy but not obliged to buy
B. Then determine the Assessment level under the Sec. 218 on whether the property is
commercial, residential, agricultural, or industrial.
- Sec 218 Speaks of the rate of the ASSESSSMENT LEVEL, let us say, for residential
parcel of land, the Sanggunian fixes the rate (Not more than 20% of the FMV);
suppose the tax ordinance fixed it at exactly 20%, the formula would be:
FMV X Assessment level ;
Lets say FMV is P 1M, hence 1M x 20% = P 200K
Q: What do you mean of the assessed value?

A: It is the FMV multiply by the assessment level.
Q: Is the P 200K the real property tax that you have to pay?
A: Not yet. This has to be multiplied with the rate fixed by the ordinance
Under Sec. 233:
a. For Province
- It should not exceed 15 of the assessed value;
- Lets say the province fixed it at exactly 1% ( P 200K x 1% = P 2K)
b. For Cities and Municipalities in Metro Manila

- It should not exceed 2% of the assessed value
- Take note, the determination of the value as the FMV or the assessed value is
important (because the one to be multiplied is the assessed value)
2. Special Levy on Educational Fund
Tapos na ba ang computation Sir?
Not yet, you have to automatically include of how much is 1% of the assessed
value (special educational fund)
3. Special Levy on Idle lands if the land is idle land because of the peace and order
conditions, or maybe because of natural calamities.
Under Sec. 237, the land is idle only with regard to the following;
A. Agricultural
B. Other lands other than agricultural
C. Subdivisions

PUP COLLEGE OF LAW
In subdivision lots, there is no area mentioned, but for agricultural, at least of the
agricultural land is idle provided it has an area of at least 1000 sq. meters
Rate of the special levy? not more than 5% of the assess value.
4. Special Levy on Public Works construction of public works like irrigation canal,
public plaza, public market, provincial roads
The Sanggunian of the LGU is authorized to recover tax, 60% of what have been
spent. If the province constructed an irrigation canal that shall traverse all the
municipalities, spent 100M; 60% of 100M is 60M.
This is the only tax ordinance which should be published before its approval to give
opportunity to the taxpayers affected by ordinance.
Q: What was being published?

A: Names of the taxpayers and the amount to be paid by them in several installments
Q: What is the rationale for the publication?

A: This is to give opportunities for the parties mentioned therein to object if there is an error.
Determining the real Property
1. For real Property tax proper and Special Levy on Educational Fund maybe any kind of
real property ( Art. 415, NCC)
2. For Special Levy on Idle Lands and Special levy on Public Works apply only to a parcel
of land
Q: Suppose the property is a personal or movable one, can it be the subject matter of real estate under real
property tax proper and special levy on educational fund?
A: Personal property attached on the ground falling under the civil code is real property.
Pure and simple personal property can be subjected to this tax provided it is actually, directly and
exclusively used in the trade or business of the taxpayer (Sec. 199 par. O)
Q: A machine shop operator, with the following equipment; typewriter, tow truck,, is the tow truck subject to
real estate tax?
A: Yes, because it is actually, directly and exclusively used by the operator of the machine shop. With regard
to the typewriter, it is not because it is not actually, directly and exclusively used by the operator of the
machine shop
Q: what about the equipment of Caltex which are purely movable property/
A: Yes. It can be the subject matter if it is is actually, directly and exclusively used..

PUP COLLEGE OF LAW
Accrual of the tax January 1 (sec. 246)
Q: On January 1, 2005 the property is possessed and owned by a person who is exempt from real property
tax; several days thereafter, on January 6, 2005, the parcel of land was sold to a person who is not exempt
(there is transfer of title in the office of the register of deeds); can the register require first the payment of
tax?
A: NO. While it is true that it is no longer used by a person who is exempt at the time of the accrual of the
tax, it was actually used by person who is exempt. The accrual of the tax will not only be in January 1, 2005
but it is up to December 31, 2005; so that if it was transferred only on January 6, 2005 to a person who is
exempt, still the real property is exempt.
Q: If here comes January 1, 2006, at the time of the time of the accrual, it was actually used by a person who
is not exempt; Suppose on January 7, 2006, it was sold to a person who is exempt. Can the register of deeds
require first the payment of the real property tax?
A: Yes. Because at the time of the accrual of the tax, the real property was subjected to real property tax and
the accrual of that will be up to December 31, 2006; Therefore, during the interval of January to December,
it doesnt matter whether it was transferred to a person who is exempt.
REMEDIES OF THE GOVERNMENT:
1. In case of n on-payment of tax
A. Judicial Action
1. Civil Action
2. Criminal action
2. Administrative Action
A. Levy and Tax Lien (Note: Destraint is not applicable here; it is only applicable in Local
taxation and NIRC))
Q: what is the difference between levy in NIRC and Levy under real estate tax?
A: The subject of the levy is only the real property that is delinquent under the real property taxation (Sec.
258). Any real property owned by the taxpayer, although it has nothing to do with his tax liability may be
levied under local tax or under the NIRC.
Q: Is it subject to prescription?
A: Before January 1, 1992, real property taxation were imprescriptible, now for COLLECTION, there is a
prescriptive period of 5 years from the time the tax became due (Sec. 270)

PUP COLLEGE OF LAW
Q: Why is there that there is no prescriptive period for ASSESSMENT?

A: Because the law says that there shall be an assessment every 3 years ( Sec. 219)
Q: What is the remedy if you received a notice of assessment again from the treasurer?
A: File a protest under Section 252.
Q: What if the treasurer did not decide within the 60 day period provided under the LGC to act on the
assessment, what is the remedy?
A: Go to the court of the competent jurisdiction (RTC)
Q: what if the treasurer decide the protest within 60 day period, remedy?
A: File an appeal with the court of competent of jurisdiction within 30 days upon receipt of the decision.
Q: What if the RTC did not decide in your favor?

A: The remedy is appeal to the CTA en banc (beginning April 23, 2004 )within 30 days from receipt of the
decision
Q: What if the CTA did not decide in your favor?

A: File an appeal with the SC, within 15 days after receipt of the decision
Note: Pursuant to RA 9282, direct appeal to CTA enbanc can be made from;
1. Decision of the RTC involving local taxation exercising appellate jurisdiction;
2. Decision of the Central Board of Assessment Appeal (CBAA) exercising appellate jurisdiction.
Q: Is payment under protest necessary?

A: No. as far as these is concerned:
1. Protest under Sec. 228 of the NIRC;
2. Protest under Sec. 195 of the LGC under Local Taxation;
3. Protest under Sec. 2313 as amended by RA 7651 of the TCC
However, under Real Property tax, it is necessary.
Q: What is meant by payment under protest?

A: It shall be annotated at the back of the real estate tax receipt that you are paying under protest
PROTEST UNDER REAL PROPERTY (Sec. 226, 230 and 252
The remedy shall be the same
Section 252, LGC:
If the taxpayer receives a notice of assessment from the treasurer, the remedy is to file a PROTEST, but
there must be first payment under protest ( only at those instance where payment under protest is
necessary)

PUP COLLEGE OF LAW
Q: How is payment under protest made?

A: At the back of the receipt there will be an annotation that there was a payment under protest within 60
days from receipt of the notice of assessment within the same treasurer who issued the assessment.
Q: If the treasurer will rule against the taxpayer?

A: The remedy is to file an appeal with the Local Board of Assessment Appeal within 30 days from receipt of
the decision.
Q: If the decision in the Local Board of Assessment Appeal is adverse, what is the remedy?
A: Appeal should be made in the Central Board of Assessment Appeals.
Note: Beginning April 23, 2004, the ruling of the Central Board of Assessment Appeal is no longer final. It
can now be appeal to the CTA, sitting en banc.
PROTEST UNDER THE TCC;
Formerly the automatic appeal under the TCC applied only to protest, nowadays, the automatic appeal
applies to both protest and forfeiture.
MATHAY V. RAMY TEXTILE (89 SCRA 586)
FACTS: The taxpayer paid the real property tax but he did not pay that under protest because he did not
have an objection at the time of the payment; thereafter, he discovered that under special statutes, he is
exempt; so he tried to file a protest and tried to have a refund. His protest has been denied simply because
he did not pay under protest.
HELD: While it is true that payment under protest is necessary under the real estate tax, but under this
particular case, payment under protest is impossible because at the time of payment, the tax payer in good
faith believes that he is indeed liable; hence the SC allowed here the refund even if the taxpayer did not
paid under protest.
REMEDY OF THE TAXPAYER:
If the taxpayer receives an assessment:
1. Reclassification from residential to commercial

2. Breach of real estate tax
The remedy is to file a protest (similar to that of Sec. 252)
Q: What if the protest is deemed denied?

A: File an appeal to the local board of assessment appeal (Sec. 226) within 30 days from the receipt of the
denial of the protest.

PUP COLLEGE OF LAW
Q: In case of adverse decision of the Local Board of Assessment appeal, what is the remedy?
A: Appeal within 30 days to the Central Board of Assessment Appeal
Note: Beginning April 23, 2004, the ruling of the Central Board of Assessment Appeal is no longer final. It
can now be appeal to the CTA, sitting en banc. Decision of the CBAA can be elevated to the SC.
Q: If you are assailing the validity, not of the assessment but the very action of the government officer (Like
the Assessor), where is the proper venue?
A: Do not go to the Local Board of Assessment Appeals but to the RTC.
PY V. TRAMPE (250 SCRA 500)
Facts: The Municipal assessor of Pasig, reclassified and reassessed all the real property in the town of Pasig.
However under PD 921, the reassessment and re-classification in the cities and municipalities and cities in
Metro manila were divided into districts. The District of Pasig shall be included in the districts of Cainta,
Marikina, Antipolo and Quezon City; Under PD 921. In the amendment or re assessment, each assessor
should consult with each other in trying to amend, reclassify or reassess the real property within the district,
but upon the effectivity of the LGC, the assessor of Pasig said we are now authorized even without
consultation of the neighboring cities and town. One of the residents questioned the act of the assessor
saying that under PD 921, he should consult and sit with the other assessors of the neighboring cities and
towns because the LGC, the assessors is allowed to reassess, reclassify the real property alone by himself
with regard to municipalities outside of Metro manila
Held: Yes In Metro Manila, the controlling factor is not the LGC but PD 921 and because of the actuation of
the assessor of Pasig, the SC declared the act of Pasig Assessor null and void because of his failure to consult
with his neighboring assessors.
Q: If you are questioning the issue of reclassification, lets say your wife sold turon and halo-halo, so the
assessor reclassified tour land from residential to commercial, and commercial has an assessment level of
50% whereas residential has only 20%, what is your remedy if the assessor does not agree with you/
A: Go to the RTC ( Note: the very issue here is the action of the assessor himself.
TARIFF AND CUSTOMS CODE

This is a very long code consisting of 5 books and most of the books are about rates of
customs only.
Coverage in the Bar Exam:
1. Procedure before the collector or Commissioner of Customs, sometime with the

Secretary of finance and up to the CTA and after that the SC;
2. Regular customs duty;
3. Special customs duty and
4. Other principles
Q: When does importation begins?

PUP COLLEGE OF LAW
A: When a carrying vehicle, maybe an airplane or a ship enters the Philippine jurisdiction with
the intention to unload the cargo (Sec. 1202).
Q: When Does it ends?

A: It would depend on what kind of imported commodity:
1. Exempt commodities upon withdrawal from the customs custody.

2. Commodities subject to duties upon payment of the customs duties and also
withdrawal from customs custody.
For a ship vessel, it is easy to determine when importation begins considering the archipelagic
doctrine ( 12 miles)
Q: Do we claim jurisdiction above?

A: Yes. But only up to the extent where there is still air
Exception to the rule on search warrant:
1. Sec. 2208, TCC

2. Sec. 2209, TCC
3. Sec. 2210, TCC
4. Sec. 15, NIRC
5. Sec. 171 NIRC
Search warrant is not necessary for customs officers in making search warrant.
Difference between Searches and Seizure in the TCC and under NIRC:
TCC NIRC
Cannot apply to residential houses or Under Sec. 171, BIR officers are
dwelling places authorized to make searches and
seizure even indwelling or residential
place.
Similarity: both does not need search warrant
Difference between Regular and Special Customs Duty:
Regular Special
Applicable even I in the absence of Always ion addition to the regular.
special customs duties
Always applicable as a matter of course Applicable only if there is a special
order from the government officers
provided for under the law
Recommendation to the Secretary of the Department of Finance:

PUP COLLEGE OF LAW
1. If the imported commodity is not an agricultural product, the TC will recommend it also to the
to Sec. of Department of Trade and Industry (In addition to the recommendation to the Sec.
of Finance;
2. If the imported commodity is an agricultural product, a recommendation in lieu of the

recommendation to the sec. of DTI, will be given to the Sec. of Agriculture;
3. The decision of these officers shall be appealable to the CTA;
4. If the decision be adverse to the taxpayer, File an MR within 15 days which said division which
decided the appeal.
5. If MR is denied, file an appeal within 15 days with the CTA enbanc
6. Ruling of the CTA en banc is appealable with the SC
Q: What is the purpose of ANTI-DUMMY DUTY?

A: So that the cost of the foreign commodity will be increased, and naturally, if the cost of the imported
commodity will be increased, the seller will also increase the selling price, hence the selling price is now
competitive with the price of locally manufactured which is either similar or identical.
Q: IS there an amount imposed?

A: There is none, it merely says up to the extent of under-pricing. The amount depends on the discretion
of the officer mentioned.
COUNTERVAILING DUTY:
- Duty equal to the ascertained or estimated amount of the subsidy or bounty or subvention
granted by the foreign country on the production, manufacture or exportation into the Philippines
of any article likely to injure an industry in the Philippines or retard the establishment of such
industry.
Q: What is the similarity of the subject matter between countervailing and anti-dummy?
A: In both cases, the imported commodity commands very low prices.
Q: What are the imported commodities will be sold in the Philippines at a very cheap or low price?
A: because of the subsidy or bounty granted by the foreign government of the manufacturer.
In Japan, the manufacturer enjoys a subsidy in the form of exemption or maybe purchase of raw materials
at a very low price, naturally commodity will commend a very cheap price; manufacturer decided to sell
to foreign countries (one of those is Philippines)
The tariff commission is obliged under the law (sec. 302) to study and if possible recommend to officers
concerned for the imposition of the countervailing duty. Similarly, information is gathered from the
embassies of that foreign country, e.g., the Philippine consul.
Q: What are the regular customs duties?

A: the following are the kinds of regular customs duties:

PUP COLLEGE OF LAW
1. Ad Valorem regular customs duty - do not confuse this with ad valorem tax under the NIKRC where it
is an excise tax under title IV, that is not the one.
2. Specific customs duty
Difference between the two:
AD VALOREM SPECIFIC
The basis of imposition is the value of The basis is the weight, width, length, per gallon,
the imported commodity (now known per volume and per meter. .
as transaction value under RA 1818)
Case where other than these two, special customs duty may be imposed;
1. Anti-Dumping Duty (Sec. 301, TCC)

2. Countervailing Duty (Sec 302, TCC)
3. Marking Duty ( Sec. 303, TCC)
4. Discriminatory Duty (Sec. 304, TCC)
5. Flexible Tariff Clause (Sec. 401, TCC and Art. VI sec, 28 of the Consti.)
Q: Who are the government officers authorized to impose the same?

A: Out of the 5, it is only the marking duty which can be imposed by the Commissioner
Explain the Different Concept of Special Customs Duties:
1. ANTI-DUMPING DUTY duty levied on imported goods where it appears that a specific kind or class
of foreign article is being imported into or sold in the Philippines at a price less than its fair market
value.
It may happen that in a foreign country (perhaps like Japan) there were over production of a certain
commodity, and they are about to destroy the same by throwing it to the Pacific Ocean; the
rd
management decided to sell this commodity instead of throwing it to the 3 world countries(one of
them is the Philippines).
That commodity shall be studied by the tariff commission and then make the necessary
recommendation (Sec. 301)
The tariff commission upon learning that certain commodities which are about to be dumped by the
manufacturer will be sold in the Philippines, they have to conduct study from the importation given
by the office of;
1. The Philippine Consul to the place;

2. The Philippine Ambassador to that country;
3. The Philippine in charge with the of the affairs in that foreign country
4. The information gathered from the pilot of the airplane, the captain of the ship;
5. The international newspaper, magazine, TV and radio

PUP COLLEGE OF LAW
STUDY: As to whether or not the importation of this commodity will prejudice locally manufactured
commodities similar or identical; Why? It might happen that this imported commodity will have a
similar or identical commodities manufactured by Filipinos, and there will be an anomalous
situation where the imported commodities commands cheaper or lower price than the price of the
locally manufactured commodity.
STUDY: (The same as dumping0 whether or not the sale of these commodities will affect similar
commodities produced by Filipinos.
Tariff Commission will make a recommendation to;
1. To the Secretary of finance;

2. Secretary of DA (if agricultural) or Sec. to DTI (if non-agri)
Q: How much is the Duty?

A: The law is silent, it is still up to the discretion of the officers concerned since it says there are only
up to the extent of the subsidy
Q: Why it is imposed?
A: same reason as anti-dumping
The rulings of these officers same steps in appeals

CTA DIVISION MR -----CTA ENBANC ----SC
2. FLEXIBLE TARIFF CLAUSE duty on ad valorem basis imposed for improperly marked article. The
law requires that foreign importations must be marked in any official language of the Philippines
with the name and country of origin of the article.
Amount: The law says 5% of the value of the imported commodity
Q: Is the recommendation of the TC necessary ?

A: No more it is now the sole prerogative of the Commissioner of Customs.
Imported commodities not properly marked or there is no mark at all in order to avoid the
confusion in the open market, the law authorizes the Commission of Customs to impose the 5%
marking duty.
Why? So that the next time in the importation of the commodity, the manufacturer will now provide
a proper mark, trademark or trade name.
3. DISCRIMINATORY OR RETALIATORY DUTY A duty imposed on imported goods wherever it is

found as a fact that the country of origin discriminates against the commerce of the Philippines in
such a manner as to place the commerce of the Philippines at a disadvantage compared with the
commerce of any foreign country.
Imposition is without recommendation of the Tariff Commission. This is the power of the President
of the Philippines.

PUP COLLEGE OF LAW
In the exportation of the Philippine commodities in a foreign country and our commodities receives
discrimination in any form by the time the foreign country will sell also their commodities in the
Philippines, our president has the right to say revenge!, Im going to impose discriminatory duty of
100%
For instance we sell in the US bottled bagoong, then it will be opened by American Authorities, then
said oh boy, what is his? It smells like shit.
4. FLEXIBLE TARIFF CALUSE- The President isa given by the TCC ample powers to adjust the tariff rates.
It is the power of the President provided for in the constitution (Art. VI, Section 28,par. 2) and under
the Tariff and Customs Code (Section 401, as inserted by RA 1957)
The power of the president to fix the import and import quota as well as the tariff rate (if it will be
increased or decrease)
Why is it flexible? He has the power to increase or decrease the import or export quota, as well as
the increase and decrease of the tariff rates.
Doctrine of Primary Jurisdiction: if the collector ordered the forfeiture of the imported goods, the order
shall be to the exclusion of all government offices and authority.
Q: Is the order of the collector limited to articles of prohibited importation?

A: No. It includes articles or commodities where importation is allowed but it has violated the TCC rules and
regulations issued by the Secretary of Finance or rules and regulation issued by the Customs Commissioner.
Importer of a chemical, under the TCC, the customs duties is only P 27 but the collector says it should be 52,
the importer will then file a protest with the office of the collector. In the old days, there is a automatic
appeal from decision of the collector under protest, but under RA 7651, the remedy of automatic appeal is
applicable to both protest and forfeiture.
In both cases of protest and forfeiture, if the importer loses the case against the government, his remedy is
to file an appeal within 15 days before the office of the Commissioner.
From the ruling of the commissioner, the importer should file an appeal within 30 days before the CTA sitting
in division.
From the ruling of the CTA in division, he importer should file an MR before the same division within 15 days.
In case of adverse decision, the importer should file an appeal sitting enbanc.
From the CTA enbanc, appeal to SC is within 15 days also ( Rule 42)
If the importer-taxpayer wins the case, the government loses the case, Sec. 2313 of TCC as amended by RA
7651, there shall be automatic review within 5 days (sec. 2313).
Q: Where should automatic review be made? ( Beginning 1993 covers both protest and forfeiture
A: It depends on the publish value of the commodity:
PUP COLLEGE OF LAW
1. If 5 Million or more automatic review shall be before the Secretary of the Department of
Finance (Final and executor) ;
2. If less than 5 Million Automatic review shall be before the office of the commissioner of
Customs
Q: Suppose the Commissioner decides or did not decide within 30 days, what happens?
A: 1. if the Commissioner reverses the ruling of the collector, the ruling is final and executor;
2. If the Commissioner affirms or did not decide within 30 days, there shall be an automatic appeal
before the Secretary of Finance.
Q: Between the two, which will be appealed in the CTA?

A: The Decision of the Secretary which passes through the office of the Commissioner (RA 9282).
But not all the decisions of the Secretary which passes the office Commissioner can be appealed to the CTA, it
is only when the commissioner affirms or did not decide within 30 days and appealed before the Secretary of
Finance will appeal to the CTA be allowed.
There are three instances where the Secretary of Finance renders a decision appealable to the CTA:
1. Decision of the Secretary by virtue of automatic review passing through the commissioner
2. Cases of anti-dumping duty, where the anti-dumping duty was ordered by the Secretary
3. Decision of the Secretary of Finance on countervailing duty.
PROCEDURE IN CUSTOMS PROTEST CASE:
1. The collector shall cause all articles entering the jurisdiction of his district and destined for
importation through his port to be entered at the customs house; therein appraised and
classified; thereafter assess and collect tax;
2. The party adversely affected by the ruling of the collector within 15 days;
3. The protest, in writing, is filed with the collector within 15 days;
4. The collector shall issue an order for hearing within 15 days from receipt of the protest and hear
the matter thus presented;
5. Upon termination of the hearing, the collector shall render a decision within 30 days;
6. The person aggrieved by the ruling of the collector may, within 15 days, have the matters reviewed
by the Commissioner.
AUTOMATIC REVIEW IN CUSTOMS PROCEEDINGS (Automatic appeal)
If the collector renders a decision which is adverse to the government, such decision shall be automatically
be elevated to the commissioner for review, and if such decision is affirmed by the commissioner, the same
is automatically elevated to the Secretary of Finance.
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If there be an adverse decision or there be no decision by the commissioner or the Sec. of Finance within 30
days appeal may be taken to the CTA within 30 days from receipt of copy of the decision or the inaction
- VOX OMNIBUS UNA -

TO GOD BE THE GLORY

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ANNEX A
Republic Act No. 9282 March 30 2004
AN ACT EXPANDING THE JURISDICTION OF THE COURT OF TAX APPEALS (CTA),

ELEVATING ITS RANK TO THE LEVEL OF A COLLEGIATE COURT WITH SPECIAL
JURISDICTION AND ENLARGING ITS MEMBERSHIP, AMENDING FOR THE PURPOSE
CERTAIN SECTIONS OR REPUBLIC ACT NO. 1125, AS AMENDED, OTHERWISE KNOWN AS
THE LAW CREATING THE COURT OF TAX APPEALS, AND FOR OTHER PURPOSES
Be it enacted by the Senate and House of Representatives of the Philippines in Congress

assembled:
Section 1. Section 1 of Republic Act No. 1125, as amended is hereby further amended to read as
follows:
"SECTION 1. Court; Justices; Qualifications; Salary; Tenure. - There is hereby created a

Court of Tax Appeals (CTA) which shall be of the same level as the Court of Appeals,
possessing all the inherent powers of a Court of Justice, and shall consist of a Presiding
Justice and five (5) Associate Justices. The incumbent Presiding Judge and Associate
Judges shall continue in office and bear the new titles of Presiding Justice and Associate
Justices. The Presiding Justice and the most Senior Associate Justice shall serve as
chairmen of the two (2) Divisions. The additional three (3) Justices and succeeding
members of the Court shall be appointed by the President upon nomination by the Judicial
and Bar Council. The Presiding Justice shall be so designated in his appointment, and the
Associate Justices shall have precedence according to the date of their respective
appointments, or when the appointments of two (2) or more of them shall bear the same
date, according to the order in which their appointments were issued by the President.
They shall have the same qualifications, rank, category, salary, emoluments and other
privileges, be subject to the same inhibitions and disqualifications, and enjoy the same
retirements and other benefits as those provided for under existing laws for the Presiding
Justice and Associate Justices of the Court of Appeals.
"Whenever the salaries of the Presiding Justice and the Associate Justices of the Court of
Appeals are increased, such increases in salaries shall be deemed correspondingly
extended to and enjoyed by the Presiding Justice and Associate Justices of the CTA.
"The Presiding Justice and Associate Justices shall hold office during good behavior, until
they reach the age of seventy (70), or become incapacitated to discharge the duties of their
office, unless sooner removed for the same causes and in the same manner provided by
law for members of the judiciary of equivalent rank."
Section 2. Section 2 of the same Act is hereby amended to read as follows:
"SEC. 2. Sitting En Banc or Division; Quorum; Proceedings. - The CTA may sit en banc or
in two (2) Divisions, each Division consisting of three (3) Justices.

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"Four (4) Justices shall constitute a quorum for sessions en banc and two (2) Justices for
sessions of a Division: Provided, That when the required quorum cannot be constituted due
to any vacancy, disqualification, inhibition, disability, or any other lawful cause, the
Presiding Justice shall designate any Justice of other Divisions of the Court to sit
temporarily therein.
"The affirmative votes of four (4) members of the Court en banc or two (2) members of a
Division, as the case may be, shall be necessary for the rendition of a decision or
resolution."
"SEC. 3. Clerk of Court; Division Clerks of Court; Appointment; Qualification;

Compensation. - The CTA shall have a Clerk of Court and three (3) Division Clerks of Court
who shall be appointed by the Supreme Court. No person shall be appointed Clerk of Court
or Division Clerk of Court unless he is duly authorized to practice law in the Philippines.
The Clerk of Court and Division Clerks of Court shall exercise the same powers and
perform the same duties in regard to all matters within the Court's jurisdiction, as are
exercised and performed by the Clerk of Court and Division Clerks of Court of the Court of
Appeals, in so far as the same may be applicable or analogous; and in the exercise of
those powers and the performance of those duties they shall be under the direction of the
Court. The Clerk of Court and the Division Clerks of Court shall have the same rank,
privileges, salary, emoluments, retirement and other benefits as those provided for the
Clerk of Court and Division Clerks of Court of the Court of Appeals, respectively.'
"SEC. 4. Other Subordinate Employees. - The Supreme Court shall appoint all officials and
employees of the CTA, in accordance with the Civil Service Law. The Supreme Court shall
fix their salaries and prescribe their duties."
"SEC. 5. Disqualifications. - No Justice or other officer or employee of the CTA shall

intervene, directly or indirectly, in the management or control of any private enterprise
which in any way may be affected by the functions of the Court. Justices of the Court shall
be disqualified from sitting in any case on the same grounds provided under Rule one
hundred thirty-seven of the Rules of Court for the disqualification of judicial officers. No
person who has once served in the Court in a permanent capacity, either as Presiding
Justice or as Associate Justice thereof, shall be qualified to practice as counsel before the
Court for a period of one (1) year from his retirement or resignation."
"SEC. 6. Place of Office. - The CTA shall have its principal office in Metro Manila and shall
hold hearings at such time and place as it may, by order in writing, designate."

PUP COLLEGE OF LAW
"Sec. 7. Jurisdiction. - The CTA shall exercise:
"a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
"1. Decisions of the Commissioner of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;
"2. Inaction by the Commissioner of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relations thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau
of Internal Revenue, where the National Internal Revenue Code provides a
specific period of action, in which case the inaction shall be deemed a
denial;
"3. Decisions, orders or resolutions of the Regional Trial Courts in local tax
cases originally decided or resolved by them in the exercise of their original
or appellate jurisdiction;
"4. Decisions of the Commissioner of Customs 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 other matters arising under the Customs Law or other laws
administered by the Bureau of Customs;
"5. Decisions of the Central Board of Assessment Appeals 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;
"6. 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 2315 of the
Tariff and Customs Code;
"7. 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 Republic Act No. 8800, where either party may appeal the decision
to impose or not to impose said duties.
"b. Jurisdiction over cases involving criminal offenses as herein provided:

PUP COLLEGE OF LAW
"1. Exclusive original jurisdiction over all criminal offenses arising from
violations of the National Internal Revenue Code or Tariff and Customs
Code and other laws administered by the Bureau of Internal Revenue or
the Bureau of Customs: Provided, however, That offenses or felonies
mentioned in this paragraph where the principal amount o taxes and fees,
exclusive of charges and penalties, claimed is less than One million pesos
(P1,000,000.00) or where there is no specified amount claimed shall be
tried by the regular Courts and the jurisdiction of the CTA shall be
appellate. Any provision of law or the Rules of Court to the contrary
notwithstanding, the criminal action and the corresponding civil action for
the recovery of civil liability for taxes and penalties shall at all times be
simultaneously instituted with, and jointly determined in the same
proceeding by the CTA, the filing of the criminal action being deemed to
necessarily carry with it the filing of the civil action, and no right to reserve
the filling of such civil action separately from the criminal action will be
recognized.
"2. Exclusive appellate jurisdiction in criminal offenses:
"a. Over appeals from the judgments, resolutions or orders of the

Regional Trial Courts in tax cases originally decided by them, in
their respected territorial jurisdiction.
"b. Over petitions for review of the judgments, resolutions or orders

of the Regional Trial Courts in the exercise of their appellate
jurisdiction over tax cases originally decided by the Metropolitan
Trial Courts, Municipal Trial Courts and Municipal Circuit Trial
Courts in their respective jurisdiction.
"c. Jurisdiction over tax collection cases as herein provided:
"1. Exclusive original jurisdiction in tax collection cases

involving final and executory assessments for taxes, fees,
charges and penalties: Provided, however, That collection
cases where the principal amount of taxes and fees,
exclusive of charges and penalties, claimed is less than
One million pesos (P1,000,000.00) shall be tried by the
proper Municipal Trial Court, Metropolitan Trial Court and
Regional Trial Court.
"2. Exclusive appellate jurisdiction in tax collection cases:
"a. Over appeals from the judgments, resolutions

or orders of the Regional Trial Courts in tax
collection cases originally decided by them, in their
respective territorial jurisdiction.
"b. Over petitions for review of the judgments,

resolutions or orders of the Regional Trial Courts
PUP COLLEGE OF LAW
in the Exercise of their appellate jurisdiction over

tax collection cases originally decided by the
Metropolitan Trial Courts, Municipal Trial Courts
and Municipal Circuit Trial Courts, in their
respective jurisdiction."
"SEC. 10. Power to Administer Oaths; Issue Subpoena; Punish for Contempt. - The Court
shall have the power to administer oaths, receive evidence, summon witnesses by
subpoena duces tecum, subject in all respects to the same restrictions and qualifications as
applied in judicial proceedings of a similar nature. The Court shall, in accordance with Rule
seventy-one of the Rules of Court, have the power to punish for contempt for the same
causes, under the same procedure and with the same penalties provided therein."
"SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely
affected by a decision, ruling or inaction of the Commissioner of Internal Revenue, the
Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry
or the Secretary of Agriculture or the Central Board of Assessment Appeals or the Regional
Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of such
decision or ruling or after the expiration of the period fixed by law for action as referred to in
Section 7(a)(2) herein.
"Appeal shall be made by filing a petition for review under a procedure analogous to that
provided for under Rule 42 of the 1997 Rules of Civil Procedure with the CTA within thirty
(30) days from the receipt of the decision or ruling or in the case of inaction as herein
provided, from the expiration of the period fixed by law to act thereon. A Division of the CTA
shall hear the appeal: Provided, however, That with respect to decisions or rulings of the
Central Board of Assessment Appeals and the Regional Trial Court in the exercise of its
appellate jurisdiction appeal shall be made by filing a petition for review under a procedure
analogous to that provided for under rule 43 of the 1997 Rules of Civil Procedure with the
CTA, which shall hear the case en banc.
"All other cases involving rulings, orders or decisions filed with the CTA as provided for in
Section 7 shall be raffled to its Divisions. A party adversely affected by a ruling, order or
decision of a Division of the CTA may file a motion for reconsideration of new trial before
the same Division of the CTA within fifteens (15) days from notice thereof: Provide,
however, That in criminal cases, the general rule applicable in regular Courts on matters of
prosecution and appeal shall likewise apply.
"No appeal taken to the CTA from the decision of the Commissioner of Internal Revenue or
the Commissioner of Customs or the Regional Trial Court, provincial, city or municipal
treasurer or the Secretary of Finance, the Secretary of Trade and Industry and Secretary of
Agriculture, as the case may be shall suspend the payment, levy, distraint, and/or sale of
any property of the taxpayer for the satisfaction of his tax liability as provided by existing
law: Provided, however, That when in the opinion of the Court the collection by the
aforementioned government agencies may jeopardize the interest of the Government
PUP COLLEGE OF LAW
and/or the taxpayer the Court any stage of the proceeding may suspend the said collection
and require the taxpayer either to deposit the amount claimed or to file a surety bond for
not more than double the amount with the Court.
"In criminal and collection cases covered respectively by Section 7(b) and (c) of this Act,
the Government may directly file the said cases with the CTA covering amounts within its
exclusive and original jurisdiction."
"SEC. 13. Decision, Maximum Period for Termination of Cases. - Cases brought before the
Court shall be decided in accordance with Section 15, paragraph (1), Article VIII (Judicial
Department) of the 1987 Constitution. Decisions of the Court shall be in writing, stating
clearly and distinctly the facts and the law on which they are based, and signed by the
Justices concurring therein. The Court shall provide for the publication of its decision in the
Official Gazette in such form and manner as may best be adopted for public information
and use.
"The Justices of the Court shall each certify on their applications for leave, and upon salary
vouchers presented by them for payment, or upon the payrolls under which their salaries
are paid, that all proceedings, petitions and motions which have been submitted to the
Court for determination or decision for a period required by the law or the Constitution, as
the case may be, have been determined or decided by the Court on or before the date of
making the certificate, and no leave shall be granted and no salary shall be paid without
such certificate."
Section 11. Section 18 of the same Act is hereby amended as follows:
"SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving
matter arising under the National Internal Revenue Code, the Tariff and Customs Code or
the Local Government Code shall be maintained, except as herein provided, until and
unless an appeal has been previously filed with the CTA and disposed of in accordance
with the provisions of this Act.
"A 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."
"SEC. 19. Review by Certiorari. - A party adversely affected by a decision or ruling of the
CTA en banc may file with the Supreme Court a verified petition for review on certiorari
pursuant to Rule 45 of the 1997 Rules of Civil Procedure."
Section 13. Distraint of Personal Property and/or Levy on Real Property. - 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 Bureau of Internal Revenue, through the Commissioner 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. This remedy shall not be exclusive and shall not
preclude the Court from availing of other means under the Rules of Court.
PUP COLLEGE OF LAW
Section 14. Retention of Personnel; Security of Tenure; Upgrading of Positions and Salaries. - All
existing permanent personnel of the CTA shall not be adversely affected by this Act. They shall
continue in office and shall not be removed or separated from the service except for cause as
provided for by existing laws. Further, the present positions and salaries of personnel shall be
upgraded to the level of their counterparts in the Court of Appeals.
Section 15. Transitory Provisions. - In consonance with the above provision, the incumbent
Presiding Judge and Associate Judges shall comprise a Division pending the constitution of the
entire Court.
Section 16. Appropriations. - The amount necessary to carry out the provisions of this Act shall be
included in the General Appropriations Act of the year following its enactment into law and
thereafter.
Section 17. Repealing Clause. - All laws, executive orders, executive issuances or letter of
instructions, or any part thereof, inconsistent with or contrary to the provisions of this Act are hereby
deemed repealed, amended or modified accordingly.
Section 18. Separability Clause. - If for any reason, any section or provision of this Act shall be
declared unconstitutional or invalid, the other parts thereof not affected thereby shall remain valid.
Section 19. Effectivity Clause - This Act shall take effect after fifteen (15) days following its
publication in at least (2) newspapers of general circulation.
ANNEX B
REPUBLIC ACT NO. 7651
AN ACT TO REVITALIZE AND STRENGTHEN THE BUREAU OF CUSTOMS,

AMENDING FOR THE PURPOSE CERTAIN SECTIONS OF THE TARIFF AND
CUSTOMS CODE OF THE PHILIPPINES, AS AMENDED.
Section 1. Sections 1210, 1301, 1801, 1802, 2301, 2313, 2503, 2601, and 3407 of
the Tariff and Customs Code, as amended, are hereby further amended to read as
follows:
"Sec. 1210. Disposition of Imported Articles Remaining on Vessel after Time for
Unloading. Imported articles remaining on board any vessel after the expiration
of the said period for discharge, and not reported for transshipment to another
port, may be unladen by the customs authorities and stored at the vessel's
expense.

PUP COLLEGE OF LAW
"Unless prevented by causes beyond the vessel's control, such as port congestion,
strikes, riots or civil commotions, failures of vessel's gear, bad weather, and similar
causes, articles so stored shall be entered within thirty (30) days, which shall not be
extendible, from the date of discharge of the last package from the vessel or aircraft
and shall be claimed within fifteen (15) days, which shall not likewise be extendible
from the date of posting of the notice to claim in conspicuous places in the Bureau
of Customs. If not entered or not claimed, it shall be disposed of in accordance with
the provisions of this Code."
"Sec. 1301. Persons Authorized to Make Import Entry. Imported articles must be
entered in the customhouse at the port of entry within thirty (30) days, which shall
not be extendible, from the date of discharge of the last package from the vessel or
aircraft either (a) by the importer, being holder of the bill of lading, (b) by a duly
licensed customs broker acting under authority from a holder of the bill or (c) by a
person duly empowered to act as agent or attorney-in-fact for each
holder: Provided, That where the entry is filed by a party other than the importer,
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: Provided, further, That such statements under
oath shall constitute prima facie evidence of knowledge and consent of the
importer of violations against applicable provisions of this Code when the
importation is found to be unlawful."
"Sec. 1801. Abandonment, Kinds and Effects of . An imported article is deemed

abandoned under any of the following circumstances:
"(a) When the owner, importer or consignee of the imported article expressly
signifies in writing to the Collector of Customs his intentions to abandon; or
"(b) When the owner, importer, consignee or interested party after due notice, fails
to file an entry within thirty (30) days, which shall not be extendible, from the date
of discharge of the last package from the vessel or aircraft, or having filed such
entry, fails to claim his importation within fifteen (15) days which shall not likewise
be extendible, from the date of posting of the notice to claim such importation.
"Any person who abandons an article or who fails to claim his importation as
provided for in the preceding paragraph shall be deemed to have renounced all his
interests and property rights therein."
"Sec. 1802. Abandonment of Imported Articles. An abandoned article shall ipso

facto be deemed the property of the Government and shall be disposed of in
accordance with the provisions of this Code.chan robles virtual law library

PUP COLLEGE OF LAW
"Nothing in this section shall be construed as relieving the owner or importer from
any criminal liability which may arise from any violation of law committed in
connection with the importation of the abandoned article.
"Any official or employee of the Bureau of Customs or of other government agencies

who, having knowledge of the existence of an abandoned article or having control
or custody of such abandoned article, fails to report to the Collector within twenty-
four (24) hours from the time the article is deemed abandoned, shall be punished
with the penalties prescribed in Paragraph 1, Section 3604 of this Code."
"Sec. 2301. Warrant for Detention of Property-Cash Bond. Upon making any
seizure, the Collector shall issue a warrant for the detention of the property; and if
the owner or importer desires to secure the release of the property for legitimate
use, the Collector shall, with the approval of the Commissioner of Customs,
surrender it upon the filing of a cash bond, in an amount to be fixed by him,
conditioned upon the payment of the appraised value of the article and/or any fine,
expenses and costs which may be adjudged in the case:Provided, That such
importation shall not be released under any bond when there is a prima facie
evidence of fraud in the importation of article: Provided, further, That articles the
importation of which is prohibited by law shall not be released under any
circumstance whatsoever: Provided, finally, That nothing in this section shall be
construed as relieving the owner or importer from any criminal liability which may
arise from any violation of law committed in connection with the importation of
the article."
"Sec. 2313. Review by Commissioner. The person aggrieved by the decision or

action of the Collector in any matter presented upon protest or by his action in any
case of seizure may, within fifteen (15) days after notification in writing by the
Collector of his action or decision, file a written notice to the Collector with a copy
furnished to the Commissioner of his intention to appeal the action or decision of
the Collector to the Commissioner. Thereupon the Collector shall forthwith
transmit all the records of the proceedings to the Commissioner, who shall approve,
modify or reverse the action or decision of the Collector and take such steps and
make such orders as may be necessary to give effect to his decision: Provided, That
when an appeal is filed beyond the period herein prescribed, the same shall be
deemed dismissed.
"If in any seizure proceedings, the Collector renders a decision adverse to the
Government, such decision shall be automatically reviewed by the Commissioner
and the records of the case elevated within five (5) days from the promulgation of
the decision of the Collector. The Commissioner shall render a decision of the
automatic appeal within thirty (30) days from receipt of the records of the case. If
the Collector's decision is reversed by the Commissioner, the decision of the
PUP COLLEGE OF LAW
Commissioner shall be final and executory. However, if the Collector's decision is

affirmed, or if within thirty (30) days from receipt of the records of the case by the
Commissioner no decision is rendered or the decision involves imported articles
whose published value is Five million pesos (P5,000,000) or more, such decision
shall be deemed automatically appealed to the Secretary of Finance and the records
of the proceedings shall be elevated within five (5) days from the promulgation of
the decision of the Commissioner or of the Collector under appeal, as the case may
be: Provided, further, That if the decision of the Commissioner or of the Collector
under appeal, as the case may be, is affirmed by the Secretary of Finance, or if
within thirty (30) days from receipt of the records of the proceedings by the
Secretary of Finance, no decision is rendered, the decision of the Secretary of
Finance, or of the Commissioner, or of the Collector under appeal, as the case may
be, shall become final and executory.
"In any seizure proceeding, the release of imported articles shall not be allowed
unless and until a decision of the Collector has been confirmed in writing by the
Commissioner of Customs."
"Sec. 2503. Undervaluation, Misclassification and Misdeclaration in Entry. When

the dutiable value of the imported articles shall be so declared and entered that the
duties, based on the declaration of the importer on the face of the entry, would be
less by ten percent (10%) than should be legally collected, or when the imported
articles shall be so described and entered that the duties based on the importer's
description on the face of the entry would be less by ten percent (10%) than should
be legally collected based on the tariff classification, or when the dutiable weight,
measurement or quantity of imported articles is found upon examination to exceed
by ten percent (10%) or more than the entered weight, measurement or quantity, a
surcharge shall be collected from the importer in an amount of not less than the
difference between the full duty and the estimated duty based upon the declaration
of the importer, nor more than twice of such difference: Provided, That an
undervaluation, misdeclaration in weight, measurement or quantity of more than
thirty percent (30%) between the value, weight, measurement, or quantity declared
in the entry, and the actual value, weight, quantity, or measurement shall
constitute a prima facie evidence of fraud penalized under Section 2530 of this
Code: Provided, further, That any misdeclared or undeclared imported
articles/items found upon examination shall ipso facto be forfeited in favor of the
Government to be disposed of pursuant to the provisions of this Code.
"When the undervaluation, misdescription, misclassification or misdeclaration in

the import entry is intentional, the importer shall be subject to the penal provision
under Section 3602 of this Code."

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Sec. 2601. Property Subject to Sale. Property in customs custody shall be subject
to sale under the conditions hereinafter provided:
"a. Abandoned articles;
"b. Articles entered under warehousing entry not withdrawn nor the duties and
taxes paid thereon within the period prescribed under Section 1908 of this Code;
"c. Seized property, other than contraband, after liability to sale shall have been
established by proper administrative or judicial proceedings in conformity with the
provisions of this Code; and
"d. Any article subject to valid lien for customs duties, taxes or other charges
collectible by the Bureau of Customs, after the expiration of the period allowed for
the satisfaction of the same."
"Sec. 3407. Issuance, Revocation and Suspension of Certificate. A candidate who

has passed the customs brokers' examination shall be entitled to the issuance of a
certificate as a customs broker: Provided, That (1) person who qualified as customs
broker in accordance with customs regulations existing before the adoption of this
Code; (2) Commissioner of Customs who has acted as ex officio Chairman of the
Board of Examiners for Customs Brokers and the Tariff Commissioner of Customs
who have served as such in any of the collection districts for a period of at least
five (5) years, who desire to have a certificate issued to them may apply for the
issuance of such certificate, upon payment of the fees required under paragraph (b)
of Section Thirty-four hundred and five of this Code.
chan robles virtual law library
"A customs broker's certificate shall show, among other things, the full name of the
registrant, shall have a serial number and shall be signed by all the members of the
Board of the Commissioner of Civil Service, and shall bear the official seal of the
Board.
"A complaint for the suspension or revocation of the certificate of a customs broker
shall be filed with the Board of Examiners for Customs Brokers which shall
investigate the case and shall submit its findings and recommendations to the
Commissioner of Civil Service and shall immediately furnish the respondent
customs broker with a copy of his decision.
"Any person who files an entry or facilitates the processing or release of any
shipment shall be liable for smuggling if the ostensible owner, importer, or
consignee and/or the ostensible given address of the owner, importer, or consignee

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is fictitious and the shipment is found to be unlawful. If the violator is a customs

broker, his license shall also be revoked by the Commissioner of Customs."
Sec. 2. Section 1803 of the Tariff and Customs Code, as amended, is hereby
repealed.
Sec. 3. The Secretary of Finance shall, upon the recommendation of the

Commissioner of Customs, promulgate the rules and regulations necessary for the
effective implementation of this Act.
Sec. 4. Separability Clause. If any part of this Act should, for any reason be held
to be invalid or unconstitutional, the remaining parts thereof shall remain in full
force and effect.
Sec. 5. Repealing Clause. All laws, decrees, executive orders, rules and
regulations and other issuances inconsistent with this Act are hereby repealed or
amended accordingly. chan robles virtual law library
Sec. 6. Effectivity Clause. This Act shall take effect after fifteen (15) days from
the date of publication in the Official Gazette or in at least two (2) national
newspapers of general circulation, whichever comes earlier.
ANNEX C
REPUBLIC ACT NO. 9337
AN ACT AMENDING SECTIONS 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116,
117, 119, 121, 148, 151, 236, 237 AND 288 OF THE NATIONAL INTERNAL REVENUE CODE OF
1997, AS AMENDED, AND FOR OTHER PURPOSES
Be it enacted by the Senate and the House of Representatives of the Philippines in Congress
assembled:

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Section 1. Section 27 of the National Internal Revenue Code of 1997, as amended, is hereby
further amended to read as follows:
"SEC. 27. Rates of Income Tax on Domestic Corporations. -
(A) In General. - Except as otherwise provided in this Code, an income tax of thirty-
five percent (35%) is hereby imposed upon the taxable income derived during each
taxable year from all sources within and without the Philippines by every
corporation, as defined in Section 22(B) of this Code and taxable under this Title as
a corporation, organized in, or existing under the laws of the Philippines: Provided,
That effective January 1, 2009, the rate of income tax shall be thirty percent (30%).
"In the case of corporations adopting the fiscal-year accounting period, the taxable
income shall be computed without regard to the specific date when specific sales,
purchases and other transactions occur. Their income and expenses for the fiscal
year shall be deemed to have been earned and spent equally for each month of the
period.
The corporate income tax rate shall be applied on the amount computed by
multiplying the number of months covered by the new rate within the fiscal year by
the taxable income of the corporation for the period, divided by twelve.
"Provided, further, That the President, upon the recommendation of the Secretary
of Finance, may, effective January 1, 2000, allow corporations the option to be
taxed at fifteen percent (15%) of gross income as defined herein, after the following
conditions have been satisfied:
"(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
"(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;
"(3) A VAT tax effort of four percent (4%) of GNP; and
"(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position
(CPSFP) to GNP.
"The option to be taxed based on gross income shall be available only to firms
whose ratio of cost of sales to gross sales or receipts from all sources does not
exceed fifty-five percent (55%).
"The election of the gross income tax option by the corporation shall be irrevocable
for three (3) consecutive taxable years during which the corporation is qualified
under the scheme.
"For purposes of this Section, the term 'gross income' derived from business shall
be equivalent to gross sales less sales returns, discounts and allowances and 'cost
of goods sold.' Cost of good sold' shall include all business expenses directly

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incurred to produce the merchandise to bring them to their present location and
use.
"For a trading or merchandising concern, 'cost of goods sold' shall include the
invoice cost of the goods sold, plus import duties, freight in transporting the goods
to the place where the goods are actually sold, including insurance while the goods
are in transit.
"For a manufacturing concern, 'cost of goods manufactured and sold' shall

include all costs of production of finished goods, such as raw materials used, direct
labor and manufacturing overhead, freight cost, insurance premiums and other
costs incurred to bring the raw materials to the factory or warehouse.
"In the case of taxpayers engaged in the sale of service, 'gross income' means
gross receipts less sales returns, allowances and discounts.
"(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational

institutions and hospitals which are non-profit shall pay a tax of ten percent (10%)
on their taxable income except those covered by Subsection (D) hereof: Provided,
That if the gross income from unrelated trade, business or other activity exceeds
fifty percent (50%) of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed in Subdection (A)
hereof shall be imposed on the entire taxable income. For purposes of this
Subsection, the term 'unrelated trade, business or other activity' means any
trade, business or other activity, the conduct of which is not substantially related to
the exercise or performance by such educational institution or hospital of its
primary purpose or function. A 'proprietary educational institution' is any private
school maintained and administered by private individuals or groups with an issued
permit to operate from the Department of Education, Culture and Sports (DECS),
or the Commission on Higher Education (CHED), or the Technical Education and
Skills Development Authority (TESDA), as the case may be, in accordance with
existing laws and regulations.
"(C) Government-owned or -Controlled Corporations, Agencies or

Instrumentalities. - The provisions of existing special or general laws to the contrary
notwithstanding, all corporations, agencies, or instrumentalities owned or controlled
by the Government, except the Government Service and Insurance System
(GSIS), the Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), and the Philippine Charity Sweepstakes Office (PCSO), shall
pay such rate of tax upon their taxable income as are imposed by this Section upon
corporations or associations engaged in a similar business, industry, or activity.
"(D) Rate of Tax on Certain Passive Incomes. -
"(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A
final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of
interest on currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements received by
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domestic corporations, and royalties, derived from sources within the Philippines:
Provided, however, That interest income derived by a domestic corporation from a
depository bank under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of
such interest income.
"(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock
Exchange. - A final tax at the rates prescribed below shall be imposed on net
capital gains realized during the taxable year from the sale, exchange or other
disposition of shares of stock in a domestic corporation except shares sold or
disposed of through the stock exchange:
"Not over P100,000 ........................................ 5%

"Amount in excess of P100,000 ....................... 10%
"(3) Tax on Income Derived under the Expanded Foreign Currency Deposit
System. - Income derived by a depository bank under the expanded foreign
currency deposit system from foreign currency transactions with nonresidents,
offshore banking units in the Philippines, local commercial banks including
branches of foreign banks that may be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with foreign currency deposit system units and
other depository banks under the expanded foreign currency deposit system shall
be 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: Provided,
however, That interest income from foreign currency loans granted by such
depository banks under said expanded system to residents other than offshore
banking units in the Philippines or other depository banks under the expanded
system shall be subject to a final tax at the rate of ten percent (10%).

transactions with depository banks under the expanded system shall be exempt
from income tax.
"(4) Intercorporate Dividends. - Dividends received by a domestic corporation from

another domestic corporation shall not be subject to tax.
"(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or
Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed
to have been realized on the sale, exchange or disposition of lands and/or
buildings which are not actually used in the business of a corporation and are
treated as capital assets, based on the gross selling price or fair market value as
determined in accordance with Section, 6(E) of this Code, whichever is higher, of
such lands and/or buildings.
"(E) Minimum Corporate Income Tax on Domestic Corporations. -

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"(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%) of
the gross income as of the end of the taxable year, as defined herein, is hereby
imposed on a corporation taxable under this Title, beginning on the fourth taxable
year immediately following the year in which such corporation commenced its
business operations, when the minimum income tax is greater than the tax
computed under Subsection (A) of this Section for the taxable year.
"(2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum
corporate income, tax over the normal income tax as computed under Subsection
(A) of this Section shall be carried forward and credited against the normal income
tax for the three (3) immediately succeeding taxable years.
"(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. -
The Secretary of Finance is hereby authorized to suspend the imposition of the
minimum corporate income tax on any corporation which suffers losses on account
of prolonged labor dispute, or because of force majeure, or because of legitimate
business reverses.
"The Secretary of Finance is hereby authorized to promulgate, upon

recommendation of the Commissioner, the necessary rules and regulations that
shall define the terms and conditions under which he may suspend the imposition
of the minimum corporate income tax in a meritorious case.
"(4) Gross Income Defined. - For purposes of applying the minimum corporate
income tax provided under Subsection (E) hereof, the term 'gross income' shall
mean gross sales less sales returns, discounts and allowances and cost of goods
sold. 'Cost of goods sold' shall include all business expenses directly incurred to
produce the merchandise to bring them to their present location and use.
"For a trading or merchandising concern, 'Cost of goods sold' shall include the
invoice of the goods sold, plus import duties, freight in transporting the goods to the
place where the goods are actually sold including insurance while the goods are in
transit.
"For a manufacturing concern, 'cost of goods manufactured and sold' shall

include all costs of production of finished goods, such as raw materials used, direct
labor and manufacturing overhead, freight cost, insurance premiums and other
costs incurred to bring the raw materials to the factory or warehouse.
"In the case of taxpayers engaged in the sale of service, 'gross income' means
gross receipts less sales returns, allowances, discounts and cost of services. 'Cost
of services' shall mean all direct costs and expenses necessarily incurred to
provide the services required by the customers and clients including (A) salaries
and employee benefits of personnel, consultants and specialists directly rendering
the service and (B) cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies; Provided, however,
That in the case of banks, 'cost of services' shall include interest expense."

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SEC. 2. Section 28(A)(1) and (B)(1) and (5)(b) of the same Code, as amended, are hereby further
amended to read as follows:
"SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation

organized, authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines, shall be subject to an
income tax equivalent to thirty-five percent (35%) of the taxable income
derived in the preceding taxable year from all sources within the
Philippines: Provided, That effective January 1, 2009, the rate of income
tax shall be thirty percent (30%).
"In the case of corporations adopting the fiscal-year accounting period, the
taxable income shall be computed without regard to the specific date when
sales, purchases and other transactions occur. Their income and expenses
for tbe fiscal year shall be deemed to have been earned and spent equdly
for each month of the period.
"The corporate income tax rate shall be applied on the amount computed
by multiplying the number of months covered by the new rate within the
fiscal year by the taxable income of the corporation for the period, divided
by twelve.
"Provided, however, That a resident foreign corporation shall be granted

the option to be taxed at fifteen percent (15%) on gross income under the
same conditions, as provided in Section 27(A).
"(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A

minimum corporate income tax of two percent (2%) of gross income, as
prescribed under Section 27(E) of this Code, shall be imposed, under the
same conditions, on a resident foreign, corporation taxable under,
paragraph (1) of this Subsection.
"(3) International Carrier. - An international carrier doing business in the

Philippines shall pay a tax of two and one-half percent (2 1/2%) on its
'Gross Philippine Billings' as defined hereunder:
"(a) International Air Carrier. - 'Gross Philippine Billings' refers to

the amount of 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: Provided, That 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: Provided, further, That for a flight which
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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.
"(b) International Shipping. - 'Gross Philippine Billings' means

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.
"(4) Offshore Banking Units. - The provisions of any law to the contrary
notwithstanding, income derived by offshore banking units authorized by
the Bangko Sentral ng Pilipinas (BSP), from foreign currency transactions
with nonresidents, other offshore banking units, local commercial banks,
including branches of foreign banks that may be authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact business with offshore banking units
shall be 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 which shall be subject to the regular income tax payable
by banks: Provided, however, That any 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, shall be subject only to a final; tax at the rate of ten percent
(10%).

transactions with said offshore banking units shall be exempt from income
tax.
"(5) Tax on Branch Profits Remittances. - any profit remitted by a branch to

its head office shall be subject to a tax of fifteen percent (15%) which shall
be based on the total profits applied or earmarked for remittance without
any deduction for the tax component thereof (except those activities which
are registered with the Philippine Economic Zone Authority). The tax shall
be collected and paid in the same manner as provided in Sections 57 and
58 of this Code: Provided, That interests, dividends, rents, royalties,
including renumeration 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.
"(6) Regional or Area Headquarters and Regional Operating Headquarters

of Multinational Companies. -

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"(a) Regional or area headquarters as defined in Section 22(DD)

shall not be subject to income tax.
"(b) Regional operating headquarters as defined in Section 22(EE)

shall pay a tax of ten percent (10%) of their taxable income.
"(7) Tax on Certain Incomes Received by a Resident Foreign

Corporation. -
"(a) Interest from Deposits and Yield or any other Monetary Benefit
from Deposit Substitutes, Trust Funds and Similar Arrangements
and Royalties. - Interest from any currency bank deposit and yield
or any other monetary benefit from deposit substitutes and from
trust funds and similar arrangements and royalties derived from
sources within the Philippines shall be subject to a final income tax
at the rate of twenty percent (20%) of such interest:Provided,
however, That interest income derived by a resident foreign
corporation from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at
the rate of seven and one-half percent (7 1/2%) of such interest
income.
"(b) Income Derived under the Expanded Foreign Currency

Deposit System. - Income derived by a depository bank under the
expanded foreign currency deposit system from foreign currency
transactions with nonresidents, offshore banking units in the
Philippines, local commercial banks including branches of foreign
banks that may be authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with foreign currency deposit system
units and other depository banks under the expanded foreign
currency deposit system shall be 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: Provided, however, That interest income from foreign
currency loans granted by such depository banks under said
expanded system to residents other than depository banks under
the expanded system shall be subject to a final tax at the rate of
ten percent (10%).
"Any income of nonresidents, whether individuals or corporations,

from transactions with depository banks under the expanded
system shall be exempt from income tax.
"(c) Capital Gains from Sale of Shares of Stock Not Traded in the
Stock Exchange. - A final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other disposition of

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shares of stock in a domestic corporation except shares sold or

"Not over P100,000 ................................... 5%

"On any amount in excess of P100,000 ....... 10%
"(d) Intercorporate Dividends. - Dividends received by a resident

foreign corporation from a domestic corporation liable to tax under
this Code shall not be subject to tax under this Title.
"(B) Tax on Nonresident Foreign Corporation. -
"(1) In General. - Except as otherwise provided in this Code, a foreign

corporation not engaged in trade or business in the Philippines shall pay a
tax equal to thirty-five percent (35%) of the gross income received during
each taxable year from all sources within the Philippines, such as interests,
dividends, rents, royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed or determinable annual,
periodic or casual gains, profits and income, and capital gains, except
capital gains subject to tax under subparagraph 5(c): Provided, That
effective January 1, 2009, the rate of income tax shall be thirty percent
(30%).
"(2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A

cinematographic film owner, lessor, or distributor shall pay a tax of twenty-
five percent (25%) of its gross income from all sources within the
Philippines.
"(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine

Nationals. - A nonresident owner or lessor of vessels shall be subject to a
tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter
fees from leases or charters to Filipino citizens or corporations, as
approved by the Maritime Industry Authority.
"(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other

Equipment. - Rentals, charters and other fees derived by a nonresident
lessor of aircraft, machineries and other equipment shall be subject to a tax
of seven and one-half percent (7 1/2%) of gross rentals or fees.
"(5) Tax on Certain Incomes Received by a Nonresident Foreign

Corporation. -
"(a) Interest on Foreign Loans. - A final withholding tax at the rate

of twenty percent (20%) is hereby imposed on the amount of
interest on foreign loans contracted on or after August 1, 1986;
"(b) Intercorporate Dividends. - A final withholding tax at the rate of

fifteen percent (15%) is hereby imposed on the amount of cash

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and/or property dividends received from a domestic corporation,

which shall be collected and paid as provided in Section 57(A) of
this Code, subject to the condition that the country in which the
nonresident foreign corporation is domiciled, shall allow a credit
against the tax due from the nonresident foreign corporation taxes
deemed to have been paid in the Philippines equivalent to twenty
percent (20%), which represents the difference between the
regular income tax of thirty-five percent (35%) and the fifteen
percent (15%) tax on dividends as provided in this subparagraph:
Provided, That effective January 1, 2009, the credit against the tax
due shall be equivalent to fifteen percent (15%), which represents
the difference between the regular income tax of thirty percent
(30%) and the fifteen percent (15%) tax on dividends;
"(c) Capital Gains from Sale of Shares of Stock not Traded in the
Stock Exchange. - A final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation, except shares sold, or
"Not over P100,000 .................................... 5%

"On any amount in excess of P100,000.............. 10%"
SEC. 3. Section 34(B)(1) of the same Code, as amended, is hereby further 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) and (C); and 28(A)(1), there shall be allowed the following deductions from gross
income:
"(A) Expenses. -
"(1) Ordinary and Necessary Trade, Business or Professional Expenses. -
"(a) In General. - There shall be allowed as deduction from gross

income all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on or which are directly
attributable to, the development, management, operation and/or
conduct of the trade, business or exercise of a profession,
including:
"(i) A reasonable allowance for salaries, wages, and other

forms of compensation for personal services actually
rendered, including the grossed- up monetary value of
fringe benefit furnished or granted by the employer to the
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employee: Provided, That the final tax imposed under

Section 33 hereof has been paid;
"(ii) A reasonable allowance for travel expenses, here and

abroad, while away from home in the pursuit of trade,
business or profession;
"(iii)A reasonable allowance for rentals and/or other

payments which are required as a condition for the
continued use or possession, for purposes of the trade,
business or profession, of property to which the taxpayer
has not taken or is not taking title or in which he has no
equity other than that of a lessee, user or possessor;
"(iv) A reasonable allowance for entertainment,

amusement and recreation expenses during the taxable
year, that are directly connected to the development,
management and operation of the trade, business or
profession of the taxpayer, or that are directly related to or
in furtherance of the conduct of his or its trade, business or
exercise of a profession not to exceed such ceilings as the
Secretary of Finance may, by rules and regulations
prescribe, upon recommendation of the Commissioner,
taking into account the needs as well as the special
circumstances, nature and character of the industry, trade,
business, or profession of the taxpayer: Provided, That
any expense incurred for entertainment, amusement or
recreation that is contrary to law, morals, public policy or
public order shall in no case be allowed as a deduction.
"(b) Substantiation Requirements. - No deduction from gross

income shall be allowed under Subsection (A) hereof unless the
taxpayer shall substantiate with sufficient evidence, such as official
receipts or other adequate records: (i) the amount of the expense
being deducted, and (ii) the direct connection or relation of the
expense being deducted to the development, management,
operation and/or conduct of the trade, business or profession of
the taxpayer.
"(c) Bribes, Kickbacks and Other Similar Payments. - No deduction

from gross income shall be allowed under Subsection (A) hereof
for any payment made, directly or indirectly, to an official or
employee of the national government, or to an official or employee
of any local government unit, or to an official or employee of a
government-owned or-controlled corporation, or to an official or
employee or representative of a foreign government, or to a private
corporation, general professional partnership, or a similar entity, if
the payment constitutes a bribe or kickback.

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"(2) Expenses Allowable to Private Educational Institutions. - In addition to

the expenses allowable as deductions under this Chapter, a private
educational institution; referred to under Section 27(B) of this Code, may at
its option elect either: (a) to deduct expenditures otherwise considered as
capital outlays of depreciable assets incurred during the taxable year for
the expansion of school facilities, or (b) to deduct allowance for
depreciation thereof under 8ubsection (F) hereof.
"(B) Interest. -
"(1) In General. - The amount of interest paid or incurred within a taxable

year on indebtedness in connection with the taxpayer's profession, trade or
business shall be allowed as deduction from gross income: Provided,
however, That the taxpayer's otherwise allowable deduction for interest
expense shall be reduced by forty-two percent (42%) of the interest income
subjected to final tax: Provided, That effective January 1, 2009, the
percentage shall be thirty-three percent (33%).
SEC. 4. Section 106 of the same Code, as amended, is hereby further amended to read as follows:
"SEC. 106. Value-Added Tax on Sale of Goods or Properties. -
"(A) Rate and Base of Tax. - There shall be levied, assessed and collected on
every sale, barter or exchange of goods or properties, a value-added tax equivalent
to ten percent (10%) 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: Provided, That the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added
tax to twelve percent (12%), after any of the following conditions has been
satisfied:
"(i) Value-added tax collection as a percentage of Gross Domestic product

(GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or
"(ii) National government deficit as a percentage of GDP of the previous

year exceeds one and one-half percent (1 1/2%).
"(1) The term 'goods or properties' shall mean all tangible and
intangible objects which are capable of pecuniary estimation and
shall include:
"(a) Real properties held primarily for sale to customers or

held for lease in the ordinary course of trade or business;
"(b) The right or the privilege to use patent, copyright,

design or model, plan secret formula or process, goodwill,
trademark, trade brand or other like property or right;

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"(c) The right or the privilege to use in the Philippines of

any industrial, commercial or scientific equipment;
"(d) The right or the privilege to use motion picture films,

films, tapes and discs; and
"(e) Radio, television, satellite transmission and cable

television time.
"The term 'gross selling price' means the total amount of

money or its equivalent which the purchaser pays or is
obligated to pay to the seller in consideration of the sale,
barter or exchange of the goods or properties, excluding
the value-added tax. The excise tax, if any, on such goods
or properties shall form part of the gross selling price.
"(2) The following sales by VAT-registered persons shall be

subject to zero percent (0%) rate:
"(a) Export Sales. - The term 'export sales' means:
"(1) The sale and actual shipment of goods from

the Philippines to a foreign country, irrespective of
any shipping arrangement that may be agreed
upon which may influence or determine the
transfer of ownership of the goods so exported
and paid for in acceptable foreign currency or its
equivalent in goods or services, and accounted for
in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas,(BSP);
"(2) Sale of raw materials or packaging materials

to a nonresident buyer for delivery to a resident
local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking
in the Philippines of the said buyer's goods and
paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas
(BSP):
"(3) Sale of raw materials or packaging materials

to export-oriented enterprise whose export sales
exceed seventy percent (70%) of total annual
production;
"(4) Sale of gold to the Bangko Sentral ng Pilipinas

(BSP);

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"(5) Those considered export sales under

Executive Order No. 226, otherwise known as the
Omnibus Investment Code of 1987, and other
special laws; and
"(6) The sale of goods, supplies, equipment and

fuel to persons engaged in international shipping
or international air transport operations.
"(b) Foreign Currency Denominated Sale. - The phrase

'foreign currency denominated sale' means sale to a
nonresident of goods, except those mentioned in Sections
149 and 150, 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 Bangko
Sentral ng Pilipinas (BSP).
"(c) Sales to persons or entities whose exemption under

special laws or international agreements to which the
Philippines is a signatory effectively subjects such sales to
zero rate.
"(B) Transactions Deemed Sale. - The following transactions shall be deemed sale:
"(1) Transfer, use or consumption not in the course of business of goods or

properties originally intended for sale or for use in the course of business;
"(2) Distribution or transfer to:
"(a) Shareholders or investors as share in the profits of the VAT-

registered persons: or
"(b) Creditors in payment of debt;
"(3) Consignment of goods if actual sale is not made within sixty (60) days
following the date such goods, were consigned; and
"(4) Retirement from or cessation of business, with respect to inventories of

taxable aoods existing as of such retirement or cessation.
"(C) Changes in or Cessation of Status of a VAT-registered Person. - The tax

imposed in Subsection (A) of this Section shall also apply to goods disposed of or
existing as of a certain date if under circumstances to be prescribed in rules and
regulations to be promulgated by the Secretary of Finance, upon recommendation
of the Commissioner, the status of a person as a VAT-registered person changes
or is terminated.

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"(D) Sales Returns, Allowances and Sales Discounts. - The value of goods or
properties sold and subsequently returned or for which allowances were granted by
a VAT-registered person may be deducted from the gross sales or receipts for the
quarter in which a refund is made or a credit memorandum or refund is issued.
Sales discount granted and indicated in the invoice at the time of sale and the grant
of which does not depend upon the happening of a future event may be excluded
from the gross sales within the same quarter it was given.
"(E) Authority of the Commissioner to Determine the Appropriate Tax Base. - The
Commissioner shall, by rules and regulations prescribed by the Secretary of
Finance, determine the appropriate tax base incases where a transaction is
deemed a sale, barter or exchange of goods or properties under Subsection (B)
hereof, or where the gross selling price is unreasonably lower than the actual
market value."
"SEC. 107. Value-Added Tax on Importation of Goods. -
"(A) In General. - There shall be levied, assessed and collected on every

importation of goods a value-added tax equivalent to ten percent (10%) based on
the total value used by the Bureau of Customs in determining tariff and customs
duties, plus customs duties, excise taxes, if any, and other charges, such tax to be
paid by the importer prior to the release of such goods from customs custody:
Provided, That where the customs duties are determined on the basis of the
quantity or volume of the goods, the value-added tax shall be based on the landed
cost plus excise taxes, if any: Provided, further, That the President, upon the
recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise
the rate of value-added tax to twelve percent (12%), after any of the following
conditions has been satisfied:
"(i) Value-added tax collection as a percentage of Gross Domestic Product

"(ii) National government deficit as a percentage of GDP of the previous

"(B) Transfer of Goods by Tax-exempt Persons. - In the case of tax free importation
of goods into the Philippines by persons, entities or agencies exempt from tax
where such goods are subsequently sold, transferred or exchanged in the
Philippines to non-exempt persons or entities, the purchasers, transferees or
recipients shall be considered the importers thereof, who shall be liable for any
internal revenue tax on such importation. The tax due on such importation shall
constitute a lien on the goods superior to all charges or liens on the goods,
irrespective of the possessor thereof."
"SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. -
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(A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-
added tax equivalent to ten percent (10%) of gross receipts derived from the sale
or exchange of services, including the use or lease of properties: Provided, That
the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent
(12%), after any of the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product

(ii) National government deficit as a percentage of GDP of the previous

"The phrase 'sale or exchange of services' means the performance of all

kinds of services in the Philippines for others for a fee, remuneration or
consideration, including those performed or rendered by construction and
service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real;
warehousing services; lessors or distributors of cinematographic films;
persons engaged in milling, processing, manufacturing or repacking goods
for others; proprietors, operators or keepers of hotels, motels, rest-houses,
pension houses, inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places, including clubs and
caterers; dealers in securities; lending investors; transportation contractors
on their transport of goods or cargoes, including persons who transport
goods or cargoes for hire and other domestic common carriers by land
relative to their transport of goods or cargoes; common carriers by air and
sea relative to their transport of passengers, goods or cargoes from one
place in the Philippines to another place in the Philippines; sales of
electricity by generation companies, transmission, and distribution
companies; services of franchise grantees of electric utilities, telephone
and telegraph, radio and television broadcasting and all other franchise
grantees except those under Section 119 of this Code and non-life
insurance companies (except their crop insurances), including surety,
fidelity, indemnity and bonding companies; and similar services regardless
of whether or not the performance thereof calls for the exercise or use of
the physical or mental faculties. The phrase 'sale or exchange of
services' shall likewise include:
"(1) The lease or the use of or the right or privilege to use any
copyright, patent, design or model plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right;
"(2) The lease or the use of, or the right to use of any industrial,
commercial or, scientific equipment;
"(3) The supply of scientific, technical, industrial or commercial

knowledge or information;

PUP COLLEGE OF LAW
"(4) The supply of any assistance that is ancillary and subsidiary to

and is furnished as a means of enabling the application or
enjoyment of any such property, or right as is mentioned in
subparagraph (2) or any such knowledge or information as is
mentioned in subparagraph (3);
"(5) The supply of services by a nonresident person or his

employee in connection with the use of property or rights belonging
to, or the installation or operation of any brand, machinery or other
apparatus purchased from such nonresident person;
"(6) The supply of technicai advice, assistance or services

rendered in connection with technical management or
administration of any scientific, industrial or commercial
undertaking, venture, project or scheme;
"(8) The lease or the use of or the right to use radio, television,
satellite transmission and cable television time.
"Lease of properties shall be subject to the tax herein imposed irrespective

of the place where the contract of lease or licensing agreement was
executed if the property is leased or used in the Philippines.
"The term 'gross receipts' means the total amount of money or its
equivalent representing the contract price, compensation, service fee,
rental or royalty, including the amount charged for materials supplied with
the services and deposits and advanced payments actually or
constructively received during the taxable quarter for the services
performed or to be performed for another person, excluding value-added
tax.
"(B) Transactions Subject to Zero Percent (0%) Rate. - The following services
performed in the Philippines by VAT-registered persons shall be subject to zero
percent (0%) rate:
"(1) Processing, manufacturing or repacking goods for other persons doing

business outside the Philippines which goods are subsequently exported,
where the services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
"(2) Services other than those mentioned in the preceding paragraph

rendered to a person engaged in business conducted outside the
Philippines or to a nonresident person not engaged in business who is
outside the Philippines when the services are performed, the consideration
for which is paid for in acceptable foreign currency and accounted for in

PUP COLLEGE OF LAW
accordance with the rules and regulations of the Bangko Sentral ng

Pilipinas (BSP);
"(3) 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 zero percent
(0%) rate;
"(4) Services rendered to persons engaged in international shipping or

international air transport operations, including leases of property for use
thereof;
"(5) Services performed by subcontractors and/or contractors in

processing, converting, or manufacturing goods for an enterprise whose
export sales exceed seventy percent (70%) of total annual production;
"(6) Transport of passengers and cargo by air or sea vessels from the
Philippines to a foreign country; and
"(7) Sale of power or fuel generated through renewable sources of energy

such as, but not limited to, biomass, solar, wind, hydropower, geothermal,
ocean energy, and other emerging energy sources using technologies
such as fuel cells and hydrogen fuels.
"SEC. 109. Exempt Transactions. - (1) Subject to the provisions of subsection (2) hereof,
the following transactions shall be exempt from the value-added tax:
"(A) Sale or importation of agricultural and marine food products in their original
state, livestock and poultry of a kind generally used as, or yielding or producing
foods for human consumption; and breeding stock and genetic materials therefor.
"Products classified under this paragraph shall be considered in their original state
even if they have undergone the simple processes of preparation or preservation
for the market, such as freezing, drying, salting, broiling, roasting, smoking or
stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses,
ordinary salt, and copra shall be considered in their original state;
"(B) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn,
livestock and poultry feeds, including ingredients, whether locally produced or
imported, used in the manufacture of finished feeds (except specialty feeds for race
horses, fighting cocks, aquarium fish, zoo animals and other animals generally
considered as pets);
"(C) Importation of personal and household effects belonging to the residents of the
Philippines returning from abroad and nonresident citizens coming to resettle in the

PUP COLLEGE OF LAW
Philippines: Provided, That such goods are exempt from customs duties under the
Tariff and Customs Code of the Philippines;
"(D) Importation of professional instruments and implements, wearing apparel,

domestic animals, and personal household effects (except any vehicle, vessel,
aircraft, machinery, other goods for use in the manufacture and merchandise of
any kind in commercial quantity) belonging to persons coming to settle in the
Philippines, for their own use and not for sale, barter or exchange, accompanying
such persons, or arriving within ninety (90) days before or after their arrival, upon
the production of evidence satisfactory to the Commissioner, that such persons are
actually coming to settle in the Philippines and that the change of residence is bona
fide;
"(E) Services subject to percentage tax under Title V;
"(F) Services by agricultural contract growers and milling for others of palay into
rice, corn into grits and sugar cane into raw sugar;
"(G) Medical, dental, hospital and veterinary services except those rendered by
professionals;
"(H) Educational services rendered by private educational institutions, duly

accredited by the Department of Education (DEPED), the Commission on Higher
Education (CHED), the Technical Education And Skills Development Authority
(TESDA) and those rendered by government educational institutions;
"(I) Services rendered by individuals pursuant to an employer-employee

relationship;
"(J) Services rendered by regional or area headquarters established in the

Philippines by multinational corporations which act as supervisory, communications
and coordinating centers for their affiliates, subsidiaries or branches in the Asia-
Pacific Region and do not earn or derive income from the Philippines;
"(K) 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;
"(L) Sales by agricultural cooperatives duly registered with the Cooperative

Development Authority to their members as well as sale of their produce, whether
in its original state or processed form, to non-members; their importation of direct
farm inputs, machineries and equipment, including spare parts thereof, to be used
directly and exclusively in the production and/or processing of their produce;
"(M) Gross receipts from lending activities by credit or multi-purpose cooperatives

duly registered with the Cooperative Development Authority;

PUP COLLEGE OF LAW
"(N) Sales by non-agricultural, non-electric and non-credit cooperatives duly

registered with the Cooperative Development Authority: Provided, That the share
capital contribution of each member does not exceed Fifteen thousand pesos
(P15,000) and regardless of the aggregate capital and net surplus ratably
distributed among the members;
"(O) Export sales by persons who are not VAT-registered;
"(P) Sale of real properties not primarily held for sale to customers or held for lease
in the ordinary course of trade or business, or real property utilized for low-cost and
socialized housing as defined by Republic Act No. 7279, otherwise known as the
Urban Development and Housing Act of 1992, and other related laws, residential
lot valued at One million five hundred thousand pesos (P1,500,000) and below,
house and lot, and other residential dwellings valued at Two million five hundred
thousand pesos (P2,500,000) and below: Provided, That not later than January 31,
2009 and every three (3) years thereafter, the amounts herein stated shall be
adjusted to their present values using the Consumer Price Index, as published by
the National Statistics Office (NSO);
"(Q) Lease of a residential unit with a monthly rental not exceeding Ten thousand
pesos (P10,000) Provided, That not later than January 31, 2009 and every three
(3) years thereafter, the amount herein stated shall be adjusted to its present value
using the Consumer Price Index as published by the National Statistics Office
(NSO);
"(R) 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;
"(S) Sale, importation or lease of passenger or cargo vessels and aircraft, including
engine, equipment and spare parts thereof for domestic or international transport
operations;
"(T) Importation of fuel, goods and supplies by persons engaged in international

shipping or air transport operations;
"(U) Services of banks, non-bank financial intermediaries performing quasi-banking

functions, and other non-bank financial intermediaries; and
"(V) 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 One million five hundred thousand
pesos (P1,500,000): Provided, That not later than January 31, 2009 and every
three (3) years thereafter, the amount herein stated shall be adjusted to its present
value using the Consumer Price Index as published by the National Statistics
Office (NSO);

PUP COLLEGE OF LAW
"(2) A VAT-registered person may elect that Subsection (1) not apply to its sale of goods or
properties or services: Provided, That an election made under this Subsection shall be
irrevocable for a period of three (3) years from the quarter the election was made."
SEC 8. Section 110 of the same Code, as amended, is hereby further amended to read as follows:
"SEC. 110. Tax Credits. -
"(A) Creditable Input Tax. -
"(1) Any input tax evidenced by a VAT invoice or official receipt issued in
accordance with Section 113 hereof on the following transactions shall be
creditable against the output tax:
"(a) Purchase or importation of goods:
"(i) For sale; or
"(ii) For conversion into or intended to form part of a

finished product for sale including packaging materials; or
"(iii) For use as supplies in the course of business; or
"(iv) For use as materials supplied in the sale of service; or
"(v) For use in trade or business for which deduction for

depreciation or amortization is allowed under this Code.
"(b) Purchase of services on which a value-added tax has actually

been paid.
"(2) The input tax on domestic purchase or importation of goods or

properties by a VAT-registered person shall be creditable:
"(a) To the purchaser upon consummation of sale and on

importation of goods or properties; and
"(b) To the importer upon payment of the value-added tax prior to

the release of the goods from the custody of the Bureau of
Customs.
"Provided, That the input tax on goods purchased or imported in a calendar

month for use in trade or business for which deduction for depreciation is
allowed under this Code, shall be spread evenly over the month of
acquisition and the fifty-nine (59) succeeding months if the aggregate
acquisition cost for such goods, excluding the VAT component thereof,
exceeds One million pesos (P1,000,000): Provided, however, That if the

PUP COLLEGE OF LAW
estimated useful life of the capital good is less than five (5) years, as used
for depreciation purposes, then the input VAT shall be spread over such a
shorter period:Provided, finally, that in the case of purchase of services,
lease or use of properties, the input tax shall be creditable to the
purchaser, lessee or licensee upon payment of the compensation, rental,
royalty or fee.
"(3) A VAT-registered person who is also engaged in transactions not

subject to the value-added tax shall be allowed tax credit as follows:
"(a) Total input tax which, can be directly attributed to transactions

subject to value-add tax; and
"(b) A ratable portion of any input tax which cannot be directly

attributed to either activity.
"The term 'input tax' means the value-added tax due from or paid by a
VAT-registered person in the course of his trade or business on importation
of goods or local purchase of goods or services, including lease or use of
property, from a VAT-registered person. It shall also include the transitional
input tax determined in accordance with Section 111 of this Code.
"The term 'output tax' means the value-added tax due on the sale or lease
of taxable goods or properties or services by any person registered or
required to register under Section 236 of this Code.
"(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax
exceeds the input tax, the excess shall be paid by the VAT-registered person. If the
input tax exceeds the output tax, the excess shall be carried over to the succeeding
quarter or quarters: Provided, That the input tax inclusive of input VAT carried over
from the previous quarter that may be credited in every quarter shall not exceed
seventy percent (70%) of the output VAT: Provided, however, That any input tax
attributable to zero-rated sales by a VAT-registered person may at his option be
refunded or credited against other internal revenue taxes, subject to the provisions
of Section 112.
"(C) Determination of Creditable Input Tax. - The sum of the excess input tax
carried over from the preceeding month or quarter and the input tax creditable to a
VAT-registered person during the taxable month or quarter shall be reduced by the
amount of claim for refund or tax credit for value-added tax and other adjustments,
such as purchase returns or allowances and input tax attributable to exempt sale.
"The claim for tax credit referred to in the foregoing paragraph shall include not
only those filed with the Bureau of Internal Revenue but also those filed with other
government agencies, such as the Board of Investments and the Bureau of
Customs."

PUP COLLEGE OF LAW
"SEC. 111. Transitional/ Presumptive Input Tax Credits. -
"(A) Transitional Input Tax Credits. - A person who becomes liable to value-added
tax or any person who elects to be a VAT-registered person shall, subject to the
filing of an inventory according to rules and regulations prescribed by the Secretary
of Finance, upon recommendation of the Commissioner, be allowed input tax on
his beginning inventory of goods, materials and supplies equivalent to two percent
(2%) of the value of such inventory or the actual value-added tax paid on such
goods, materials and supplies, whichever is higher, which shall be creditable
against the output tax.
"Persons or firms engaged in the processing of sardines, mackerel and milk, and in
manufacturing refined sugar, cooking oil and packed noodle based instant meals, shall be
allowed a presumptive input tax, creditable against the output tax, equivalent to four
percent (4%) of the gross value in money of their purchases of primary agricultural products
which are used as inputs to their production.
"As used in this Subsection, the term 'processing' shall mean pasteurization, canning and
activities which through physical or chemical process alter the exterior texture or form or
inner substance of a product in such manner as to prepare it for special use to which it
could not have been put in its original form or condition."
SEC. 10. Section 112 of the same Code, as amended, is hereby further amended to read as
follows:
"SEC. 112. Refunds or Tax Credits of Input Tax. -
"(A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-registered person,

whose sales are zero-rated or effectively zero-rated may, within two (2) years after
the close of the taxable quarter when the sales were made, apply for the issuance
of a tax credit certificate or refund of creditable input tax due or paid attributable to
such sales, except transitional input tax, to the extent that such input tax has not
been applied against output tax: Provided, however, That in the case of zero-rated
sales under Section 106(A)(2)(a)(1), (2) and (b) and Section 108 (B)(1) and (2), the
acceptable foreign currency exchange proceeds thereof had been duly accounted
for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP):Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of goods of properties
or services, and the amount of creditable input tax due or paid cannot be directly
and entirely attributed to any one of the transactions, it shall be allocated
proportionately on the basis of the volume of sales: Provided, finally, That for a
person making sales that are zero-rated under Section 108 (B)(6), the input taxes
shall be allocated ratably between his zero-rated and non-zero-rated sales.
"(B) Cancellation of VAT Registration. - A person whose registration has been

cancelled due to retirement from or cessation of business, or due to changes in or
cessation of status under Section 106(C) of this Code may, within two (2) years
PUP COLLEGE OF LAW
from the date of cancellation, apply for the issuance of a tax credit certificate for
any unused input tax which may be used in payment of his other internal revenue
taxes.
"(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In
proper cases, the Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred twenty (120) days from the
date of submission of complete documents in support of the application filed in
accordance with Subsection (A) hereof.
"In case of full or partial denial of the claim for tax refund or tax credit, or the failure
on the part of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30) days from the
receipt of the decision denying the claim or after the expiration of the one hundred
twenty day-period, appeal the decision or the unacted claim with the Court of Tax
Appeals.
"(D) Manner of Giving Refund. - Refunds shall be made upon warrants drawn by
the Commissioner or by his duly authorized representative without the necessity of
being countersigned by the Chairman, Commission on Audit, the provisions of the
Administrative Code of 1987 to the contrary notwithstanding: Provided, That
refunds under this paragraph shall be subject to post audit by the Commission on
Audit."
follows:
"SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. -
"(A) Invoicing Requirements. - A VAT-registered person shall issue:
"(1) A VAT invoice for every sale, barter or exchange of goods or

properties; and
"(2) A VAT official receipt for every lease of goods or properties, and for
every sale, barter or exchange of services.
"(B) Information Contained in the VAT Invoice or VAT Official Receipt. - The
following information shall be indicated in the VAT invoice or VAT official receipt:
"(1) A statement that the seller is a VAT-registered person, followed by his

taxpayer's identification number (TIN);
"(2) The total amount which the purchaser pays or is obligated to pay to the
seller with the indication that such amount includes the value-added
tax: Provided, That:

PUP COLLEGE OF LAW
"(a) The amount of the tax shall be shown as a separate item in

the invoice or receipt;
"(b) If the sale is exempt from value-added tax, the term "VAT-
exempt sale" shall be written or printed prominently on the invoice
or receipt;
"(c) If the sale is subject to zero percent (0%) value-added tax, the
term "zero-rated sale" shall be written or printed prominently on
the invoice or receipt;
"(d) If the sale involves goods, properties or services some of

which are subject to and some of which are VAT zero-rated or
VAT-exempt, the invoice or receipt shall clearly indicate the
breakdown of the sale price between its taxable, exempt and zero-
rated components, and the calculation of the value-added tax on
each portion of the sale shall be shown on the invoice or receipt:
"Provided, That the seller may issue separate invoices or receipts
for the taxable, exempt, and zero-rated components of the sale.
"(3) The date of transaction, quantity, unit cost and description of the goods
or properties or nature of the service; and
"(4) In the case of sales in the amount of one thousand pesos (P1,000) or
more where the sale or transfer is made to a VAT-registered person, the
name, business style, if any, address and taxpayer identification number
(TIN) of the purchaser, customer or client.
"(C) Accounting Requirements. - Notwithstanding the provisions of Section 233, all

persons subject to the value-added tax under Sections 106 and 108 shall, in
addition to the regular accounting records required, maintain a subsidiary sales
journal and subsidiary purchase journal on which the daily sales and purchases are
recorded. The subsidiary journals shall contain such information as may be
required by the Secretary of Finance.
"(D) Consequence of Issuing Erroneous Vat Invoice or Vat Official Receipt. -
"(1) If a person who is not a VAT-registered person issues an invoice or

receipt showing his Taxpayer Identification Number (TIN), followed by the
word "VAT":
"(a) The issuer shall, in addition to any liability to other percentage

taxes, be liable to:
"(i) The tax imposed in Section 106 or 108 without the

benefit of any input tax credit; and
"(ii) A 50% surcharge under Section 248 (B) of this code;

PUP COLLEGE OF LAW
"(b) The VAT shall, if the other requisite information required under
Subsection (B) hereof is shown on the invoice or receipt, be
recognized as an input tax credit to the purchaser under Section
110 of this Code.
"(2) If a VAT-registered person issues a VAT invoice or VAT official receipt

for a VAT-exempt transaction, but fails to display prominently on the
invoice or receipt the term "VAT-exempt Sale", the issuer shall be liable to
account for the tax imposed in Section 106 or 108 as if Section 109 did not
apply.
"(E) Transitional Period. - Notwithstanding Subsection (B) hereof, taxpayers may

continue to issue VAT invoices and VAT official receipts for the period July 1, 2005
to December 31, 2005, in accordance with Bureau of Internal Revenue
administrative practices that existed as of December 31, 2004."
follows:
"SEC. 114. Return and Payment of Value-Added Tax. -
"(A) In General. - Every person liable to pay the value-added tax imposed under
this Title shall file a quarterly return of the amount of his gross sales or receipts
within twenty-five (25) days following the close of each taxable quarter prescribed
for each taxpayer: Provided, however, That VAT-registered persons shall pay the
value-added tax on a monthly basis.
"Any person, whose registration has been cancelled in accordance with Section
236, shall file a return and pay the tax due thereon within twenty-five (25) days
from the date of cancellation of registration: Provided, That only one consolidated
return shall be filed by the taxpayer for his principal place of business or head
office and all branches.
"(B) Where to File the Return and Pay the Tax. - Except as the Commissioner
otherwise permits, the return shall be filed with and the tax paid to an authorized
agent bank, Reveenue Collection Officer or duly authorized city or municipal
Treasurer in the Philippines located within the revenue district where the taxpayer
is registered or required to register.
"(C) Withholding of Value-Added Tax. - The Government or any of its political

subdivisions, instrumentalities or agencies, including government-owned or -
controlled corporations (GOCCs) shall, before making payment on account of each
purchase of goods and services which are subject to the value-added tax imposed
in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax
at the rate of five percent (5%) of the gross payment thereof: Provided, That the
payment for lease or use of properties or property rights to nonresident owners
shall be subject to ten percent (10%) withholding tax at the time of payment. For
purposes of this Section, the payor or person in control of the payment shall be
considered as the withholding agent.
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"The value-added tax withheld under this Section shall be remitted within ten (10)
days following the end of the month the withholding was made."
follows:
"SEC. 116. Tax on Persons Exempt from Value-Added Tax (VAT). - Any person whose
sales or receipts are exempt under Section 109 (V) of this Code from the payment of value-
added tax and who is not a VAT-registered person shall pay a tax equivalent to three
percent (3%) of his gross quarterly sales or receipts: Provided, That cooperatives shall be
exempt from the three percent (3%) gross receipts tax herein imposed."
follows:
"SEC. 117. Percentage Tax on Domestic Carriers and Keepers of Garages. - Cars for rent
or hire driven by the lessee; transportation contractors, including persons who transport
passengers for hire, and other domestic carriers by land for the transport of passengers
(except owners of bancas and owners of animal-drawn two wheeled vehicle), and keepers
of garages shall pay a tax equivalent to three percent (3%) of their quarterly gross receipts.
"The gross receipts of common carriers derived from their incoming and outgoing freight
shall not be subjected to the local taxes imposed under Republic Act No. 7160, otherwise
known as the Local Government Code of 1991.
"In computing the percentage tax provided in this Section, the following shall be considered
the minimum quarterly gross receipts in each particular case:
"Jeepney for hire -
"1. Manila and other cities P2,400
"2. Provincial 1,200
"Public utility bus-
"Not exceeding 30 passengers P3,600
"Exceeding 30 but not exceeding 50 passengers 6,000
"Exceeding 50 passengers 7,200
Taxis -
"1. Manila and other cities P3,600

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"2. Provincial 2,400
follows:
"SEC. 119. Tax on Franchises. - Any provision of general or special law to the contrary
notwithstanding, there shall be levied, assessed and collected in respect to all franchises
on radio and/or television broadcasting companies whose annual gross receipts of the
preceding year does not exceed Ten million pesos (P10,000,000), subject to Section 236 of
this Code, a tax of three percent (3%) and on gas and water utilities, a tax of two percent
(2%) on the gross receipts derived from the business covered by the law granting the
franchise: Provided, however, That radio and television broadcasting companies referred to
in this Section shall have an option to be registered as a value-added taxpayer and pay the
tax due thereon: Provided, further, That once the option is exercised, said option shall be
irrevocable.
"The grantee shall file the return with, and pay the tax due thereon to the Commissioner or
his duly authorized representative, in accordance with the provisions of Section 128 of this
Code, and the return shall be subject to audit by the Bureau of Internal Revenue, any
provision of any existing law to the contrary notwithstanding."
follows:
"SEC. 121. Tax on Banks and Non-Bank Financial Intermediaries Performing Quasi-
Banking Functions. - There shall be collected a tax on gross receipts derived from sources
within the Philippines by all banks and non-bank financial intermediaries in accordance with
the following schedule:
"(a) On interest, commissions and discounts from lending activities as well as

income from financial leasing, on the basis of remaining maturities of instruments
from which such receipts are derived:
Maturity period is five years or less 5%
Maturity period is more than five years 1%
"(b) On dividends and equity shares and net income of subsidiaries 0%
"(c) On royalties, rentals of property, real or personal, profits, from exchange and
all other items treated as gross income under Section 32 of this Code 7%
"(d) On net trading gains within the taxable year on foreign currency, debt
securities, derivatives, and other similar financial instruments 7%

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"Provided, however, That in case the maturity period referred to in paragraph (a) is
shortened thru pre-termination, then the maturity period shall be reckoned to end as of the
date of pre-termination for purposes of classifying the transaction and the correct rate of tax
shall be applied accordingly.
"Provided, finally, That the generally accepted accounting principles as may be prescribed
by the Bangko Sentral ng Pilipinas for the bank or non-bank financial intermediary
performing quasi-banking functions shall likewise be the basis for the calculation of gross
receipts.
"Nothing in this Code shall preclude the Commissioner from imposing the same tax herein
provided on persons performing similar banking activities."
follows:
"SEC. 148. Manufactured Oils and Other Fuels. - There shall be collected on refined and
manufactured mineral oils and motor fuels, the following excise taxes which shall attach to
the goods hereunder enumerated as soon as they are in existence as such:
"(a) Lubricating oils and greases, including but not limited to, basestock for lube oils
and greases, high vacuum distillates, aromatic extracts and other similar
preparations, and additives for lubricating oils and greases, whether such additives
are petroleum based or not, per liter and kilogram, respectively, of volume capacity
or weight, Four pesos and fifty centavos (P4.50): Provided, however, That the
excise taxes paid on the purchased feedstock (bunker) used in the manufacture of
excisable articles and forming part thereof shall be credited against the excise tax
due therefrom: Provided, further, That lubricating oils and greases produced from
basestocks and additives on which the excise tax has already been paid shall no
longer be subject to excise tax: Provided, finally, That locally produced or imported
oils previously taxed as such but are subsequently reprocessed, rerefined or
recycled shall likewise be subject to the tax imposed under this Section.
"(b) Processed gas, per liter of volume capacity, Five centavos (P0.05);
"(c) Waxes and petroleum, per kilogram, Three pesos and fifty centavos (P3.50);
"(d) On denatured alcohol to be used for motive power, per liter of volume capacity,
Five centavos (P0.05); Provided, That unless otherwise provided by special laws, if
the denatured alcohol is mixed with gasoline, the excise tax on which has already
been paid, only the alcohol content shall be subject to the tax herein prescribed.
For purposes of this Subsection, the removal of denatured alcohol of not less than
o
one hundred eighty degrees (180 ) proof (ninety percent (90%) absolute alcohol)
shall be deemed to have been removed for motive power, unless shown otherwise;
"(e) Naphtha, regular gasoline and other similar products of distillation, per liter of
volume capacity, Four pesos and thirty-five centavos (P4.35): Provided,
however, That naphtha, when used as a raw material in the production of
petrochemical products or as replacement fuel for natural gas-fired-combined cycle
PUP COLLEGE OF LAW
power plant, in lieu of locally-extracted natural gas during the non-availability

thereof, subject to the rules and regulations to be promulgated by the Secretary of
Energy, in consultation with the Secretary of Finance, per liter of volume capacity,
Zero (P0.00): Provided, further, That the by-product including fuel oil, diesel fuel,
kerosene, pyrolysis gasoline, liquefied petroleum gases and similar oils having
more or less the same generating power, which are produced in the processing of
naphtha into petrochemical products shall be subject to the applicable excise tax
specified in this Section, except when such by-products are transferred to any of
the local oil refineries through sale, barter or exchange, for the purpose of further
processing or blending into finished products which are subject to excise tax under
this Section;
"(f) Leaded premium gasoline, per liter of volume capacity, Five pesos and thirty-
five centavos (P5.35); unleaded premium gasoline, per liter of volume capacity,
Four pesos and thirty-five centavos (P4.35);
"(g) Aviation turbo jet fuel, per liter of volume capacity, Three pesos and sixty-
seven centavos (P3.67);
"(h) Kerosene, per liter of volume capacity, Zero (P0.00): Provided, That kerosene,
when used as aviation fuel, shall be subject to the same tax on aviation turbo jet
fuel under the preceding paragraph (g), such tax to be assessed on the user
thereof;
"(i) Diesel fuel oil, and on similar fuel oils having more or less the same generating
power, per liter of volume capacity, zero (P0.00);
"(j) Liquefied petroleum gas, per liter, zero (P0.00): Provided, That liquefied
petroleum gas used for motive power shall be taxed, at the equivalent rate as the
excise tax on diesel fuel oil;
"(k) Asphalts, per kilogram, Fifty-six centavos (P0.56); and
"(l) Bunker fuel oil, and on similar fuel oils having more or less the same generating
power, per liter of volume capacity, zero (P0.00)."
SEC. 18. Section 151 of the same Code, as amended, is hereby amended to read as follows:
"SEC. 151. Mineral Products. -
"(A) Rates of Tax. - There shall be levied, assessed and collected on minerals,
mineral products and quarry resources, excise tax as follows:
"(1) On coal and coke, a tax of Ten pesos (P10.00) per metric ton;

PUP COLLEGE OF LAW
"(2) On all nonmetallic minerals and quarry resources, a tax of two percent
(2%) based on the actual market value of the gross output thereof at the
time of removal, in the case of those locally extracted or produced; or the
value used by the Bureau of Customs in determining tariff and customs
duties, net of excise tax and value-added tax, in the case of importation.
Notwithstanding the provision of paragraph (4) of subsection (A) of this

Section, locally extracted natural gas and liquefied natural gas shall not be
subject to the excise tax imposed herein.
"(3) On all metallic minerals, a tax based on the actual market value of the
gross output thereof at the time of removal, in the case of those locally
extracted or produced; or the value used by the Bureau of Customs in
determining tariff and customs duties, net of excise tax and value-added
tax, in the case of importation, in accordance with the following schedule:
"(a) Copper and other metallic minerals;
"(i) On the first three (3) years upon the effectivity of

Republic Act No. 7729, one percent (1%);
"(ii) On the fourth and the fifth years, one and a half
percent (1 1/2%); and
"(iii) On the sixth year and thereafter, two percent (2%);
"(b) Gold and chromite,' two percent (2%).
"(4). On indigenous petroleum, a tax of three percent (3%) of the fair

international market price thereof, on the first taxable sale, barter,
exchange or such similar transaction, such tax to be paid by the buyer or
purchaser before removal from the place of production. The phrase 'first
taxable sale, barter, exchange or similar transaction' means the
transfer of indigenous petroleum in its original state to a first taxable
transferee. The fair international market price shall be determined in
consultation with an appropriate government agency.
"For the purpose of this Subsection, 'indigenous petroleum' shall include

locally-extracted mineral oil, hydrocarbon gas, bitumen, crude asphalt,
mineral gas and all other similar or naturally associated substances with
the exception of coal, peat, bituminous shale and/or stratified mineral
deposits.
"(B) For purposes of this Section, the term -
"(1) 'Gross output' shall be interpreted as the actual market value of

minerals or mineral products, or of bullion from each mine or mineral land
operated as a separate entity, without any deduction from mining, milling,

PUP COLLEGE OF LAW
refining (including all expenses incurred to prepare the said minerals or

mineral products in a marketable state), as well as transforting, handling,
marketing or any other expenses: Provided, That if the minerals or mineral
products are sold or consigned abroad by the lessee or owner of the mine
under C.I.F. terms, the actual cost of ocean freight and insurance shall be
deducted Provided, however, That in the case of mineral concentrate not
traded in commodity exchanges in the Philippines or abroad, such as
copper concentrate, the actual market value shall be the world price
quotations of the refined mineral products content thereof prevailing in the
said commodity exchanges, after deducting the smelting, refining and other
charges incurred in the process of converting the mineral concentrates into
refined metal traded in those commodity exchanges.
"(2) 'Minerals" shall mean all naturally occurring inorganic substances

(found in nature)whether in solid, liquid, gaseous or any intermediate state.
"(3) 'Mineral products' shall mean things produced and prepared in a

marketable state by simple treatment processes such as washing or
drying, but without undergoing any chemical change or process or
manufacturing by the lessee, concessionaire or owner of mineral lands.
"(4) 'Quarry resources' shall mean any common stone or other common
mineral substances as the Director of the Bureau of Mines and Geo-
Sciences may declare to be quarry resources such as, but not restricted to,
marl, marble, granite, volcanic cinders, basalt, tuff and rock
phosphate: Provided, That they contain no metal or metals or other
valuable minerals in economically workable quantities."
follows:
"SEC. 236. Registration Requirements. -
"(A) Requirements. - Every person subject to any internal revenue tax shall register
once with the appropriate Revenue District Officer:
"(1) Within ten (10) days from date of employment, or
"(2) On or before the commencement of business, or
"(3) Before payment of any tax due, or
"(4) Upon filing of a return, statement or declaration as required in this

Code.
"The registration shall contain the taxpayer's name, style, place of

residence, business, and such other information as may be required by the
Commissioner in the form prescribed therefor.

PUP COLLEGE OF LAW
"A person maintaining a head office, branch or facility shall register with the
Revenue District Officer having jurisdiction over the head office, branch or
facility. For purposes of this Section, the term 'facility' may include but not
be limited to sales outlets, places of production, warehouses or storage
places.
"(B) Annual Registration Fee. - An annual registration fee in the amount of Five
hundred pesos (P500) for every separate or distinct establishment or place of
business, including facility types where sales transactions occur, shall be paid upon
registration and every year thereafter on or before the last day of
January: Provided, however, That cooperatives, individuals earning purely
compensation income, whether locally or abroad, and overseas workers are not
liable to the registration fee herein imposed.
"The registration fee shall be paid to an authorized agent bank located within the
revenue district, or to the Revenue Collection Officer, or duly authorized Treasurer
of the city or municipality where each place of business or branch is registered.
"(C) Registration of Each Type of Internal Revenue Tax. - Every person who is
required to register with the Bureau of Internal Revenue under Subsection (A)
hereof, shall register each type of internal revenue tax for which he is obligated,
shall file a return and shall pay such taxes, and shall update such registration of
any changes in accordance with Subsection (E) hereof.,
"(D) Transfer of Registration. - In case a registered person decides to transfer his

place of business or his head office or branches, it shall be his duty to update his
registration status by filing an application for registration information update in the
form prescribed therefor.
"(E) Other Updates. - Any person registered in accordance with this Section shall,
whenever applicable, update his registration information with the Revenue District
Office where he is registered, specifying therein any change in tax type and other
taxpayer details.
"(F) Cancellation of Registration. -
"(1) General Rule. - The registration of any person who ceases to be liable
to a tax type shall be cancelled upon filing with the Revenue District Office
where he is registered, an application for registration information update in
a form prescribed therefor;
"(2) Cancellation of Value-Added Tax Registration. - A VAT-registered

person may cancel his registration for VAT if:
"(a) He makes written application and can demonstrate to the

Commissioner's satisfaction that his gross sales or receipts for the
following twelve (12) months, other than those that are exempt
under Section 109 (A) TO (U), will not exceed One million five
hundred thousand pesos (P1,500,000); or
PUP COLLEGE OF LAW
"(b) He has ceased to carry on his trade or business, and does not
expect to recommence any trade or business within the next
twelve (12) months.
"The cancellation of registration will be effective from the first day

of the following month.
"(G) Persons Required to Register for Value-added Tax. -
"(1) Any person who, in the course of trade or business, sells, barters or
exchanges goods or properties, or engages in the sale or exchange of
services, shall be liable to register for Value-added tax if:
"(a) His gross sales or receipts for the past twelve (12) months,
other than those that are exempt under section 109 (a) to (u), have
exceeded One million five hundred thousand pesos (P1,500,000);
or
"(b) There are reasonable grounds to believe that his gross sales
or receipts for the next twelve (12) months, other than those that
are exempt under Section 109 (A) to (U), will exceed one million
five hundred thousand pesos (P1,500,000).
"(2) Every person who becomes liable to be registered under paragraph (1)
of this Subsection shall register with the Revenue District Office which has
jurisdiction over the head office or branch of that person, and shall pay the
annual registration fee prescribed in Subsection (B) hereof. If he fails to
register, he shall be liable to pay the tax under Title IV as if he were a VAT-
registered person, but without the benefit of input tax credits for the period
in which he was not properly registered.
"(H) Optional Registration for Value-added Tax of Exempt Person. - (1) Any person
who is not required to register for Value-added tax under Subsection (G) hereof
may elect to register for Value-added tax by registering with the Revenue District
Office that has jurisdiction over the head office of that person, and paying the
annual registration fee in Subsection (B) hereof.
(2) Any person who elects to register under this Subsection shall not be
entitled to cancel his registration under Subsection (F)(2) for the next three
(3) years.
"For purposes of Title IV of this Code, any person who has registered
value-added tax as a tax type in accordance with the provisions of
Subsection (C) hereof shall be referred to as a "VAT-registered person"
who shall be assigned only one Taxpayer Identification Number (TIN).
"(I) Supplying of Taxpayer Identification Number (TIN). - Any person required under
the authority of this Code to make, render or file a return, statement or other

PUP COLLEGE OF LAW
document shall be supplied with or assigned a Taxpayer Identification Number

(TIN) which he shall indicate in such return, statement or document filed with the
Bureau of Internal Revenue for his proper identification for tax purposes, and which
he shall indicate in certain documents, such as, but not limited to, the following:
"(1) Sugar quedans, refined sugac release order or similar instruments;
"(2) Domestic bills of lading;
"(3) Documents to be registered with the Register of Deeds or Assessor's

Office;
"(4) Registration certificate of transportation equipment by land, sea or air;
"(5) Documents to be registered with the Securities and Exchange

Commission;
"(6) Building construction permits;
"(7) Application for loan with banks, financial institutions, or other financial
intermedieries;
"(8) Application for mayor's permit;
"(9) Application for business license with the Department of Trade and
Industry; and
"(10) Such other documents which may hereafter be required under rules
and regulations to be promulgated by the Secretary of Finance, upon
"In cases where a registered taxpayer dies, the administrator or executor

shall register the estate of the decedent in accordance with Subsection (A)
hereof and a new Taxpayer Identification Number (TIN) shall be supplied in
accordance with the provisions of this Section.
"In the case of a nonresident decedent, the executor or administrator of the

estate shall register the estate with the Revenue District Office where he is
registered: Provided, however; That in case such executor or administrator
is not registered, registration of the estate shall be made with and the
Taxpayer Identification Number (TIN) supplied by the Revenue District
Office having jurisdiction over his legal residence.
"Only one Taxpayer Identification Number (TIN) shall be assigned to a

taxpayer. Any person who shall secure more than one Taxpayer
Identification Number shall be criminally liable under the provisions of
Section 275 on 'Violation of Other Provisions of this Code or Regulations in
General.'"
PUP COLLEGE OF LAW
SEC. 20. Section 237 of the Code, as amended, is hereby amended to read as follows:
"SEC. 237. Issuance of Receipts or Sales or Commercial Invoices. - All persons subject to
an internal revenue tax shall, for each sale and transfer of merchandise or for services
rendered valued at Twenty-five pesos (P25.00) or more, issue duly registered receipts or
sale or commercial invoices, prepared at least in duplicate, showing the date of transaction,
quantity, unit cost and description of merchandise or nature of service: Provided, however,
That where the receipt is issued to cover payment made as rentals, commissions,
compensation or fees, receipts or invoices shall be issued which shall show the name,
business style, if any, and address of the purchaser, customer or client.
"The original of each receipt' or invoice shall be issued to the purchaser, customer or client
at the time the transaction is effected, who, if engaged in business or in the exercise of
profession, shall keep and preserve the same in his place of business for a period of three
(3) years from the close of the taxable year in which such invoice or receipt was issued,
while the duplicate shall be kept and preserved by the issuer, also in his place of business,
for a like period.
"The Commissioner may, in meritorious cases, exempt any person subject to an internal
revenue tax from compliance with the provisions of this Section."
follows:
"SEC. 288. Disposition of Incremental Revenues. -
"(A) Incremental Revenues from Republic Act No. 7660. - The incremental
revenues from the increase in the documentary stamp taxes under R.A. No. 7660
shall be set aside for the following purposes:
"(1) In 1994 and 1995, twenty-five percent (25%) thereof respectively, shall
accrue to the Unified Home-Lending Program under Executive Order No.
90 particularly for mass-socialized housing program to be allocated as
follows: fifty percent (50%) for mass-socialized housing; thirty percent
(30%) for the community mortgage program; and twenty percent (20%) for
land banking and development to be administered by the National Housing
Authority: Provided, That not more than one percent (1%) of the respective
allocations hereof shall be used for administrative expenses;
"(2) In 1996, twenty-five percent (25%) thereof to be utilized for the

National Health Insurance Program that hereafter may be mandated by
law;
"(3) In 1994 and every year thereafter, twenty-five percent (25%) thereof
shall accrue to a Special Education Fund to be administered by the
Department of Education, Culture and Sports for the construction and
repair of school facilities, training of teachers, and procurement or
production of instructional materials and teaching aids; and

PUP COLLEGE OF LAW
"(4) In 1994 and every year thereafter, fifty percent (50%) thereof shall
accrue to a Special Infrastructure Fund for the construction and repair of
roads, bridges, dams and irrigation, seaports and hydroelectric and other
indigenous power projects: Provided, however, That for the years 1994 and
1995, thirty percent (30%), and for the years 1996, 1997 and 1998, twenty
percent (20%), of this fund-shall be allocated for depressed provinces as
declared by the President as of the time of the effectivity of R.A. No.
7660: Provided, further, That availments under this fund shall be
determined by the President on the basis of equity.
"Provided, finally, That in paragraphs (2), (3) and (4) of this Section, not
more than one percent (1%) of the allocated funds thereof shall be used for
administrative expenses by the implementing agencies.
"(B) Incremental Revenues from Republic Act No. 8240. - Fifteen percent (15%) of
the incremental revenue collected from the excise tax on tobacco products under
R.A. No. 8240 shall be allocated and divided among the provinces producing
burley and native tobacco in accordance with the vo1ume of tobacco leaf
production. The fund shall be exclusively utilized for programs in pursuit of the
following objectives:
"(1) Cooperative projects that will enhance better quality of agricultural

products and increase income and productivity of farmers;
"(2) Livelihood projects, particularly the development of alternative farming

system to enhance farmer's income; and
"(3) Agro-industrial projects that will enable tobacco farmers to be involved

in the management and subsequent ownership of projects, such as post-
harvest and secondary processing like cigarette manufacturing and by-
product utilization.
"The Department of Budget and Management, in consultation with the

Oversight Committee created under said R.A. No. 8240, shall issue the
corresponding rules and regulations governing the allocation and
disbursement of this fund.
"(C) Incremental Revenues from the Excise Tax on Alcohol and Tobacco
Products. -
"(1) Two and a half percent (2.5%) of the incremental revenue from the
excise tax on alcohol and tobacco products starting January 2005 shall be
remitted directly to the Philippine Health Insurance Corporation for the
purpose of meeting and sustaining the goal of universal coverage of the
National Health Insurance Program; and
"(2) Two and a half percent (2.5%) of the incremental revenue from the
excise tax on alcohol and tobacco products starting January 2005 shall he

PUP COLLEGE OF LAW
credited to the account of the Department of Health and constituted as a

trust fund for its disease prevention program.
"The earmarking provided under this provision shall be observed for five
(5) years starting from January 2005."
(D) Incremental Revenue from the Value-added Tax. - Fifty percent (50%) of the
local government unit's share from the incremental revenue from the value-added
tax shall be allocated and used exclusively for the following purposes:
1. Fifteen percent (15%) for public elementary and secondary education, to

finance the construction of buildings, purchases of school furniture and in-
service teacher trainings;
2. Ten percent (10%) for health insurance premiums of enrolled indigents

as a counterpart contribution of the local government to sustain the
universal coverage of the national health insurance program;
3. Fifteen percent (15%) for environmental conservation to fully implement

a comprehensive national reforestation program; and
4. Ten percent (10%) for agricultural modernization to finance the

construction of farm-to-market roads and irrigation facilities.
Such allocations shall be segregated as separate trust funds by the

National Treasury and shall be over and above the annual appropriation for
similar purposes.
(E) The amount of fifteen million pesos (P15,000,000) shall be allocated for a
public information and education program to be administered by the Bureau of
Internal Revenue, explaining clearly to businesses their registration, invoicing and
reporting requirements under the Value-added tax rules. Such program should
include seminars and visits to taxpayers to familiarize them with the tax, and the
development and publication of easy-to-read guides on the Value-added Tax."
SEC. 22. Franchises of Domestic Airlines. - The provisions of P.D. No. 1590 on the franchise tax of
Philippine Airlines, Inc., R.A. No. 7151 on the franchise tax of Cebu Air, Inc., R.A. No. 7583 on the
franchise tax of Aboitiz Air Transport Corporation, R.A. No. 7909 on the franchise tax of Pacific
Airways Corporation, R.A. No. 8339 on the franchise tax of Air Philippines, or any other franchise
agreement or law pertaining to a domestic airline to the contrary notwithstanding:
(A) The franchise tax is abolished;
(B) The franchisee shall be liable to the corporate income tax;
(C) The franchisee shall register for value-added tax under Section 236, and to account
under Title IV of the National Internal Revenue Code of 1997, as amended, for value-added
tax on its sale of goods, property or services and its lease of property; and
PUP COLLEGE OF LAW
(D) The franchisee shall otherwise remain exempt from any taxes, duties, royalties,
registration, license, and other fees and charges, as may be provided by their respective
franchise agreement.
SEC. 23. Implementing Rules and Regulations. - The Secretary of Finance shall, upon the
recommendation of the Commissioner of Internal Revenue, promulgate not later than June 30,
2005, the necessary Rules and Regulations for the effective implementation of this Act. Upon
issuance of the said Rules and Regulations, all former rules and regulations pertaining to value-
added tax shall be deemed revoked.alf-itc
SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed and the
persons and/or transactions affected herein are made subject to the value-added tax subject to the
provisions of Title IV of the National Internal Revenue Code of 1997, as amended:
(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of National Power
Corporation (NPC);
(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sales
of generated power by generation companies; and
(C) All other laws, acts, decrees, executive orders, issuances and rules and regulations or
parts thereof which are contrary to and inconsistent with any provisions of this Act are
hereby repealed, amended or modified accordingly.
SEC. 25. Separability Clause. - If any provision of this Act is subsequently declared
unconstitutional, the validity of the remaining provisions hereof shall remain in full force and effect.
SEC. 26. Effectivity Clause. - This Act shall take effect on July 1, 2005
Vox omnibus una

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J E L O N O T E S IN TAX LAW REVIEW 2009

Based on the Lectures of Atty. Francis J. Sababan

INHERENT LIMITATIONS OF TAXATION:

CONSTITUTIONAL LIMITATIONS OF TAXATION

2. Equal Protection Clause

Page 2 Compiled by Joel V. Ofilan

Q: What are the requirements of reasonable classification?

(1) it is based on substantial distinctions which make real differences;

TIU CASE 301 SCRA 278

Page 3 Compiled by Joel V. Ofilan

Q. what about the obligation of the lessee towards the lessor?

A: It is pursuant to the contract of Lease

A: Is the non-impairment clause a limitation on the power to tax?

Page 4 Compiled by Joel V. Ofilan

5. Non-imprisonment for non-payment of a Poll Tax

Q: What is a poll tax?

Page 5 Compiled by Joel V. Ofilan

6. Delegation of Taxing Power to Local Governments

Q: May the Government tax itself?

BASCO vs. PAGCOR

Page 6 Compiled by Joel V. Ofilan

Mactan Cebu International Airport vs. Marcos

261 SCRA 667

EXEMPTION FROM REAL ESTATE TAX BY VIRTUE OF INCIDENTAL PURPOSE:

To fully understand this concept, four SC decisions should be scrutinized:

1. Herrera vs, QC Board of Assessment Appeals;

1. Herrera vs, QC Board of Assessment Appeals (1935)

Page 7 Compiled by Joel V. Ofilan

Q: Who are the entities covered by these constitutions?

HERRERA VS. QCBAA

GRN L- 15270, September 30, 1961

PROVINCE OF ABRA VS. HERNANDO

GRN L- 9086, JUNE 15, 1988

Page 8 Compiled by Joel V. Ofilan

ABRA VALLEY COLLEGE VS. AQUINO

GRN L= 49336, AUGUST 31, 1981

PHILIPPINE LUNG CENTER VS. QC

GR NO. 144104, JUNE 29, 2004

Page 9 Compiled by Joel V. Ofilan

Q: Is exemption by virtue of incidental purpose still applicable in this case?

Ans.: It may be answered in two ways;

INTERNATIONAL JURIDICAL DOUBLE TAXATION

Q: what is the tax credit provided for in this case?

NECESSITY OF TAX TREATIES

Page 11 Compiled by Joel V. Ofilan

EXISTENCE OF JURIDICAL DOUBLE TAXATION:

Page 12 Compiled by Joel V. Ofilan

The study of set-off in taxation is best illustrated in the following cases:

1. Republic vs. Mambulao

Rules re: set off or compensation of debts

Page 13 Compiled by Joel V. Ofilan

REPUBLIC VS. MAMBULAO

Q: What do we mean by the world mutual?

DOMINGO VS. GARLITOS

GRN L- 18994, JUNE 29, 1963

FRANCIA VS. CIR

CALIFORNIA TEXAS (CALTEX) VS. COA

GRN 92585, MAY 8, 1998

Page 15 Compiled by Joel V. Ofilan

Philex Mining Corporation v. Commissioner, 294 SCRA 687 (1998)

Page 16 Compiled by Joel V. Ofilan

a. Resident Citizen (RC)

a. Domestic Corporation (DC)

3. Estate and trust