TAXATION QUESTION AND ANSWER TYPE OF REVIEWER

VER. 2010.08.12
copyrighted 2010
Prepared by Prof. Abelardo T. Domondon
(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.). LawyerCPA-Customs Broker, Management Consultant, Professor of Law and Pre-Bar
Reviewer)
How to use the BAR STAR NOTES. The BAR STAR NOTES in
the form of questions and answers as well as textual discussion
were specially prepared by Prof. Domondon for the exclusive use of
Bar Reviewees who attended the 2010 Wrap-Up Lectures on
TAXATION conducted by Primus Information, Center, Inc., and the Bar
Reviewees of various law schools and Review Centers where he was invited
to lecture on Taxation. Included in the presentation are doctrines contained
in Supreme Court decisions up to April 2010.
The purpose of the BAR STAR NOTES is to provide the Bar
Reviewee with a handy review material which serves as memory-joggers
for the September 12, 2010 Bar Examinations in Taxation. The author tries
to second guess what would be included in the Bar Exams using statistical
analysis. The actual Bar questions may not be formulated in the same
manner as the BAR STAR NOTES. However, the doctrines tested in the Bar
would in all probability be included in these Notes.
If pressed for time, the author suggests that the reader should focus
his attention on the following:

Nice to know

Should know

Must know and master

It is further suggested that the reader should merely browse those
without stars.
The BAR STAR NOTES in TAXATION is the 4 th in the series of
Bar Star Notes the author has prepared for all the eight Bar
subjects. The other Bar Star Notes may be availed of by enrolling in
the 2010 Wrap-Up lectures conducted by PRIMUS INFORMATION
CENTER, INC.Please feel free to call Baby, Tel. No. 816-07-68 or 817-8449; Leon, Mobile No. 0917-793-6169; Atty. Celia, Mobile No. 0917-7908406, or Venny, Mobile No. 0917-337-6479.
.

TAXATION
GENERAL PRINCIPLES OF TAXATION
TAXATION, IN GENERAL
1.
State
briefly
and
concisely
the
nature
of
taxation. Alternatively, define taxation.
SUGGESTED ANSWER: The inherent power of the sovereign exercised
through the legislature to impose burdens upon subjects and objects within
its jurisdiction for the purpose of raising revenues to carry out the legitimate
objects of government.
2.
What is the nature of the States power to tax ? Explain
briefly.
SUGGESTED ANSWER: The nature of the states power to tax is twofold. It is both an inherent power and a legislative power.
It
is inherent in nature being an attribute of sovereignty. This is so, because
without the taxes, the states existence would be imperiled. There is thus, no
need for a constitutional grant for the state to exercise this
power.
It is a legislative power because it involves the promulgation
of rules. Taxation is a set of rules, how much is the tax to be paid, who pays
the tax, to whom it should be paid, and when the tax should be paid.
3.
What is the underlying theory of taxation ? Explain
briefly.
SUGGESTED
ANSWER: Taxes
are
the
lifeblood
of
the
nation.
Without revenue raised from taxation, the government will not
survive, resulting in detriment to society. Without taxes, the government
would be paralyzed for lack of motive power to activate and operate
it. (Commissioner of Internal Revenue v. Algue, Inc. et al., 158 SCRA 8,
16-17)
4.
Marshall said that, the power to tax involves the
power to destroy. On the other hand, Holmes stated that
the power
to tax
is
not
the
power to destroy while the court sits.
Reconcile
the
statements.
In
the
alternative, what are the implications that flow from the above
statements
?
SUGGESTED
ANSWERS: Marshalls view refers to a valid tax while the Holmes view
refers to an invalid tax.
a.
The
imposition of a valid tax could not be judicially restrained merely because it

would
prejudice
taxpayers
property.
b.
An
illegal tax could be
judicially declared invalid
and should not work to prejudice a taxpayers property.
5.
Discuss briefly the basis/bases, or rationale of
taxation.
SUGGESTED ANSWER: a.
Reciprocal duties of protection and support
between
the state and its citizens and residents. Also called symbiotic
relation between the state and its citizens.
b.
Jurisdiction by the state over persons and property
within its territory.
6.
Discuss briefly but comprehensively the objectives or
purposes of taxation.
SUGGESTED ANSWER: The purposes or objectives of taxation are
the
following:
a.
The
primary
purpose:
1)
Revenue
purpose.
b.
The
secondary
purposes
1)
S
umptuary
or
regulatory
purpose.
2)
Compensatory
purpose.
3)
To
implement the power of eminent domain.
7.

Distinguish
a
tax
from
a
license
fee.
SUGGESTED
ANSWER: The
following
are
the
distinctions:
a.
Purpose: Tax imposed for revenue while
license fee for regulation. Tax for general public purposes while license fee
for
regulatory
purposes
only.
b.
Basis: Tax imposed under power of taxation while license fee under
police
power.
c.
Amount: In taxation, no limit as to amount while license fee
limited to cost of the license and the expenses of police surveillance and
regulation.
d.
Time of payment: Taxes normally paid after
commencement
of
business
while
license
fee
before.
e.
Effect of payment: Failure to pay
a tax does not make the business illegal while failure to pay license fee
makes business illegal.
f.
Surrender: Taxes, being the

lifeblood of the state, cannot be surrendered except for lawful consideration

while
a
license
fee
may
be
surrendered
with
or
without
consideration. (Cooley on Taxation, pp. 1137-1138; Pacific Commercial
Company v. Romualdez, et al., 49 Phil. 924)
8.
How may the power to tax be utilized to carry out the
social
justice
program
of
our
government
?
SUGGESTED
ANSWER: The
compensatory purpose of taxation is to implement the social justice provisions
of the constitution through the progressive system of taxation, which would
result to equal distribution of wealth, etc.
Progressive income taxes alleviate the margin between rich and
poor. (Southern Cross Cement Corporation v. Cement Manufacturers
Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)
In recent years, the increasing social challenges of the times
expanded the scope of the state activity, and taxation has become a tool to
realize social justice and the equitable distribution of wealth, economic
progress and the protection of local industries as well as public welfare and
similar objectives.
(Batangas Power Corporation v. Batangas City, et
al., G. R. No. 152675, and companion case, April 28, 2004 citing National
Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)
9.
Explain the sumptuary purpose of taxation.
SUGGESTED ANSWER: The sumptuary purpose of taxation is to
promote the general welfare and to protect the health, safety or morals of the
inhabitants. It is in the joint exercise of the power of taxation and police
power where regulatory taxes are collected.
Taxation may be made the implement of the states police power. The
motivation behind many taxation measures is the implementation of police
power goals. [Southern Cross Cement Corporation v. Cement Manufacturers
Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) The
reader should note that the August 3, 2005 Southern Cross case is the
decision on the motion for reconsideration of the July 8, 2004 Southern
Cross decision.
The so-called sin taxes on alcohol and tobacco manufacturers help
dissuade the consumers from excessive intake of these potentially harmful
products. (Southern Cross Cement Corporation v. Cement Manufacturers
Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)
10.
Taxation distinguished from police power. Taxation is
distinguishable from police power as to the means employed to implement
these public goals. Those doctrines that are unique to taxation arose from
peculiar considerations such as those especially punitive effects (Southern
Cross Cement Corporation v. Cement Manufacturers Association of the
Philippines, et al., G. R. No. 158540, August 3, 2005) as the power to tax

involves the power to destroy and the belief that taxes are lifeblood of the
state. (Ibid.) taxes being the lifeblood of the government, their prompt and
certain availability is of the essence.
These considerations necessitated the evolution of taxation as a
distinct legal concept from police power. (Ibid.)
11.
How the power of taxation may be used to implement
power of eminent domain. Tax measures are but enforced contributions
exacted on pain of penal sanctions and clearly imposed for public
purpose. In most recent years, the power to tax has indeed become a most
effective tool to realize social justice, public welfare, and the equitable
distribution of wealth. (Commissioner of Internal Revenue v. Central Luzon
Drug Corporation, G.R. No. 159647, April 16, 2005)
Establishments granting the 20% senior citizens discount may claim
the discounts granted to senior citizens as tax deduction based on the net
cost of the goods sold or services rendered: Provided, That the cost of the
discount shall be allowed as deduction from gross income for the same
taxable year that the discount is granted. Provided, further, That the total
amount of the claimed tax deduction net of value added tax if applicable,
shall be included in their gross sales receipts for tax purposes and shall be
subject to proper documentation and to the provisions of the National
Internal Revenue Code, as amended. [M.E. Holding Corporation v. Court of
Appeals, et al., G.R. No. 160193, March 3, 2008 citing Expanded Senior
Citizens Act of 2003, Sec. 4 (a)]
12. What are the three basic principles of a sound tax
system? Explain
each
briefly.
SUGGESTED
ANSWER: The
canons of a sound tax system, also known as the characteristics or,
principles of a sound tax system, are used as a criteria in order to determine
whether a tax system is able to meet the purposes or objectives of
taxation. They are:
a.
Fiscal adequacy.
b.
Administrative feasibility.
c.
Theoretical justice.
13.
What
are
the
elements
or
characteristics of
a
tax
?
SUGGESTED
ANSWER:
a.
Enforce
d contribution.
b.
Generally payable in money.
c.
Proportionate in character.
d.
Levied on persons, property or exercise of a right or
privilege.

e.
f.
g.
h.

Levied by the state having jurisdiction.

Levied by the legislature.
Levied for a public purpose.
Paid at regular periods or intervals.

14. State the requisites of a valid tax.

SUGGESTED
ANSWER:
a.
A valid
tax should be within the jurisdiction of the taxing authority.
b.
That the assessment and collection of certain kinds (The
same as the inherent limitations of the power of taxation) should be for a
public purpose.
c.
The rule of taxation should be uniform.
d.
That either the person or property of taxes guarantees
against injustice to individuals, especially by way or notice and opportunity
for hearing be provided.
e.
The tax must not impinge on the inherent and Constitutional
limitations
on
the
power
of
taxation.

15. What are the classes or kinds of taxes according to the subject
matter or object ?
SUGGESTED
ANSWER:
a.
Persona
l, poll or capitalization imposed on all residents, whether citizen or
not. Example Community Tax.
b.
Property - Imposed on property. Example Real property
tax.
c.
Excise imposed upon the performance of an
act, the enjoyment of a privilege or the engaging in an occupation. Example
income tax, estate tax.
16. What are the kinds of taxes classified as to who bears
the burden ? Explain each briefly.
SUGGESTED
ANSWER: Based on the possibility of shifting the incidence of taxation, or as
to who shall bear the burden of taxation, taxes may be classified into:
a.
Direct taxes. Those that are extracted from the very person
who, it is intended or desired, should pay them (Commissioner of Internal
Revenue v. Philippine Long Distance Telephone Company, G. R. No. 140230,
December 15, 2005); they are impositions for which a taxpayer is directly
liable on the transaction or business he is engaged in, (Commissioner of
Internal Revenue v. Philippine Long Distance Telephone Company,
supra)
which liability cannot be shifted or transferred to another. Example
income tax, estate tax, donors tax, etc.
b.
Indirect taxes are those that are demanded in the first
instance, from, or are paid by, one person in the expectation and intention
that he can shift the burden to (Commissioner of Internal Revenue v.

Philippine Long Distance Telephone Company, supra) to someone else not as

a tax but as part of the purchase price. (Commissioner, of Internal Revenue
v. American Express International, Inc. (Philippine Branch), G. R. No.
152609, June 29, 2005 citing various cases and authorities) Example value
added tax (VAT), documentary stamp tax, excise tax, percentage tax, etc.
17.
Silkair
(Singapore)
PTE,
Ltd.,
an
international
carrier, purchased aviation gas from Petron Corporation, which it
uses for its operations. It now claims for refund or tax credit for the
excise taxes it paid claiming that it is exempt from the payment of
excise taxes under the provisions of Sec. 135 of the NIRC of 1997
which provides that petroleum products are exempt from excise taxes
when sold to Exempt entities or agencies covered by tax treaties,
conventions, and other international agreements for their use and
consumption: Provided, however, That the country of said foreign
international carrier or exempt entities or agencies exempts from similar
taxes petroleum products sold to Philippine carriers, entities or agencies
Silkair further anchors its claim on Article 4(2) of the Air
Transport Agreement between the Government of the Republic of
the Philippines and the Government of the Republic of Singapore (Air
Transport Agreement between RP and Singapore) which reads: Fuel,
lubricants, spare parts, regular equipment and aircraft stores introduced
into, or taken on board aircraft in the territory of one Contracting party by,
or on behalf of, a designated airline of the other Contracting Party and
intended solely for use in the operation of the agreed services shall, with the
exception of charges corresponding to the service performed, be exempt
from the same customs duties, inspection fees and other duties or taxes
imposed in the territories of the first Contracting Party , even when these
supplies are to be used on the parts of the journey performed over the
territory of the Contracting Party in which they are introduced into or taken
on board. The materials referred to above may be required to be kept under
customs supervision and control.
Silkair likewise argues that it is exempt from indirect taxes
because the Air Transport Agreement between RP and Singapore
grants exemption from the same customs duties, inspection fees
and other duties or taxes imposed in the territory of the first
Contracting Party. It invokes Maceda v. Macaraig, Jr., G.R. No.
88291, May 31, 1991, 197 SCRA 771.which upheld the claim for tax
credit or refund by the National Power Corporation (NPC) on the
ground that the NPC is exempt even from the payment of indirect
taxes.
Is Silkair entitled to the tax refund or credit it
seeks ? Reason out your answer.

SUGGESTED ANSWER: Silkair is not entitled to tax refund or credit

for the following reasons:
a.
The excise tax on aviation fuel is an indirect tax. The proper
party to question, or seek a refund of, an indirect tax is the statutory
taxpayer, the person on whom the tax is imposed by law and who paid the
same even if he shifts the burden thereof to another. (Philippine Geothermal,
Inc. v. Commissioner of Internal Revenue, G.R. No. 154028, July 29, 2005,
465 SCRA 308, 317-318)
The NIRC provides that the excise tax should be
paid by the manufacturer or producer before removal of domestic products
from place of production. Thus, Petron Corporation, not Silkair, is the
statutory taxpayer which is entitled to claim a refund based on Section 135
of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between
RP and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax,
the additional amount billed to Silkair for jet fuel is not a tax but part of the
price which Silkair had to pay as a purchaser. [Philippine Acetylene Co., Inc.
v. Commissioner of Internal Revenue, 127 Phil. 461, 470 (1967)]
b.
Silkair could not seek refuge under Maceda v. Macaraig,
Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771.which upheld the claim
for tax credit or refund by the National Power Corporation (NPC) on the
ground that the NPC is exempt even from the payment of indirect taxes.
In Commissioner of Internal Revenue v. Philippine Long Distance
Telephone Company, G.R. No. 140230, December 15, 2005, 478 SCRA
61 the Supreme Court clarified the ruling in Maceda v. Macaraig, Jr., viz: It
may be so that in Maceda vs. Macaraig, Jr., the Court held that an exemption
from all taxes granted to the National Power Corporation (NPC) under its
charter includes both direct and indirect taxes.
An exemption from all taxes excludes indirect taxes, unless the
exempting statute, like NPCs charter, is so couched as to include indirect tax
from the exemption. The amendment under Republic Act No. 6395
enumerated the details covered by NPCs exemption. Subsequently, P.D.
380, made even more specific the details of the exemption of NPC to cover,
among others, both direct and indirect taxes on all petroleum products used
in its operation. Presidential Decree No. 938 [NPCs amended charter]
amended the tax exemption by simplifying the same law in general
terms. It succinctly exempts NPC from all forms of taxes, duties, fees
The use of the phrase all forms of taxes demonstrates the intention of the
law to give NPC all the tax exemptions it has been enjoying before.
The exemption granted under Section 135 (b) of the NIRC of 1997 and
Article 4(2) of the Air Transport Agreement between RP and Singapore
cannot, without a clear showing of legislative intent, be construed as
including indirect taxes. Statutes granting tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally in favor of
the taxing authority, and if an exemption is found to exist, it must not be

enlarged by construction. (Silkair (Singapore) PTE, Ltd., v. Commissioner of

Internal
Revenue, G.R.
No.
173594,
February
6,
2008)
taxes
classified
to
purpose ?
SUGGESTED
ANSWER:
a.
Ge
neral, fiscal or revenue imposed for the purpose of raising public funds
for the service of the government.
b.
Special
or regulatory imposed primarily for the regulation of useful or non-useful
occupation or enterprises and secondarily only for the raising of public funds.
18.

What

are

the
as

different

kinds

of

LIMITATIONS OR RESTRICTIONS ON THE POWER

1.
Purpose for the limitations on the power of taxation.
The inherent and constitutional limitations to the power of taxation are
safeguards which would prevent abuse in the exercise of this otherwise
unlimited and plenary power.
The limitations also serve as a standard to measure the validity of a
tax law or the act of a taxing authority. A violation of the limitations serves to
invalidate a tax law or act in the exercise of the power to tax.
INHERENT LIMITATIONS
1. What are the inherent limitations on the power of
taxation ?
SUGGESTED ANSWERS:
a.
Public purpose. The revenues collected from taxation should
be devoted to a public purpose.
b.
No improper delegation of legislative authority to tax. Only
the legislature can exercise the power of taxes unless the same is delegated
to some other governmental body by the constitution or through a law which
does not violate any provision of the constitution.
c.
Territoriality. The taxing power should be exercised only
within territorial boundaries of the taxing authority.
d.
Recognition of government exemptions; and
e.
Observance of the principle of comity. Comity is the respect
accorded by nations to each other because they are equals. On the other
hand taxation is an act of sovereign. Thus, the power should be imposed upon
equals out of respect.
Some authorities include no double taxation.

 2.
What are the principles to consider in the
determination of whether tax revenues are devoted for a public
purpose ?
SUGGESTED ANSWER:
a.
The tax revenues are for a public purpose if utilized for the
benefit of the community in general. An alternative meaning is that tax
proceeds should be utilized only to attain the objectives of government.
b.
Inequalities resulting from the singling out of one particular
class for taxation or exemption infringe no constitutional limitation.
REASON: It is inherent in the power to tax that the legislature is
free to select the subjects of taxation.
BASIS: The lifeblood theory.
c.
An individual taxpayer need not derive direct
benefits from the tax.
REASON: The paramount consideration is the welfare of the greater
portion of the population.
d.
A tax may be imposed, not so much for revenue
purposes, but under police power for the general welfare of the community.
This would still be for a public purpose.
e.
Public
purpose
continually
expanding. Areas
formerly left to private initiative now lose their boundaries and may be
undertaken by the government if it is to meet the increasing social
challenges of the times.
f.
Tax revenue must not be used for purely private
purposes or for the exclusive benefit of private persons.
g.
Private persons may be benefited but such benefit should be
merely incidental as its main object is the benefit of the community in
general.
h.
Determined at the time of enactment of tax law and not at
the time of implementation.
i.
There is a presumption of public purpose even if the tax law
does not specifically provide for its purpose. (Santos & Co., v. Municipality
of Meycauayan, et al., 94 Phil. 1047)
j. Public use is no longer confined to the traditional notion of use
by the public but held synonymous with public interest, public benefit, public
welfare, and public convenience. (Commissioner of Internal Revenue v.
Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005)
3. A law was enacted imposing a tax on manufacturers of
coconut oil, the proceeds of which are to be used exclusively for the
protection and promotion of the coconut industry, namely, to
improve the working conditions in coconut mills and to conduct
research on the use of coconut oil for motor fuel. Some of the
manufacturers of coconut oil challenge the validity of the law,

contending that the tax is to be used for a private purpose, and

therefore, the law violates the rule that public revenues shall not be
appropriated for anything but a public purpose. Decide with
reason.
SUGGESTED ANSWER: The levy is for a public purpose. It cannot
be denied that the coconut industry is one of the major industries supporting
the national economy. It is, therefore, the states concern to make it a
strong and secure source not only of the livelihood of the significant segment
of the population, but also of export earnings, the sustained growth of
which is one of the imperatives of economic growth. (Philippine Coconut
Producers Federation, Inc. (Cocofed v. Presidential Commission on Good
Government, 178 SCRA 236, 252)
4.
Requisites for taxpayers, concerned citizens, voters or
legislators to have locus standi to sue.
a.
In general, the case should involve constitutional
issues. (David, et al., v. President Gloria Macapagal-Arroyo, etc., et al., G.
R. No. 171396, May 3, 2006)
b.
For taxpayers, there must be a showing:
1)
That tax money is being extracted and spent
in violation
of
specific
constitutional
protections
against
abuses of
legislative power. (Flast v. Cohen, 392 U.S.
83)
2)
That public money is being deflected to
any
improper
purpose (Pascual v. Secretary of Public Works,
110
Phil. 33) or a
claim of illegal disbursement of public
funds
or that the tax measure is unconstitutional. (David, supra)
3)
A taxpayer is allowed to sue where there is
a
claim
that public
funds
are illegally disbursed, or that
public
money is being deflected to any improper purpose, or
that
there is a wastage of
public funds through the enforcement
of
an invalid or
unconstitutional law. (Abaya v. Ebdane, G.
R.
No.
167919,
February
14,
2007; Garcia
v.
Enriquez,
Jr. G.R.
No. 112655 December 9,
1993, Minute Resolution)
A taxpayers suit is properly brought only when
there
is
an exercise of the spending or taxing power
of
Congress.
(Automotive
Industry
Workers
Alliance (AIWA),etc.,
et
al.,
v.
Romulo,
etc.
,et
al., G.
R.
No.
157509,
January
18,
2005
citing Gonzales
v.
Narvasa, G.
R.
No. 140835,
August
14,
2000,
337
SCRA
733, 741)
c.
For voters, there must be a showing of obvious interest in
the validity of the election law in question.
d.
For concerned citizens, there must be a showing that the
issues raised are of transcendental importance which must be settled early.

e.
For legislators, there must be a claim that the official action
complained of infringes upon their prerogatives as legislators. (David, et al.,
v. President Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3,
2006)
5.
Only those directly affected have locus standi to
impugn the alleged encroachment by the executive department into
the legislative domain of Congress.
a.
Only those who shall be directly affected by such executive
encroachment, such as for example employees who would find themselves
subject to disciplinary powers that may be imposed under the questioned
Executive Order as they have a direct and specific interest in raising the
substantive
issue
therein (Automotive
Industry
Workers
Alliance
(AIWA),etc., et al., v. Romulo, etc. ,et al., G. R. No. 157509, January 18,
2005) or employees who are going to be demoted, transferred or otherwise
affected by any personnel action subject o the rule on exhaustion of
administrative remedies.
b. Moreover, and if at all, only Congress, can claim any injury from
the alleged executive encroachment of the legislative function to amend,
modify and/or repeal laws. (Automotive Industry Workers Alliance
(AIWA),etc., et al., supra, citing Gonzales v. Narvasa, G. R. No. 140835,
August 14,2000, 337 SCRA 733, 741)
6.
Locus standi being merely a matter of procedure, have
been waived in certain instances where a party who is not personally
injured may be allowed to bring suit. The following are examples of
instances where suits have been brought by parties who have not have been
personally injured by the operation of a law or any other government act but
by concerned citizens, taxpayers or voters who actually sue in the public
interest:
a.
Taxpayers suits to question contracts entered into by the
national government or government-owned or controlled corporations
allegedly in contravention of the law.
b.
A taxpayer is allowed to sue where there is a claim that public
funds are illegally disbursed, or that public money is being deflected to any
improper purpose, or that there is a wastage of public funds through the
enforcement of an invalid or unconstitutional law. (Abaya v. Ebdane, G. R.
No. 167919, February 14, 2007)
7. The VAT law provides 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 have been satisfied. (i) valueadded 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 %).
Was there an invalid delegation of legislative power ?
SUGGESTED ANSWER: No. There is no undue delegation of
legislative power but only of the discretion as to the execution of the
law. This is constitutionally permissible.
Congress does not abdicate its functions or unduly delegate power
when it describes what job must be done, who must do it, and what is the
scope of his authority. In the above case the Secretary of Finance becomes
merely the agent of the legislative department, to determine and declare the
even upon which its expressed will takes place. The President cannot set
aside the findings of the Secretary of Finance, who is not under the conditions
acting as the execute alter ego or subordinate. . [Abakada Guro Party List
(etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and
companion cases citing various cases]]
8. Instances of proper delegation: When taxing power could
be delegated: Exceptions to the rule on non-delegation:
a. Delegation of tariff powers by Congress to the President under
the flexible tariff clause, Section 28 (2), Article VI of the Constitution.
b. Delegation of emergency powers to the President under Section
23 (2) of Article VI of the Constitution.
c. The delegation to the President of the Philippines to enter into
executive agreements, and to ratify treaties which may contain tax
exemption provisions subject to the concurrence by the Senate in the
ratification made by the President.
d.
Delegation to the people at large.
e. Delegation to administrative bodies [Abakada Guro Party List
(Formerly AASJS), etc., v, Ermita, et al., G. R. No.168056, September 1,
2005], which is referred to as subordinate legislation.
In this instance, there is a requirement that the law is complete in all
aspects so what is delegated is merely the implementation of the law or
there exists sufficiently determinate standards to guide the delegate and
prevent a total transference of the taxing power.
9.
Paradigm shift from exclusive Congressional power
to direct grant of taxing power to local legislative bodies. The power to
tax is no longer vested exclusively on Congress; local legislative bodies are
now given direct authority to levy taxes, fees and other charges pursuant to
Article X, section 5 of the 1987 Constitution. (Batangas Power Corporation v.
Batangas City, et al. G. R. No. 152675, and companion case, April 28, 2004
citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110,
April 9, 2003)

Local government legislation, is not regarded as a transfer of general

legislative power, but rather as the grant of authority to prescribe local
regulations, according to immemorial practice, subject, of course, to the
interposition of the superior in cases of necessity. (People v. Vera, 65 Phil.
56)
10.
Taxing power of the local government is limited. The
taxing power of local governments is limited in the sense that Congress can
enact legislation granting tax exemptions.
While the system of local government taxation has changed with the
onset of the 1987 Constitution, the power of local government units to tax is
still limited.
While the power to tax by local governments may be exercised by
local legislative bodies, no longer merely by virtue of a valid delegation as
before, but pursuant to direct authority conferred by Section 5, Article X of
the Constitution, the basic doctrine on local taxation remains essentially the
same, the power to tax is [still] primarily vested in the Congress. (Quezon
City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408,
October 6, 2008 citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169
in turn referring to Mactan Cebu International Airport Authority, v.
Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680)
11.
Further amplification by Bernas of the local
governments power to tax. What is the effect of Section 5 on the fiscal
position of municipal corporations? Section 5 does not change the doctrine
that municipal corporations do not possess inherent powers of
taxation. What it does is to confer municipal corporations a general power
to levy taxes and otherwise create sources of revenue. They no longer have
to wait for a statutory grant of these powers. The power of the legislative
authority relative to the fiscal powers of local governments has been reduced
to the authority to impose limitations on municipal powers. Moreover, these
limitations must be consistent with the basic policy of local autonomy. The
important legal effect of Section 5 is thus to reverse the principle that doubts
are resolved against municipal corporations. Henceforth, in interpreting
statutory provisions on municipal fiscal powers, doubts will be resolved in
favor of municipal corporations. It is understood, however, that taxes
imposed by local government must be for a public purpose, uniform within a
locality, must not be confiscatory, and must be within the jurisdiction of the
local unit to pass. (Quezon City, et al., v. ABS-CBN Broadcasting
Corporation, G. R. No. 166408, October 6, 2008 citing City Government of
Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015,
March 6, 2006, 484 SCRA 169)

12.
Reconciliation of the local governments authority to
tax and the Congressional general taxing power. Congress has the
inherent power to tax, which includes the power to grant tax
exemptions. On the other hand, the power of local governments, such as
provinces and cities for example Quezon City, to tax is prescribed by Section
151 in relation to Section 137 of the LGC which expressly provides that
notwithstanding any exemption granted by any law or other special law, the
City or a province may impose a franchise tax. It must be noted that
Section 137 of the LGC does not prohibit grant of future exemptions.
The Supreme Court in a series of cases has sustained the power of
Congress to grant tax exemptions over and above the power of the local
governments delegated power to tax. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City
Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R.
No. 162015, March 6, 2006, 484 SCRA 16)
Indeed, the grant of taxing powers to local government units under
the Constitution and the LGC does not affect the power of Congress to grant
exemptions to certain persons, pursuant to a declared national policy. The
legal effect of the constitutional grant to local governments simply means
that in interpreting statutory provisions on municipal taxing powers, doubts
must be resolved in favor of municipal corporations. [Ibid., referring
to Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of
Davao]
13. General principles of income taxation in the
Philippines or the source rule of income taxation as provided in the
NIRC of 1997.
a. A citizen of
the
Philippines residing therein
is
taxable
on all income derived from sourceswithin and without the Philippines;
b.
A nonresident citizen is taxable only on income derived
from sources within the Philippines;
c. An individual citizen of the Philippines who is working and deriving
income abroad as anoverseas contract worker is taxable only
on income from
sources within the
Philippines:
Provided,
That
a seaman who is a citizen of the Philippines and who receives compensation
for services rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as an overseas
contract worker;
d.
An alien individual, whether a resident or not of the
Philippines, is taxable only onincome derived from sources within the
Philippines;
e. A domestic corporation is taxable on all income derived from
sources within and without the Philippines; and

f. A foreign corporation, whether engaged or not in trade or business

in
the
Philippines,
is
taxable
only
on income derived
from
sources within the Philippines. (Sec. 23, NIRC of 1997, emphasis supplied)
14.
Juliane a non-resident alien appointed as a commission
agent by a domestic corporation with a sales commission of 10% all
sales actually concluded and collected through her efforts. The local
company withheld the amount of P107,000 from her sales
commission and remitted the same to the BIR.
She filed a claim for refund alleging that her sales commission
is not taxable because the same was a compensation for her services
rendered in Germany and therefore considered as income from
sources outside the Philippines.
Is her contention correct ?
SUGGESTED ANSWER: Yes. The important factor which determines
the source of income of personal services is not the residence of the payor, or
the place where the contract for service is entered into, or the place of
payment, but the place where the services were actually performed.
Since the activity of securing the sales were in Germany, then the
income
did
not
originate
from
sources
from
within
the
Philippines. (Commissioner of Internal Revenue v. Baier-Nickel, G. R. No.
153793, August 29, 2006)
15. Ensite, Ltd.. is a Canadian corporation not doing
business in the Philippines. It holds 40% of the shares of Philippine
Stamping Plant, Inc.,., a Philippine company while the 60% is owned
by Fred Corporation, a Filipino-owned Philippine corporation. Ensite
Co. also owns 100% of the shares of Susanto Co., an Indonesian
company which has a duly licensed Philippine branch. Due to
worldwide restructuring of the Ensite Ltd.,. group, Ensite Ltd.,.
decided to sell all its shares in Philippine Stamping Plant, Inc. and
Susanto Co. The negotiations for the buy-out and the signing of the
Agreement of Sale were all done in the Philippines. The Agreement
provides that the purchase price will be paid to Ensite Ltds bank
account in the U.S. and that title to the Philippine Stamping Plant,
Inc. and Susanto Co. shall be transferred to General Co., in Toronto
Canada where stock certificates will be delivered. General Co. seeks
your advice as to whether or not it will subject the payments of the
purchase
price
to
withholding
tax. Explain
your
advice.
SUGGESTED ANSWER: The payments of the
purchase price will be subject to withholding tax. Considering that all the
activities (sales) occurred within the Philippines, the income is considered as
income from within, subject to Philippine income taxation. Ensite, Ltd. being
a foreign corporation is to be taxed on its income derived from sources

within
Philippines.

the

16.Ensite, Ltd. is a Canadian corporation,

which has a duly licensed Philippine branch engage in trading
activities in the Philippines. Ensite, Ltd.. also invested directly in
40% of the shares ofstock of Philippine Stamping Plant, Inc.., a
Philippine corporation. These shares are booked in the Head Office
of Ensite, Ltd.. and are not reflected as assets of the Philippine
branch. In 2009, Philippine Stamping Plant, Inc.. declared dividends
to its stockholders. Before remitting the dividends to Ensite Ltd.,.,
Philippine Stamping Plant, Inc. Co. seeks your advice as to whether
it will subject the remittance to withholding tax. There is no need to
discuss WT rates, if applicable. Focus your discussion on what is the
issue.
SUGGESTED
ANSWER: Philippine Stamping Plant, Inc.. should subject the remittance to
withholding tax.. Since Philippine Stamping Plant. is a Philippine
corporation, its shares of stock have obtained a business situs in the
Philippines, hence the dividends are considered as income from
within. Ensite. Ltd., being a foreign corporation, should be subject to tax on
its income from within.
17. Philippine
Stamping
Plant,
Inc.,
a
Philippine
corporation,
has
an
executive
Larry
who
is
a
Filipino
citizen. Philippine Stamping Plant, Inc,. has a subsidiary in Malaysia
(Kuala Lumpur Manufacturing, Inc.) and will assign Larry for an
indefinite period to work full time for Kuala Lumpur Manufacturing,
Inc.. Larry will bring his family to reside in Malaysia and will lease
out his residence in the Philippines. The salary of Larry will be
shouldered 50% by Philippine Stamping Plant, Inc.. while the other
50% plus housing, cost of living and educational allowances of
Larrys dependents will be shouldered by Kuala Lumpur
Manufacturing, Inc.. Philippine Stamping Plant, Inc.. will credit the
50% of Larrys salary to his Philippine bank account. Larry will sign
the contract of employment in the Philippines. He will also be
receiving rental income for the lease of his Philippine
residence.
Are these salaries, allowances and rentals subject to
Philippine
income
tax? Explain
briefly.
SUGGESTED
ANSWER: The
salaries and allowances of Larry, being derived from labor or personal
services rendered outside of the Philippines is considered as income from
without. Since Larry is an OCW, then he is to be taxed only on his income
derived from within the Philippines such as the rentals on his Philippine
residence, and not on his income from without.

18.
Obama Airlines, Inc., a foreign airline company which
does not maintain any flight to and from the Philippines sold air
tickets in the Philippines, through a general sales agent, relating to
the carriage of passengers and cargo between two points, both
outside the Philippines.
a.
Is Obama, Inc., subject to income taxes on the sale of
the tickets ?
SUGGESTED ANSWER: Yes. The source of income which is taxable is
that activity which produced the income. The sale of tickets in the
Philippines is the activity that determines whether such income is taxable in
the Philippines.
The tickets exchanged hands here and payments for fares were also
made here in Philippine currency. The situs of the source of payments is the
Philippines. the flow of wealth proceeded from and occurred, within the
Philippine territory, enjoying the protection accorded by the Philippine
Government. In consideration of such protection, the flow of wealth should
share the burden of supporting the government. [Commissioner of Internal
Revenue v. British Overseas Airways Corporation (BOAC), 149 SCRA 395]
Off-line air carriers having general sales agents in the Philippines are
engaged in or doing business in the Philippines and their income from sales
of passage documents here is income from within the Philippines. Thus, the
off-line air carrier liable for the 32% (now 30%) tax on its taxable
income. [South African Airways v. Commissioner of Internal Revenue, G.R.
No. 180356, February 16, 2010 citingCommissioner of Internal Revenue v.
British Overseas Airways Corporation (British Overseas Airways), No. L65773-74, April 30, 1987, 149 SCRA 395]
b.
Supposing that Obama, Inc., sells tickets outside of
the Philippines for passengers it carry from Gold City, South Africa to
the Philippines but returns to South Africa without any cargo or
passengers. Would it then be subject to any Philippine tax on such
sales ?
SUGGESTED ANSWER: It would not be subject to any tax. It is not
subject to any income tax because the activity which generated the income
(the sale of the tickets) was performed outside of the Philippines.
It is not subject to the carriers tax based on gross Philippine billings
because there were no lifts that originated from the Philippines. 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. [NIRC of 1997, Sec. 28(A)(3)(a)]
c.
Would your answer be the same if Obama, Inc. sold
tickets outside of the Philippines for travelers who are going to picked
up by Obama, Inc., planes from the Diosdado Macapagal Intl. Airport

at Clark, Angeles, Pampanga, bound for Nairobi, Kenya ? Reason out

your answer.
SUGGESTED ANSWER: No more. This time Obama, Inc., would be
subject to the carriers tax based on Gross Philippine Billings. (GPB).
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. [NIRC of 1997, Sec. 28(A)(3)(a)]
The place of sale is irrelevant; as long as the uplifts of passengers and
cargo occur from the Philippines, income is included in GPB. (South African
Airways v. Commissioner of Internal Revenue, G.R. No. 180356, February
16, 2010)
19.
No improper delegation of legislative authority to
tax. The power to tax is inherent in the State, such power being inherently
legislative, based on the principle that taxes are a grant of the people who
are taxed, and the grant must be made by the immediate representatives of
the people; and where the people have laid the power, there it must remain
and be exercised. (Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008)
CONSTITUTIONAL LIMITATIONS
1.
Constitutional
limitations
on
the
power
of
taxation . The general or indirect constitutional limitations as well as the
specific or direct constitutional limitations.
2. The general or indirect constitutional limitations on the
power of taxation are:
a.
Due process clause;
b.
Equal protection clause;
c.
Freedom of the press;
d.
Religious freedom;
e.
No taking of private property without just compensation;
f.
Non-impairment clause;
g.
Law-making process:
1)
Bill should embrace only one subject
expressed
in
the title thereof;
2)
Three (3) readings on three separate days;
3)
Printed copies in final form distributed three
(3) days
before passage.
h.
Presidential power to grant reprieves, commutations and
pardons and remittal of fines and forfeiture after conviction by final judgment.

3.
The specific or direct constitutional limitation.
a.
No imprisonment for non-payment of a poll tax;
b.
Taxation shall be uniform and equitable;
c.
Congress shall evolve a progressive system of taxation;
d.
All appropriation, revenue or tariff bills shall originate
exclusively in the House of Representatives, but the Senate may propose and
concur with amendments;
e. The President shall have the power to veto any particular item or
items in an appropriation, revenue, or tariff bill, but the veto shall not affect
the item or items to which he does not object;
f.
Delegated power of the President to impose tariff rates,
import and export quotas, tonnage and wharfage dues:
1)
Delegation by Congress
2)
through a law
3)
subject to Congressional limits and
restrictions
4)
within the framework of national development program.
g.
Tax exemption of charitable institutions, churches,
parsonages and convents appurtenant thereto, mosques, and all lands,
buildings and improvements of all kinds actually, directly and exclusively used
for religious, charitable or educational purposes;
h.
No tax exemption without the concurrence of majority vote
of all members of Congress;
i.
No use of public money or property for religious purposes
except if priest is assigned to the armed forces, penal institutions,
government orphanage or leprosarium;
j.
Money collected on tax levied for a special purpose to be
used only for such purpose, balance if any, to general funds;
k.
The Supreme Court's power to review judgments or orders
of lower courts in all cases involving the legality of any tax, impose,
assessment or toll or the legality of any penalty imposed in relation to the
above;
l.
Authority of local government units to create their own
sources of revenue, to levy taxes, fees and other charges subject to
guidelines and limitations imposed by Congress consistent with the basic
policy of local autonomy;
m.
Automatic release of local government's just share in
national taxes;
n.
Tax exemption of all revenues and assets of non-stock, nonprofit educational institutions used actually, directly and exclusively for
educational purposes;
o. Tax exemption of all revenues and assets of proprietary or
cooperative educational institutions subject to limitations provided by law
including restrictions on dividends and provisions for reinvestment of profits;

p.
Tax exemption of grants, endowments, donations or
contributions used actually, directly and exclusively for educational purposes
subject to conditions prescribed by law.
5.
Equal protection of the law clause is subject to
reasonable classification. If the groupings are characterized by
substantial distinctions that make real differences, one class may be treated
and regulated differently from another. The classification must also be
germane to the purpose of the law and must apply to all those belonging to
the same class. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410,
January 20, 1999)
6.
Requisites for valid classification. All that is required of a
valid
classification
is
that
it
be
reasonable,
which
means
that
a.
the classification should be based on substantial
distinctions which make for real differences,
b.
that it must be germane to the purpose of the law;
c.
that it must not be limited to existing conditions only; and
d.
that it must apply equally to each member of the class.
The standard is satisfied if the classification or distinction is based on
a reasonable foundation or rational basis and is not palpably
arbitrary. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No.
166715, August 14, 2008]
7.
Equal
protection
does
not
demand
absolute
equality. It merely requires that all persons shall be treated alike, under
like circumstances and conditions, both as to the privileges conferred and
liabilities enforced. (Santos v. People, et al, G. R. No. 173176, August 26,
2008)
It is imperative to duly establish that the one invoking equal
protection and the person to which she is being compared were indeed
similarly situated, i.e., that they committed identical acts for which they
were charged with the violation of the same provisions of the NIRC; and that
they presented similar arguments and evidence in their defense - yet, they
were treated differently. (Santos, supra)
8.
Tests to determine validity of classification.
The
United States Supreme Court has established different tests to determine
the validity of a classification and compliance with the equal protection
clause. The recognized tests are:
a.
The traditional (or rational basis) test.
b.
The strict scrutiny (or compelling interest) test.
c. The intermediate level of scrutiny (or quasi-suspect class)
test.

9.
The traditional (or rational basis) test used in order to
determine the validity of classification. The classification is valid if it is
rationally related to a constitutionally permissible state interest.
The complainant must prove that the classification is invidous,
wholly arbitrary, or capricious, otherwise the classification is presumed to
be valid. (Lindsley v. Natural Carboinic Gas Co.,220 U.S. 61; McGowan
v. Maryland, 366 U.S. 420; United States Railroad Retirement Board v.
Fritz, 449 U.S. 166)
10.
The strict scrutiny (or compelling interest) test used
in order to determine the validity of the classification. Government
regulation that intentionally discriminates against a suspect class such as
racial or ethnic minorities, is subject to strict scrutiny and considered to
violate the equal protection clause unless found necessary to promote a
compelling state interest.
A classification is necessary when it is narrowly drawn so that no
alternative, less burdensome means is available to accomplish the state
interest.
Thus, it was held that denial of free public education to the children
of illegal aliens imposes an enormous and lasting burden based on a status
over which the children have no control is violative of equal protection
because there is no showing that such denial furthers a substantial state
goal. (Plyler v. Doe, 457 U.S. 202)
11.
The intermediate level of scrutiny (or quasi-suspect
class) test used in order to determine the validity of he
classification. Classification based on gender or legitimacy are not
suspect, but neither are they judged by the traditional or rational basis
test.
Intentional discriminations against members of a quasi-suspect class
violate equal protection unless they are substantially related to important
government objectives. (Craig v. Boren, 429 U.S. 190)
Thus, a state law granting a property tax exemption to widows, but
not widowers, has been held valid for it furthers the state policy of
cushioning the financial impact of spousal loss upon the sex for whom that
loss usually imposes a heavier burden. (Kahn v. Shevin, 416 U.S. 351)
12.
Equality and uniformity of taxation may mean the
same as equal protection. In such a case, the terms would mean that all
subjects and objects of taxation which are similarly situated shall be subject
to the same burdens and granted the same privileges without any
discrimination whatsoever.
13.
It is inherent in the power to tax that the State be
free to select the subjects of taxation, and it has been repeatedly held

that, "inequalities which result from a singling out of one particular class of
taxation, or exemption, infringe no constitutional limitation." (Commissioner
of Internal Revenue, et al., v. Santos, et al., 277 SCRA 617)
9. Benjie is a law-abiding citizen who pays his real estate
taxes promptly. Due to a series of typhoons and adverse economic
conditions, an ordinance is passed by Soliman City granting a 50%
discount for payment of unpaid real estate taxes for the preceding
year and the condonation of all penalties on fines resulting from the
late payment.
Arguing that the ordinance rewards delinquent tax payers
and discriminates against prompt ones, Benjie demands that he be
refunded an amount equivalent to one-half of the real property taxes
he paid. The municipal attorney rendered an opinion that Benjie
cannot be reimbursed because the ordinance did not provide for
such reimbursement. Benjie files suit to declare the ordinance void
on the ground that it is a class legislation. Will his suit prosper ?
Explain your answer briefly.
SUGGESTED ANSWER: No. There is no class legislation because
there is no violation of the equal protection suit. There is a valid
classification between those who already paid their taxes and those who
have not. Furthermore, the taxing authority has the prerogative to select
the subjects and objects of taxation, including granting a 50% discount in
the payment of unpaid real estate taxes, and the condonation of all
penalties on fines resulting from late payment.
10.
The rewards law to tax collectors does not violate
equal protection. The equal protection clause recognizes a valid
classification, that is, a classification that has a reasonable foundation or
rational basis and not arbitrary. With respect to RA 9335, its expressed
public policy is the optimization of the revenue-generation capability and
collection of the BIR and the BOC. Since the subject of the law is the
revenue- generation capability and collection of the BIR and the BOC, the
incentives and/or sanctions provided in the law should logically pertain to
the said agencies. Moreover, the law concerns only the BIR and the BOC
because they have the common distinct primary function of generating
revenues for the national government through the collection of taxes,
customs duties, fees and charges.
Indubitably, such substantial distinction is germane and intimately
related to the purpose of the law. Hence, the classification and treatment
accorded to the BIR and the BOC under RA 9335 fully satisfy the demands of
equal protection. (ABAKADA Guro Party List, etc., v. Purisima, etc., et
al., G. R. No. 166715, August 14, 2008)

11.
The prosecution of one guilty person while others
equally guilty are not prosecuted, however, is not, by itself, a denial
of the equal protection of the laws. Where the official action purports to
be in conformity to the statutory classification, an erroneous or mistaken
performance of the statutory duty, although a violation of the statute, is not
without more a denial of the equal protection of the laws.
The unlawful administration by officers of a statute fair on its face,
resulting in its unequal application to those who are entitled to be treated
alike, is not a denial of equal protection unless there is shown to be present
in it an element of intentional or purposeful discrimination. This may appear
on the face of the action taken with respect to a particular class or person,
or it may only be shown by extrinsic evidence showing a discriminatory
design over another not to be inferred from the action itself.
(Santos v. People, et al, G. R. No. 173176, August 26, 2008)
12.
Equal protection should not be used to protect
commission of crime. While all persons accused of crime are to be treated
on a basis of equality before the law, it does not follow that they are to be
protected in the commission of crime. It would be unconscionable, for
instance, to excuse a defendant guilty of murder because others have
murdered with impunity.
Likewise, if the failure of prosecutors to enforce the criminal laws as
to some persons should be converted into a defense for others charged with
crime, the result would be that the trial of the district attorney for
nonfeasance would become an issue in the trial of many persons charged
with heinous crimes and the enforcement of law would suffer a complete
breakdown. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)
13.
Illustration of double taxation in local taxation. there is
indeed double taxation if Coca-Cola is subjected to the taxes under both
Sections 14 and 21 of Tax Ordinance No. 7794, since these are being
imposed: (1) on the same subject matter the privilege of doing business in
the City of Manila; (2) for the same purpose to make persons conducting
business within the City of Manila contribute to city revenues; (3) by the
same taxing authority City of Manila; (4) within the same taxing
jurisdiction within the territorial jurisdiction of the City of Manila; (5) for
the same taxing periods per calendar year; and (6) of the same kind or
character a local business tax imposed on gross sales or receipts of the
business. (The City of Manila, et al., v. Coca-Cola Bottlers Philippines,
Inc., G. R. No. 181845, August 4, 2009)
14.
A lawful tax on a new subject, or an increased tax on
an old one, does not interfere with a contract or impairs its

obligation, within the meaning of the constitution. (Tolentino

Secretary of Finance, et al., and companion cases, 235 SCRA 630)

v.

15.
The withdrawal of a tax exemption should not be
construed as prohibiting future grants of exemption from all
taxes. (Philippine Long Distance Telephone Company, Inc., v. City of Davao,
et al., etc., G. R. No. 143867, August 22, 2001)
16.
Tax exemptions in franchises are always subject to
withdrawal. A legislative franchise is granted with the express condition
that it is subject to amendment, alteration, or repeal. (1987
Constitution, Art. XII, Sec. 11)
It is enough to say that the parties to a contract cannot, through the
exercise of prophetic discernment, fetter the exercise of the taxing power of
the State. For not only are existing laws read into contracts in order to fix
obligations as between parties, but the reservation of essential attributes of
sovereign power is also read into contracts as a basic postulate of the legal
order. The policy of protecting contracts against impairment presupposes the
maintenance of a government which retains adequate authority to secure
the peace and good order of society. (Smart Communications, Inc. v. The
City of Davao, etc., et al., G. R. No. 155491, September 16, 2008)
NOTES AND COMMENTS: Philippine Long Distance Telephone
Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22,
2001 made the observation that since Smarts franchise was granted after the
effectivity of the Local Government Code that its tax exemption privilege was
reinstated. However,Smart Communications, Inc. v. The City of Davao, etc.,
et al., G. R. No. 155491, September 16, 2008 is explicit in its holding that
Smart is not entitled to a tax exemption.
17. When withdrawal of a tax exemption impairs the
obligation of contracts. The Contract Clause has never been thought as a
limitation on the exercise of the States power of taxation save only where a
tax exemption has been granted for a valid consideration. (Smart
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008) citing Tolentino v. Secretary of Finance, G. R. No.
115455, August 25, 1994, 235 SCRA 630, 685) The author opines that
since practically all franchises granted to telecommunications companies are
similarly worded that the above doctrine finds application to the others)
18. The primary reason for the withdrawal of tax exemption
privileges
granted
to
government
owned
and
controlled
corporations and all other units of government was that such privilege
resulted to serious tax base erosion and distortions in the tax treatment of
similarly situated enterprises, hence resulting in the need for these entities to

share in the requirements of development, fiscal or otherwise, by paying the

taxes and other charges due them. (Philippine Ports Authority v. City of
Iloilo, G. R. No. 109791, July 14, 2003)
19.
National Power Corporation (NPC) is of the insistence
that it is not subject to the payment of franchises taxes imposed by
the Province of Isabela because all of its shares are owned by the
Republic of the Philippines. It is thus, an instrumentality of the
National Government which is exempt from local taxation. As such it
is not a private corporation engaged in business enjoying franchise
Is such contention meritorious ?
SUGGESTED ANSWER: No. Philippine Long Distance Telephone
Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22,
2001, upheld the authority of the City of Davao, a local government unit, to
impose and collect a local franchise tax because the Local Government Code
has withdrawn all tax exemptions previously enjoyed by all persons and
authorized local government units to impose a tax on business enjoying a
franchise tax notwithstanding the grant of tax exemption to them.
20.
In lieu of all taxes in the franchise of ABS-CBN
does not exempt it from local franchise taxes. It does not expressly
provide what kind of taxes ABS-CBN is exempted from. It is not clear
whether the exemption would include both local, whether municipal, city or
provincial, and national tax. Whether the in lieu of all taxes provision
would include exemption from local tax is not unequivocal.
The right to exemption from local franchise tax must be clearly
established and cannot be made out of inference or implications but must be
laid beyond reasonable doubt. Verily, the uncertainty in the in lieu of all
taxes provision should be construed against ABS-CBN. ABS-CBN has the
burden to prove that it is in fact covered by the exemption so claimed but
has failed to do so. (Quezon City, et al., v. ABS-CBN Broadcasting
Corporation, G. R. No. 166408, October 6, 2008)
NOTES AND COMMENTS: This is practically the same holding in an
earlier
case involving
another
telecommunications
company Smart
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008. The author opines that since practically all franchises
granted to telecommunications companies are similarly worded that the
above doctrine finds application to the others.)
21. In lieu of all taxes refers to national internal
revenue taxes and not to local taxes. The in lieu of all taxes clause
applies only to national internal revenue taxes and not to local taxes. As
appropriately pointed out in the separate opinion of Justice Antonio T. Carpio

in a similar case involving a demand for exemption from local franchise

taxes:
[T]he "in lieu of all taxes" clause in Smart's franchise refers only to
taxes, other than income tax, imposed under the National Internal Revenue
Code. The "in lieu of all taxes" clause does not apply to local taxes. The
proviso in the first paragraph of Section 9 of Smart's franchise states that
the grantee shall "continue to be liable for income taxes payable under Title
II of the National Internal Revenue Code." Also, the second paragraph of
Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of
Internal Revenue or his duly authorized representative in accordance with
the National Internal Revenue Code." Moreover, the same paragraph
declares that the tax returns "shall be subject to audit by the Bureau of
Internal Revenue." Nothing is mentioned in Section 9 about local taxes. The
clear intent is for the "in lieu of all taxes" clause to apply only to taxes under
the National Internal Revenue Code and not to local taxes. Even with respect
to national internal revenue taxes, the "in lieu of all taxes" clause does not
apply to income tax.
If Congress intended the "in lieu of all taxes" clause in Smart's
franchise to also apply to local taxes, Congress would have expressly
mentioned the exemption from municipal and provincial taxes. Congress
could have used the language in Section 9(b) of Clavecilla's old franchise, as
follows:
x x x in lieu of any and all taxes of any kind, nature or description
levied, established or collected by any authority whatsoever, municipal,
provincial or national, from which the grantee is hereby expressly exempted,
x x x. (Emphasis supplied).
However, Congress did not expressly exempt Smart from local
taxes. Congress used the "in lieu of all taxes" clause only in reference to
national internal revenue taxes. The only interpretation, under the rule on
strict construction of tax exemptions, is that the "in lieu of all taxes" clause
in Smart's franchise refers only to national and not to local taxes. [Smart
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008 citing Philippine Long Distance Telephone Company,
Inc. v. City of Davao, 447 Phil. 571, 594 (2003)]
NOTES AND COMMENTS: The author opines that the above finds
application to all telecommunications companies.
22.
The in lieu of all taxes clause in the franchise
of ABS-CBN has become functus officio with the abolition of the
franchise tax on broadcasting companies with yearly gross receipts
exceeding Ten Million Pesos. The clause in lieu of all taxes does not
pertain to VAT or any other tax. It cannot apply when what is paid is a tax
other than a franchise tax. Since the franchise tax on the broadcasting
companies with yearly gross receipts exceeding ten million pesos has been

abolished, the in lieu of all taxes clause has now become functus officio,
rendered inoperative. (Quezon City, et al., v. ABS-CBN Broadcasting
Corporation, G. R. No. 166408, October 6, 2008)
NOTES AND COMMENTS: This is practically the same holding in an
earlier case involving another telecommunications company. Smart
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008. The author opines that since practically all franchises
granted to telecommunications companies are similarly worded that the
above doctrine finds application to the others.)
23. Double taxation in its generic sense, this means taxing
the same subject or object twice during the same taxable period. In
its particular sense, it may mean direct duplicate taxation, which is prohibited
under the constitution because it violates the concept of equal protection,
uniformity and equitableness of taxation. Indirect duplicate taxation is not
anathematized by the above constitutional limitations.
24. Elements of direct duplicate taxation:
a.
Same
1)
Subject or object is taxed twice
2)
by the same taxing authority
3)
for the same taxing purpose
4)
during the same taxable period
b.
Taxing all of the subjects or objects for the first time without
taxing all of them for the second time.
If any of the elements are absent then there is indirect duplicate
taxation which is not prohibited by the constitution.
NOTES AND COMMENTS:
a.
Presence of the 2nd element violates the equal
protection clause. If only the 1stelement is present, taxing the same
subject or object twice, by the same taxing authority, etc., there is no
violation of the equal protection clause because all subjects and objects that
are similarly situated are subject to the same burdens and granted the same
privileges without any discrimination whatsoever,
The presence of the 2nd element, taxing all of the subjects and objects
for the first time, without taxing all for the second time, results to
discrimination among subjects and objects that are similarly situated, hence
violative of the equal protection clause.
25. Double taxation a valid defense against the legality of a tax
measure if the double taxation is direct duplicate taxation, because it
would violate the equal protection clause of the constitution.
26.
When an item of income is taxed in the Philippines
and the same income is taxed in another country, this would be

known as international juridical double taxation which is the imposition

of comparable taxes in two or more states on the same taxpayer in respect of
the same subject matter and for identical grounds. (Commissioner of Internal
Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, June 25,
1999)
27. Methods for avoiding double taxation (indirect duplicate
taxation).
a.
Tax treaties which exempts foreign nationals from local
taxation and local nationals from foreign taxation under the principle of
reciprocity.
b.
Tax credits where foreign taxes are allowed as deductions
from local taxes that are due to be paid.
c.
Allowing foreign taxes as a deduction from gross income.
28.
Tax credit generally refers to an amount that is subtracted
directly from ones total tax liability, an allowance against the tax itself, or a
deduction from what is owned.
A tax credit reduces the tax due, including whenever applicable the
income tax that is determined after applying the corresponding tax rates to
taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, G. R. No. 159647, April 15, 2005)
29.
A tax deduction is defined as a subtraction fro income for
tax purposes, or an amount that is allowed by law to reduce income prior to
the application of the tax rate to compute the amount of tax which is due.
A tax deduction reduces the income that is subject to tax in order to
arrive at taxable income. (Commissioner of Internal Revenue v. Central Luzon
Drug Corporation, G. R. No. 159647, April 15, 2005)
30.
The petitioners allege that the R-VAT law is
constitutional because the Bicameral Conference Committed has
exceeded its authority in including provisions which were never
included in the versions of both the House and Senate such as
inserting the stand-by authority to the President to increase the VAT
from 10% to 12%; deleting entirely the no pass-on provisions found
in both the House and Senate Bills; inserting the provision imposing a
70% limit on the amount of input tax to be credited against the
output tax; and including the amendments introduced only by Senate
Bill No. 1950 regarding other kinds of taxes in addition to the valueadded tax. Thus, there was a violation of the constitutional mandate
that revenue bills shall originate exclusively from the House of
Representatives.

Are the contentions of such weight as to constitute grave abuse

of discretion which may invalidate the law ? Explain briefly.
SUGGESTED ANSWER: No. There was no grave abuse of discretion
because all the changes and modifications made by the Bicameral Conference
Committee were germane to subjects of the provisions referred to it for
reconciliation.
The Bicameral Conference Committee merely exercised the judicially
recognized long-standing legislative practice of giving said conference
committee ample latitude for compromising differences between the Senate
and the House. [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R.
No. 168056, September 1, 2005 and companion cases]
31. The VAT while regressive is NOT violative of the mandate
to evolve a progressive system of taxation. Do you agree ? The
mandate to Congress is not to prescribe but to evolve a progressive system of
taxation. Otherwise, sales taxes which perhaps are the oldest form of indirect
taxes, would have been prohibited with the proclamation of the constitutional
provision. Sales taxes are also regressive. . [Abakada Guro Party List (etc.)
v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion
cases citing Tolentino v. Secretary of Finance, et al., G. R. No. 115455,
August 25, 1994, 235 SCRA 630]
32.
All revenues and assets of non-stock, non-profit
educational institutions that are actually, directly and exclusively
used for educational purposes shall be exempt from taxation.
33.
Revenues and assets of proprietary educational
institutions, including those which are cooperatively owned, may be
entitled to exemptions subject to limitations provided by law
including
restrictions
on
dividends
and
provisions
for
reinvestments. There is no law at the present which grants exemptions,
other the exemptions granted to cooperatives.
OTHER CONCEPTS
1.
Basis
Failure to
Pay
Mode of
Payment

Distinguish tax from debt.

TAX
DEBT
based on law
based on contract
or judgment
may result in
no imprisonment
imprisonment
generally payable payable in money,
in money
property or
service

Assignability not assignable assignable

Payment
unless it
may be a subject
becomes a debt is
not subject to
compensation or
set-off
Interest
does not draw
draws interest if
interest unless
stipulated or
delinquent
delayed
Authority
imposed by public can be imposed
authority
by private
individuals
Prescription Prescriptive
debt under the
periods for tax
Civil Code
under NIRC
WARNING: Do not use the above arrangement in answering Bar
questions.
2.
Compensation takes place by operation of law, where the
local government and the taxpayer are in their own right reciprocally debtors
and creditors of each other, and that the debts are both due and demandable,
in consequence of Articles 1278 and 1279 of the Civil Code. (Domingo v.
Garlitos, 8 SCRA 443)
3. May there be compensation or set-off between a national tax
and
a
debt
? Reason
out
your
answer.
SUGGESTED ANSWER: As a general
rule, there could be no compensation or set-off between a tax and a debt for
the
following
reasons:
a.
Lifeblood
theory.
b.
Taxes are not contractual obligations but arise out of a duty to, and are
the positive acts of government, to the making and enforcing of which the
personal consent of the individual taxpayer is not required.(Republic v.
Mambulao
Lumber
Co., 4
SCRA
622)
c.
Taxes cannot be the
subject of compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for taxes is not
such a debt, demand, contract or judgment as is allowed to be set-off.
Thus, it is correct to say that the offsetting of a taxpayers tax refund
with its alleged tax deficiency is unavailing under Art. 1279 of the Civil
Code. (South African Airways v. Commissioner of Internal Revenue, G.R.

No. 180356, February 16, 2010 reiterating Caltex Philippines, Inc. v.

Commission on Audit, which applied Francia v. Intermediate Appellate Court)
4. Exceptions: When set-off or compensation allowed for
local
taxes.
a.
Where both claims already become overdue and demandable as well as fully
liquidated. Compensation takes place by operation of law under Art. 1200 in
relation to Arts. 1279 and 1290 all of the Civil Code. (Domingo v. Garlitos, 8
SCRA
443)
b.
Compensation
takes
place by operation of law, where the government and the taxpayer are in
their own right reciprocally debtors and creditors of each other, and that the
debts are both due and demandable. This is in consequence of Article 1278
and
1279
of
the
Civil
Code.
(Domingo
v. Garlitos, 8
SCRA
443)
c.
,The
Supreme Court upheld the validity of a set-off between the taxpayer and the
government. In both cases, the claims of the taxpayers therein were certain
and liquidated. The claims were certain since there were no doubts or
disputes as to their refundability. In fact, the government admitted the fact
of
over-payment.
(Commissioner of Internal Revenue v.
Esso
Standard Eastern, Inc., 172 SCRA 364)
d.
In case
of a tax overpayment, the BIRs obligation to refund or off-set arises from
the moment the tax was paid. REASON: Solutio indebeti. (Commissioner of
Internal
Revenue
v.
Esso
Standard
Eastern,
Inc 172
SCRA
364)
e.
While judgment should be rendered in favor of Republic
for unpaid taxes, judgment ought at the same time to issue for Sampaguita
Pictures commanding payment to the latter by the Republic of the value of
the backpay certificates which the Republic received. (Republic v. Ericta, 172
SCRA 623)
5. Gilbert obtained a judgment for a sum of money
against the municipality of Camiling. The judgment has become final
although execution has not issued. Upon receiving an assessment
for municipal sales taxes from the Municipal Treasurer, Gilbert
executed a partial assignment of his judgment sufficient to cover the
assessment in favor of the Municipality. May the Municipal
Treasurer validly accept the assignment? Why?
SUGGESTED ANSWER: Yes. The parties in this case are mutually
debtors and creditors of each other, and since both of the claims became
overdue, demandable and fully liquidated, compensation takes place by
operation of law. Such was the holding in Domingo v. Garlitos, 8 SCRA 443,
a case decided by the Supreme Court whose factual antecedents are similar
to
the
problem.

6.
In case of doubt, tax laws must be construed strictly
against the State and liberally in favor of the taxpayer because taxes,
as burdens which must be endured by the taxpayer, should not be presumed
to go beyond what the law expressly and clearly declares. (Lincoln Philippine
Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92,
99)
7.
Interpretation in the imposition of taxes, is not the
similar doctrine as that applied to tax exemptions. The rule in the
interpretation of tax laws is that a statute will not be construed as imposing
a tax unless it does so clearly, expressly, and unambiguously. A tax cannot
be imposed without clear and express words for that purpose. Accordingly,
the general rule of requiring adherence to the letter in construing statutes
applies with peculiar strictness to tax laws and the provisions of a taxing act
are not to be extended by implication. In answering the question of who is
subject to tax statutes, it is basic that in case of doubt, such statutes are to
be construed most strongly against the government and in favor of the
subjects or citizens because burdens are not to be imposed nor presumed to
be imposed beyond what statutes expressly and clearly import.
[Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R.
Nos. 167274-75, July 21, 2008 citing CIR v. Court of Appeals, 338 Phil. 322,
330-331 (1997)] As burdens, taxes should not be unduly exacted nor
assumed beyond the plain meaning of the tax laws. (Ibid., citing CIR v.
Philippine American Accident Insurance Company, Inc., G.R. No. 141658,
March 18, 2005, 453 SCRA 668)

8.
Strict interpretation of tax exemption laws. Taxes are
what civilized people pay for civilized society. They are the lifeblood of the
nation. Thus, statutes granting tax exemptions are construed stricissimi
juris against the taxpayer and liberally in favor of the taxing authority. A
claim of tax exemption must be clearly shown and based on language in law
too plain to be mistaken. Otherwise stated, taxation is the rule, exemption
is the exception. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation,
G. R. No. 166408, October 6, 2008 citing Mactan Cebu International Airport
Authority v. Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667,
680) The burden of proof rests upon the party claiming the exemption to
prove that it is in fact covered by the exemption so claimed. (Quezon City,
supra citing Agpalo, R.E., Statutory Construction, 2003 ed., p. 301)
9.
Rationale for strict interpretation of tax exemption
laws. The basis for the rule on strict construction to statutory provisions
granting tax exemptions or deductions is to minimize differential treatment

and foster impartiality, fairness and equality of treatment among taxpayers.

(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008) He who claims an exemption from his share of
common burden must justify his claim that the legislature intended to
exempt him by unmistakable terms. For exemptions from taxation are not
favored in law, nor are they presumed. They must be expressed in the
clearest and most unambiguous language and not left to mere
implications. It has been held that exemptions are never presumed the
burden is on the claimant to establish clearly his right to exemption and
cannot be made out of inference or implications but must be laid beyond
reasonable doubt. In other words, since taxation is the rule and exemption
the exception, the intention to make an exemption ought to be expressed in
clear and unambiguous terms. (Quezon City, supra citing Agpalo, R.E.,
Statutory Construction, 2003 ed., p. 302)
10.
Why are tax exemptions are strictly construed against
the taxpayer and liberally in favor of the State ?
SUGGESTED ANSWER: Taxes are necessary for the continued
existence of the State.
11.
In case of a tax overpayment, where the BIRs
obligation to refund or set-off arises from the moment the tax was
paid under the principle of solutio indebeti. (Commissioner of Internal
Revenue v. Esso Standard Eastern, Inc, 172 SRCA 364)
12.
But note Nestle Phil. v. Court of Appeals, et al., G.R.
No. 134114, July 6, 2001which held that in order for the rule on solutio
indebeti to apply it is an essential condition that the petitioner must first show
that its payment of the customs duties was in excess of what was required by
the law at the time the subject 16 importations of milk and milk products
were made. Unless shown otherwise, the disputable presumption of
regularity of performance of duty lies in favor of the Collector of
Customs.
13.
Strict interpretation of a tax refund that partakes of
the nature of a tax does not apply to tax refund based on erroneous
payment or where there is no law that authorizes collection of the
tax. There is parity between tax refund and tax exemption only when the
former is based either on a tax exemption statute or a tax refund
statute. (Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008)
Tax refunds (or tax credits), on the other hand, are not founded
principally on legislative grace but on the legal principle which underlies all
quasi-contracts abhorring a persons unjust enrichment at the expense of
another. [Commissioner, supra citing Ramie Textiles, Inc. v. Hon. Mathay,

Sr., 178 Phil. 482 (1979); Puyat & Sons v. City of Manila, et al., 117 Phil.
985 (1963)]
The dynamic of erroneous payment of tax fits to a tee the prototypic
quasi-contract, solutio indebiti, which covers not only mistake in fact but also
mistake in law. (Commissioner, supra citing CIVIL CODE, Arts. 2142, 2154
and 2155)
The Government is not exempt from the application of solutio indebiti.
(Commissioner, supraciting Commissioner of Internal Revenue v. Firemans
Fund Insurance Co., G.R. No. L-30644, 9 March 1987, 148 SCRA 315, 324325; Ramie Textiles, Inc. v. Mathay, supra; Gonzales Puyat & Sons v. City of
Manila, supra)
Indeed, the taxpayer expects fair dealing from the Government, and
the latter has the duty to refund without any unreasonable delay what it has
erroneously collected. (Commissioner, supra citingCommissioner of Internal
Revenue v. Tokyo Shipping Co., supra at 338) If the State expects its
taxpayers to observe fairness and honesty in paying their taxes, it must hold
itself against the same standard in refunding excess (or erroneous)
payments of such taxes. It should not unjustly enrich itself at the expense
of taxpayers. [Commissioner, supra citing AB Leasing and Finance
Corporation v. Commissioner of Internal Revenue, 453 Phil. 297 in turn
citing BPI-Family Savings Bank, Inc. v. Court of Appeals, 330 SCRA 507,
510, 518 (2000)] And so, given its essence, a claim for tax refund
necessitates only preponderance of evidence for its approbation like in any
other ordinary civil case. (Commissioner, supra)
14.
Tax refunds premised upon a tax exemption strictly
construed, Tax exemption is a result of legislative grace. And he who
claims an exemption from the burden of taxation must justify his claim by
showing that the legislature intended to exempt him by words too plain to be
mistaken. [Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008 citing Surigao
Consolidated Mining Co. Inc. v. Commissioner of Internal Revenue and Court
of Tax Appeals, 119 Phil. 33, 37 (1963)]
The rule is that tax exemptions must be strictly construed such that
the exemption will not be held to be conferred unless the terms under which
it is granted clearly and distinctly show that such was the intention.
[Commissioner, supra citing Phil. Acetylene Co. v. Commission of Internal
Revenue, et al., 127 Phil. 461, 472 (1967); Manila Electric Company v.
Vera, G.R. No. L-29987, 22 October 1975, 67 SCRA 351, 357-358; Surigao
Consolidated Mining Co. Inc. v. Commissioner of Internal Revenue, supra]
A claim for tax refund may be based on statutes granting tax
exemption or tax refund. In such case, the rule of strict interpretation
against the taxpayer is applicable as the claim for refund partakes of the
nature of an exemption, a legislative grace, which cannot be allowed unless

granted in the most explicit and categorical language. The taxpayer must
show that the legislature intended to exempt him from the tax by words too
plain to be mistaken. [Commissioner, supra with a note to see Surigao
Consolidated Mining Co. Inc. v. CIR, supra at 732-733; Philex Mining Corp.
v. Commissioner of Internal Revenue, 365 Phil. 572, 579 (1999); Davao
Gulf Lumber Corp. v. Commissioner of Internal Revenue, 354 Phil. 891-892
(1998); . Commissioner of Internal Revenue v. Tokyo Shipping Co., Ltd.,
314 Phil. 220, 228 (1995)]
15. Effect of a BIR reversal of a previous ruling interpreting a
law as exempting a taxpayer. A reversal of a BIR ruling favorable to a
taxpayer would not necessarily create a perpetual exemption in his favor, for
after all the government is never estopped from collecting taxes because of
mistakes or errors on the part of its agents. (Lincoln Philippine Life Insurance
Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)
16.
A tax amnesty is a general pardon or intentional
overlooking by the State of its authority to impose penalties on persons
otherwise guilty of evasion or violation of a revenue or a tax law.
It partakes of an absolute waiver by the government of its right to
collect what is due it and to give tax evaders who wish to relent a chance to
start with a clean slate. A tax amnesty, much like a tax exemption, is never
favored nor presumed in law. The grant of a tax amnesty, similar to a tax
exemption, must be construed strictly against the taxpayer and liberally in
favor of the taxing authority. (Philippine Banking Corporation, etc., v.
Commissioner of Internal Revenue, G. R. No. 170574, January 30, 2009)
17.
The purpose of tax amnesty is to
a. give tax evaders who wish to relent a chance to
start a
clean slate, and to
b. give the government a chance to collect
uncollected tax
from
tax evaders without having to go
through the tedious process
of a tax case. (Banas, Jr. v. Court
of Appeals, et al.,G.R. No. 102967,
February 10, 2000)
18.
Tax amnesty distinguished from tax exemption.
a.
Tax amnesty is an immunity from all criminal, civil and
administrative liabilities arising from nonpayment of taxes (People v.
Castaneda, G.R. No. L-46881, September 15, 1988) WHILE a tax exemption
is an immunity from civil liability only. It is an immunity or privilege, a
freedom from a charge or burden to which others are subjected. (Florer v.
Sheridan, 137 Ind. 28, 36 NE 365)

b.
Tax amnesty applies only to past tax periods, hence of
retroactive application (Castaneda,supra) WHILE tax exemption has
prospective application.
19.
Tax avoidance is the use of legally permissible means to
reduce the tax while tax evasion is the use of illegal means to escape the
payment of taxes.
20.
Tax evasion connotes the integration of three factors:
a.
The end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-payment of tax when it is
shown that a tax is due;
b.
an accompanying state of mind which is described as being
evil on bad faith, willful, or deliberate and not accidental; and
c.
a course of action or failure of action which is
unlawful. (Commissioner of Internal Revenue v. The Estate of Benigno P.
Toda, Jr., , etc., G. R. No. 147188, September 14, 2004)
21.
Tax avoidance distinguished from tax evasion.
a.
Tax avoidance is legal while tax evasion is illegal.
b.
The objective of tax avoidance in most instances is merely to
reduce the tax that is due while is tax evasion the object is to entirely escape
the payment of taxes.
c.
Tax evasion warrants the imposition of civil, administrative
and criminal penalties while tax avoidance does not.

22.
Tax sparing is a provision in some tax treaties which
provides that the state of residence allows as credit the amount that would
have been paid, as if no reduction has been made. (Vogel, Klaus on Double
Taxation Conventions, Third Edition, p.1255 cited in Segarra, Venice H, Tax
Treaties: Trick or treat ?, Philippine Daily Inquirer, December 6, 2002, p. C5)
There may be instances where a particular income is exempt from
taxation in order to encourage foreign investments which may lead to
economic development. If the tax credit method is used, there would be no
more tax to credit since there is no more tax to credit as a result of the tax
exemption. Consequently, when the tax method credit method is applied to
these items of income, such incentives are siphoned off since, in effect, the
tax benefits are cancelled out. (Ibid.) Thus, the need for the tax sparing
provision.
NATIONAL INTERNAL REVENUE CODE

ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL

REVENUE
1.
Rep. Act No. 1405, the Bank Deposits Secrecy Law
prohibits inquiry into bank deposits. As exceptions to Rep. Act No.
1405, the Commissioner of Internal Revenue is only authorized to
inquire into the bank deposits of:
a.
a decedent to determine his gross estate; and
b.
any taxpayer who has filed an application for compromise of
his tax liability by reason of financial incapacity to pay his tax liability. [Sec. 5
(F), NIRC of 1997]
c.
A taxpayer who authorizes the Commissioner to inquire into
his bank deposits.
2.
Purpose of the NIRC of 1997. Revenue generation
has undoubtedly been a major consideration in the passage of the
Tax Code. (Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G.
R.
Nos.
167274-75,
July
21,
2008)
3.
Purp
ose of shift from ad valorem system to specific tax system in
taxation of cigarettes. The shift from the ad valorem system to the
specific
tax
system
is likewise meant to promote fair competition among the
players in the industries concerned, to ensure an equitable distribution of
the tax burden and to simplify tax administration by classifying cigarettes,
among others, into high, medium and low-priced based on their net retail
price and accordingly graduating tax rates. (Commissioner of Internal
Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21,
2008)
TAX ON INCOME
1.
The Tax Code has included under the term
corporation partnerships, no matter how created or organized, jointstock companies, joint accounts (cuentas en participacion), associations, or
insurance companies. [Sec. 24 now Sec. 24 (B) of the NIRC of 1997]
2.
In Evangelista v. Collector, 102 Phil. 140, the Supreme
Court held citing Mertens that the term partnership includes a syndicate,
group, pool, joint venture or other unincorporated organization, through or by
means of which any business, financial operation, or venture is carried on.

3.
Certain business organizations do not fall under the
category of corporations under the Tax Code, and therefore not
subject to tax as corporations, include:
a.
General professional partnerships;
b.
Joint venture or consortium formed for the purpose
of undertaking construction projects engaging in petroleum, coal,
geothermal, and other energy operations, pursuant to an operation or
consortium
agreement
under
a
service
contract
with
the
st
Government. [1 sentence, Sec. 22 (B), BIRC of 1997]
4. Co-heirs who own inherited properties which produce
income should not automatically be considered as partners of an
unregistered corporation subject to income tax for the following
reasons:
a. The sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or common
right or interest in any property from which the returns are derived. There
must be an unmistakable intention to form a partnership or joint
venture. (Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436)
b.
There is no contribution or investment of additional capital to
increase or expand the inherited properties, merely continuing the dedication
of the property to the use to which it had been put by their forebears. (Ibid.)
c.
Persons who contribute property or funds to a common
enterprise and agree to share the gross returns of that enterprise in
proportion to their contribution, but who severally retain the title to their
respective contribution, are not thereby rendered partners. They have no
common stock capital, and no community of interest as principal proprietors
in the business itself from which the proceeds were derived. (Elements of the
Law of Partnership by Floyd R. Mechem, 2 nd Ed., Sec. 83, p. 74 cited
in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560)
5.
The common ownership of property does not itself create
a partnership between the owners, though they may use it for purpose of
making gains, and they may, without becoming partners, are among
themselves as to the management and use of such property and the
application of the proceeds therefrom.. (Spurlock v,. Wilson, 142 S.W. 363,
160 No. App. 14, cited in Pascual v. Commissioner of Internal Revenue, 166
SCRA 560)
6.
The income from the rental of the house, bought from
the earnings of co-owned properties, shall be treated as the income
of an unregistered partnership to be taxable as a corporation because of
the clear intention of the brothers to join together in a venture for making
money out of rentals.

7.
Income is gain derived and severed from capital, from labor
or from both combined. For example, to tax a stock dividend would be to tax
a capital increase rather than the income. (Commissioner of Internal Revenue
v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)
8.
The term taxable income means the pertinent items of
gross income specified in the Tax Code, less the deductions and/or personal
and additional exemptions, if any, authorized for such types of income by the
Tax Code or other special laws. (Sec. 31, NIRC of 1997)
9.
The cancellation and forgiveness of indebtedness may
amount to (a) payment of income; (b) gift; or to a (c) capital transaction
depending upon the circumstances.
10.
If an individual performs services for a creditor who,
in consideration thereof, cancels the debt, it is income to the extent of
the amount realized by the debtor as compensation for his services.
11.
An insolvent debtor does not realize taxable income
from the cancellation or forgiveness. (Commissioner v. Simmons Gin
Co., 43 Fd 327 CCA 10th)
12.
The insolvent debtor realizes income resulting from
the cancellation or forgiveness of indebtedness when he becomes
solvent. (Lakeland Grocery Co., v. Commissioner 36 BTA (F) 289)
13.
If a creditor merely desires to benefit a debtor and
without any consideration therefor cancels the amount of the debt it
is a gift from the creditor to the debtor and need not be included in
the latters income.
14.
If a corporation to which a stockholder is indebted
forgives the debt, the transaction has the effect of payment of a
dividend. (Sec. 50, Rev. Regs. No. 2)
15.
Members of cooperatives not subject to tax on the
interest earned from their deposits with the cooperative. No less than our
Constitution guarantees the protection of cooperatives. Section 15, Article XII of
the Constitution considers cooperatives as instruments for social justice and
economic development. At the same time, Section 10 of Article II of the
Constitution declares that it is a policy of the State to promote social justice in all
phases of national development. In relation thereto, Section 2 of Article XIII of
the Constitution states that the promotion of social justice shall include the

commitment to create economic opportunities based on freedom of initiative and

self-reliance. Bearing in mind the foregoing provisions, we find that an
interpretation exempting the members of cooperatives from the imposition of the
final tax under Section 24(B)(1) of the NIRC (tax on interest earned by
deposits) is more in keeping with the letter and spirit of our
Constitution. (Dumaguete Cathedral Credit Coopertive [DCCC)] etc., v.
Commissioner of Internal Revenue, G. R. No. 182722, January 22, 2010)
In closing, cooperatives, including their members, deserve a
preferential tax treatment because of the vital role they play in the attainment of
economic development and social justice. Thus, although taxes are the lifeblood
of the government, the States power to tax must give way to foster the creation
and growth of cooperatives. To borrow the words of Justice Isagani A. Cruz: The
power of taxation, while indispensable, is not absolute and may be subordinated
to the demands of social justice. (Ibid., citing Commissioner of Internal
Revenue v. American Express International, Inc. (Philippine Branch), 500
Phil. 586 (2005).
16.
The Global system of income taxation is a system
employed where the tax system views indifferently the tax base and generally
treats in common all categories of taxable income of the individual. (Tan v.
del Rosario, Jr., 237 SCRA 324, 331)
17. The Schedular system of income taxation is a system
employed where the income tax treatment varies and is made to depend on
the kind or category of taxable income of the taxpayer. (Tan v. del Rosario,
Jr., 237 SCRA 324, 331)
18. Under the National Internal Revenue Code the global
system is applicable to taxable corporations and the schedular to
individuals.
19.
Compensation income is considered as having been
earned in the place where the service was rendered and not considered
as sourced from the place of origin of the money.
20.
Payment for services, other than compensation
income, is considered as having been earned at the place where the
activity or service was performed.
21.
A non-resident alien, who has stayed in the
Philippines for an aggregate period of more than 180 days during any
calendar year, shall be considered as a non-resident alien doing
business in the Philippines. Consequently, he shall be subject to income

tax on his income derived from sources from within the Philippines. [Sec. 25
(A) (1), NIRC]
He is allowed to avail of the itemized deductions including the personal
and additional exemptions subject to the rule on reciprocity.
22. What are considered as de minimis benefits not subject
to withholding tax on compensation income of both managerial and
rank and file employees ?
SUGGESTED ANSWER:
a.
Monetized unused vacation leave credits of employees not
exceeding ten (10) days during the year;
b.
Medical cash allowance to dependents of employees not
exceeding P750.00 per employee per semester or P125 per month;
c.
Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per
month amounting to not more than P1,000.00;
d. Uniforms and clothing allowance not exceeding P3,000.00 per
annum;
e. Actual yearly medical benefits not exceeding P10,000.00 per
annum;
f.
Laundry allowance not exceeding P300 per month;
g.
Employees achievement awards, e.g. for length of service or
safety achievement, which must be in the form of a tangible persona property
other than cash or gift certificate, with an annual monetary value not
exceeding P10,000.00 received by an employee under an established written
plan which does not discriminate in favor of highly paid employees;
h.
Gifts given during Christmas and major anniversary
celebrations not exceeding P5,000 per employee per annum;
i.
Flowers, fruits, books, or similar items given to employees
under special circumstances, e.g. on account of illness, marriage, birth of a
baby, etc.; and
j.
Daily meal allowance for overtime work not exceeding
twenty five percent (25%) of the basic minimum wage.
The amount of de minimis benefits conforming to the ceiling herein
prescribed shall not be considered in determining the P30,000 ceiling of
other benefits provided under Section 32 (B)(7)(e) of the Code. However, if
the employer pays more than the ceiling prescribed by these regulations, the
excess shall be taxable to the employee receiving the benefits only if such
excess is beyond the P30,000.00 ceiling, provided, further, that any amount
given by the employer as benefits to its employees, whether classified asde
minimis benefits or fringe benefits, shall constitute as deductible expense
upon such employer. [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as amended by
Rev. Regs. No. 8-2000]

23.
Income subject to final tax refers to an income
collected through the withholding tax system. The payor of the income
withholds the tax and remits it to the government as a final settlement of the
income tax as a final settlement of the income tax due on said income. The
recipient is no longer required to include the income subjected to a final tax
as part of his gross income in his income tax return.
24. Distinguish exclusions from deductions.
SUGGESTED ANSWER:
a.
Exclusions from gross income refer to a flow of wealth to the
taxpayer which are not treated as part of gross income for purposes of
computing the taxpayers taxable income, due to the following
reasons: (1) It is exempted by the fundamental law; (2) It is exempted by
statute; and (3) It does not come within the definition of income (Sec. 61,
Rev. Regs. No. 2) WHILE deductions are the amounts which the law allows to
be subtracted from gross income in order to arrive at net income.
b.
Exclusions pertain to the computation of gross income
WHILE deductions pertain to the computation of net income.
c.
Exclusions are something received or earned by the taxpayer
which do not form part of gross income WHILE deductions are something
spent or paid in earning gross income.
An example of an exclusion from gross income are life insurance
proceeds, and an example of a deduction are losses.
25. What are excluded from gross income ?
SUGGESTED ANSWER:
a.
Proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured whether in a single sum or
otherwise.
b.
Amounts 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 maturity of the term mentioned in the contract, or upon
surrender of the contract.
c.
Value of property acquired by gift, bequest, devise, or
descent.
d. Amounts received, through accident or health insurance or
Workmens Compensation Acts as compensation for personal injuries or
sickness, plus the amounts of any damages received on whether by suit or
agreement on account of such injuries or sickness.
e.
Income of any kind to the extent required by any treaty
obligation binding upon the Government of the Philippines.
f.
Retirement benefits received under Republic Act No.
7641. Retirement received from reasonable private benefit plan after
compliance with certain conditions. Amounts received for beyond control

separation. Foreign social security, retirement

etc. USVA benefits, SSS benefits and GSIS benefits.

gratuities,

pensions,

26.
What are the conditions for excluding retirement
benefits from gross income, hence tax-exempt ?
SUGGESTED ANSWER:
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 the employers reasonable private
benefit plan approved by the BIR.
b.
Retiring official or employee
1)
In the service of the same employer for at least ten (10) years;
2)
Not less than fifty (50) years of age at time of retirement;
3)
Availed of the benefit of exclusion only once. [Sec. 32 (B) (6) (a),
NIRC of 1997] The retiring official or employee should not have previously
availed of the privilege under the retirement plan of the same or another
employer. [1st par., Sec. 2.78 (B) (1), Rev. Regs. No. 2-98]
27. What kind of separation (retirement) pay is excluded
from gross income, hence tax-exempt ?
SUGGESTED ANSWER:
a.
Any amount received by an official, employee or by his
heirs,
b.
From the employer
c.
As a consequence of separation of such official or employee
from the service of the employer because of
1)
Death, sickness or other physical disability; or
2)
For any cause beyond the control of said official or employee
[Sec. 32 (B) (6) (b), NIRC of 1997], such as retrenchment, redundancy and
cessation of business. [1st par., Sec. 2.78 (B), (1) (b), Rev. Regs. No. 2-98]
28.
What are the Itemized deductions from gross income
and who may avail of them ?
a. Ordinary
and
necessary trade,
business
or
professional expenses.
b.
The amount of interest paid or incurred within a taxable year
on indebtedness in connection with the taxpayers profession, trade or
business.
Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these
expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross
incomes from within may also deduct this expense.

Nonresident alien individuals not engaged in trade or business in the

Philippines are not allowed to deduct this expense.
c. Taxes paid or incurred within the taxable year in connection with
the taxpayers profession.
Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these
expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross
incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense.
d. Ordinary losses, losses from casualty, theft or embezzlement;
and net operating losses.
Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these
expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross
incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense.
e.
Bad debts due to the taxpayer, actually ascertained to be
worthless and charged off within the taxable year, connected with profession,
trade or business, not sustained between related parties.
Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these
expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross
incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense.
f.
Depreciation or a reasonable allowance for the exhaustion,
wear and tear (including reasonable allowance for obsolescence) of property
used in trade or business.
Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these
expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross
incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense.

g.
Depletion or deduction arising from the exhaustion of a nonreplaceable asset, usually a natural resource.
Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these
expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross
incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense.
h. Charitable and other contributions. Resident citizens, resident
alien individuals and nonresident alien individuals who are engaged in trade
and business, on their gross incomes other from compensation income are
allowed to deduct these expenses. Domestic corporations, estates and trusts
may also deduct this expense. Nonresident citizens and foreign corporations
on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense.
i. Research and development expenditures treated as deferred
expenses paid or incurred by the taxpayer in connection with his trade,
business or profession, not deducted as expenses and chargeable to capital
account but not chargeable to property of a character which is subject to
depreciation or depletion.
Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these
expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross
incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense.
j. Contributions to pension trusts. Resident citizens, resident alien
individuals and nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation income are
allowed to deduct these expenses. Domestic corporations, estates and trusts
may also deduct this expense. Nonresident citizens and foreign corporations
on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense.
k. Insurance premiums for health and hospitalization. Resident
citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from
compensation income are allowed to deduct these expenses. Nonresident
citizens and nonresident alien individual engaged in trade or business in the

Philippine on their gross incomes from within may also deduct these
premiums.
Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct these premiums.
l. Personal and additional exemptions. Resident citizens, and
resident alien on their gross incomes and from compensation income are
allowed to deduct these premiums. Nonresident citizens on their gross
incomes from within may also deduct this expense. Nonresident alien
individuals engaged in trade or business in the Philippines are allowed to
deduct these exemptions under reciprocity.
Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense.
29. Distinguish ordinary expenses from capital expenditures.
SUGGESTED ANSWER: Ordinary expenses are those which are
common to incur in the trade or business of the taxpayer WHILE capital
expenditures are those incurred to improve assets and benefits for more than
one taxable year. Ordinary expenses are usually incurred during a taxable
year and benefits such taxable year. Necessary expenses are those which are
appropriate or helpful to the business.
30. What are the requisites for the deductibility of business
expenses ?
SUGGESTED ANSWER: The following are the requisites for
deductibility of business expenses:
a.
Compliance with the business test:
1)
Must be ordinary and necessary;
2)
Must be paid or incurred within the taxable
year;
3)
Must be paid or incurred in carrying on a trade or business.
4)
Must
not
be
bribes,
kickbacks
or
other
illegal
expenditures
b. Compliance with the substantiation test. Proof by evidence or
records of the deductions allowed by law including compliance with the
business test.
31. What are the requisites for the deductibility of ordinary
and necessary trade, business, or professional expenses, like
expenses paid for legal and auditing services ?
SUGGESTED ANSWER:
a.
the expense must be ordinary and necessary;
b.
it must have been paid or incurred during the taxable year
dependent upon the method of accounting upon the basis of which the net
income is computed.

c.
it must be supported by receipts, records or other pertinent
papers. (Commissioner
of
Internal
Revenue
v,
Isabela
cultural
Corporation, G. R. No. 172231, February 12, 2007)
32.
TMG Corporation is issuing the accrual method of
accounting. In 2005 XYZ Law Firm and ABC Auditing Firm rendered
various services which were billed by these firms only during the
following year 2006. Since the bills for legal and auditing services
were received only in 2006 and paid in the same year, TMG deducted
the same from its 2006 gross income. The BIR disallowed the
deduction ?
Who is correct, TMG or BIR ? Explain.
SUGGESTED ANSWER: The BIR is correct. TMG should have deducted
the professional and legal fees in the year they were incurred in 2005 and
not in 2006 because at the time the services were rendered in 2005, there
was already an obligation to pay them. (Commissioner of Internal Revenue
v, Isabela Cultural Corporation, G. R. No. 172231, February 12, 2007)
NOTES AND COMMENTS:
a.
Accounting methods for tax purposes comprise a set of
rules for determining when and how to report income and
deductions. (Commissioner of Internal Revenue v, Isabela cultural
Corporation, G. R. No. 172231, February 12, 2007)
The two (2) principal accounting methods for recognition of income are
the (a) accrual method; and the (b) cash method.
b.
Recognition of income and expenses under the accrual
method of accounting. Amounts of income accrue where the right to
receive them becomes fixed, where there is created an enforceable
liability. Liabilities, are incurred when fixed and determinable in nature
without regard to indeterminacy merely of time of payment.. (Commissioner
of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231,
February 12, 2007)
The accrual of income and expense is permitted when the all-events
test has been met. (Ibid.)
c.
All-events test. This test requires:
1)
fixing of a right to income or liability to pay; and
2)
the availability of the reasonable accurate determination of such
income or liability.
The test does not demand that the amount of such income or liability
be known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy.
The all-events test is satisfied where computation remains uncertain; if
its basis is unchangeable, the test is satisfied where a computation may be
unknown, but is not as much as unknowable, within the taxable year. The
amount of liability does not have to be determined exactly,; it must be

determined with reasonable accuracy implies something less than an exact

or completely accurate amount.
The propriety of an accrual must be judged by the fact that a taxpayer
knew, or could reasonably be expected to have known, at the closing of its
books for the taxable year. Accrual method of accounting presents largely a
question of fact; such that the taxpayer bears the burden of proof of
establishing the accrual of an item of income or deduction. (Commissioner of
Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February
12, 2007)
d.
Under the cash method income is to be construed as income
for tax purposes only upon actual receipt of the cash payment. It is also
referred to as the cash receipts and disbursements method because both
the receipt and disbursements are considered. Thus, income is recognized
only upon actual receipt of the cash payment but no deductions are allowed
from the cash income unless actually disbursed through an actual payment in
cash.
33. The fringe benefits tax is a final withholding tax imposed on
the grossed-up monetary value of fringe benefits furnished, granted or paid
by the employer to the employee, except rank and file employees. [1st par.,
Sec. 2.33 (A), Rev. Regs. No. 3-98]
34. What is meant by fringe benefit for purposes of
taxation ?
SUGGESTED ANSWER: For purposes of taxation, 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), such
as but not limited to:
a.
Housing;
b.
Expense account;
c.
Vehicle of any kind;
d.
Household personnel, such as maid, driver and others;
e.
Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted;
f.
Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or other similar
organizations;
g.
Expenses for foreign travel;
h.
Holiday and vacation expenses;
i.
Educational assistance to the employee or his dependents;
and
j.
Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law allows. [Sec. 33 (B),
NIRC of 1997; 1st par., Sec. 2.33 (B), Rev. Regs. No. 3-98]

35.
Fringe benefits that are not subject to the fringe
benefits tax:
a.
When the fringe benefit is required by the nature of, or
necessary to the trade, business or profession of the employer; or
b.
When the fringe benefit is for the convenience or advantage
of the employer. [Sec. 32(A), NIRC of 1997; 1st par., Sec. 2.33 (A), Rev.
Regs. No. 3-98]
c.
Fringe benefits which are authorized and exempted from
income tax under the Tax Code or under any special law;
d.
Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization benefit plans;
e.
Benefits given to the rank and file employees, whether
granted under a collective bargaining agreement or not; and
f.
De minimis benefits as defined in the rules and regulations
to be promulgated by the Secretary of Finance upon recommendation of the
Commissioner of Internal Revenue. [1st par., Sec. 32 (C), NIRC of 1997; Sec.
2.33 (C), Rev. Regs. No. 3-98]
36. De minimis benefits are facilities and privileges (such as
entertainment, medical services, or so-called courtesy discounts on
purchases), furnished or offered by an employer to his employees. They are
not considered as compensation subject to income tax and consequently to
withholding tax, if such facilities are offered or furnished by the employer
merely as a means of promoting the health, goodwill, contentment, or
efficiency of his employees. [Sec. 2.78,1 (A) (3), Rev. Regs. 2-98 as
amended by Rev. Regs. No. 8-2000]
37. Preferred shares are considered capital regardless of the
conditions under which such shares are issued and dividends or
interests paid thereon are not allowed as deductions from the gross
income of corporations. (Revenue Memorandum Circular No. 17-71)
38. Bad debts are those which result from the worthlessness or
uncollectibility, in whole or in part, of amounts due the taxpayer by others,
arising from money lent or from uncollectible amounts of income from goods
sold or services rendered. (Sec. 2.a, Rev. Regs. 5-99)
39. Who are related parties ?
SUGGESTED ANSWER: The following are related parties:
a.
Members of the same family. The family of an individual
shall include only his brothers and sisters (whether by the whole or halfblood), spouse, ancestors, and lineal descendants;

b.
An individual and a corporation more than fifty percent
(50%) in value of the outstanding stock of which is owned, directly or
indirectly, by or for such individual;
c.
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;
d.
A grantor and a fiduciary of any trust; or
e.
The fiduciary of a trust and the fiduciary of another trust if
the same person is a grantor with respect to each trust; or
f.
A fiduciary of a trust and a beneficiary of such. [Sec. 36
(B), NIRC of 1997]
40. What are the requisites for valid deduction of bad debts
from gross income ?
SUGGESTED ANSWER:
a. There must be an existing indebtedness due to the taxpayer which
must be valid and legally demandable;
b. The same must be connected with the taxpayers trade, business or
practice of profession;
c. The same must not be sustained in a transaction entered into
between related parties;
d. The same must be actually charged off the books of accounts of the
taxpayer as of the end of the taxable year; and
e. The debt must be actually ascertained to be worthless and
uncollectible during the taxable year;
f. The debts are uncollectible despite diligent effort exerted by the
taxpayer. [Sec. 34 (E) (1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-99
reiterated in Rev. Regs. No. 25-2002; Philippine Refining Corporation v. Court
of Appeals, et al., 256 SCRA 667]
g. Must have been reported as receivables in the income tax return of
the current or prior years. (Sec. 103, Rev. Regs. No. 2)
:
41. What is the tax benefit rule ?
SUGGESTED ANSWER: The tax benefit rule posits that the recovery
of bad debts previously allowed as deduction in the preceding year or years
shall be included as part of the taxpayers gross income in the year of such
recovery to the extent of the income tax benefit of said deduction.
NOTES AND COMMENTS:
a.
If in the year the taxpayer claimed deduction of bad debts
written-off, he realized a reduction of the income tax due from him on account
of the said deduction, his subsequent recovery thereof from his debtor shall
be treated as a receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)
b.
If the said taxpayer did not benefit from the deduction of the
said bad debt written-off because it did not result to any reduction of his

income tax in the year of such deduction (i.e. where the result of his business
operation was a net loss even without deduction of the bad debts written-off),
then his subsequent recovery thereof shall be treated as a mere recovery or a
return of capital, hence, not treated as receipt of realized taxable
income. (Sec. 4, Rev. Regs. 5-99)
42.
Depreciation is the gradual diminution in the useful value
of tangible property resulting from ordinary wear and tear and from normal
obsolescence. The term is also applied to amortization of the value of
intangible assets the use of which in the trade or business is definitely limited
in duration.
43.
The methods of depreciation are the following:
a.
Straight line method;
b.
Declining balance method;
c.
Sum of years digits method; and
d.
Any other method prescribed by the Secretary of Finance
upon the recommendation of the Commissioner of Internal Revenue:
1)
Apportionment to units of production;
2)
Hours of productive use;
3)
Revaluation method; and
4)
Sinking fund method.
44.
What are personal and additional exemptions ?
SUGGESTED ANSWER: These are the theoretical persona, living and
family expenses of an individual allowed to be deducted from the gross or net
income of an individual taxpayer.
These are arbitrary amounts which have been calculated by our
lawmakers to be roughly equivalent to the minimum of subsistence, taking
into account the personal status and additional qualified dependents of the
taxpayer. They are fixed amounts in the sense that the amounts have been
predetermined by our lawmakers and until our lawmakers make new
adjustments on these personal exemptions, the amounts allowed to be
deducted by a taxpayer are fixed as predetermined by Congress. [Pansacola
v. Commissioner of Internal Revenue, G. R. No. 159991, November 16, 2006
citing Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil. 414, 418
(1918)]
45.

What is the amount allowed as basic personal exemption

?
SUGGESTED ANSWER: There shall be allowed a basic personal
exemption amounting to Fifty thousand pesos (P50,000) for each individual
taxpayer.

In the case of married individuals where only one of the spouse is

deriving gross income, only such spouse shall be allowed the personal
exemption. [Sec. 35 (A), NIRC of 1997 as amended by Rep. Act No. 9504;
Sec. 2.79 (I) (1) (a), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 102008]
NOTES AND COMMENTS: It is clear from Rep. Act No. 9504 that each
of the spouses may claim the P50,000.00. Thus, the total familial basic
personal exemption for spouses is P100,000.00.
Furthermore, the distinctions between the concepts of single, married
and head of the family for purpose of availing of the basic personal
exemption has already been eliminated by Rep. Act No. 9504.
45. What are the amounts of additional exemptions ?
SUGGESTED ANSWER: An individual,
a.
whether single or married,
b.
shall be allowed an additional exemption of Twenty-Five
Thousand Pesos (P25,000.00)
c.
for each qualified dependent child,
d.
provided that the total number of dependents for which
additional exemptions may be claimed
1)
shall not exceed four (4) dependents. [1st par., Sec. 2.79 (I) (1)
(b), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008,
arrangement and numbering supplied; Sec. 35 (B), NIRC of 1997 as
amended by Rep. Act No. 9504]
NOTES AND COMMENTS:
a.
It is clear that under the amendment, single individuals
may now claim for the additional exemptions. Furthermore, the concept of
head of a family does not find application anymore.
b.
A dependent means
a.
a legitimate, illegitimate or legally adopted child
b.
chiefly dependent upon and living with the taxpayer
c.
if such dependent is
1)
not more than twenty-one (21) years of age,
2)
unmarried and
3)
not gainfully employed or
d.
if such dependent,
1)
regardless of age
2)
is incapable of self-support
3)
because of mental or physical defect. [2nd par., Sec. 2.79 (I)
(1) (b), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008,
arrangement and numbering supplied; Sec. 35 (b), NIRC of 1997, as
amended by Rep. Act No. 9504]
c.
It is to be noted that under the NIRC of 1997, as amended
by Rep. Act No. 9504, only qualified dependent children are considered for

additional exemptions. Grandparents, parents, as well, as brothers or

sisters, and other collateral relatives are not qualified dependents to be
claimed as additional exemptions.
However, if they are senior citizens they may qualify as additional
exemptions under the Senior Citizens Law but not under the NIRC of 1997,
as amended by Rep. Act No. 9504.
Senior citizen shall be treated as dependents provided for in the
National Internal Revenue Code, as amended, and as such, individual
taxpayers caring for them, be they relatives or not shall be accorded the
privileges granted by the Code insofar as having dependents are concerned.
[last par. Sec. 5 (a), Rep. Act No. 7432, as amended by Rep. Act 9257, The
Expanded Senior Citizens Act of 2003]
47. Capital assets shall refer to all real properties held by a
taxpayer, whether or not connected with his trade or business, and which are
not included among the real properties considered as ordinary assets. (Sec.
2.a, Rev. Regs. No. 7-2003)
The term capital assets means property held by the taxpayer
(whether or not connected with his trade or business), BUT DOES NOT
INCLUDE:
a. Stock in trade of the taxpayer, or
b. 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
c. Property held by the taxpayer primarily for sale to customers in
the ordinary course of his trade or business, or
d. Property used in the trade or business, of a character which is subject to
the allowance for depreciation; or real property used in the trade or business
of the taxpayer. [Sec. 39 (A) (1), NIRC of 1997, capitalized words, numbering
and arrangement supplied; Sec. 2.a, Rev. Regs. No. 7-2003]
48.
Examples of capital assets:
a.
Stock and securities held by taxpayers other than dealers in
securities;
b.
Jewelry not used for trade and business;
c.
Residential houses and lands owned and used as such;
d.
Automobiles not used in trade and business;
e.
Paintings, sculptures, stamp collections, objects of arts
which are not used in trade or business;
f.
Inherited large tracts of agricultural land which were subdivided
pursuant to the government mandate under land reform, then sold to
tenants. (Roxas v. Court of Tax Appeals, etc. L-25043, April 26, 1968)
g.
Real property used by an exempt corporation in its exempt
operations, such as a corporation included in the enumeration of Section 30 of
the Code, shall not be considered used for business purposes, and therefore

considered as capital asset. (last sentence, 3rd par., Sec. 3.b, Rev. Regs. No.
7-2003)
h.
Real property, whether single detached, townhouse, or
condominium unit, not used in trade or business as evidenced by a
certification from the Barangay Chairman or from the head of administration,
in case of condominium unit, townhouse or apartment, and as validated from
the existing available records of the Bureau of Internal Revenue, owned by an
individual engaged in business, shall be treated as capital asset. (last par.,
Sec. 3.b., Rev. Regs. No. 7-2003)
49. Ordinary assets shall refer to all real properties
specifically excluded from the definition of capital assets, namely:
a. Stock in trade of a taxpayer or other real property of a kind which
would properly be included in the inventory of a taxpayer if on hand at the
close of the taxable year; or
b. Real property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business; or
c. Real property used in trade or business (i.e. buildings and/or
improvements), of a character which is subject to the allowance for
depreciation; or
d. Real property used in trade or business of the taxpayer. (Sec. 2. b,
Rev. Regs. No. 7-2003)
50.. Examples of ordinary assets hence not capital assets:
a.
The machinery and equipment of a manufacturing concern
subject to depreciation;
b. The tractors, trailers and trucks of a hauling company;
c. The condominium building owned by a realty company the units of
which are for rent or for sale;
d.
The wood, paint, varnish, nails, glue, etc. which are the raw
materials of a furniture factory;
e.
Inherited parcels of land of substantial areas located in the
heart of Metro Manila, which were subdivided into smaller lots then sold on
installment basis after introducing comparatively valuable improvements not
for the purpose of simply liquidating the estate but to make them more
saleable ; the employment of an attorney-in-fact for the purpose of
developing, managing, administering and selling the lots; sales made with
frequency and continuity; annual sales income from the sales was
considerable; and the heir was not a stranger to the real estate
business. (Tuazon, Jr. v. Lingad, 58 SCRA 170)
f. Inherited agricultural property improved by introduction of good
roads, concrete gutters, drainage and lighting systems converts the property
to an ordinary asset. The property forms part of the stock in trade of the
owner, hence an ordinary asset. This is so, as the owner is now engaged in

the business of subdividing real estate. (Calasanz v. Commissioner of Internal

Revenue, 144 SCRA at p. 672)
51. Tax treatment of real properties that have been
transferred. Real properties classified as capital or ordinary asset in the
hands of the seller/transferor may change their character in the hands of the
buyer/transferee. The classification of such property in the hands of the
buyer/transferee shall be determined in accordance with the following rules:
a. Real property transferred through succession or donation to the heir
or donee who is not engaged in the real estate business with respect to the
real property inherited or donated, and who does not subsequently use such
property in trade or business, shall be considered as a capital asset in the
hands of the heir or donee.
b. Real property received as dividend by stockholders who are not
engaged in the real estate business and who not subsequently use such real
property in trade or business shall be treated as capital assets in the hands of
the recipient even if the corporation which declared the real property dividend
is engaged in real estate business.
c. The real property received in an exchange shall be treated as
ordinary asset in the hands of the transferee in the case of a tax-free
exchange by taxpayer not engaged in real estate business to a taxpayer who
is engaged in real estate business, or to a taxpayer who, even if not engaged
in real estate business, will use in business the property received in the
exchange. (Sec. 3.f., Rev. Regs. No. 7-2003)
52. The tax is 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. [Sec.
24 (D) (1`), NIRC of 1997] Revenue Regulations No. 7-2003 has defined real
property as having the same meaning attributed to that term under Article
415 of Republic Act No. 386, otherwise known as the Civil Code of the
Philippines. (Sec. 2.c, Rev. Regs. No. 7-2003)
53. Transactions covered by the presumed capital gains tax
on real property:
a.
sale,
b.
exchange,
c.
or other disposition, including pacto de retro sales and other
forms of conditional sales. [Sec. 24 (D) (1), NIRC of 1997, numbering and
arrangement supplied]
d.
Sale, exchange, or other disposition includes taking by the
government through condemnation proceedings. (Gutierrez v. Court of Tax
Appeals, et al., 101 Phil. 713; Gonzales v. Court of Tax Appeals, et al., 121
Phil. 861)

54.
In case the mortgagor exercises his right of
redemption within one (1) year from the issuance of the certificate of sale,
in a foreclosure of mortgage sale of real property, no capital gains tax shall be
imposed because no capital gains has been derived by the mortgagor and no
sale or transfer of real property was realized. [Sec. 3 (1), Rev. Regs. No. 499]
55. In case of non-redemption of the property sold upon a
foreclosure of mortgage sale, the presumed capital gains tax shall be
imposed, based on the bid price of the highest bidder but only upon the
expiration of the one year period of redemption provided for under Sec. 6 of
Act No. 3135, as amended by Act No. 4118, and shall be paid within thirty
(30) days from the expiration of the said one-year redemption period. [Sec.
3 (2), Rev. Regs. No. 4-99]
56. The basis for the final presumed capital gains tax of six
per cent (6%) is whichever is the higher of the
a. gross selling price, or
b. the current fair market value as determined below:
1) the fair market value or real properties located in each zone or
area as determined by the Commissioner of Internal Revenue after
consultation with competent appraisers both from the private and public
sectors; or
2) the fair market value as shown in the schedule of values of the
Provincial and City Assessors. [Sec. 24 (D) (1) in relation to Sec. 6 (E), both
of the NIRC of 1997]
It does not matter whether there was an actual gain or loss because
the tax is a presumed capital gains tax. It is the transaction that is taxed
not the gain.
57. Holding period not applied to the taxation of the presumed
capital gains derived from the sale of real property considered as capital
assets.
58. The tax liability, of individual taxpayers (not corporate),
if any, on gains from sales or other dispositions of real property,
classified as capital assets, to the government or any of its political
subdivisions or agencies or to government owned or controlled corporations
shall be determined, at the option of the taxpayer, by including the proceeds
as part of gross income to be subjected to the allowable deductions and/or
personal and additional exemptions, then to the schedular tax [Sec. 24 (D)
(1), in relation to Sec. 24 (A) (1), both of the NIRC of 1997] or the final

presumed capital gains tax of six percent (6%). [Sec. 24 (D) (1) in relation
to Sec. 6 (E), both of the NIRC of 1997]
59. The seller of the real property, classified as a capital asset,
pays the presumed capital gains tax whether:
a. an individual [Sec. 24 (D) (1), NIRC of 1997];
1) Citizen, whether resident or not [Ibid.];
2) Resident alien [Ibid.];
3) Nonresident alien engaged in trade or business in the Philippines
[Sec. 25 (A) (3) in relation to Sec. 24 (D) (1), both of the NIRC of 1997];
4) Nonresident alien not engaged in trade or business in the
Philippines [Sec. 25 (B) in relation to Sec. 24 (D) (1), both of the NIRC of
1997];
b. an estate or trust (Ibid.);
c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997]
60. Excepted from the payment of the presumed capital
gains tax are those presumed to have been realized from the
disposition by natural persons of their principal place of residence
a.
the proceeds of which is fully utilized in acquiring or
constructing a new principal residence;
b.
within eighteen (18) calendar months from the date of sale
or disposition
c.
the BIR 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; and
d.
the said tax exemption can only be availed of once every ten
(10) years. [Sec. 24 (D) (2), NIRC of 1997]
61.
MBC was incorporated in 1961 and engaged in
commercial banking operations since 1987. On May 22, 1987, it
ceased operations that year by reason of insolvency and its assets
and liabilities were placed under the charge of a governmentappointed receiver. On June 23, 1999, the BSP authorized MBC to
operate as a thrift bank.
In 2000, It filed its tax return for the year 1999 paying the
amount of P33 million computed in accordance with the minimum
corporate income tax (MCIT). It sought the BIRs ruling on whether
it is entitled to the four (4) year grace period for paying on the basis
of MCIT reckoned from 1999. BIR then ruled that cessation of
business activities as a result of being placed under involuntary
receivership may be an economic reason for suspending the
imposition of the MCIT.

As a result of the ruling MBC filed an application for refund of

the P33 million. Due to the BIRs inaction, MBC filed a petition for
review with the CTA.
The CTA denied the petition on the ground that MBC is not a
newly organized corporation. In a volte facie the BIR now maintains
that MBC should pay the MCIT beginning January 1, 1998 as it did not
close its business operations in 1987 but merely suspended the
same. Even if placed under receivership, the corporate existence was
never affected. Thus, it falls under the category of an existing
corporation recommencing its banking operations.
Should the refund be granted ?
SUGGESTED ANSWER: Yes. The MCIT shall be imposed beginning in
the fourth taxable year immediately following the year in which the
corporation commenced its business operations. [Sec. 27 (E) (1), NIRC of
1997]
The date of commencement of operations of a thrift bank is the date it
was registered with the SEC or the date when the Certificate of Authority to
Operate was issued to it by the Monetary Board, whichever comes later. (Sec.
6, Rev. Regs. No. 4-95)
Clearly then. MBC is entitled to the grace period of four years from
June 23, 1999 when it was authorized by the BSP to operate as a thrift bank
before the MCIT should be applied to it. (Manila Banking Corporation v.
Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006)
NOTES AND COMMENTS:
a.
The MCIT and when should be imposed and the four
(4) year grace period. 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 corporate income tax
is greater than the tax computed under Subsection (A) of this section for the
taxable year. [Sec. 27 (E) (1), NIRC of 1997]
b.
Period when a corporation becomes subject to the
MCIT. (5) Specific rules for determining the period when a corporation
becomes subject to the MCIT (minimum corporate income tax) For purposes of the MCIT, the taxable year in which business
operations commenced shall be the year in which the domestic corporation
registered with the Bureau of Internal Revenue (BIR).
Firms which were registered with BIR in 1994 and earlier years shall be
covered by the MCIT beginning January 1, 1998. x x x (Rev. Regs. No. 9-98)
Manila Banking Corporation v. Commissioner of Internal Revenue, G.
R. No. 168118, August 26, 2006 did not apply Rev. Regs. No. 9-98 because
Rev. Regs. No. 4-95 specifically refers to thrift banks.)

c.
Purpose of the four (4) year grace period. The intent of
Congress relative to the MCIT is to grant a four (43) year suspension of tax
payment to newly organized corporations. Corporations still starting their
business operations have to stabilize their venture in order to obtain a
stronghold in the industry. It does not come as a surprise then when many
companies reported losses in their initial years of operations.
Thus, in order to allow new corporations to grow and develop at the
initial stages of their operations, the lawmaking body saw the need to provide
a grace period of four years from their registration before they pay their
minimum corporate income tax. (Manila Banking Corporation v.
Commissioner of Internal Revenue,G. R. No. 168118, August 26, 2006)
ESTATE TAXES
1. In determining the gross estate of a decedent, are
his properties abroad to be included, and more particularly, what
constitutes gross estate ?
SUGGESTED ANSWER: Yes, if the decedent is a Filipino citizen or a
resident alien.
The gross estate of a Filipino citizen or a resident alien comprises all
his real property, wherever situated; all his personal property, tangible,
intangible or mixed, wherever situated, to the extent of his interest existing
therein at the time of his death.
The gross estate of a non-resident alien comprises all his real property,
situated in the Philippines; all his personal property, tangible, intangible or
mixed, situated in the Philippines, to the extent of his interest existing
therein at the time of his death.
2.
William
Smith, an American citizen, was a
permanent resident
of
the
Philippines. He
died
in
San
Francisco, California. He left 10,000 shares of San Miguel
Corporation, a condominium unit at the Twin Towers Building at
Pasig, Metro Manila and a house and lot in Miami, Florida.
What assets shall be included in the Estate Tax Return to be
filed with the BIR ?
SUGGESTED ANSWER: All of the assets should be included in the Estate
Tax Return to be filed with the BIR.
Smith, an American citizen and a permanent resident of the Philippines
is considered,
for Philippine estate tax purposes,
a resident
alien. Consequently, the assets to be included in the Estate Tax Return to be
filed with the BIR should be all property, real or personal, tangible, intangible
or mixed, wherever situated, to the extent of the interest that Smith has at
the time of his death. Thus, all of the properties enumerated in the problem

irrespective of where they are situated are includible in the gross estate of
Smith.
3. Proceeds of life insurance includible in a decedents
gross estate.
a.
The decedent takes the insurance policy on his own life
1) The amounts are receivable by
a)
the decedents estate,
b)
his executor, or
c)
administrator irrespective of whether or not
the insured retained the power of revocation, OR
2)
The
amounts
are
receivable
by
any
beneficiary
designated in the policy of insurance as
revocable beneficiary.
[Sec. 85 (E), NIRC of 1997]
b.
One, other than the decedent takes the insurance policy on
the life of the decedent
1)
The amounts are receivable by
a)
the decedents estate,
b)
his executor, or
c)
administrator
2)
irrespective of whether or not the insured retained
the
power of revocation.
4. Proceeds of life insurance NOT included in a decedents
gross estate.
a.
The decedent takes the insurance policy on his own life, and
b.
the proceeds are receivable by a beneficiary designated as
irrevocable. [Sec. 85 (E), NIRC of 1997)
NOTES AND COMMENTS: The beneficiary must not be the decedents
estate, executor or administrator, because the proceeds are includible as
part of gross estate whether or not the decedent retained the power of
revocation. (Ibid.)
c.
Where the insurance was NOT taken by the decedent upon
his own life and the beneficiary is not the decedents estate, his executor or
administrator.
4.
or nonresident
a.
b.
c.
d.
e.
f.

Items deductible from the gross estate of a resident

Filipino decedent or resident alien decedent:
Expenses, losses, claims, indebtedness and taxes;
Property previously taxed;
Transfers for public use;
The Family Home up to a value not exceeding P1 million;
Standard deduction of P1 million;
Medical expenses not exceeding P500,000.00;

g.
Amount of exempt retirement received by the heirs under
Rep. Act Mo. 4917;
h.
Net share of the surviving spouse in the conjugal
partnership.
5.
There is no transfer in contemplation of death if there
is no showing that the transferor 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. [Sec. 85 (B),
NIRC of 1997]
6. Vanishing deduction (deduction for property previously
taxed),
defined. The deduction allowed from the gross estates of
citizens, resident aliens and nonresident estates for properties which were
previously subject to donors or estate taxes. The deduction is called a
vanishing deduction because the deduction allowed diminishes over a period
of five (5) years.
It is also known as a deduction for property previously taxed.
7. Vanishing deduction (property previously taxed) allowed
as a deduction from the gross estate of a Filipino citizen, whether
resident or not, of a resident alien decedent, or of a nonresident
alien decedent.
a.
An amount equal to the value specified below of
b.
Any property forming a part of the gross estate situated in
the Philippines
c
Of any person who died within five years prior to the
death of the decedent, or transferred to the decedent by gift within five
years prior to his death,
d.
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
e.
Which can be identified as having been acquired in
exchange for property so received:
100% of the value if the prior decedent died within one 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;
80% of the value if the prior decedent died more than one year
but not more than two yearsprior to the death of the decedent, or if the
property was transferred to him by gift within the same period prior to his
death;

60% of the value if the prior decedent died more than two years
but not more than three yearsprior to the death of the decedent, or if the
property was transferred to him by gift within the same period prior to his
death;
40% of the value if the prior decedent died more than three years
but not more than four yearsprior 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
20% of the value if the prior decedent died more than four years
but not more than five yearsprior to the death of the decedent, or if the
property was transferred to him by gift within the same period prior to his
death. [Sec. 86 (A) (2) and (B) (2), NIRC of 1997, numbering, arrangement
and underlining supplied]
8.
The approval of the court sitting in probate, or as a
settlement tribunal over the estate of the deceased is not a
mandatory requirement for the collection of the estate. The probate
court is determining issues which are not against the property of the
decedent, or a claim against the estate as such, but is against the interest or
property right which the heir, legatee, devisee, etc. has in the property
formerly held by the decedent.
The notices of levy were regularly issued within the prescriptive period.
The tax assessment having become final, executory and enforceable,
the same can no longer be contested by means of a disguised
protest. (Marcos, II v. Court of Appeals, et al., 273 SCRA 47)
DONORS TAXES
1.
What is the donors tax rate if the donee is a stranger ?
SUGGESTED ANSWER:
When the donee or beneficiary is a stranger,
the tax payable by the donor shall be 30% of the net gifts.
2.
For purposes of the donors tax who is a stranger ?
SUGGESTED ANSWER: A stranger is a is person who is not a:
a.
Brother, sister (whether by whole or half-blood), spouse,
ancestor and lineal descendant; or
b.
Relative by consanguinity in the collateral line within the
fourth degree of relationship. [Sec. 99 (B), NIRC of 1997]
NOTES AND COMMENTS: All relatives by affinity, irrespective of the
degree, are considered as strangers.
3.
What is the tax base for donations ?
SUGGESTED ANSWER: The net gifts made during the calendar year.
[Sec. 99 (A), NIRC of 1997]

4.
For purposes of the donors tax, what is meant by net
gifts ?
SUGGESTED ANSWER: The net economic benefit from the transfer
that accrues to the donee. Accordingly, if a mortgaged property is
transferred as a gift, but imposing upon the donee the obligation to pay the
mortgage liability, then the net gift is measured by deducting from the fair
market value of the property the amount of the mortgage assumed. (last
par., Sec. 11, Rev. Regs.No.2-2003)
5.
How are gifts of personal property to be valued for
donors tax purposes ?
SUGGESTED ANSWER: The market value of the personal property at
the time of the gift shall be considered the amount of the gift. (Sec. 102,
NIRC of 1997)
6.
What is the valuation of donated real property for
donors tax purposes ?
SUGGESTED ANSWER: The real property shall be appraised at its fair
market value as of the time of the gift.
However, the appraised value of the real property at the time of the
gift shall be whichever is the higher of:
a.
the fair market value as determined by the Commissioner of
Internal Revenue (zonal valuation) or
b.
the fair market value as shown in the schedule of values
fixed by the Provincial and City Assessors. [Sec. 102, in relation to Sec. 88
(B) both of the NIRC of 1997]
7.
A died leaving as his only heirs, his surviving spouse B,
and three minor children, X, Y and Z. Since B does not want to
participate in the distribution of the estate, she renounced her
hereditary share in the estate.
a.
Is the renunciation subject to donors tax ? Explain.
SUGGESTED ANSWER: No. The general renunciation by an heir,
including the surviving spouse, as in the case B, of her share in the
hereditary estate left by the decedent is not subject to donors tax. (4 th par.,
Sec. 11, Rev. Regs. No. 2-2003)
This is so because the general renunciation by B was not specifically
and categorically done in favor of identified heir/s to the exclusion or
disadvantage of the other co-heirs in the hereditary estate.
b.
Supposing that instead of a general renunciation, B
renounced her hereditary share in As estate to X who is a special
child, would your answer be the same ? Explain.

SUGGESTED ANSWER: My answer would be different. The

renunciation in favor of X would be subject to donors tax.
This is so because the renunciation was specifically and categorically
done in favor of X and identified heir to the exclusion or disadvantage of Y
and Z, the other co-heirs in the hereditary estate. (4th par., Sec. 11, Rev.
Regs. No. 2-2003)
8. Give some donations that are exempt from donors tax.
SUGGESTED ANSWER:
a.
The first P100,000.00 net donation during a calendar year is
exempt from donors tax [Sec. 99 (A), NIRC of 1997] made by a resident or
non resident;
b.
The donation by a resident or non-resident of a prize to an
athlete in an international sports tournament held abroad and sanctioned by
the national sports association is exempt from donors tax (Sec. 1, Rep. Act
No. 7549)
c.
Political contributions made by a resident or non-resident
individual if registered with the COMELEC irrespective of whether donated to
a political party or individual.
However, the Corporation Code prohibits corporations from making
political contributions. (Corp. Code, Title IV, Sec. 36.9)
d.
Dowries or gifts made on account of marriage and before
its celebration or within one year thereafter by residents who are parents to
each of their legitimate, recognized natural, or adopted children to the
extent of the first ten thousand pesos (P10,000.00);
e.
Gifts made by residents or non-residents 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 subdivisions of the said
Government;
f.
Gifts made by residents or non residents in favor of an
educational and/or charitable, religious, cultural or social welfare
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. [Sec. 101 (A), NIRC of 1997, numbering and
arrangement supplied]
g.
Gifts made by non-resident aliens outside of the Philippines
to Philippine residents are exempt from donors taxes because taxation is
basically territorial. The transaction, which should have been subject to tax
was made by non-resident aliens and took place outside of the Philippines.
9. What
is
splitting ? Illustrate.

the

concept

of

donation

or

gift

SUGGESTED ANSWER: Donation or gift splitting is spreading the

gift over numerous calendar years in order to avail of lower donors taxes.
In 2008 Leon was thinking of donating a P200,000.00 to Miklos, his
first cousin. The P200,000.00 is the totality of the net gifts for
2008. If he donated the P200,000.00 in 2008 the first P100,000 would
be exempt and the remaining P50,000.00 would be subject to donors tax
If Leon spreads the P200,000 donation over two (2) calendar years,
donating P100,000.00 on December 30, 2008 and the remaining
P100,000.00 on January 1, 2009 the transaction would be exempt
from donors tax. This is so even if the donation is separated only by two
days because the basis is the calendar year. Leon would be enjoying the
exemption for the first P100,000.00 net gifts for each calendar year.
10.
A, who is engaged in the car buy and sell
business sold to B P7 million Jaguar for only P4 million. The proper
VAT on the sale was paid. If you are the BIR examiner assigned to
review the sale, would you issue a tax assessment on the
transaction ? Explain your answer briefly.
SUGGESTED ANSWER: Donors taxes would be due on the
insufficiency of consideration.
Where property, other than real property that has been subjected to
the final capital gains tax, is transferred for less than an adequate and full
consideration in money or moneys worth, then the amount by which the fair
market value of the property at the time of the execution of the Contract to
Sell or execution of the Deed of Sale which is not preceded by a Contract to
Sell exceeded the value of the agreed or actual consideration or selling price
shall be deemed a gift, and shall be included in computing the amount of
gifts made during the calendar year. (5th par., Sec. 11, Rev. Regs. No. 22003)
VALUE-ADDED TAXES (VAT)
WARNING !!! Approximately 10% of the total questions asked in the
Bar Examination are sourced from VAT and its concepts. This area is
probably the most difficult area to forecast because there are no statistically
perceived patterns. The author has retained the Stars System for VAT.
Considering the limited period of time, the reader is advised to focus
on areas marked with stars and just browse the unmarked areas.
1.
Value-added tax (VAT) is a tax which is imposed
only on the increase in the worth, merit or importance of goods, properties
or services, and not on the total value of the goods or services being sold or
rendered.

2. Nature of VAT. VAT is an indirect tax that may be shifted or

passed on to the buyer, transferee or lessee of the goods, properties or
services. As such, it should be understood not in the context of the person
or entity that is primarily, directly liable for its payment, but in terms of its
nature as a tax on consumption. [Commissioner of Internal Revenue v.
Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005
citing various authorities}
VAT is a percentage tax imposed on any person whether or not a
franchise grantee, who in the course of trade or business, sells, barters,
exchanges, leases, goods or properties, renders services. It is also levied on
every importation of goods whether or not in the course of trade or
business. The tax base of the VAT is limited only to the value added to such
goods, properties, or services by the seller, transferor or lessor. Further,
the VAT is an indirect tax and can be passed on to the buyer. (Quezon City,
et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6,
2008)
3. Effect of exemptions from VAT which is an indirect
tax. If a special law merely exempts a party as a seller from its direct
liability for payment of the VAT, but does not relieve the same party as a
purchaser from its indirect burden of the VAT shifted to it by its VATregistered suppliers, the purchase transaction is not exempt.
REASON: The VAT is a tax on consumption, the amount of which may
be shifted or passed on by the seller to the purchaser of the goods,
properties or services. [Commissioner of Internal Revenue v. Seagate
Technology (Philippines), G. R. No. 153866, February 11, 2005)
4.
Illustration of effects of exemptions from VAT which
is an indirect tax.
A VAT exempt seller sells to a non-VAT exempt
purchaser. The purchaser is subject to VAT because the VAT is merely added
as part of the purchase price and not as a tax because the burden is merely
shifted. The seller is still exempt because it could pass on the burden of
paying the tax to the purchaser.
5.
The VAT is a tax on consumption. Meaning of
consumption as used under the VAT system. Consumption is "the use
of a thing in a way that thereby exhausts it."
Applied to services, the term means the performance or "successful
completion of a contractual duty, usually resulting in the performer's release
from any past or future liability x x x" Unlike goods, services cannot be
physically used in or bound for a specific place when their destination is
determined. Instead, there can only be a "predetermined end of a course"
when determining the service "location or position x x x for legal purposes."

[Commissioner of Internal Revenue v. Placer Dome Technical Services

(Phils.), Inc. G. R. No. 164365, June 8, 2007]
6.
Illustration of the meaning of consumption as used
under the VAT system. For example the services rendered by a local firm
to its foreign client are performed or successfully completed upon its sending
to a foreign client the drafts and bills it has gathered from service
establishments here. Its services, having been performed in the Philippines,
are therefore also consumed in the Philippines. Such facilitation service has
no physical existence, yet takes place upon rendition, and therefore upon
consumption, in the Philippines. [Commissioner of Internal Revenue v.
Placer Dome Technical Services (Phils.), Inc. G. R. No. 164365, June 8,
2007]
Who are liable for the value-added tax.
Any person who, in the course of his trade or business,
1)
Sells, barters, exchanges
or
leases
goods
or
properties, or
2)
renders services, and
b.
any person who imports goods xxx
However, in the case of importation of taxable goods, the importer,
whether an individual or corporation and whether or not made in the course
of his trade or business, shall be liable to VAT xxx. (Rev. Regs. No. 162005,Sec. 4.105-1, paraphrasing supplied)
7.
a.

8. Various VAT methods and systems.

a.
Cost deduction method. This is a single-stage tax which
is payable only by the original sellers.
(Abakada Guro Party List (etc.) v.
Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion
cases) This was subsequently modified and a mixture of cost deduction
method and tax credit method was used to determine the value-added tax
payable. (Ibid.)
b.
Tax credit method. This method relies on invoices, an
entity can credit against or subtract from the VAT charged on its sales or
outputs the VAT paid on its purchases, inputs and imports. [Commissioner
of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866,
February 11, 2005]
If at the end of a taxable period, the output taxes charged by a seller
are equal to the input taxes passed on by the suppliers, no payment is
required. It is when the output taxes exceed the input taxes that the excess
has to be paid.
If however, the input taxes exceed the output taxes, the excess shall
be carried over to the succeeding quarter or quarters. Should the input
taxes result from zero-rated or effectively zero-rated transactions or from

acquisition of capital goods, any excess over the output taxes shall instead
be refunded to the taxpayer or credited against other internal revenue taxes.
(Ibid.)
9.
How the VAT is imposed on the increase in worth,
merit or improvement of the goods or services. The VAT utilizes the
concept of the output and input taxes.
Output VAT less Input VAT = VAT due on the increase in worth, merit
or improvement f the goods or services.
10.
The right to credit the input tax be limited by
legislation because it is a mere creation of law. Prior to the enactment
of multi-stage sales taxation, the sales taxes paid at every level of
distribution are not recoverable from the taxes payable. With the advent of
Executive Order No. 273 imposing a 10% multi-stage tax on all sales, it was
only then that the crediting of the input tax paid on purchase or importation
of goods and services by VAT-registered persons against the output tax was
established. This continued with the Expanded VAT Law (R.A. No. 7716),
and The Tax Reform Act of 1997 (R.A. No. 8424). The right to credit input
tax as against the output tax is clearly a privilege created by law, a privilege
that also the law can limit. It should be stressed that a person has no
vested right in statutory privileges. (ABAKADA Guro Party List, etc. et al. vs.
Ermita, G.R. No. 168207, October 15, 2005, and companion cases, on the
motion for reconsideration)
11.
Output tax is the value-added tax due on the sale or
lease or taxable goods, properties or services by any VAT-registered person.
12.
Input tax is the value-added tax due on or paid by a
VAT-registered person on importation of good or local purchases of goods or
services, including lease or use of properties, in the course of his trade or
business. (Rev. Regs. No. 4.110-1, 1st par.)
13.
Included in the input tax.
a.
the transitional input tax and
b.
the presumptive input tax xxx.
It includes
c.
input taxes which can be directly attributed to transactions
subject to the VAT plus a ratable portion of any input tax which cannot be
directly attributed to either the taxable or exempt activity. (Rev. Regs. No.
4.110-1, 1st par., 2nd sentence,. And 2nd par., paraphrasing, arrangement and
numbering supplied )
14.
Concept of transitional input tax credits on beginning
inventories. Taxpayers who become VAT-registered persons upon

exceeding the minimum turnover of P1,500,000.00 in any 12-month period,

or who voluntarily register even if their turnover does not exceed
P1,500,000.00 (except franchise grantees of radio and television
broadcasting whose threshold is P10,000,000.00) shall be entitled to a
transitional input tax on the inventory on hand as of the effectivity of their
VAT registration, on the following:
a.
goods purchased for resale in their present condition;
b.
materials purchased for further processing, but which have
not yet undergone processing;
c.
goods which have been manufactured by the taxpayer;
d.
goods in process for sale; or
e.
goods and supplies for use in the course of the taxpayers
trade or business as a VAT-registered person. [Rev. Regs. No. 16-2005,
Sec.4.111-1, (a), 1st par., arrangement and numbering supplied]
15.
Concept of 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.
As used in this paragraph, 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 a manner as to prepare it for special use to which it could not have
been put in its original form or condition. [Rev. Regs. No. 16-2005,
Sec.4.111-1, (b)]
16.
The VAT registration fee does NOT violate religious
freedom. The VAT registration fee imposed on non-VAT enterprises which
includes among others, religious sects which sells and distributes religious
literature is not violative of religious freedom, although a fixed amount is not
imposed for the exercise of a privilege but only for the purpose of defraying
part of the cost of registration.
The registration fee is thus more of an administrative fee, one not
imposed on the exercise of a privilege, much less a constitutional
right. (Tolentino v. Secretary of Finance, et al., and companion cases, 235
SCRA 630)
17.
Interpretation of the term In the Course of Trade or
Business as used in the VAT system. The term "doing business" or
course of business conveys the idea of business being done, not from time
to
time,
but
all
the
time. It
does
not
include
isolated

transactions. (Commissioner of Internal Revenue v. Magsaysay Lines, Inc.,

et al., G. R. No. 146984, July 28, 2006)
18.
Pursuant
to
a
government
program
of
privatization, NDC, a VAT-registered entity created for the purpose
of selling real property, decided to sell to private enterprise all of its
shares in its wholly-owned subsidiary the National Marine
Corporation (NMC). The NDC decided to sell in one lot its NMC shares
and five (5) of its ships, which are 3,700 DWT Tween-Decker,
"Kloeckner" type vessels. The vessels were constructed for the NDC
between 1981 and 1984, then initially leased to Luzon Stevedoring
Company, also its wholly-owned subsidiary. Subsequently, the
vessels were transferred and leased, on a bareboat basis, to the
NMC.
The NMC shares and the vessels were offered for public
bidding. Among the stipulated terms and conditions for the public
auction was that the winning bidder was to pay "a value added tax
of 10% on the value of the vessels." Magsaysay Lines, Inc., offered
to buy the shares and the vessels for P168,000,000.00. The bid was
made by Magsaysay Lines, purportedly for a new company still to be
formed composed of itself, Baliwag Navigation, Inc., and FIM Limited
of the Marden Group based in Hongkong . The bid was approved by
the Committee on Privatization, and a Notice of Award was issued to
Magsaysay
Lines.
Is
the
sale
subject
to
VAT
?
SUGGESTED
ANSWER: No. The term "carrying on business" does not mean the
performance of a single disconnected act, but means conducting,
prosecuting and continuing business by performing progressively all the acts
normally incident thereof; while "doing business" conveys the idea of
business being done, not from time to time, but all the time. "Course of
business" is what is usually done in the management of trade or
business.
"Course of business" or "doing business" connotes regularity of
activity.
In
the
instant
case,
the
sale
was
an
isolated
transaction.
The sale which was involuntary and made pursuant to the declared policy
of Government for privatization could no longer be repeated or carried on
with regularity. It should be emphasized that the normal VAT-registered
activity of NDC is leasing personal property.
This finding is
confirmed by the Revised Charter of the NDC which bears no indication that
the NDC was created for the primary purpose of selling real property.
(Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et al., G. R.
No. 146984, July 28, 2006)
19.
Under the Value Added Tax (VAT), the tax is
imposed on sales, barter, or exchange or goods and services. The
VAT is also imposed on certain transactions deemed sales which
include:
a.

Transfer, use or consumption not in the course of business or

properties originally intended for sale or for use in the course of
business. xxx
b.
Distribution or transfer to:
1)
Shareholders or investors as share in the profits of the
VAT- registered person; xxx or
2)
Creditors in payment of debt or obligation
c. Consignment of goods if actual sale is not made within sixty
(60) days following the date such goods were consigned. Consigned goods
returned by the consignee within the 60-day period are not deemed sold.
d.
Retirement from or cessation of business, with respect
to all goods on hand,
1)
whether capital goods, stock-in-trade, supplies or
materials as of the date of such retirement, or cessation,
2)
whether or not the business is continued by the new
owner or successor. xxx [Rev. Regs. No. 16-2005, Sec. 4.106-7,
paraphrasing, arrangement and numbering supplied]
20.
Transactions considered retirement or cessation of
business deemed sale subject to VAT.
a.
Change of ownership of the business. There is change in the
ownership of the business where a single proprietorship incorporates; or
1)
the proprietor of a single proprietorship sells his entire
business.
b.
Dissolution of a partnership and creation of a new
partnership which takes over the business. [Rev. Regs. No. 16-2005, Sec.
4.106-7 (a), (4) paraphrasing, arrangement and numbering supplied]
21.
Sale of or lease of real properties subject to VAT. Sale
of real properties primarily for sale to customers or held for lease in the
ordinary course of trade or business of the seller shall be subject to
VAT. (Rev. Regs. No. 16-2005, Sec. 4.106-3, 1st par.)
Thus, capital transactions of individuals are not subject to VAT. Only
real estate dealers are subject to VAT.
22.
On September 4, 2009, XYZ, Inc., a
domestic corporation engaged in the real estate business, sold a
building for P10,000,000.00. Is the sale subject to the value-added
tax (VAT)? If so, how much? Explain.
SUGGESTED ANSWER: Yes. 12% on the gross selling price because
the sale was made in the ordinary course of trade of business of X, a
domestic corporation engaged in the real estate business.

23.
The following sales of real properties are exempt
from VAT, namely:
a.
Sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of trade or business;
b.
Sale of real properties utilized for low-cost housing as
defined by RA No. 7279, otherwise known as the Urban and Development
Housing Act of 1992 and other related laws, such as RA No. 7835 and RA
No. 8763.
xxx
xxx
xxx
c.
Sale of real properties utilized for socialized housing as
defined under RA No. 7279, and other related laws wherein the price ceiling
per unit is P225,000.00 or as may from time to time be determined by the
HUDCC and the NEDA and other related laws.
xxx
xxx
xxx
d.
Sale of residential lot valued at One Million Five Hundred
Thousand Pesos (P1,500,000.00) and below, or house & lot and other
residential dwellings valued at Two Million Give Hundred Thousand Pesos
(P2,500,000.00) and below where the instrument of sale/transfer/disposition
was executed on or after November 1, 2005, provided, That not later than
January 31, 2009 and every three (3) years thereafter, the amounts stated
herein shall be adjusted to its present value using the Consumer Price Index,
as published by the National Statistics Office (NSO); provided, further, that
such adjustment shall be published through revenue regulations to be issued
not later than March 31 of each year.
If two or more adjacent residential lots are sold or disposed in favor
of one buyer, for the purpose of utilizing the lots as one residential lot, the
sale shall be exempt from VAT only if the aggregate value of the lots do not
exceed P1,500,000.00. Adjacent residential lots, although covered by
separate titles and/or separate tax declarations, when sold or disposed of to
one and the same buyer, whether covered by one or separate Deed of
Conveyance, shall be presumed as a sale of one residential lot. [Rev. Regs.
No. 4.109-1 (B), (p), paraphrasing and numbering supplied]
24.
a.
b.
gross receipts
c.

VAT on services and lease of properties.

There shall be levied, assessed, and collected,
a value-added tax equivalent to twelve percent (12%) of

derived from the sale or exchange of services,

1)
including the use or lease of properties. [NIRC
of
1997, Sec. 108 (A),as amended by R.A. No. 9337, arrangement
and numbering supplied]
25.
Sale or exchange of services, defined. The term
sale or exchange of services means the performance of all kinds of services

in the Philippines for others for a fee, remuneration or consideration,

whether in kind or in cash, including those performed or rendered by the
following:
a.
construction
and
service
contractors;
b.
stock,
real
estate,
commercial,
customs
and
immigration
brokers;
c.
lessors
of
property,
whether
personal
or
real;
d.
persons
engaged
in
warehousing services
e.
lessors or
distributors of cinematographic films;
f.
persons
engaged in milling, processing, manufacturing or repacking goods for
others;
g.
proprietors, operators or keepers of hotels, motels, rest-houses, pension
houses,
inns,
resorts;
theaters,
and
movie
houses;
h.
proprietors
or
operators
of
restaurants, refreshment parlors, cafes and other eating places, including
clubs
and
caterers;
i.
dealers
in
securities;
j.
lending
investors;
k.
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;
l.
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;
m.
sales of electricity by generation companies, transmission,
and/or distribution
companies;
n.
franchise grantees of electric utilities, telephone and telegraph, radio
and television broadcasting and all other franchise grantees except franchise
grantees of radio and/or television broadcasting whose annual gross receipts
of the preceding year do not exceed Ten Million Pesos (P10,000,000.00), and
franchise
grantees
of
gas
and
water
utilities;
o.
non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding companies;
and
p.
similar
services
regardless of whether or not the performance thereof calls for the exercise
or use of the physical or mental faculties. [NIRC of 1997, Sec. 108 (A), as

amended by R.A. No. 9337; Rev. Regs. No. 16-2005, Sec. 4,108-2, 1 st par.,
arrangement and numbering supplied]
26.
Also included in the phrase sale or exchange of
services.
a.
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;
b.
The lease or the use of, or the right to use any industrial,
commercial or scientific equipment;
c.
The supply of scientific, technical, industrial or commercial
knowledge or information;
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 subparagraph
(2) hereof or any such knowledge or information as is mentioned in
subparagraph (3) hereof; or
e.
The supply of services by a non-resident 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 non-resident person;
f.
The supply of technical advice, assistance or services
rendered in connection with technical management or administration of any
scientific, industrial or commercial undertaking, venture, project of scheme;
g.
The lease of motion picture films, film tapes and discs;
h.
The lease or the use of or the right to use radio,
television, satellite transmission and cable television time. (Rev. Regs. No.
16-2005, Sec. 4.108-2, 2nd par.)
27.
Zero-rated Sales of Goods or Properties. A zerorated sale of goods or properties by a sale by a VAT-registered person is a
taxable transaction for VAT purposes but the sale does not result in any
output tax.
However, the input tax on the purchases of goods, properties or services
related to such zero-rated sale shall be available as tax credit or refund in
accordance with Rev. Regulations No. 16-2005. (Rev. Regs. No. 16-2005,
1st par.)
28. Concept of VAT zero-rating. The tax rate is set at
zero. When applied to the tax base, such rate obviously results in no tax
chargeable against the purchaser. The seller of such transactions charges no
output tax, but can claim a refund or a tax credit certificate for the VAT
previously charged by suppliers. [Commissioner of Internal Revenue v.
Seagate Technology (Philippines),G. R. No. 153866, February 11, 2005]

Under a zero-rating scheme, the sale or exchange of a particular

service is completely freed from the VAT, because the seller is entitled to
recover, by way of a refund or as an input tax credit, the tax that is included
in the cost of purchases attributable to the sale or exchange. The tax paid
or withheld is not deducted from the tax base. (Commissioner, of Internal
Revenue v. American Express International, Inc. (Philippine Branch), G. R.
No. 152609, June 29, 2005 citing various cases)
29.
Situs of taxation of zero-rated VAT services such as
facilitating the collection of receivables from credit card members
situated in the Philippines and payment to service establishments in
the Philippines. The place where the service is rendered determines the
jurisdiction to impose the VAT
Performed in the Philippines, the service is necessarily subject to its
jurisdiction for the State necessarily has to have a substantial
connection to it in order to enforce a zero rate. The place of payment is
immaterial much less is the place where the output of the service will be
further or ultimately used.
This is so because the law neither makes a qualification nor adds a
condition
in
determining
the
tax
situs
of
a
zero-rated
service. (Commissioner of Internal Revenue v. American Express
International, Inc. (Philipppine Branch), G. R. No. 152609, June 29, 2005)
30.
Destination principle under the VAT System. As a
general rule, the VAT system uses the destination principle as a basis for the
jurisdictional reach of the tax.
Goods and services are taxed only in the country where they are
consumed. Thus, exports are zero-rated, while imports are taxed.
This is also known as the Cross Border Doctrine.
31.
Exception to the destination principle. The law
clearly provides for an exception to the destination principle; that is, for a
zero percent VAT rate for services that are performed in the Philippines,
"paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the [BSP]."
32.
Rationale
for
zero-rating
of
exports. The
Philippine VAT system adheres to the Cross Border Doctrine, according to
which, no VAT shall be imposed to form part of the cost of goods destined for
consumption
outside
of
the
territorial
border
of
the
taxing
authority. [Commissioner of Internal Revenue v. Toshiba Information
Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005] The Cross
Border
Doctrine
is
also
known
as
the
destination
principle.
Hence,

actual or constructive export of goods and services from the Philippines to a

foreign country must be zero-rated for VAT; while, those destined for use or
consumption within the Philippines shall be imposed the twelve percent
(12%) VAT.
33.
Zero-rated sale distinguished from exempt
transactions:
a.
A zero-rated sale is a taxable transaction but does not result
in an output tax WHILE an exempt transaction is not subject to the output
tax.
b.
The input tax on the purchases of a VAT registered person
who has zero-rated sales may be allowed as tax credits or refunded WHILE
the seller in an exempt transaction is not entitled to any input tax on his
purchases despite the issuance of a VAT invoice or receipt.
c.
Persons engaged in transactions which are zero rated being
subject to VAT are required to register WHILE registration is optional for VATexempt persons.
34.
Zero-rated sales by VAT-registered persons. The
following sales by VAT-registered persons shall be subject to zero percent
(0%) rate:
a.
Export sales;
b.
Considered export sales under Executive Order No. 224;
c.
Foreign currency denominated sale; and
d.
Sales to persons or entities deemed tax-exempt under
special law or international agreement. (Rev. Regs. No. 16-2005, Sec.
4.106-5, 2nd par., paraphrasing supplied)
35.
Sale of gold to the Central Bank considered as export
sales. As export sales, the sale of gold to the Central Bank is zero-rated,
hence, no tax is chargeable to it as purchaser. Zero rating is primarily
intended to be enjoyed by the seller, which charges no output VAT but can
claim a refund of or a tax credit certificate for the input VAT previously
charged to it by suppliers. (Commissioner of Internal Revenue v. Manila
Mining Corporation, G.R. No. 153204, August 31, 2005)
36.
Sales to ecozone, such as PEZA, considered exportsale. Notably, while an ecozone is geographically within the Philippines, it is
deemed a separate customs territory and is regarded in law as foreign
soil. Sales by suppliers from outside the borders of the ecozone to this
separate customs territory are deemed as exports and treated as export
sales. These sales are zero-rated or subject to a tax rate of zero
percent. (Commissioner of Internal Revenue v. Sekisui Jushi Philippines,
Inc., G. R. No. 149671, July 21, 2006 citing various authorities)

37.
Ecozone, defined. An ECOZONE or a Special Economic
Zone has been described as [S]elected areas with highly developed or
which have the potential to be developed into agro-industrial, industrial,
tourist, recreational, commercial, banking, investment and financial centers
whose metes and bounds are fixed or delimited by Presidential
Proclamations. An ECOZONE may contain any or all of the following:
industrial estates (IEs), export processing zones (EPZs), free trade zones
and tourist/recreational centers.
The national territory of the Philippines
outside of the proclaimed borders of the ECOZONE shall be referred to as the
Customs Territory. [Commissioner of Internal Revenue v. Toshiba
Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005]
38.
Zero-rated sale of service, defined. A zero-rated
sale of service (by a VAT-registered person) is a taxable transaction for VAT
purposes, but shall not result in any output tax. However, the input tax on
purchases of goods, properties or services related to such zero-rated sale
shall be available as tax credit or refund in accordance with Rev. Regs. No.
16-2005. [Rev. Regs. No. 16-2005, Sec. Sec. 4.108-5 (a), words in italics
supplied)
39. Service performed by American Express in facilitating
the collection of receivables from credit card members situated in
the Philippines and payment to service establishments in the
Philippines in behalf of its Hong-Kong based client is subject to VAT
but zero-rated. This is so because it meets all the requirements for VAT
imposition, as follows:
a.
It regularly renders in the Philippines the service of
facilitating the collection and payment of receivables belonging to a foreign
company that is a clearly separate and distinct entity.
b.
Such service is commercial in nature; carried on over a
sustained period of time; on a significant scale with a reasonable degree of
frequency; and not at random, fortuitous, or attenuated.
c.
For this service, it definitely receives consideration in
foreign currency that is accounted for in conformity with law.
d.
It is not an entity exempt under any of our laws or
international agreements. (Commissioner, of Internal Revenue v. American
Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29,
2005)
40.
While the service performed by American Express is
subject to VAT it is zero-rated, and BIR Revenue Regulations that
alter the legal requirements for zero-rating are ultra vires and
invalid. The VAT system uses the destination principle which posits that the
goods and services are taxed only in the country where they are consumed,

However, the law itself provides for clear exceptions under which the
supply of services shall be zero-rated, among which are the following:
a.
The service is performed in the Philippines;
b.
The services are within the categories provided for under
the Tax Code; and
c.
It is paid for in acceptable foreign currency of the Bangko
Sentral ng Pilipinas.
American Express renders assistance to its foreign clients by receiving
the bills of service establishments located in the country and forwarding
them to their clients abroad. The services are performed or successfully
completed upon send to its foreign clients the drafts and bills it has gathered
from service establishments here, Its services, having been performed in
the Philippines are therefore also consumed in the Philippines. Thus, its
services are exempt from the destination principle and are zero-rated.
The BIR could not change the law. [Commissioner, of Internal
Revenue v. American Express International, Inc. (Philippine Branch), G. R.
No. 152609, June 29, 2005]
41.
A foreign Consortium composed of BWSC-Denmark,
Mitsui Engineering and Shipbuilding Ltd., and Mitsui and Co., Ltd.,
which entered into a contract with NAPOCOR for the operation and
maintenance of two power barges appointed BWSC-Denmark as its
coordination
manager. BWSCMI
was
established
as
the
subcontractor to perform the actual work in the Philippines. The
Consortium paid BWSCMI in acceptable foreign exchange and
accounted for in accordance with the rules and regulations of the
BSP.
Through a February 14, 1995 ruling the BIR declared that
BWSCMI may choose to register as a VAT persons subject to VAT at
zero rate. For 1996, it filed the proper VAT returns showing zero
rating. On December 29, 1997, believing that it is covered by Rev.
Regs. 5-96, dated February 20, 1996, BWSCMI paid 10% output VAT
for the period April-December 1996, through the Voluntary
Assessment Program (VAP).
On January 7, 1999, BWSCMI was able to obtain a Ruling
from the BIR reconfirming that it is subject to VAT at zerorating. On this basis, BWSCMI applied for a refund of the output VAT
it paid.
a.
Is BWSCMI subject to the 10% VAT or is it zero
rated ?

SUGGESTED ANSWER: Yes. BWSCMI is not zero rated and is subject

to the 10% VAT. It is rendering service for the Consortium which is not
doing business in the Philippines. Zero-rating finds application only where
the recipient of the services are other persons doing business outside of the
Philippines. BWSCMI provides services to the Consortium which by virtue of
its
contract
with
NAPOCOR
is
doing
business
within
the
Philippines. (Commissioner of Internal Revenue v. Burmeister and Wain
Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, January 22,
2007)
b.
Could it obtain a refund of the VAT it paid through the
VAP ? Explain.
SUGGESTED ANSWER: Yes. BWSCMI is entitled to refund of the 10%
output VAT it paid the based on the non-retroactivity of the prejudicial
revocation of the BIR Rulings which held that its services are subject to 0%
VAT and which BWSCMI invoked in applying for refund of the output
VAT. (Commissioner of Internal Revenue v. Burmeister and Wain
Scandinavian Contractor Mindanao, Inc., supra)
NOTES AND COMMENTS:
a.
Do not confuse the BWSCMI case with the American
Express case. American Express International, Inc. (Philippine Branch)] is
a VAT-registered person that facilitates the collection and payment of
receivables belonging to its non-resident foreign client [American Express
International, Inc. (Hongkong Branch)], for which it gets paid in acceptable
foreign currency inwardly remitted and accounted for in accordance with
BSP rules and regulations. (Commissioner of Internal Revenue v.
Burmeister and Wain Scandinavian Contractor Mindanao, Inc., G. R. No.
153205, January 22, 2007)
42.
What
are
VAT-Exempt
transactions
? SUGGESTED
ANSWER: The sale of goods or properties and/or services and the use or
lease of properties that is
b.
not subject to VAT (output tax) and
c. the seller is not allowed any tax credit on VAT (input tax)
purchases.
The person making the exempt sale of goods, properties or services
shall not bill any output tax to his customers because the said transaction is
not subject to VAT. [Rev. Regs. No. 16-2005, Sec. 4.109-1 (A), arrangement
and numbering supplied]
43.
VAT-exempt
entities.

VAT-exempt

transactions

distinguished

from
a

.
An exempt transaction, on the one hand, involves goods or services
which, by their nature, are specifically listed in and expressly exempted from
the VAT under the Tax Code, without regard to the tax status VAT-exempt
or
not

of
the
party
to
the
transaction.
An exempt party, on the other
hand, is a person or entity granted VAT exemption under the Tax Code, a
special law or an international agreement to which the Philippines is a
signatory, and by virtue of which its taxable transactions become exempt
from VAT. [Commissioner of Internal Revenue v. Toshiba Information
Equipment (Phils.), Inc., G. R. No. 150154, August 9, 2005]
b.
An exempt transaction shall not be the subject of any billing
for output VAT but it shall not also be allowed any input tax credits WHILE an
exempt party being zero-rated is allowed to claim input tax credits.
44.
Transactions are exempt from VAT. (Subject to the
election by a VAT-registered person not to be subject to the value-added
tax), the following shall be exempt from VAT:
(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.
Livestock shall include cows, bulls and calves, pigs, sheep, goats
and rabbits. Poultry shall include fowls, ducks, geese and turkey, Livestock
or poultry does not include fighting cocks, race horses, zoo animals and
other animals generally considered as pets.
Marine food products shall include fish and crustaceans, such as,
but not limited to, eels, trout, lobster, shrimps, prawns, oysters, mussels and
clams.
Meat, fruit, fish, vegetables and other agricultural and marine
food 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, including those using advanced
technological means of packaging, such as shrink wrapping in plastics,
vacuum packing, tetra-pack, and other similar packaging methods. Polished
and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt,
and copra shall be considered in their original state.
Sugar whose content of sucrose by weight, in the dry state, has a
polarimeter reading of 99.5o and above are presumed to be refined sugar.
Cane sugar produced from the following shall be presumed, for
internal revenue purposes, to be refined sugar:

(1)
(2)

product of a refining process,

products of a sugar refinery, or
(3)
product of a production line of a sugar mill accredited by
the BIR to be producing sugar with polarimeter reading of 99.5o and above,
and for which the quedanissued therefor, and verified by the Sugar
Regulatory Administration, identifies the same to be of a polarimeter reading
of 99.5o and above.
Bagasse is not included in the exemption provided for under this
section.
(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);
Specialty feeds refers to non-agricultural feeds or food 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;
(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 of Internal Revenue, 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 of the Tax Code,
as enumerated below:
(1)
Sale or lease of goods or properties or the performance
of services of non-VAT-registered persons, other than the transactions
mentioned in paragraphs (A) to (U) of Sec. 109 (1) of the Tax Code, the
annual sales and/or receipts of which does not exceed the amount of
One Million Five Hundred thousand Pesos (P1,500,000.00), 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. 116, Tax Code)
(2)
Services rendered by domestic common carriers by land
for the transport of passengers and keepers of garages. (Sec. 117)
(3)
Services
rendered
by
international
air/shipping
carriers. (Sec. 118)
(4)
Service rendered by franchise grantees of radio and/or
television broadcasting whose annual gross receipts of the preceding year do
not exceed Ten Million Pesos (P10,000,000.00) and by franchises of gas and
water utilities. (Sec. 119)
(5)
Service rendered for overseas dispatch message or
conversation originating from the Philippines. (Sc. 120)
(6)
Services rendered by any person, company or
corporation (except purely cooperative companies or associations ) doing life
insurance business of any sort in the Philippines. (Sec. 123)
(7)
Services rendered by fire, marine or miscellaneous
insurance agents of foreign insurance companies. (Sec. 124)
(8)
Services of proprietors, lessees or operators of cockpits,
cabarets, night or day clubs, boxing exhibitions professional basketball
games, jai-Alai and race tracks. (Sec. 125). and
(9)
Receipts on sale, barter or exchange of shares of stock
listed and traded through the local stock exchange or through initial public
offering. (Sec. 127)
(F)
Services by agricultural contract growers and milling for
others of palay into rice, corn into grits and sugar cane into raw sugar;
Agricultural contract growers refers to those persons producing for
others poultry, livestock or other agricultural and marine food products in
their original state.
(G)
Medical, dental, hospital and veterinary services except
those rendered by professionals;
Laboratory services are exempted. If the hospital or clinic operates
a pharmacy or drug store, the sale of drugs and medicine is subject to VAT.
(H)
Educational services rendered by private educational
institutions, duly accredited by theDepartment of Education (DEPED),
the Commission on Higher Education (CHED), the Technical Education And
Skills Development Authority (TESDA) and those rendered by government
educational institutions;
Educational services shall refer to academic, technical or
vocational education provided by private educational institutions duly
accredited by the DepED, the CHED and TESDA and those rendered by
government educational institutions and it does not include seminars, in-

service training, review classes and other similar services rendered by

persons who are not accredited by the DepED, the CHED and/or the TESDA.
(I)
Services rendered by individuals pursuant to an employeremployee 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 Petroleum Exploration
Concessionaires under the Petroleum Act of 1949; and;
(L)
Sales by agricultural cooperatives duly registered with
the Cooperative Development Authority (CDA) to their members as well as
sale of their produce, whether in its original state or processed form, to nonmembers; 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 multipurpose cooperatives duly registered and in good standing with
the Cooperative Development Authority;
(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;
Importation by non-agricultural, non-electric and non-credit
cooperatives of machineries and equipment, including spare parts thereof, to
be used by them are subject to VAT.
(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, such as RA No. 7835 and RA
No. 8765, residential lot valued at One million five hundred thousand pesos
(P 1,500,000) and below, house and lot, and other residential dwellings
valued at Two million five hundred thousand pesos (P 2,500,000) and
below: Provided, That not later than January 31, 2009 and every three (3)
years thereafter, the amounts herein stated shall be adjusted totheir 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 (P 10,000) 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 theNational 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; Provided, that the exemption
from VAT on the importation and local purchase of passenger and/or cargo
vessels shall be limited to those of one hundred fifty (150) tons and above,
including engine and spare parts of said vessels; Provided, further, that the
vessels be imported shall comply with the age limit requirement, at the time
of acquisition counted from the date of the vessels original commissioning,
as follows: (i) for passenger and/or cargo vessels, the age limit is fifteen
years (15) years old, (ii) for tankers, the age limit is ten (10) years old,
and (iii) For high-speed passenger cars, the age limit is five (5) years old,
Provided, finally, that exemption shall be subject to the provisions of section
4 of Republic Act No. 9295, otherwise known as The Domestic Shipping
Development Act of 2004.
(T)
Importation of fuel, goods and supplies by persons engaged
in international shipping or air transport operations; Provided, that the said
fuel, goods and supplies shall be used exclusively or shall pertain to the
transport of goods and/or passenger from a port in the Philippines directly to
a foreign port without stopping at any other port in the Philippines; provided,
further, that if any portion of such fuel, goods or supplies is used for
purposes other than that mentioned in this paragraph, such portion of fuel,
goods and supplies shall be subject to 10% VAT (now 12%);
(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).
For purposes of the threshold of P1,500,000.00, the husband and
wife shall be cnsidered separate taxpayers. However, the aggregation rule
for each taxpayer shall apply. For instance, if a profesional, aside from the
practice ofhis profession, also derives revenue from other lines of business
which are otherwise subject to VAT, the same shall be combined for purposes
of determining whether the threshold has been exceeded. Thus, the VATexempt sales shall to be icluded in determining the threshold. [NIRC of
1997, Sec. 109 (1), as amended by R. A. No. 9337; words in italics from
Rev. Regs. No. 16-2005, Sec. 4.109-1 (B), words in parentheses supplied]
45.
Tax to be paid by persons exempt from VAT.
a.
Any person, whose sales or receipts are exempt under Sec.
109 (1) (V) of the Tax Code,
(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 theNational Statistics Office (NSO), from the payment
of VAT and
b.
who is not a VAT-registered person
c.
shall pay a tax equivalent to three percent (3%) of his
gross monthly sales or receipts;
Provided, that cooperatives shall be exempt from the three (3%)
gross receipts tax herein imposed. (Rev. Regs. No. 16-2005, Sec. 4.116-1,
arrangement, numbering and words in italics supplied)
RETURNS AND

WITHHOLDING

1.
Income tax returns being public documents, until
controverted by competent evidence, are competent evidence, are prima
facie correct with respect to the entries therein. (Ropali Trading v. NLRC, et
al., 296 SCRA 309, 317)
2.
Individuals 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. [Sec. 51 (A) (1), NIRC of 1997]
3.
Married
individuals
who
are
earning
compensation income allowed to file separate returns.

purely

4.
Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from compensation
shall file a consolidated 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. [Section 51 (D) of the NIRC of 1997]
5.
Computation of income tax for married individuals
whether citizens, resident or non-resident aliens, who do not derive
income purely from compensation required file a consolidated return
for the taxable year but could not do so. For married individuals, the
husband and wife, subject to no. 2, supra,, shall compute separately their
individual income tax based on their respective total taxable
income: Provided, that if any income cannot be definitely attributed to or
identified as income exclusively earned or realized by either of the spouses,
the same shall be divided equally between the spouses for the purpose of
determining their respective taxable income. [2nd to the last par., Sec. 24
(A) (2), NIRC of 1997 as amended by Rep. Act No. 9504]
6.
Individuals who are not required to file an income tax
return.
a.
An individual whose gross income does not exceed his total
personal and additional exemptions for dependents, Provided, That a citizen
of the Philippines and any alien individual engaged in business or practice of
profession within the Philippines shall file an income tax return regardless of
the amount of gross income [Sec. 51 (A) (2), NIRC of 1997]
b.
An individual with respect to pure compensation income,
derived from such sources within the Philippines, the income tax on which
has been correctly withheld: 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 [Sec. 51 (A) (2), NIRC of
1997, as amended by Rep. Act No. 9504, paraphrasing supplied]

c.
An individual whose sole income has been subject to final
withholding tax;
d.
A minimum wage earner (is a worker in the private sector
paid the statutory minimum wage, or is an employee in the public sector
with compensation income of not more than the statutory minimum wage in
the non-agricultural sector where he/she is assigned), an individual who is
exempt from income tax pursuant to the provisions of the Tax Code and
other laws, general or special. [Sec. 51 (A) (2), NIRC of 1997 in relation to
Sec. 22 (HH), both as amended by Rep. Act. 9504]
7.
Minimum wage earners are exempt from income
taxation. That minimum wage earners (is a worker in the private sector
paid the statutory minimum wage, or is an employee in the public sector
with compensation income of not more than the statutory minimum wage in
the non-agricultural sector where he/she is assigned) shall be exempt from
the payment of income tax on their taxable income: Provided, further, That
the holiday pay, overtime pay, night shift differential pay and hazard pay
received by such minimum wage earners shall likewise be exempt from
income tax. [Sec. 51 (A) (2), NIRC of 1997 in relation to Sec. 22 (HH), both
as amended by Rep. Act. 9504]
8.

An individual who is not required to file an income tax

return may nevertheless be required to file an information
return. [Sec. 51 (A) (3), NIRC of 1997]
9.
A corporation files its income tax return and pays its
income tax four (4) times during a single taxable year. Quarterly
returns are required to be filed for the first three quarters, then a final
adjustment return is filed covering the total taxable income for the whole
taxable year, be it calendar or fiscal.
10.
An individual earning from the practice of his
profession or who engages in trade or business files his income tax
return and pays his income tax four (4) times during a single taxable
year. Quarterly returns are required to be filed for the first three quarters,
then an annual income tax return is filed covering the total taxable income for
the whole of the previous calendar year.
11.
The purpose of the above four (4) times a year
requirement is to make available sufficient funds to meet the
budgetary requirements, on a quarterly basis thereby increasing

government liquidity. It also eases hardships on the part of individuals who

are required to make this four time return. Thus, the taxpayer does not have
to raise large sums of money in order to pay the tax.
12.
An individual earning purely compensation income
files only one annual income tax return covering the total taxable
compensation income for the whole of the previous calendar year.
13.
Under the withholding tax system, taxes imposed or
prescribed by the NIRC of 1997 are to be deducted and withheld by
the payors from payments made to payees for the former to pay
directly to the Bureau of Internal Revenue. It is also known as collection
of the tax at source.
14.
A withholding agent is explicitly made personally
liable under the Tax Code for the payment of the tax required to be
withheld, in order to compel the withholding agent to withhold the tax under
any and all circumstances. In effect, the responsibility for the collection of the
tax as well as the payment thereof is concentrated upon the person over
whom the Government has jurisdiction. (Filipinas Synthetic Fiber Corporation
v. Court of Appeals, et al., G.R. Nos. 118498 & 124377, October 12,
1999) The system facilitates tax collection and reduces tax evasion.
15.
The two (2) types of withholding at source are the 1)
final withholding tax; and 2) creditable withholding tax.
16. Under the final withholding tax system the amount of
income tax withheld by the withholding agent is constituted as a full
and final payment of the income due from the payee on the said
income. [1st sentence, 1st par., Sec. 2.57 (A), Rev. Regs. No. 2-98]
The liability for payment of the tax rests primarily on the payor or the
withholding agent.. Thus, in case of his failure to withhold the tax or in case
of under withholding, the deficiency tax shall be collected from the payor
withholding agent. The payee is not required to file an income tax return for
the particular income.
17.
Under the creditable withholding tax system, taxes
withheld on certain income payments are intended to equal or at
least approximate the tax due from the payee on the said
income. The income recipient is still required to file an income tax return

and/or pay the difference between the tax withheld and the tax due on the
income. [1st and 2nd sentences, Sec. 257(B), Rev. Regs. No. 2-98]
18.
The two kinds of creditable withholding taxes are
(a) taxes withheld on income payments covered by the expanded withholding
tax; and (b) taxes withheld on compensation income.
19.
Payments to the following are exempt from the
requirement of withholding or when no withholding taxes
required:
a.
National Government and its instrumentalities including
provincial, city, or municipal governments;
b.
Persons enjoying exemption from payment of income taxes
pursuant to the provisions of any law, general or special, such as but not
limited to the following:
1) Sales of real property by a corporation which is registered with and
certified by the HLURB or HUDCC as engaged in socialized housing project
where the selling price of the house and lot or only the lot does not exceed
P180,000.00 in Metro Manila and other highly urbanized areas and
P150,000.00 in other areas or such adjusted amount of selling price for
socialized housing as may later be determined and adopted by the HLURB;
2) Corporations registered with the Board of Investments and enjoying
exemptions from income under the Omnibus Investment Code of 1997;
3)
Corporations exempt from income tax under Sec. 30, of the Tax
Code, like the SSS, GSIS, the PCSO, etc. However, income payments arising
from any activity which is conducted for profit or income derived from real or
personal property shall be subject to a withholding tax. (Sec. 57.5, Rev.
Regs. No. 2-98)
20.
For tax amnesty purposes, the withholding agent is
not a taxpayer. He is made to pay the tax where he fails to withhold as a
penalty and not because the tax is due from him. (Commissioner of Internal
Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999,
the Anscor case)
PENALTIES, INTERESTS AND SURCHARGES
1.
Surtaxes or surcharges, also known as the civil penalties,
are the amounts imposed in addition to the tax required.

They are in the nature of penalties and shall be collected at the same
time, in the same manner, and as part of the tax. [Sec.248 (A), NIRC of
1997]
2.
What are the two (2) kinds of civil penalties ?
SUGGESTED ANSWER:
a.
the 25% surcharge for late filing or late payment [Sec. 248
(A), NIRC of 1997] (also known as the delinquency surcharge), and
b.
the 50% willful neglect or fraud surcharge. [Sec. 248
(B), Ibid.]
3.
Define deficiency income tax.
SUGGESTED ANSWER: Deficiency income tax is the amount by which
the tax imposed under the NIRC of 1997 exceeds the amount shown as the
tax due by the taxpayer upon his return. [Sec. 56 (B) (1), NIRC of 1997]
4.
Deficiency interest, defined. The interest assessed and
collected on any unpaid amount of tax at the rate of 20% per annum or such
higher rate as may be prescribed by regulations, from the date prescribed for
payment until the amount is fully paid. [Sec. 249 (A) (B), NIRC of 1997]
5.
Delinquency interest, defined. The interest assessed
and collected on the unpaid amount until fully paid where there is failure on
the part of the taxpayer to pay the amount die on any return required to be
filed; or the amount of the tax due for which no return is required; or a
deficiency tax, or any surcharge or interest thereon, on the date appearing in
the notice and demand by the Commissioner of Internal Revenue. [Sec.249
(c), NIRC of 1997]
6.
After resolving the issues the BIR Commissioner
reduced the assessment. Was it proper to impose delinquency
interest despite the reduction of the assessment ? Why ?
SUGGESTED ANSWER: Yes. The intention of the law is to discourage
delay in the payment of taxes due to the State and in this sense the
surcharge and interest charged are not penal but compensatory in nature
they are compensation to the State for the delay in payment, or for the
concomitant tuse of the funds by the taxpayer beyond the date he is
supposed to have paid them to the State. (Bank of the Philippine Islands v.
Commissioner of Internal Revenue, G. R. No. 137002, July 27, 2006)

7.
Compromise penalty is the amount agreed upon between
the taxpayer and the Government to be paid as a penalty in cases of a
compromise.
8.
As a result of divergent rulings on whether it is
subject to tax or not, the taxpayer was not able to pay his taxes on
time. Imposed surcharges and interests for such delay, the taxpayer
not invokes good faith with the BIR countering by saying that good
faith is not a valid defense for violation of a special
law. Furthermore, the BIR further raises the defense that the
government is not bound by the errors of its agents. Who is correct ?
SUGGESTED ANSWER: The taxpayer is correct. The settled rule is that
good faith and honest belief that one is not subject to tax on the basis of
previous interpretation of government agencies tasked to implement the tax,
are sufficient justification to delete the imposition of surcharges. (Michel J.
Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, G. R. No.
166786, September 11, 2006)
REPUBLIC ACT NO. 1125, CREATING THE COURT OF TAX APPEALS
INCLUDING JURISDICTION OF THE CTA, AS AMENDED
COURT OF TAX APPEALS, IN GENERAL
1.
Discuss
the
role
of
the
judiciary
in
taxation. SUGGESTED ANSWER: The role of the judiciary is to be the
sympathetic or vigilant court which would check injustices or abuses of the
legislative and administrative agents of the State in their exercise of the
power of taxation.
2. What is the nature and composition of the Court of Tax
Appeals ?
SUGGESTE
D ANSWER: The Court of Tax Appeals is the special tax court created under
Republic Act No. 1125, as amended, and is composed of a Presiding Justice
and eight (8) Associate Justices, organized into three (3) divisions.
3.
What are the purposes for the creation of the Court of
Tax Appeals ?
SUGGESTED
ANSWER:
a.
To prevent delay in the disposition of tax cases by the then
Courts of First Instance (now RTCs), in view of the backlog of civil, criminal,
and cadastral cases accumulating in the dockets of such courts; and

b.
To have a body with special knowledge which ordinary
Judges of the then Courts of First Instance (now RTCs), are not likely to
possess, thus providing for an adequate remedy for a speedy determination of
tax cases. (Ursal v. Court of Tax Appeals, et al., 101 Phil. 209)
4. Jurisdiction of the Court of Tax Appeals.
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 Code or other laws administered by the Bureau
of Internal Revenue; (DIVISION)
2.
Inaction by the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds or internal revenue taxes, fees or
other charges, penalties in relation thereto, or other matter 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; (The inaction on refunds in two years from the time tax was
paid. Thus, if the prescriptive period of two years is about to expire, the
taxpayer should interpose a petition for review with the CTA DIVISION)
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; (If original DIVISION; if appellate EN
BANC)
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; (DIVISION)
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; (EN BANC)
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; (This has reference to forfeiture cases where the
decision is to release the seized articles DIVISION)

7.
Decisions of the Secretary of Trade and Industry, in 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. (DIVISION)
b.
Jurisdiction over cases involving criminal offenses as
herein provided:
1.
Exclusive original jurisdiction over all criminal
cases 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 of taxes and
fees, exclusive of charges and penalties claimed, is less than One million
pesos (P1,000,000.00) or where there is no specified amount claimed shall be
tried by the regular Courts and the jurisdiction of the CTA shall be appellate.
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 filing of such civil action separately
from the civil 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
respective territorial jurisdiction.
b)
Over petitions for review of the judgments, resolutions
or
orders of the Regional Trial Courts in the exercise of their
appellate jurisdiction over tax cases originally decided by the Metropolitan
Trial
Courts, Municipal Trial Courts and Municipal Circuit Trial Courts
in their respective jurisdiction.
c.
Jurisdiction over tax collection cases:
1.
Exclusive original jurisdiction in tax collection cases
involving final and executory assessments for taxes, fees, charges and
penalties: 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) 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 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 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. 7, R. A. No.
1125,
as amended by R. A. No. 9282, emphasis and words in
parentheses
supplied)
The petition for review to be filed with the CTA en banc as the
mode for appealing a decision, resolution, or order of the CTA
Division, under Section 18 of Republic Act No. 1125, as amended, is
not a totally new remedy, unique to the CTA, with a special
application or use therein. To the contrary, the CTA merely adopts the
procedure for petitions for review and appeals long established and practiced
in other Philippine courts. Accordingly, doctrines, principles, rules, and
precedents laid down in jurisprudence by this Court as regards petitions for
review and appeals in courts of general jurisdiction should likewise bind the
CTA, and it cannot depart therefrom. (Santos v. People, et al, G. R. No.
173176, August 26, 2008)
5.
It is the Regional Trial Court that has jurisdiction to rule
upon the constitutionality of a tax law or a regulation issued by the
taxing authorities. Where what is assailed is the validity or
constitutionality of a law, or a rule or regulation issued by the administrative
agency in the performance of its quasi-legislative function, the regular courts
have jurisdiction to pass upon the same. The determination of whether a
specific rule or set of rules issued by an administrative agency contravenes
the law or the constitution is within the jurisdiction of the regular courts.
Indeed, the Constitution vests the power of judicial review or the
power to declare a law, treaty, international or executive agreement,
presidential decree, order, instruction, ordinance, or regulation in the courts,
including the regional trial courts. This is within the scope of judicial power,
which includes the authority of the courts to determine in an appropriate
action the validity of the acts of the political departments. Judicial power
includes the duty of the courts of justice to settle actual controversies
involving rights which are legally demandable and enforceable, and to
determine whether or not there has been a grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of any branch or

instrumentality of the Government. (British American Tobacco v. Camacho

et al., G. R. No. 163583, August 20, 2008 with an intervenor)
NOTES AND COMMENTS: The above doctrine supersedes Asia
International Auctioneers, Inc., etc et al., .v. Parayno, Jr., etc.,, et al., G. R.
No. 103445, December 18, 2007 which ruled that it is the Court of Tax
Appeals that has jurisdiction relative to matters involving the constitutionality
of regulations issued by the BIR. The reason was that this falls under the
concept of decisions of the BIR Commissioner on other matter arising under
the provisions of laws administered by the Commission. Issuance of revenue
regulations are authorized under the NIRC.
British American Tobacco reversed Asia International Auctioneers upon
the concept of the judiciarys expanded power.
6.
Instances where the Court of Tax Appeals would have
jurisdiction even if there is no decision of the Commissioner of
Customs:
a.
Decisions of the Secretary of Trade and Industry or the
Secretary of Agriculture in anti-dumping and countervailing duty cases are
appealable to the Court of Tax Appeals within thirty (30) days from receipt of
such decisions.
b. In case of automatic review by the Secretary of Finance in seizure or
forfeiture cases where the value of the importation exceeds P5 million or
where the decision of the Collector of Customs which fully or partially releases
the shipment seized is affirmed by the Commissioner of Customs.
c. In case of automatic review by the Secretary of Finance of a
decision of a Collector of Customs acting favorably upon a customs protest.
ASSESSMENT OF INTERNAL REVENUE TAXES
1. Outline of tax remedies of a taxpayer and the government
relative to ASSESSMENT of internal revenue taxes.
a.
The taxpayer files his tax return.
b.
A Letter of Authority is issued authorizing BIR examiner to audit
or examine the tax return and determines whether the full and complete
taxes have been paid.
c.
If the examiner is satisfied that the tax return is truly reflective
of the taxable transaction and all taxes have been paid, the process
ends. However, if the examiner is not satisfied that the tax return is truly
reflective of the taxable transaction and that the taxes have not been fully
paid, a Notice of Informal Conference is issued inviting the taxpayer to explain
why he should not be subject to additional taxes.

d.
If the taxpayer attends the informal conference and the
examiner is satisfied with the explanation of the taxpayer, the process is again
ended.
If the taxpayer ignores the invitation to the informal conference, or if
the examiner is not satisfied with taxpayers explanation,, and he believes
that proper taxes should be assessed, the Commissioner of Internal Revenue
or his duly authorized representative shall then notify the taxpayer of the
findings in the form of a pre-assessment notice. The pre-assessment notice
requires the taxpayer to explain within fifteen (15) days from receipt why no
notice of assessment and letter of demand for additional taxes should be
directed to him.
e.
If the Commissioner is satisfied with the explanation of the
taxpayer, then the process is again ended.
If the taxpayer ignores the pre-assessment notice by not responding or
his explanations are not accepted by the Commissioner, then a notice of
assessment and a letter of demand is issued.
The notice of assessment must be issued by the Commissioner to the
taxpayer within a period of three (3) years from the time the tax return was
filed or should have been filed whichever is the later of the two
events. Where the taxpayer did not file a tax return or where the tax return
filed is false or fraudulent, then the Commissioner has a period of ten (10)
years from discovery of the failure to file a tax return or from discovery of the
fraud within which to issue an assessment notice. The running of the above
prescriptive periods may however be suspended under certain instances.
The notice of assessment must be issued within the prescriptive period
and must contain the facts, law and jurisprudence relied upon by the
Commissioner. Otherwise it would not be valid.
f.
The taxpayer should then file an administrative protest by filing
a request for reconsideration or reinvestigation within thirty (30) days from
receipt of the assessment notice.
The taxpayer could not immediately interpose an appeal to the Court of
Tax Appeals because there is no decision yet of the Commissioner that could
be the subject of a review.
To be valid the administrative protest must be filed within the
prescriptive period, must show the error of the Bureau of Internal Revenue
and the correct computations supported by a statement of facts, and the law
and jurisprudence relied upon by the taxpayer. There is no need to pay under
protest. If the protest was not seasonably filed the assessment becomes final
and collectible and the Bureau of Internal Revenue could use its
administrative and judicial remedies in collecting the tax.

g.
Within sixty (60) days from filing of the protest, all relevant
supporting documents shall be submitted, otherwise the assessment shall
become final and collectible and the BIR could use its administrative and
judicial remedies to collect the tax.
Once an assessment has become final and collectible, not even the BIR
Commissioner could change the same. Thus, the taxpayer could not pay the
tax, then apply for a refund, and if denied appeal the same to the Court of Tax
Appeals.
h.
If the protest is denied in whole or in part, or is not acted upon
within one hundred eighty (180) days from the submission of documents, the
taxpayer adversely affected by the decision or inaction may appeal to the
Court of Tax Appeals within thirty (30) days from receipt of the adverse
decision, or from the lapse of the one hundred eighty (180-) day period, with
an application for the issuance of a writ of preliminary injunction to enjoin the
BIR from collecting the tax subject of the appeal.
If the taxpayer fails to so appeal, the denial of the Commissioner or
the inaction of the Commissioner would result to the notice of assessment
becoming final and collectible and the BIR could then utilize its administrative
and judicial remedies to collect the tax.
i.
A decision of a division of the Court of Tax Appeals adverse to
the taxpayer or the government may be the subject of a motion for
reconsideration or new trial, a denial of which is appealable to the Court of
Tax Appeals en banc by means of a petition for review.
The Court of Tax Appeals, has a period of twelve (12) months from
submission of the case for decision within which to decide.
j.
If the decision of the Court of Tax Appeals en banc affirms the
denial of the protest by the Commissioner or the assessment in case of failure
by the Commissioner to decide the taxpayer must file a petition for review on
certiorari with the Supreme Court within fifteen (15) days from notice of the
judgment on questions of law. An extension of thirty (30) days may for
justifiable reasons be granted. If the taxpayer does not so appeal, the
decision of the Court of Tax Appeals would become final and this has the
effect of making the assessment also final and collectible. The BIR could then
use its administrative and judicial remedies to collect the tax.
2.
The word assessment when used in connection with
taxation, may have more than one meaning. More commonly the word
assessment means the official valuation of a taxpayers property for purpose
of taxation. The above definition of assessment finds application under tariff
and customs taxation as well as local government taxation.

For real property taxation, there may be a special meaning to

the burdens that are imposed upon real properties that have been
benefited by a public works expenditure of a local government. It is
sometimes called a special assessment or a special levy. (Commissioner of
Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R.
No. 128315, June 29, 1999)
For internal revenue taxation assessment as laying a tax. The
ultimate purpose of an assessment to such a connection is to ascertain the
amount that each taxpayer is to pay. (Ibid.)
3.
An assessment is a notice duly sent to the taxpayer
which is deemed made only when the BIR releases, mails or sends
such notice to the taxpayer. (Commissioner of Internal Revenue v. Pascor
Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999)
4.
Self-assessed tax, defined. A tax that the taxpayer
himself assesses or computes and pays to the taxing authority. It is a tax
that self-assessed by the taxpayer without the intervention of an assessment
by the tax authority to create the tax liability.
The Tax Code follows the pay-as-you-file system of taxation under
which the taxpayer computes his own tax liability, prepares the return, and
pays the tax as he files the return. The pay-as-you-file system is a selfassessing tax return.
Internal revenue taxes are self-assessing. (Dissent of J. Carpio
in Philippine National Oil Company v. Court of Appeals, et al., G. R. No.
109976, April 26, 2005 and companion case)
A clear example of a self-assessed tax is the annual income tax, which
the taxpayer himself computes and pays without the intervention of any
assessment by the BIR. The annual income tax becomes due and payable
without need of any prior assessment by the BIR. The BIR may or may not
investigate or audit the annual income tax return filed by the taxpayer. The
taxpayers liability for the income tax does not depend on whether or not the
BIR conducts such subsequent investigation or audit.
However, if the taxing authority is first required to investigate, and
after such investigation to issue the tax assessment that creates the tax
liability, then the tax is no longer self-assessed. (Ibid.)
5. Sec. 6 (B) of the NIRC of 1997 allows the BIR to make or
amend a tax return from his own knowledge or obtained through
testimony or otherwise. Thus, the Commissioner of Internal Revenue
investigates any circumstance which led him to believe that the taxpayer had

taxable income larger than that reported. Necessarily, this inquiry would have
to be outside of the books because they supported the return as filed. He
may take the sworn testimony of the taxpayer, he may take the testimony of
third parties; he may examine and subpoena, if necessary, traders and
brokers accounts and books and the taxpayers books of accounts. The
Commissioner is not bound to follow any set of patterns. The existence of
unreported income may be shown by any particular proof that is available in
the circumstances of the particular situation. (Commissioner of Internal
Revenue v. Hantex Trading Co., Inc. G. R. No. 136975, March 31, 2005)
6. General rule: When the Commissioner of Internal Revenue
may rely on estimates. The rule is that in the absence of accounting
records of a taxpayer, his tax liability may be determined by estimation. The
petitioner (Commissioner of Internal Revenue) is not required to compute
such tax liabilities with mathematical exactness. Approximation in the
calculation of taxes due is justified. To hold otherwise would be tantamount
to holding that skillful concealment is an invincible barrier to proof.
(Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. No.
136975, March 31, 2005)
However, the rule does not apply where the estimation is arrived at
arbitrarily and capriciously. (Ibid.)
7.
Meaning of "best evidence obtainable" under Sec. 6 (B),
NIRC
of
1997. This means that the original documents must be
produced. If it could not be produced, secondary evidence must be
adduced. (Hantex Trading Co., Inc. v. Commissioner of Internal Revenue, CA
- G.R. SP No. 47172, September 30, 1998)
8. The following are the general methods developed by the
Bureau of Internal Revenue for reconstructing a taxpayers
income where the records do not show the true income or where no return
was filed or what was filed was a false and fraudulent return
(a) Percentage method;
(b) Net worth method.;
(c) Bank deposit method;
(d) Cash expenditure method;
(e) Unit and value method;
(f) Third party information or access to records method;
(g) Surveillance and assessment method. (Chapter XIII. Indirect
Approach to Investigation, Handbook on Audit Procedures and Techniques
Volume I, pp. 68-74)

 9. Third party information or access to records method. The

BIR may require third parties, public or private to supply information to the
BIR, and thus, obtain on a regular basis from any person other than the
person whose internal revenue tax liability is subject to audit or investigation,
or from any office or officer of the national and local governments,
government agencies and instrumentalities including the Bangko Sentral ng
Pilipinas and government-owned or controlled corporations, any information
such as, but not limited to, costs and volume of production, receipts or sales
and gross incomes of taxpayers, and the names , addresses, and financial
statements of corporations, mutual fund companies, insurance companies,
regional operating headquarters or multinational companies, joint accounts,
associations, joint ventures or consortia and registered partnerships, and their
members; xxx [Sec. 5 (B), NIRC of 1997)
10.
A pre-assessment notice is a letter sent by the Bureau of
Internal Revenue to a taxpayer asking him to explain within a period of fifteen
(15) days from receipt why he should not be the subject of an assessment
notice. It is part of the due process rights of a taxpayer.
As a general rule, the BIR could not issue an assessment notice
without first issuing a pre-assessment notice because it is part of the due
process rights of a taxpayer to be given notice in the form of a preassessment notice, and for him to explain why he should not be the subject of
an assessment notice.
11. Instances where a pre-assessment notice is not required
before a notice of assessment is sent to the taxpayer.
a. When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as appearing on the face of
the return; or
b. When a discrepancy has been determined between the tax withheld
and the amount actually remitted by the withholding agent; or
c. When a taxpayer opted to claim a refund or tax credit of excess
creditable withholding tax for a taxable period was determined to have carried
over and automatically applied the same amount claimed against the
estimated tax liabilities for the taxable quarter or quarters of the succeeding
table year; or
d. When the excess tax due on excisable articles has not been paid; or
e. When an article locally purchased or imported by an exempt
person, such as, but not limited to vehicles, capital equipment, machineries

and spare parts, has been sold, trade or transferred to non-exempt

persons. (Sec. 228, NIRC of 1997)
12. Prescriptive periods for making assessments of internal
revenue taxes.
a.
Three (3) years from the last day within which to file a return or
when the return was actually filed, whichever is later (Sec. 203, NIRC of
1997). The CIR has three (3) years from the date of actual filing of the tax
return to assess a national internal revenue tax or to commence court
proceedings for the collection thereof without an assessment. [Bank of
Philippine Islands (Formerly Far East Bank and Trust Company) v.
Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008]
b.
ten years from discovery of the failure to file the tax return or
discovery of falsity or fraud in the return [Sec. 222 (a), NIRC of 1997[ ; or
c.
within the period agreed upon between the government and
the taxpayer where there is a waiver of the prescriptive period for assessment
(Sec. 222 (b), NIRC of 1997).
13.
Purpose of period of limitations in taxation. For the
purpose of safeguarding taxpayers from any unreasonable examination,
investigation or assessment, our tax law provides a statute of limitations in
the collection of taxes. [Commissioner of Internal Revenue v. B.F. Goodrich
Phils, Inc., (now Sime Darby International Tire Co., Inc.), et al., G.R. No.
104171, February 24, 1999, 303 SCRA 546;Philippine Journalists, Inc. v.
Commissioner of Internal Revenue, G. R. No. 162852, December 16,
2004], as well as their assessments.
The law prescribing a limitation of actions for the collection of the
income tax is beneficial both to the Government and to its citizens; to the
Government because tax officers would be obliged to act promptly in the
making of assessment, and to citizens because after the lapse of the period
of prescription citizens would have a feeling of security against unscrupulous
tax agents who will always find an excuse to inspect the books of taxpayers,
not to determine the latters real liability, but to take advantage of every
opportunity to molest peaceful, law-abiding citizens. Without such a legal
defense taxpayers would furthermore be under obligation to always keep
their books and keep them open for inspection subject to harassment by
unscrupulous tax agents. The law on prescription being a remedial measure
should be interpreted in a way conducive to bringing about the beneficent
purpose of affording protection to the taxpayer within the contemplation of
the Commission which recommend the approval of the law. [Bank of

Philippine Islands (Formerly Far East Bank and Trust Company) v.

Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008]
This mandate governs the question of prescription of the
governments right to assess internal revenue taxes primarily to safeguard
the interests of taxpayers from unreasonable investigation. Accordingly, the
government must assess internal revenue taxes on time so as not to extend
indefinitely the period of assessment and deprive the taxpayer of the
assurance that it will no longer be subjected to further investigation for taxes
after the expiration of reasonable period of time. (Commissioner of Internal
Revenue v. FMF Development Corporation, G. R. No. 167765, June 30, 2008
citing Philippine Journalists, Inc. v. Commissioner of Internal Revenue G.R.
No. 162852, December 16, 2004, 447 SCRA 214, 225)
14.
Unreasonable investigation contemplates cases where
the period for assessment extends indefinitely because this deprives the
taxpayer of the assurance that it will not longer be subjected to further
investigation for taxes after the expiration of a reasonable period of
time. (Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R.
No. 162852, December 16, 2004 with note to see Republic v. Ablaza, 108
Phil. 1105. 1108)
Laws on prescription should be liberally construed in favor of the
taxpayer. Reason: for the purpose of safeguarding taxpayers from an
unreasonable examination, investigation or assessment, our tax laws provide
a statute of limitation on the collection of taxes. Thus, the law on prescription,
being a remedial measure, should be liberally construed in order to afford
such protection, As a corollary, the exceptions to the law on prescription
should perforce be strictly construed. [Philippine Journalists, Inc. v.
Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004
citing Commissioner of Internal Revenue v. B.F. Goodrich Phils, Inc (now
Sime Darby International Tire Co., Inc.),., et al., G.R. No. 104171, February
24, 1999, 303 SCRA 546]
The prescriptive period was precisely intended to give the taxpayers
peace of mind. (Commissioner of Internal Revenue v. B.F. Goodrich
Phils., Inc., et al., G.R. No. 104171, February 24, 1999)
15.
A
jeopardy
assessment is
a
delinquency
tax
assessment which was assessed without the benefit of complete or partial
audit by an authorized revenue officer, who has reason to believe that the
assessment and collection of a deficiency tax will be jeopardized by delay
because of the taxpayers failure to comply with the audit and investigation
requirements to present his books of accounts and/or pertinent records, or to

substantiate all or any of the deductions, exemptions, or credits claimed in his

return. [Sec. 3.1 (a), Rev. Regs. No. 6-2000)
Jeopardy assessment is an indication of the doubtful validity of the
assessment, hence it may be subject to a compromise. [Sec. 3.1 (a), Rev.
Regs. No. 6-2000]
16. Requisites for Formal Letter of Demand and Assessment
Notice. The formal letter of demand and assessment notice shall be issued
by the Commissioner or his duly authorized representative. The letter of
demand calling for payment of the taxpayers deficiency tax or taxes shall
state the facts, the law, rules and regulations, or jurisprudence on which the
assessment is based,otherwise, the formal letter of demand and assessment
notice shall be void. The same shall be sent to the taxpayer only by
registered mail or by personal delivery.
17. What are the requirements for the validity of a formal
letter of demand and assessment notice ?
SUGGESTED ANSWER:
a. There must have been previously issued a pre-assessment notice
until excepted;
b. It must have been issued prior to the prescriptive period; and
c. The letter of demand calling for payment of the taxpayers deficiency
tax or taxes shall state the facts, the law, rules and regulations, or
jurisprudence on which the assessment is based, otherwise, the formal letter
of demand and assessment notice shall be void. (Sec. 3.1.4, Rev. Regs. No.
12-99)
18.
What are the reasons for presumption of correctness
of assessments ?
SUGGESTED ANSWER:
a.
Lifeblood theory
b.
Presumption of regularity (Commissioner of Internal
Revenue v. Hantex Trading Co., Inc.,G, R. No. 136975, March 31, 2005) in
the performance of public functions. (Commissioner of Internal Revenue v.
Tuazon, Inc., 173 SCRA 397)
c.
The likelihood that the taxpayer will have access to the
relevant information [Commissioner of Internal Revenue, supra citing United
States v. Rexach, 482 F.2d 10 (1973). The certiorari was denied by the
United States Supreme Court on November 19, 1973]
d.
The
desirability
of
bolstering
the
record-keeping
requirements of the NIRC. (Ibid.)

 19. Give instances where prima facie correctness of a tax

assessment does not apply.
SUGGESTED ANSWER: The prima facie correctness of a tax
assessment does not apply upon proof that an assessment is utterly without
foundation, meaning it is arbitrary and capricious. Where the BIR has come
out with a naked assessment i.e., without any foundation character, the
determination of the tax due is without rational basis. [Commissioner of
Internal Revenue v. Hantex Trading Co., Inc., G, R. No. 136975, March 31,
2005 citing United States v. Janis, 49 L. Ed. 2d 1046 (1976); 428 US 433
(1976)] In such a situation, the determination of the Commissioner
contained in a deficiency notice disappears. [Commissioner of Internal
Revenue, supra citing a U.S. Court of Appeals ruling, in Clark and Clark v.
Commissioner of Internal Revenue, 266 F. 2d 698 (1959)] Hence, the
determination by the CTA must rest on all the evidence introduced and its
ultimate determination must find support in credible evidence.
[Commissioner of Internal Revenue, supra]
20. What are the instances that suspends the running of the
prescriptive periods (Statute of Limitations) within which to make an
assessment and the beginning of distraint or levy or of a proceeding
in court for the collection, in respect of any tax deficiencies?
SUGGESTED ANSWER:
a.
When the Commissioner is prohibited from making the
assessment, or beginning distraint, or levy or proceeding in court and for sixty
(60) days thereafter;
b.
When the taxpayer requests for and is granted a
reinvestigation by the commissioner;
c.
When the taxpayer could not be located in the address given
by him in the return filed upon which the tax is being assessed or collected;
d.
When the warrant of distraint and levy is duly served upon
the taxpayer, his authorized representative, or a member of his household
with sufficient discretion, and no property could be located; and
e.
When the taxpayer is out of the Philippines.
NOTES AND COMMENTS:
The holding in Commissioner of Internal Revenue v. Court of Appeals,
et al., G.R. No. 115712, February 25, 1999 (Carnation case) that the waiver
of the period for assessment must be in writing and have the written consent
of the BIR Commissioner is still doctrinal because of the provisions of Sec.
223, NIRC of 1997 which provides for the suspension of the prescriptive
period:

 21. Under RMO No. 20-90, which implements Sections 203

and 222 (b), the following procedures should be followed for a valid
waiver
of
the
prescriptive
period
for
an
assessment:
a.
The
waiver
must
be
in
the
proper
form;
b.
The waiver shall be
signed by the taxpayer himself or his duly authorized representative. In the
case of a corporation, the waiver must be signed by any of its responsible
officials.
Soon after the waiver is signed by
the taxpayer, the Commissioner of Internal Revenue or the revenue official
authorized by him, as hereinafter provided, shall sign the waiver indicating
that the Bureau has accepted and agreed to the waiver. The date of such
acceptance by the Bureau should be indicated. Both the date of
execution by the taxpayer and date of acceptance by the Bureau should
be before the expiration of the period of prescription or before the lapse of
the period agreed upon in case a subsequent agreement is
executed.
c.
The following revenue officials are
authorized
to
sign
the
waiver.
A.
In
the
National
Office
x
x
x
x
3.
Commissioner
For
tax
cases
involving
more
than P1M
B.
In
the
RegionalOffices
1.
The Revenue
District
Officer
with
respect
to
tax
cases still pending investigation and the period to assess
is
about
to
prescribe
regardless
of
amount.
x
x
x
x
d.
The wa
iver must be executed in three (3) copies, the original copy to be
attached to the docket of the case, the second copy for the taxpayer and
the third copy for the Office accepting the waiver. The fact of receipt by
the taxpayer of his/her file copy shall be indicated in the original
copy.
d.
Th
e foregoing procedures shall be strictly followed. Any revenue official
found not to have complied with this Order resulting in prescription of the
right to assess/collect shall be administratively dealt with. (Renumbering
and emphasis supplied.)

If the above are not followed there is no valid waiver and

prescription would run. (Commissioner of Internal Revenue v. FMF
Development Corporation, G. R. No. 167765, June 30, 2008 citing Philippine
Journalists, Inc. v. Commissioner of Internal Revenue G.R. No. 162852,
December 16, 2004, 447 SCRA 214, 228-229)
22. The procedures in RMO No. 20-90 are NOT merely
directory and that the execution of a waiver is a renunciation of a
taxpayers right to invoke prescription. RMO No. 20-90 must be
strictly followed. A waiver of the statute of limitations under the NIRC, to a
certain extent being a derogation of the taxpayers right to security against
prolonged and unscrupulous investigations, must be carefully and strictly
construed. The waiver of the statute of limitations does not mean that the
taxpayer relinquishes the right to invoke prescription unequivocally,
particularly where the language of the document is equivocal.
Thus a waiver becomes unlimited in time, and invalid, because it did
not specify a definite date, agreed upon between the BIR and the taxpayer,
within which the former may assess and collect taxes. It also would have no
binding effect on the taxpayer if there was no consent by the
Commissioner. On this basis, no implied consent can be presumed, nor can it
be contended that the concurrence to such waiver is a mere
formality. (Commissioner of Internal Revenue v. FMF Development
Corporation, G. R. No. 167765, June 30, 2008 citing Philippine Journalists,
Inc. v. Commissioner of Internal Revenue G.R. No. 162852, December 16,
2004, 447 SCRA 214, 229 in turn citing Id. at 229, citing Commissioner of
Internal Revenue v. Court of Appeals, G.R. No. 115712, February 25, 1999,
303 SCRA 614, 620-622.)
23. BIR cannot rely on its invocation of the rule that the
government cannot be estopped by the mistakes of its revenue officers
in the enforcement of RMO No. 20-90 because the law on prescription
should be interpreted in a way conducive to bringing about the beneficent
purpose of affording protection to the taxpayer within the contemplation of the
Commission which recommended the approval of the law. To the Government,
its tax officers are obliged to act promptly in the making of assessment so that
taxpayers, after the lapse of the period of prescription, would have a feeling of
security against unscrupulous tax agents who will always try to find an excuse
to inspect the books of taxpayers, not to determine the latters real liability, but
to take advantage of a possible opportunity to harass even law-abiding
businessmen. Without such legal defense, taxpayers would be open season to
harassment by unscrupulous tax agents. [Commissioner of Internal Revenue

v. FMF Development Corporation, G. R. No. 167765, June 30, 2008

citing Republic of the Phils. v. Ablaza, 108 Phil. 1105, 1108 (1960)]
24. The signatures of both the Commissioner and the
taxpayer, are required for a waiver of the prescriptive period, thus a
unilateral waiver on the part of the taxpayer does not suspend the
prescriptive period. [Commissioner of Internal Revenue v. Court of Appeals,
et al., G.R. No. 115712, February 25, 1999 (Carnation case)]
47.
The act of requesting a reinvestigation alone does not
suspend the running of the prescriptive period. The request for
reinvestigation must be granted by the CIR. The Supreme
Court declared that the burden of proof that the request for reinvestigation
had been actually granted shall be on the Commissioner of Internal
Revenue. Such grant may be expressed in its communications with the
taxpayer or implied from the action of the Commissioner or his authorized
representative in response to the request for reinvestigation. [Bank of
Philippine Islands (Formerly Far East Bank and Trust Company) v.
Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008]
PROTESTING INTERNAL REVENUE TAX ASSESSMENTS
1. What is the presumption that flows from a taxpayers failure to
protest an assessment ?
SUGGESTED ANSWER: Tax assessments by tax examiners are
presumed correct and made in good faith. The taxpayer has the duty to
prove otherwise. In the absence of proof of any irregularities in the
performance of duties, an assessment duly made by a Bureau of Internal
Revenue examiner and approved by his superior officers will not be
disturbed. All presumptions are in favor of the correctness of tax
assessments. (Commissioner of Internal Revenue v. Bank of Philippine
Islands., G, R. No. 134062, April 17, 2007 citing Sy Po v. Court of Appeals, G.
R. No. L-81446, 18 August 1988, 164 SCRA 524, 530, citations omitted)
2.
What are the two ways of protesting an assessment
notice for an internal revenue tax ? Alternatively, what are the two
types of protests ? Explain briefly.
SUGGESTED ANSWER:
a.
Request for reconsideration which refers to a plea for reevaluation of an assessment on the basis of existing records without need of
additional evidence. It may involve both a question of fact or of law or both.

b.
Request for reinvestigation which refers to a plea for reevaluation of an assessment on the basis of newly-discovered evidence or
additional evidence that a taxpayer intends to present in the investigation. It
may also involve a question of fact or law or both. (Commissioner of Internal
Revenue v. Philippine Global Communication, Inc., G. R. No. 167146, October
31, 2006 citing Rev. Regs. No. 12-85)
3.
What is that type of protest that suspends the running
of the statute of limitations for the beginning of distraint or levy or a
proceeding in court for collection ? Why ?
SUGGESTED ANSWER: It is that type of protest when the taxpayer
requests for a reinvestigation which is granted by the Commissioner (Sec.
223, NIRC of 1997), that suspends the running of the statute of limitations for
collection of the tax. (Commissioner of Internal Revenue v. Philippine Global
Communication, Inc., G. R. No. 167146, October 31, 2006 citing Sec. 271,
now Sec. 223, NIRC of 1997) When a taxpayer demands a reinvestigation,
the time employed in reinvestigation should be deducted from the total period
of limitation. [Commissioner of Internal Revenue, supra citing Republic v.
Lopez, 117 Phil. 575, 578; 7 SCRA 566, 568-569 (1963)]
Undoubtedly, a reinvestigation, which entails the reception and
evaluation of additional evidence, will take more time than a reconsideration
of a tax assessment which will be limited to the evidence already at hand; this
justifies why the former can suspend the running of the statute of limitations
on collection of the assessed tax, while the latter cannot. (Commissioner of
Internal Revenue v. Philippine Global Communication, Inc., G. R. No. 167146,
October 31, 2006 citing Bank of Philippine Islands v. Commissioner of
Internal Revenue, G. R. No. 139736, 17 October 2005, 473 SCRA 205, 230231)
4.
What are the requirements for the validity of a
taxpayers protest ?
SUGGESTED ANSWER:
a.
It must be filed within the reglementary period of thirty (30)
days from receipt of the notice of assessment.
b.
The taxpayer must not only show the errors of the Bureau of
Internal Revenue but also the correct computation through
1)
A statement of the facts, the applicable law, rules and regulations,
or jurisprudence on which the taxpayers protest is based,
2)
If there are several issues involved in the disputed assessment and
the taxpayer fails to state the facts, the applicable law, rules and regulations,
or jurisprudence in support of his protest against some of the several issues

on which the assessment is based, the same shall be considered undisputed

issue or issues, in which case, the taxpayer shall be required to pay the
corresponding deficiency tax or taxes attributable thereto. (Sec. 3.1.5, Rev.
Regs. 12-99)
c.
Within sixty (60) days from filing of the protest, the taxpayer
shall submit all relevant supporting documents. [4th par., Sec. 228 (e), NIRC
of 1997]
5. Relevant supporting documents, defined. The term
relevant supporting documents should be understood as those documents
necessary to support the legal basis in disputing a tax assessment as
determined by the taxpayer. The BIR can only inform the taxpayer to submit
additional documents.
The BIR cannot demand what type of supporting documents should be
submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which
may require the production of documents that a taxpayer cannot
submit. (Commissioner of Internal Revenue v. First Express Pawnshop
Company, Inc., G. R. 172045-46, June 16, 2009)
JUDICIAL REMEDIES INVOLVING PROTESTED ASSESSMENTS
1. Acts of BIR Commissioner that may be considered as
denial of a protest which serve as basis for appeal to the Court of Tax
Appeals.
a.
Filing by the BIR of a civil suit for collection of the deficiency
tax is considered a denial of the request for reconsideration. (Commissioner
of Internal Revenue v. Union Shipping Corporation, 185 SCRA 547)
b.
An indication to the taxpayer by the Commissioner in clear
and unequivocal language of his final denial not the issuance of the warrant
of distraint and levy. What is the subject of the appeal is the final decision
not the warrant of distraint. (Ibid.)
c.
A BIR demand letter sent to the taxpayer after his protest of
the assessment notice is considered as the final decision of the Commissioner
on the protest. (Surigao Electric Co., Inc. v. Court of Tax Appeals, et al., 57
SCRA 523)
d.
A letter of the BIR Commissioner reiterating to a taxpayer
his previous demand to pay an assessment is considered a denial of the
request for reconsideration or protest and is appealable to the Court of Tax
Appeals. (Commissioner v. Ayala Securities Corporation, 70 SCRA 204)
e.
Final notice before seizure considered as commissioners
decision of taxpayers request for reconsideration who received no other

response. Commissioner of Internal Revenue v. Isabela Cultural Corporation,

G.R. No. 135210, July 11, 2001 held that not only is the Notice the only
response received: its content and tenor supports the theory that it was the
CIRs final act regarding the request for reconsideration. The very title
expressly indicated that it was a final notice prior to seizure of property. The
letter itself clearly stated that the taxpayer was being given this LAST
OPPORTUNITY to pay; otherwise, its properties would be subjected to
distraint and levy.
2. The taxpayer seasonably protested the assessment issued
by the Commissioner of Internal Revenue. During the pendency of
the protest the CIR issued a warrant of distraint and levy to collect
the taxes subject of the protest.
As counsel what advice shall you give the taxpayer. Explain
briefly your answer.
SUGGESTED ANSWER: The taxpayer should appeal, by way of a
petition for review, to the Court of Tax Appeals not on the ground of the
denial of the protest but on other matter arising under the provisions of the
National Internal Revenue Code. The actual issuance of a warrant of distraint
and levy in certain cases cannot be considered a final decision on a disputed
assessment.
To be a valid decision on a disputed assessment, the decision of the
Commissioner or his duly authorized representative shall (a) state the facts,
the applicable law, rules and regulations, or jurisprudence on which such
decision is based, otherwise, the decision shall be void, in which case the
same shall not be considered a decision on the disputed assessment; and (b)
that the same is his final decision. (Sec. 3.1.6, Rev. Regs. 12-99) These
conditions are not complied with by the mere issuance of a warrant of
distraint and levy. (Commissioner of Internal Revenue v. Union Shipping
Corp., 185 SCRA 547)
Furthermore, a motion for the suspension of the collection of the tax
may be filed together with the petition for review (Sec. 3, Rule 10, RRCTA
effective December 15, 2005) because the collection of the tax may
jeopardize the interest of the taxpayer.
3.
As a general rule, there must always be a decision of
the Commissioner of Internal Revenue or Commissioner of Customs
before the Court of Tax Appeals, would have jurisdiction. If there is no
such decision, the petition would be dismissed for lack of jurisdiction unless
the case falls under any of the following exceptions.

4.
Instances where the Court of Tax Appeals would have
jurisdiction even if there is no decision yet by the Commissioner of
Internal Revenue:
a. Where the Commissioner has not acted on the disputed assessment
after a period of 180 days from submission of complete supporting
documents, the taxpayer has a period of 30 days from the expiration of the
180 day period within which to appeal to the Court of Tax Appeals. (last par.,
Sec. 228 (e), NIRC of 1997; Commissioner of Internal Revenue v. Isabela
Cultural Corporation, G.R. No. 135210, July 11, 2001)
b. Where the Commissioner has not acted on an application for refund
or credit and the two year period from the time of payment is about to expire,
the taxpayer has to file his appeal with the Court of Tax Appeals before the
expiration of two years from the time the tax was paid.
It is disheartening enough to a taxpayer to be kept waiting for an
indefinite period for the ruling,. It would make matters more exasperating for
the taxpayer if the doors of justice would be closed for such a relief until after
the Commissioner, would have, at his personal convenience, given his go
signal. (Commissioner of Customs, et al, v. Court of Tax Appeals, et al., G.R.
No. 82618, March 16, 1989, unrep.)
5.
The characteristic of a BIR denial of a protest such as
would enable the taxpayer to appeal the same to the Court of Tax
Appeals. The Commissioner of Internal Revenue should always indicate to
the taxpayer in clear and unequivocal language whenever his action on an
assessment questioned by a taxpayer constitutes his final determination on
the disputed assessment.
On the basis of his statement indubitably showing that the
Commissioners communicated action is his final decision on the contested
assessment, the aggrieved taxpayer would then be able to take recourse to
the tax court at the opportune time. Without needless difficulty, the taxpayer
would be able to determine when his right to appeal to the tax court
accrues. (Commissioner of Internal Revenue v. Bank of the Philippines
Islands, G. R. No. 134062, April 17, 2007)
COLLECTION OF INTERNAL REVENUE TAXES
1.
General
rule: Collection
of
taxes
is
imprescriptible. While this may be so, statutes may provide for periods of
prescription,
2.

Why is the collection of taxes imprescriptible ?

SUGGESTED ANSWER:
a.
As a general rule, revenue laws are not intended to be
liberally
construed,
and
exemptions
are
not
given
retroactive
application, considering that taxes are the lifeblood of the government and in
Holmes memorable metaphor, the price we pay for civilization, tax laws must
be faithfully and strictly implemented. (Commissioner of Internal Revenue v.
Acosta, etc.,G. R. No. 154068, August 3, 2007) However, statutes may
provide for prescriptive periods for the collection of particular kinds of taxes.
b.
Tax laws, unlike remedial laws, are not to be applied
retroactively. Revenue laws are substantive laws and their application must
not be equated with remedial laws. (Acosta, supra)
3.
What is the prescriptive period for collecting internal
revenue taxes ?
SUGGESTED ANSWER: There are four (4) prescriptive periods for the
collection of an internal revenue tax:
a.
Collection upon a false or fraudulent return or no return
without assessment. In case of a false or fraudulent return with the intent to
evade tax or of failure to file a return, a proceeding in court for the collection
of such tax may be filed without assessment, at any time within ten (10)
years after the discovery of the falsity, fraud or omission. [Sec. 222 (a),
NIRC of 1997]
b.
Collection upon a false or fraudulent return or no return with
assessment. Any internal revenue tax which has been assessed (because the
return is false or fraudulent with intent to evade tax or of failure to fail a
return), within a period of ten (10) years from discovery of the falsity, fraud
or omission may be collected by distraint or levy or by a proceeding in
court within five (5) years following the assessment of the tax. [Sec.
222 (c), in relation to Sec. 222 (a) NIRC of 1997, emphasis supplied]
c.
Collection upon an extended assessment. Where a tax has
been assessed with the period agreed upon between the Commissioner and
the taxpayer in writing (which should initially be within three (3) years from
the time the return was filed or should have been filed), or any extensions
before the expiration of the period agreed upon, the tax may be collected
by distraint or levy or by a proceeding in court within the period
agreed upon in writing before the expiration of the five (5) year
period. The period so agreed upon may be extended by subsequent written
agreements made before the expiration of the period previously agreed
upon. [Sec. 222 (d), in relation to Secs. 222 (b) and 203, NIRC of 1997,
emphasis supplied]

d.
Collection upon a return that is not false or fraudulent, or
where the assessment is not an extended assessment. Except as provided in
Section 222, internal revenue taxes shall be assessed within three (3) years
after the last day prescribed by law for the filing of the return, and no
proceeding in court without assessment for the collection of such
taxes shall be begun after the expiration of such period; Provided, That
in case where a return is filed beyond the period prescribed by law, the three
(3) year period shall be computed from the day the return was filed. For
purposes of this Section, a return filed before the last day prescribed by law
for the filing thereof shall be considered filed on such last day. (Sec. 203,
NIRC of 1997, emphasis supplied)
When the BIR validly issues an assessment within the three (3)-year
period, it has another three (3) years within which to collect the tax due by
distraint, levy, or court proceeding. The assessment of the tax is deemed
made and the three (3)-year period for collection of the assessed tax begins
to run on the date the assessment notice had been released, mailed or sent
to the taxpayer. [Bank of Philippine Islands (Formerly Far East Bank and
Trust Company) v. Commissioner of Internal Revenue, G. R. No.
174942, March 7, 2008 citing BPI v. Commissioner of Internal Revenue,
G.R. No. 139736, 17 October 2005, 473 SCRA 205, 222-223]
NOTES AND COMMENTS:
a.
Both the former Sec. 269, NIRC of 1977 and Sec.222
of NIRC of 1997 do not refer to a regular return. It is clear that in
enacting Sec. 222, entitled Exceptions as to the period of limitation of
assessment and collection of taxes, the NIRC of 1997 has eliminated subparagraph c of the former Sec. 269 of the NIRC, also entitled Exceptions as
to the period of limitation of assessment and collection of taxes. Said Sec.
269 (c), reads Any internal revenue tax which has been assessed within the
period of limitation above-prescribed may be collected by distraint or levy or
by a proceeding in court within three years following the assessment of the
tax.
A perusal of Sec. 222 of the NIRC is clear that it covers only three
scenarios only. 1) No assessment was made upon a false or fraudulent
return or omission to file a return; 2) an assessment was made upon a false
or fraudulent return or omission to file a return; and 3) an extended
assessment issued within a period agreed upon by the Commissioner and the
taxpayer. The same scenarios are those referred to in the former Sec. 269
which provided for a prescriptive period for collection of three (3) years.
It is clear therefore that neither Sec. 222 nor the former Sec.
269 provide for an instance where the assessment was made upon a regular

return or one that is not false or fraudulent, or that there was an agreement
to extend the period for assessment.
Resort should therefore be made to the three (3) year period referred
to in Sec. 203 of the NIRC of 1997 which reads, Except as provided in
Section 222, internal revenue taxes shall be assessed within three (3) years
after the last day prescribed by law for the filing of the return, and no
proceeding in court without assessment for the collection of such
taxes x x x (paraphrasing and emphasis supplied)
4. What is a compromise ?
SUGGESTED ANSWER: A compromise is a contract whereby the
parties, by making reciprocal concessions, avoid a litigation or put an end to
one already commenced. (Art. 2028, Civil Code)
A compromise penalty could not be imposed by the BIR, if the
taxpayer did not agree. A compromise being, by its nature, mutual in
essence requires agreement. The payment made under protest could only
signify that there was no agreement that had effectively been reached
between the parties. (Vda. de San Agustin, et al., v. Commissioner of
Internal Revenue, G. R. No. 138485, September 10, 2001)
5. What tax cases may be the subject of a compromise ?
SUGGESTED ANSWER: The following cases may, upon taxpayers
compliance with the basis for compromise, be the subject matter of
compromise settlement:
a.
Delinquent accounts;
b.
Cases under administrative protest after issuance of the
Final Assessment Notice to the taxpayer which are still pending in the
Regional Offices, Revenue District Offices, Legal Service, Large Taxpayer
Service (LTS), Collection Service, Enforcement Service and other offices in the
National Office;
c.
Civil tax cases being disputed before the courts;
d.
Collection cases filed in courts;
e.
Criminal violations, other than those already filed in court, or
those involving criminal tax fraud. (Sec. 2, Rev. Regs. No. 30-2002)
6. What tax cases could not be the subject of compromise ?
SUGGESTED ANSWER:
a.
Withholding tax cases unless the applicant-taxpayer invokes
provisions of law that cast doubt on the taxpayers obligation to withhold.;
b. Criminal tax fraud cases, confirmed as such by the Commissioner of
Internal Revenue or his duly authorized representative;

c.

Criminal violations already filed in court;

Delinquent accounts with duly approved schedule of installment

d.
payments;
e.
Cases where final reports of reinvestigation or reconsideration
have been issued resulting to reduction in the original assessment and the
taxpayer is agreeable to such decision by signing the required agreement
form for the purpose. On the other hand, other protested cases shall be
handled by the Regional Evaluation Board (REB) or the National Evaluation
Board (NEB) on a case to case basis;
f.
Cases which become final and executory after final judgment of
a court where compromise is requested on the ground of doubtful validity of
the assessment; and
g.
Estate tax cases where compromise is requested on the ground
of financial incapacity of the taxpayer. (Sec. 2, Rev. Regs. No. 30-2002)
7. When may the Commissioner of Internal Revenue
compromise the payment of any internal revenue tax ? Alternatively,
what are the grounds for a compromise, and what are the amounts
for which a compromise may be entered into ?
SUGGESTED ANSWER:
a.
A reasonable doubt as to the validity of the claim against the
taxpayer exists provided that the minimum compromise entered into is
equivalent to forty percent (40%) of the basic tax; or
b.
The financial position of the taxpayer demonstrates a clear
inability to pay the assessed tax provided that the minimum compromise
entered into is equivalent to ten percent (10%) of the basic assessed tax
In the above instances the Commissioner is allowed to enter into a
compromise only if the basic tax involved does not exceed One million pesos
(P1,000,000.00), and the settlement offered is not less than the prescribed
percentages. [Sec. 204 (A), NIRC of 1997]
In instances where the Commissioner is not authorized, the
compromise shall be subject to the approval of the Evaluation Board
composed of the Commissioner and the four (4) Deputy Commissioners.
8. When is the Commissioner of Internal Revenue authorized
to abate or cancel a tax liability ?:
SUGGESTED ANSWER:
a. The tax or any portion thereof appears to be unjustly or excessively
assessed; or
b. The administration and collection costs involved do not justify the
collection of the amount due. [Sec. 204 (B), NIRC of 1997]

9.
The collection of a tax may not be suspended. Only the
Court of Tax Appeals may issue an order suspending the collection of a tax.
10. As a general rule, No court shall have the authority to
grant an injunction to restrain the collection of any national internal
revenue tax, fee or charge. (Sec. 218, NIRC)
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 and/or the taxpayer the Court at 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. (Sec. 11, Rep. Act No. 1125, as amended by Sec. 9,
Rep. Act No. 9282 )
The Supreme Court may enjoin the collection of taxes under its general
judicial power but it should be apparent that the source of the power is not
statutory but constitutional.
11. What is the procedure for suspension of collection of
taxes ?
SUGGESTED ANSWER: Where the collection of the amount of the
taxpayers liability, sought by means of a demand for payment, by levy,
distraint or sale of property of the taxpayer, or by whatever means, as
provided under existing laws, may jeopardize the interest of the government
or the taxpayer, an interested party may file a motion for the suspension of
the collection of the tax liability (Sec. 1, Rule 10, RRCTA effective December
15, 2005) with the Court of Tax Appeals.
The motion for suspension of the collection of the tax may be filed
together with the petition for review or with the answer, or in a separate
motion filed by the interested party at any stage of the proceedings. (Sec.
3, Rule 10, RRCTA effective December 15, 2005)
REFUND OF INTERNAL REVENUE TAXES

 1.
What are the grounds for refund or credit of internal
revenue taxes ?
SUGGESTED ANSWER: The grounds for refund or credit or internal
revenue taxes are the following:
a.
The tax was illegally collected. There is no law that
authorizes the collection of the tax.
b.
The tax was excessively collected. There is a law that
authorizes the collection of a tax but the tax collected was more than what
the law allows.
c.
The tax was paid through a mistaken belief that the taxpayer
should pay the tax (solution indebeti)
2.
What are the three (3) conditions for the grant of a
claim for refund of creditable withholding tax ?
SUGGESTED ANSWER:
a.
The claim is filed with the Commissioner of Internal Revenue
within the two-year period from the date of the payment of the tax.
b.
It is shown on the return of the recipient that the income
payment received was declared as part of the gross income; and
c.
The fact of withholding is established by a copy of a
statement duly issued by the payee showing the amount paid and the amount
of tax withheld therefrom. (Banco Filipino Savings and Mortgage Bank v.
Court of Appeals, et al., G. R. No. 155682, March 27, 2007)
NOTES AND COMMENTS:
a.
Proof of fact of withholding. Sec. 10. Claim for tax
credit or refund. (a) Claims for Tax Credit or Refund of Income tax
deducted and withheld on income payments shall be given due course only
when it is shown on the return that the income payment received has been
declared as part of the gross income and the fact of withholding is established
by a copy of the Withholding Tax Statement duly issued by the payor to the
payee showing the amount paid and the amount of the tax withheld
therefromxxx (Rev. Regs. No. 6-85, as amended)
The document which may be accepted as evidence of the third
condition, that is, the fact of withholding, must emanate from the payor itself,
and not merely from the payee, and must indicate the name of the payor, the
income payment basis of the tax withheld, the amount of the tax withheld and
the nature of the tax paid. (Banco Filipino Savings and Mortgage Bank v.
Court of Appeals, et al., G. R. No. 155682, March 27, 2007)
3.
What should be established by a taxpayer for the
grant of a tax refund ? Why ?

SUGGESTED ANSWER: A taxpayer needs to establish not only that

the refund is justified under the law, but also the correct amount that should
be refunded.
If the latter requisite cannot be ascertained with particularity, there is
cause to deny the refund, or allow it only to the extent of the sum that is
actually proven as due.
Tax refunds partake of the nature of tax exemptions and are thus
construed strictissimi juris against the person claiming the exemption. The
burden in proving the claim for refund necessarily falls on the taxpayer. (Far
East Bank Trust and Company, etc., v. Commissioner of Internal Revenue, et
al., G. R. No. 138919, May 2, 2006)
4. What is The legal remedy under the NIRC of 1997 at
the judicial
level with
respect
to refund
or
recovery
of
tax erroneously or illegally collected ?
SUGGESTED ANSWER: Filing of a suit or proceeding with the Court of
Tax Appeals
a.
before the expiration of two (2) years from the date of
payment of the tax regardless of any supervening cause that may arise after
payment (2nd par., Sec. 229, NIRC of 1997), or
b.
within thirty (30) days from receipt of the denial by the
Commissioner of the application for refund or credit. (Sec. 11, R.A. No. 1125)
5.
The two (2) year period and the thirty (30) day period
should be applied on a whichever comes first basis. Thus, if the 30
days is within the 2 years, the 30 days applies, if the 2 year period is about to
lapse but there is no decision yet by the Commissioner which would trigger
the 30-day period, the taxpayer should file an appeal, despite the absence of
a decision. (Commissioners, etc. v. Court of Tax Appeals, et al., G. R. No.
82618, March 16, 1989, unrep.)
6. Where the taxpayer is a corporation the two year
prescriptive period from date of payment for refund of income taxes
should be the date when the corporation filed its final adjustment
return not on the date when the taxes were paid on a quarterly
basis. (Philippine Bank of Communications v. Commissioner of Internal
Revenue, et al., G.R. No. 112024, January 28, 1999)
It is only when the return, covering the whole year, is filed that the
taxpayer will be able to ascertain whether a tax is still due or refund can be
claimed based on the adjusted and audited figures.(Bank of the Philippine

Islands v. Commissioner of Internal Revenue, G.R. No. 144653, August 28,

2001)
7. What is solutio indebeti as applied to tax cases ?
SUGGESTED ANSWER: Under the principle of solutio indebiti provided
in Art. 2154, Civil Code, If something is received when there is no right to
demand it, and it was unduly delivered through mistake, the obligation to
return it arises. The BIR received something when there [was] no right to
demand it, and thus, it has the obligation to return it. [State Land
Investment Corporation v. Commissioner of Internal Revenue, G. R. No.
171956, January 18, 2008citing Citibank, N. A. v. Court of Appeals and
Commissioner of Internal Revenue, G.R. No. 107434, October 10, 1997, 280
SCRA 459, in turn citingRamie Textiles, Inc. v. Mathay, Sr., 89 SCRA 586
(1979)]. It is an ancient principle that no one, not even the state, shall
enrich oneself at the expense of another. Indeed, simple justice requires the
speedy refund of the wrongly held taxes. (Ibid.)

56. What are the reasons for requiring the filing of an

administrative
application
for
refund
or
credit
with
the
BSUGGESTED
8.
Why is it necessary to file an
administrative claim for refund with the BIR, before filing a case with
the
Court
of
Tax
Appeals
?

a
.
a.
To afford the Commissioner an opportunity to correct his
errors or that of subordinate officers. (Gonzales v. Court of Tax Appeals, et

al., 14
SCRA79)

b. To notify the Government that such taxes have been

questioned and the notice should be borne in mind in estimating the revenue
available for expenditures

9.
As a
general rule the filing of an application for refund or credit with the
Bureau of Internal Revenue is an administrative precondition before a
suit
may
be
filed
with
the
Court
of
Tax
Appeals
?

SUGGEST
ED ANSWER:

S
UGGESTED
SUGGESTED ANSWER: Yes. The failure to first file a
written claim for refund or credit is not fatal to a petition for review involving
a disputed assessment where an assessment was disputed but the protest
was

denied by the Bureau of Internal

Revenue. To hold that the taxpayer has now lost the right to appeal from the
ruling on the disputed assessment and require him to file a claim for a refund
of the taxes paid as a condition precedent to his right to appeal, would in
effect require of him to go through a useless and needless ceremony that
would only delay the disposition of the case, for the Commissioner would
certainly disallow the claim for refund in the same way as he disallowed the
protest against the assessment. The law, should not be interpreted as to
result in absurdities. (vda. de San Agustin., etc., v. Commissioner of Internal
Revenue, G.R. No. 138485, September 10, 2001 citing Roman Catholic
Archbishop of Cebu v. Collector of Internal Revenue, 4 SCRA
279) NOTE: Reconciliation between above two numbers (8 and 9). An
application for refund or credit under Sec. 229 of the NIRC of 1997 is required
where the case filed before the CTA is a refund case, which is not premised
upon a disputed assessment. There is no need for a prior application for
refund or credit, if the refund is merely a consequence of the resolution of the
BIRs
denial
of
a
protested
assessment.

Who could apply for a

tax refund or credit ?
10. Who could apply for a refund or credit ?
SUGGESTED ANSWER: The person who paid the tax may apply for a
refund or credit.
A withholding tax agent may also apply for a refund. In a sense, he is
also a taxpayer because the tax may be collected from him if he does not
withhold.
11. What is the nature of the taxpayers remedy of either to ask
for a refund of excess tax payments or to apply the same in payment
of succeeding taxable periods taxes ?
SUGGESTED ANSWER: Sec. 69 of the 1977 NIRC (now Sec. 76 of the
NIRC of 1997) provides that any excess of the total quarterly payments over
the actual income tax computed in the adjustment or final corporate income
tax return, shall either (a) be refunded to the corporation, or (b) may be
credited against the estimated quarterly income tax liabilities for the quarters
of the succeeding taxable year. To ease the administration of tax collection,
these remedies are in the alternative and the choice of one precludes the
other. Since the Bank has chosen the tax credit approach it cannot anymore
avail of the tax refund.(Philippine Bank of Communications v. Commissioner
of Internal Revenue, et al., G.R. No. 112024, January 28, 1999)
NOTES AND COMMENTS:
a.
The choice, is given to the taxpayer, whether to claim
for refund under Sec. 76 or have its excess taxes applied as tax credit for
the succeeding taxable year, such election is not final. Prior verification and
approval by the Commissioner of Internal Revenue is required. The availment
of the remedy of tax credit is not absolute and mandatory. It does not confer
an absolute right on the part of the taxpayer to avail of the tax credit scheme
if it so chooses. Neither does it impose a duty on the part of the government
to sit back and allow an important facet of tax collection to be at the sole
control and discretion of the taxpayer. (Paseo Realty & Development
Corporation v. Court of Appeals, et al., G. R. No. 119286, October 13, 2004)
12.
What is the irrevocability rule in claims for refund and
what is the rationale behind this ?
SUGGESTED ANSWER: A corporation entitled to a tax credit or refund
of the excess estimated quarterly income taxes paid has two options: (1) to

carry over the excess credit or (2) to apply for the issuance of a tax credit
certificate or to claim a cash refund. If the option to carry over the excess
credit is exercised, the same shall be irrevocable for that taxable period.
In exercising its option, the corporation must signify in its annual
corporate adjustment return (by marking the option box provided in the BIR
form) its intention either to carry over the excess credit or to claim a refund.
To facilitate tax collection, these remedies are in the alternative and the
choice of one precludes the other. [Systra Philippines, Inc., v. Commissioner
of Internal Revenue, G. R. No. 176290, September 21, 2007 citing Philippine
Bank of Communications v. Commissioner of Internal Revenue, 361 Phil. 916
(1999)]
This is known as the irrevocability rule and is embodied in the last
sentence of Section 76 of the Tax Code. The phrase such option shall be
considered irrevocable for that taxable period means that the option to
carry over the excess tax credits of a particular taxable year can no longer
be revoked.
The rule prevents a taxpayer from claiming twice the excess
quarterly taxes paid: (1) as automatic credit against taxes for the taxable
quarters of the succeeding years for which no tax credit certificate has been
issued and (2) as a tax credit either for which a tax credit certificate will be
issued or which will be claimed for cash refund. (Systra Philippines, Inc.,
supra citing De Leon, Hector, THE NATIONAL INTERNAL REVENUE
CODE, Seventh Edition, 2000, p. 430)
13.
In the year 2000 Systra derived excess tax credits and
exercised the option to carry them over as tax credits for the next
taxable year. However, the tax due for the next taxable year is
lower than excess tax credits. It now applies for a refund of the
unapplied tax credits. May its refund be granted ? If the refund is
denied, does Systra lose the unapplied tax credits ? Explain briefly
your answer.
SUGGESTED ANSWER: Systras claim for refund should be
denied. Once the carry over option was made, actually or constructively, it
became forever irrevocable regardless of whether the excess tax credits
were actually or fully utilized Under Section 76 of the Tax Code, a claim for
refund of such excess credits can no longer be made. The excess credits will
only be applied against income tax due for the taxable quarters of the
succeeding taxable years.
Despite the denial of its claim for refund, Systra does not lose the
unapplied tax credits. The amount will not be forfeited in favor of the
government but will remain in the taxpayers account. Petitioner may claim

and carry it over in the succeeding taxable years, creditable against future
income tax liabilities until fully utilized. (Systra Philippines, Inc., v.
Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007
citing Philam Asset Management, Inc. v. Commissioner of Internal Revenue,
G.R. Nos. 156637/162004, 14 December 2005, 477 SCRA 761)
Supposing in the above problem that Systra permanent
ceased operations, what happens to the unapplied credits ?
SUGGESTED ANSWER: Where, the corporation permanently ceases
its operations before full utilization of the tax credits it opted to carry over, it
may then be allowed to claim the refund of the remaining tax credits. In
such a case, the remaining tax credits can no longer be carried over and the
irrevocability rule ceases to apply. Cessante ratione legis, cessat ipse
lex. (Footnote no. 23, Systra Philippines, Inc., v. Commissioner of Internal
Revenue, G. R. No. 176290, September 21, 2007)
NOTES AND COMMENTS: The holding in State Land Investment
Corporation v. Commissioner of Internal Revenue, G. R. No. 171956,
January 18, 2008 that the taxpayer is entitled to a refund because during
the succeeding year there was no tax due against which the excess tax
credits may be applied is not doctrinal. This is so because it interpreted the
provisions of then Sec. 69 of the NIRC, which did not provide for the
irrevocability rule now contained in Sec. 76 of the NIRC of 1997.
14.
A simultaneous filing of the application with the BIR
for refund/credit and the institution of the court suit with the CTA is
allowed. There is no need to wait for a BIR denial. REASONS:
a. The positive requirement of Section 230 NIRC (now Sec. 229, NIRC
of 1997);
b. The doctrine that delay of the Commissioner in rendering decision
does not extend the peremptory period fixed by the statute;
c. The law fixed the same period two years for filing a claim for refund
with the Commissioner under Sec. 204, par. 3, NIRC (now Sec. 204 [C], NIRC
of 1997), and for filing suit in court under Sec. 230, NIRC (now Sec. 229,
NIRC of 1997), unlike in protests of assessments under Sec. 229 (now Sec.
228, NIRC of 1997), which fixed the period (thirty days from receipt of
decision) for appealing to the court, thus clearly implying that the prior
decision of the Commissioner is necessary to take cognizance of the
case. (Commissioner of Internal Revenue v. Bank of Philippine Islands, etc. et
al., CA-G.R. SP No. 34102, September 9, 1994; Gibbs v. Collector of Internal
Revenue, et al., 107 Phil, 232; Johnston Lumber Co. v. CTA, 101 Phil. 151)

15.
The grant of a refund is founded on the assumption that
the tax return is valid,i.e. that the facts stated therein are true and
correct. (Commissioner of Internal Revenue v. Court of Tax Appeals, G. R.
No. 106611, July 21, 1994, 234 SCRA 348) Without the tax return it would be
virtually impossible to determine whether the proper taxes have been
assessed and paid. After all, it is axiomatic that a claimant has the burden of
proof to establish the factual basis of his or her claim for tax credit or
refund. Tax refunds, like tax exemptions, are construed strictly against the
taxpayer. (Paseo Realty & Development Corporation v. Court of Appeals, et
al., G. R. No. 119286, October 13, 2004)
However, in BPI-Family Savings Bank v. Court of Appeals, 386 Phil.
719; 326 SCRA 641 (2000), refund was granted, despite the failure to
present the tax return, because other evidence was presented to prove that
the overpaid taxes were not applied. (Ibid.)
16. Discuss the difference between tax refund and tax
credit..
SUGGESTED ANSWER: There are unmistakable formal and practical
differences between the two modes. Formally, a tax refund requires a
physical return of the sum erroneously paid by the taxpayer, while a tax credit
involves the application of the reimbursable amount against any sum that
may be due and collectible from the taxpayer.
On the practical side, the taxpayer to whom the tax is refunded would
have the option, among others, to invest for profit the returned sum, an
option not proximately available if the taxpayer chooses instead to receive a
tax credit. (Commissioner of Customs v. Philippine Phosphate Fertilizer
Corporation, G. R. No. 144440, September 1, 2004)
NOTES AND COMMENTS: It may be that there is no essential
difference between a tax refund and a tax credit since both are moves of
recovering
taxes
erroneously
or
illegally
paid
to
the
government. (Commissioner of Customs v. Philippine Phosphate Fertilizer
Corporation, G. R. No. 144440, September 1, 2004)
17.
A bank-trustee of employee trusts filed an
application for the refund of taxes withheld on the interest incomes
of the investments made of the funds of the employees
trusts. Instead of presenting separate accounts for interest incomes
made of these investments, the bank-trustee instead presented
witness to establish that it would next to impossible to single out
the specific transactions involving the employees trust funds from

the totality of all interest income from its total investments. On the
above basis will the application for refund prosper ?
SUGGESTED ANSWER: No. The application for refund will not
prosper.
The bank-trustee needs to establish not only that the refund is
justified under the law (which is so because incomes of employees trusts
are tax exempt), but also the correct amount that should be refunded.
Tax refunds partake of the nature of tax exemptions and are thus
construed strictissimi jurisagainst the person or entity claiming the
exemption. The burden in proving the amount to be refunded necessarily
falls on the bank-trustee, and there is an apparent failure to do so.
A necessary consequence of the special exemption enjoyed alone by
employees trusts would be a necessary segregation in the accounting of
such income, interest or otherwise, earned from those trusts from that
earned by the other clients of the bank-trustee. (Far East Bank and Trust
Company, etc., v. Commissioner, etc., et al., G.R. No. 138919, May 2,
2006) The amounts that are the exempt earnings of the employees trust
has not been shown as they have been commingled with the interest income
of the other clients of the bank-trustee.
18.
CTA Circular No. 1-95 clearly requires that
photocopies of the receipts or invoices must be pre-marked and
submitted to the CTA to verify the correctness of the summary listing
and the CPA certification. CTA Circular No. 1-95, issued on 25 January
1995, reads:
1.
The party who desires to introduce as evidence such
voluminous documents must present: (a) Summary containing the total
amount/s of the tax account or tax paid for the period involved and a
chronological or numerical list of the numbers, dates and amounts covered
by the invoices or receipts; and (b) a Certification of an independent
Certified Public Accountant attesting to the correctness of the contents of the
summary after making an examination and evaluation of the voluminous
receipts and invoices. Such summary and certification must properly be
identified by a competent witness from the accounting firm.
2. The method of individual presentation of each and every receipt
or invoice or other documents for marking, identification and comparison
with the originals thereof need not be done before the Court or the
Commissioner anymore after the introduction of the summary and CPA
certification. It is enough that the receipts, invoices and other
documents covering the said accounts or payments must be premarked by the party concerned and submitted to the Court in order

to be made accessible to the adverse party whenever he/she desires

to check and verify the correctness of the summary and CPA
certification. However, the originals of the said receipts, invoices or
documents should be ready for verification and comparison in case doubt on
the authenticity of the particular documents presented is raised during the
hearing of the case. (Emphasis supplied)
19.
Manila Electric Company a grantee of a legislative
franchise under Act No. 484, as amended by Republic Act No. 4159
and Presidential Decree No. 551,[1][3] had been paying a 2%
franchise tax based on its gross receipts, in lieu of all other taxes
and assessments of whatever nature. Upon the effectivity of
Executive Order No. 72 on February 10, 1987, however, respondent
became subject to the payment of regular corporate income tax.
For the last quarter ending December 31, 1987, respondent
filed on April 15, 1988 its tentative income tax reflecting a
refundable amount of P101,897,741, but only P77,931,812 was
applied as tax credit for the succeeding taxable year 1988.
Acting on a yearly routinary Letter of Authority No. 0018064
NA dated June 27, 1988 issued by petitioner, directing the
investigation of tax liabilities of respondent for taxable year 1987,
an investigation was conducted by Revenue Officer Frederick
Capitan which showed that respondent was liable for 1. deficiency
income tax in the amount of P2,340,902.52; and 2. deficiency
franchise tax in the amount of P2,838,335.84.
On April 17, 1989, respondent filed an amended final
corporate Income Tax Return ending December 31, 1988 reflecting a
refundable amount of P107,649,729.
Respondent thus filed on March 30, 1990 a letter-claim for
refund or credit in the amount of P107,649,729 representing
overpaid income taxes for the years 1987 and 1988.
Petitioner not having acted on its request, respondent filed on
April 6, 1990 a judicial claim for refund or credit with the Court of
Tax Appeals.
It
is
gathered
that
respondent
paid
the
deficiency franchise tax
in
the
amount
ofP2,838,335.84. It
protested the payment of the alleged deficiency income tax and
claimed as an alternative remedy the deduction thereof from its
claim for refund or credit.

The Court of Tax Appeals granted the P107,649,729 claim for

refund, or in the alternative for the BIR to issue a tax credit. Is the
Court of Tax Appeals correct ?
SUGGESTED ANSWER: Yes. Section 69 of the National Internal
Revenue Code of 1986, now Sec. 76 provides, if the sum of the quarterly
tax payments made during a taxable year is not equal to the total tax due on
the entire taxable income of that year as shown in its final adjustment
return, the corporation has the option to either: (a) pay the excess tax still
due, or (b) be refunded the excess amount paid. The returns submitted are
merely pre-audited which consist mainly of checking mathematical accuracy
of the figures in the return. After such checking, the purpose of which being
to insure prompt action on corporate annual income tax returns showing
refundable amounts arising from overpaid quarterly income taxes, (Revenue
Memorandum Order No. 32-76 dated June 11, 1976) the refund or tax credit
is granted. (Commissioner of Internal Revenue v. Manila Electric
Company, G. R. No. 121666, October 10, 2007)
TARIFF AND CUSTOMS LAWS
ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL
REVENUE
TARIFF AND CUSTOMS CODE
1. When does importation begin, and why is it important to
know whether importation has already begun or not ?
SUGGESTED ANSWER: Importation begins when the conveying vessel
or aircraft enters the jurisdiction of the Philippines with intention to unlade
therein. (Sec. 1202, TCCP)
The jurisdiction of the Bureau of Customs to enforce the provisions of
the TCCP including seizure and forfeiture also begins from the beginning of
importation. Thus, the Bureau of Customs obtains jurisdiction over imported
articles only after importation has begun.
2.
When is importation deemed terminated and why is it
important to know whether importation has already ended?
SUGGESTED ANSWER: Importation is deemed terminated upon
payment of the duties, taxes and other charges due upon the agencies, or
secured to be paid, at the port of entry and the legal permit for withdrawal
shall have been granted.

In case the articles are free of duties, taxes and other charges, until
they have legally left the jurisdiction of the customs. (Sec. 1202, TCCP) The
Bureau of Customs loses jurisdiction to enforce the TCCP and to make
seizures and forfeitures after importation is deemed terminated.
3. The flexible tariff clause is a provision in the Tariff and
Customs Code, which implements the constitutionally delegated power to
the Congress to further delegate to the President of the Philippines, in the
interest of national economy, general welfare and/or national security upon
recommendation of the NEDA (a) to increase, reduce or remove existing
protective rates of import duty, provided that, the increase should not be
higher than 100% ad valorem; (b) to establish import quota or to ban imports
of any commodity, and (c) to impose additional duty on all imports not
exceeding 10% ad valorem, among others.
4.
Customs duties defined. Customs duties is the name
given to taxes on the importation and exportation of commodities, the tariff or
tax assessed upon merchandise imported from, or exported to, a foreign
country. (Nestle Phils. v. Court of Appeals, et al., G.R. No. 134114, July 6,
2001)
5. Special customs duties are additional import duties imposed
on specific kinds of imported articles under certain conditions. The
special customs duties under the Tariff and Customs Code (TCCP) are the
anti-dumping duty, the countervailing duty, the discriminatory duty, and the
marking duty, and under the Safeguard Measures Act (SMA) additional tariffs
as safeguard measures.
6. The special customs duties are imposed for the protection of
consumers and manufacturers, as well as Philippine products.
7. Dumping duty is an additional special duty amounting to
the difference between the export price and the normal value of such
product, commodity or article (Sec. 301 (s) (1), TCC, as amended
by Rep. Act No. 8752, Anti-Dumping Act of 1999.) imposed on the
importation of a product, commodity or article of commerce into the
Philippines at less than its normal value when destined for domestic
consumption in the exporting country which is causing or is threatening to
cause material injury to a domestic industry, or materially retarding the
establishment of a domestic industry producing the like product. [Sec. 301
(s) (5), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999]

 8. When is the anti-dumping duty imposed ?

SUGGESTED ANSWER: The anti-dumping duty is imposed
a. Where a product, commodity or article of commerce is exported
into the Philippines at a price less than its normal value when destined for
domestic consumption in the exporting country,
b. and such exportation is causing or is threatening to cause material
injury to a domestic industry, or materially retards the establishment of a
domestic industry producing the like product. [Sec. 301 (a), TCC, as
amended by Rep. Act No. 8752, Anti-Dumping Act of 1999]
9.
Normal value for purposes of imposing the antidumping duty is the comparable price at the date of sale of like product,
commodity, or article in the ordinary course of trade when destined for
consumption in the country of export. [Sec. 301 (s) (3 ), TCC, as amended
by Rep. Act No. 8752, Anti-Dumping Act of 1999]
10.
The imposing authority for the anti-dumping duty is
the Secretary of Trade and Industry in the case of non-agricultural
product, commodity, or article or the Secretary of Agriculture, in the
case of agricultural product, commodity or article, after formal
investigation and affirmative finding of the Tariff Commission. [Sec. 301 (a),
TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999]
11.
Even when all the requirements for the imposition
have been fulfilled, the decision on whether or not to impose a
definitive anti-dumping duty remains the prerogative of the Tariff
Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, AntiDumping Act of 1999] Thus, the cabinet secretaries could not contravene
the recommendation of the Tariff Commission. They could not impose the
anti-dumping duty or any special customs duty without the favorable
recommendation of the Tariff Commission.
12. In the determination of whether to impose the antidumping duty, the Tariff Commission, may consider among others,
the effect of imposing an anti-dumping duty on the welfare of the
consumers and/or the general public, and other related local
industries. (Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, AntiDumping Act of 1999)

13. The amount of anti-dumping duty that may be imposed is

the difference between the export price and the normal value of such
product, commodity or article. (Sec. 301 (s) (1), TCC, as amended by
Rep. Act No. 8752, Anti-Dumping Act of 1999)
The anti-dumping duty shall be equal to the margin of dumping on
such product, commodity or article thereafter imported to the Philippines
under similar circumstances, in addition to ordinary duties, taxes and charges
imposed by law on the imported product, commodity or article.
14. What are countervailing duties and when are they
imposed ?
SUGGESTED ANSWER: Countervailing duties are additional customs
duties imposed on any product, commodity or article of commerce which is
granted directly or indirectly by the government in the country of origin or
exportation, any kind or form of specific subsidy upon the production,
manufacture or exportation of such product commodity or article, and the
importation of such subsidized product, commodity, or article has caused or
threatens to cause material injury to a domestic industry or has materially
retarded the growth or prevents the establishment of a domestic
industry. (Sec. 302, TCCP as amended by Section 1, R.A. No. 8751)
15. The imposing authority for the countervailing duties is
the Secretary of Trade and Industry in the case of non-agricultural
product, commodity, or article or the Secretary of Agriculture, in the
case of agricultural product, commodity or article, after formal
investigation and affirmative finding of the Tariff Commission.
Even when all the requirements for the imposition have been fulfilled,
the decision on whether or not to impose a definitive anti-dumping duty
remains the prerogative of the Tariff Commission. (Sec. 301 (a), TCC, as
amended by Rep. Act No. 8752, Anti-Dumping Act of 1999)
16. The countervailing duty is equivalent to the value of the
specific subsidy.
17. Marking duties are the additional customs duties imposed on
foreign articles (or its containers if the article itself cannot be marked), not
marked in any official language in the Philippines, in a conspicuous place as
legibly, indelibly and permanently in such manner as to indicate to an ultimate
purchaser in the Philippines the name of the country of origin.
18. The Commissioner of Customs imposes the marking duty.

19. The marking duty is equivalent to five percent (5%) ad

valorem.
20. A discriminatory duty is a new and additional customs duty
imposed upon articles wholly or in part the growth or product of, or imported
in a vessel, of any foreign country which imposes, directly or indirectly, upon
the disposition or transportation in transit through or re-exportation from such
country of any article wholly or in part the growth or product of the
Philippines, any unreasonable charge, exaction, regulation or limitation which
is not equally enforced upon like articles of every foreign country, or
discriminates against the commerce of the Philippines, directly or indirectly,
by law or administrative regulation or practice, by or in respect to any
customs, tonnage, or port duty, fee, charge, exaction, classification,
regulation, condition, restriction or prohibition, in such manner as to place the
commerce of the Philippines at a disadvantage compared with the commerce
of any foreign country.
21. The President of the Philippines imposes the discriminatory
duties.
22. Safeguard measures are emergency measures, including
tariffs, to protect domestic industries and producers from increased imports
which inflict or could inflict serious injury on them.
The CTA is vested with jurisdiction to review decisions of the Secretary
of Trade and Industry imposing safeguard measures as provided under Rep.
Act No. 8800 the Safeguard Measures Act (SMA). (Southern Cross Cement
Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R. No.
158540, July 8, 2004)
The DTI Secretary cannot impose the safeguard measures if the Tariff
Commission does not favorably recommend its imposition.
23.
Imposing authority for safeguard measures. The
imposing authority for the countervailing duties is the Secretary of
Trade and Industry in the case of non-agricultural product,
commodity, or article or the Secretary of Agriculture, in the case of
agricultural product, commodity or article, after formal investigation and
affirmative finding of the Tariff Commission.
24.
Safeguards measures that may be imposed. Additional
tariffs, import quotas or banning of imports.

 25. The basis of dutiable value of merchandise that is subject

to ad valorem customs duties is the transaction value, which shall be
the price actually paid or payable for the goods when sold for export to the
Philippines, adjusted by adding certain cost elements to the extent that they
are incurred by the buyer but are not included in the price actually paid or
payable for the imported goods, and may include the following:
a.
Cost of containers and packing,
b.
Insurance, and
c.
Freight. (Sec. 201, TCC as amended by Sec. 1, Rep. Act No.
9135)
26. The above transaction value is the primary method of
determining dutiable value. If the transaction value of the imported
article could not be determined using the above, the following
alternative methods should be used one after the other:
a.
Transaction value of identical goods
b.
Transaction value of similar goods
c.
Deductive method
d.
Computed method
e.
Fallback method
27.
How and to whom should claims for refund of customs
duties be made ?
SUGGESTED ANSWER: All claims for refund of duties shall be made in
writing and forwarded to the Collector of Customs to whom such duties are
paid, who upon receipt of such claim, shall verify the same by the records of
his Office, and if found to be correct and in accordance with law, shall certify
the same to the Commissioner of Customs with his recommendation together
with all necessary papers and documents. Upon receipt by the Commissioner
of such certified claim he shall cause the same to be paid if found
correct. (Sec. 1708, TCC)
28.
What is mean by the term entry in Customs Law ?
SUGGESTED ANSWER: It has a triple meaning.
a.
the documents filed at the Customs house;
b.
the submission and acceptance of the documents; and
c.
Customs declaration forms or customs entry forms required
to be accomplished by passengers of incoming vessels or passenger planes
as envisaged under Sec. 2505 of the TCCP (Failure to declare
baggage). (Jardeleza v. People, G.R. No. 165265, February 6, 2006)

29. A flight stewardess arrived from Singapore. Upon her

arrival she was asked whether she has anything to declare. She
answered none, and she submitted her Customs Baggage
Declaration Form which she accomplished and signed with nothing
or written on the space for items to be declared. When her hanger
bag was examined some pieces of jewelry were found concealed
within the lining of said bag.
She was then convicted of violating of Sec. 3601 of the Tariff
and Customs Code for unlawful importation which penalizes any
person who shall fraudulently import or bring into the Philippines any
article contrary to law.
She now appeals claiming that lower court erred n convicting
her under Sec. 3601 when the facts alleged both in the information
and those shown by the prosecution constitute the offense under Sec.
2505 Failure to Declare Baggage, of which she was acquitted. Is
she correct ?
SUGGESTED ANSWER: No. Sec. 3601 does not define a crime. It
merely provides, inter alia, the administrative remedies which can be resorted
to by the Bureau of Customs when seizing dutiable articles found the
baggage of any person arriving in the Philippines which is not included in the
accomplished baggage declaration submitted to the customs authorities, and
the administrative penalties that such person must pay for the release of such
goods if not imported contrary to law.
Such administrative penalties are independent of the criminal liability
for smuggling that may be imposed under Sec. 3601, and other provisions of
the TCC which can only be determined after the appropriate criminal
proceedings, prescinding from the outcome in any administrative case that
may have been filed and disposed of by the customs authorities.
Indeed the second paragraph of Sec. 2505 provides that nothing shall
prevent the bringing of a criminal action against the offender for smuggling
under Section 3601. (Jardeleza v. People, G. R. No. 165265, February 6,
2006)
30. Payment is not a defense in smuggling. When upon trial for
violation of this section, the defendant is shown to have possession of the
article in question, possession shall be deemed sufficient evidence to
authorize conviction, unless the defendant shall explain the possession to the
satisfaction of the court: Provided, however, That payment of the tax due
after apprehension shall not constitute a valid defense in any prosecution
under this section. (last par., Sec. 3601, TCC)

31.
How is smuggling committed ?
SUGGESTED ANSWER: Smuggling is committed by any person who:
a.
fraudulently imports or brings into the country any article
contrary to law;
b.
assists in so doing any article contrary to law; or
c.
receives, conceals, buys, sells or in any manner facilitates
the transportation, concealment or sale of such goods after importation,
knowing the same to have been imported contrary to law. (Jardeleza v.
People, G.R. No. 165265, February 6, 2006 citing Rodriguez v. Court of
Appeals, G. R. No. 115218, September 18, 1995, 248 SCRA 288, 296)
NOTES AND COMMENTS:
a.
Importation consists of bringing an article into the country
from the outside. Importation begins when the conveying vessel or aircraft
enters the jurisdiction of the Philippines with intention to unload therein.
b.
When unlawful importation is complete. In the
absence of a bona fide intent to make entry and pay duties when the
prohibited article enters the Philippine territory. Importation is complete
when the taxable, dutiable commodity is brought within the limits of the port
of entry. Entry through a custom house is not the essence of the
act. (Jardeleza v. People, G.R. No. 165265, February 6, 2006)
32. The Collector of Customs sitting in seizure and forfeiture
proceedings has exclusive jurisdiction to hear and determine all
questions touching on the seizure and forfeiture of dutiable
goods. RTCs are precluded from assuming cognizance over such
matters even through petitions of certiorari, prohibition or
mandamus. (The Bureau of Customs, et al., v. Ogario, et al., G.R. No.
138081, March 20, 2000)
What is the rationale for this doctrine ?
SUGGESTED ANSWER:
a.
Regional Trial Courts have no jurisdiction to replevin a
property which is subject to seizure and forfeiture proceedings for violation of
the Tariff and Customs Code otherwise, actions for forfeiture of property for
violation of the Customs laws could easily be undermined by the simple
device of replevin. (De la Fuente v. De Veyra, et al., 120 SCRA 455)
b.
The doctrine of exclusive customs jurisdiction over customs
cases to the exclusion of the RTCs is anchored upon the policy of placing no
unnecessary hindrance on the governments drive, not only to prevent
smuggling and other frauds upon Customs,

c.
but more importantly, to render effective and efficient the
collection of import and export duties due the State, which enables the
government to carry out the functions it has been instituted to perform. (Jao,
et al., v. Court of Appeals, et al., and companion case, 249 SCRA 35, 43)
d.
The issuance by regular courts of writs of preliminary
injunction in seizure and forfeiture proceedings before the Bureau of Customs
may arouse suspicion that the issuance or grant was for consideration other
than the strict merits of the case. (Zuno v. Cabredo, 402 SCRA 75 [2003])
e. Under the doctrine of primary jurisdiction, the Bureau of Customs
has exclusive administrative jurisdiction to conduct searches, seizures and
forfeitures of contraband without interference from the courts. It could
conduct searches and seizures without need of a judicial warrant except if the
search is to be conducted in a dwelling place.
Where an administrative office has obtained a technical expertise in a
specific subject, even the courts must defer to this expertise.
NOTES AND COMMENTS: The Bureau of Customs could search and
seize articles without need of a judicial warrant unless the place to be
searched is a dwelling place. In such a case customs requires a judicial
warrant.
33.
A claiming to be the owner of a vessel which is the
subject of customs warrant of seizure and detention sought the
intercession of the RTC to restrain the Bureau of Customs from
interfering with his property rights over the vessel. Would the suit
prosper?
SUGGESTED ANSWER: No. His remedy was not with the RTC but
with the CTA, as issues of ownership of goods in the custody of customs
officials are within the power of the CTA to determine.
The Collector of Customs has exclusive jurisdiction over seizure and
forfeiture proceedings and trial courts are precluded from assuming
cognizance over such matters even through petitions for certiorari,
prohibition or mandamus. (Commissioner of Customs v. Court of Appeals,
et al., G. R. Nos. 111202-05, January 31, 2006)
34.
The customs authorities do not have to prove to the
satisfaction of the court that the articles on board a vessel were
imported from abroad or are intended to be shipped abroad before
they may exercise the power to effect customs searches, seizures, or
arrests provided by law and continue with the administrative
hearings. (The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081,
March 20, 2000)

35. The Tariff and Customs Code allows the Bureau of Customs to
resort to the administrative remedy of seizure, such as by enforcing
the tax lien on the imported article when the imported articles could
be found and be subject to seizure and forfeiture.
36. The Tariff and Customs Code allows the Bureau of Customs to
resort to the judicial remedy of filing an action in court when the
imported articles could not anymore be found.
37. Section 2301 of the TCCP states that seized articles may
not be released under bond if there is prima facie evidence of fraud
in their importation. Commissioner of Customs v. Court of Tax Appeals, et
al., G. R. No. 171516-17, February 13, 2009
Section 2301. Warrant for Detention of Property-Cash Bond. Upon
making any seizure, the Commissioner 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 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 prima facie evidence of fraud
in the importation of the article: Provided,further, That articles the
importation of which is prohibited by law shall not be released under any
circumstances 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. (emphasis supplied)
38.
Instances where there is no right of redemption of
seized and forfeited articles:
a.
There is fraud;
b.
The importation is absolutely prohibited, or
c.
The release of the property would be contrary to
law. (Transglobe International, Inc. v. Court of Appeals, et al., G.R. No.
126634, January 25, 1999)
39.
In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated
in Farolan, Jr. v. Court of Tax appeals, et al., 217 SCRA 298, the Supreme
Court clarified that the fraud contemplated by law must be actual and

not constructive. It must be intentional, consisting of deception, willfully

and deliberately done or resorted to in order to induce another to give up
some right.
40. Requisites for forfeiture of imported goods:
a.
Wrongful making by the owner, importer, exporter or
consignee of any declaration or affidavit, or the wrongful making or delivery
by the same person of any invoice, letter or paper all touching on the
importation or exportation of merchandise.
b.
the falsity of such declaration, affidavit, invoice, letter or
paper; and
c.
an intention on the part of the importer/consignee to evade
the payment of the duties due.(Republic, etc., v. The Court of Appeals, et al.,
G.R. No. 139050, October 2, 2001)
41.
On January 7, 1989, the vessel M/V Star Ace,
coming from Singapore laden with cargo, entered the Port of San
Fernando, La Union for needed repairs. When the Bureau of Customs
later became suspicious that the vessels real purpose in docking was
to smuggle cargo into the country, seizure proceedings were
instituted and subsequently two Warrants of Seizure and Detention
were issued for the vessel and its cargo.
Cesar does not own the vessel or any of its cargo but claimed a
preferred maritime lien. Cesar then brought several cases in the RTC
to enforce his lien. Would these suits prosper ?
SUGGESTED ANSWER: No. The Bureau of Customs having first
obtained possession of the vessel and its goods has obtained jurisdiction to
the exclusion of the trial courts.
When Cesar has impleaded the vessel as a defendant to enforce his
alleged maritime lien, in the RTC, he brought an action in rem under the Code
of Commerce under which the vessel may be attached and sold.
However, the basic operative fact is the actual or constructive
possession of the res by the tribunal empowered by law to conduct the
proceedings. This means that to acquire jurisdiction over the vessel, as a
defendant, the trial court must have obtained either actual or constructive
possession over it. Neither was accomplished by the RTC as the vessel was
already in the possession of the Bureau of Customs. (Commissioner of
Customs v. Court of Appeals, et al., G. R. Nos. 111202-05, January 31, 2006)
NOTES AND COMMENTS:
a.
Forfeiture of seized goods in the Bureau of Customs is
in the nature of a proceeding in rem, i.e. directed against the res or

imported goods and entails a determination of the legality of their

importation. In this proceeding, it is in legal contemplation the property itself
which commits the violation and is treated as the offender, without reference
whatsoever to the character or conduct of the owner.
The issue is limited to whether the imported goods should be forfeited
and disposed of in accordance with law for violation of the Tariff and Customs
Code. .(Transglobe International, Inc. v. Court of Appeals, et al., G.R. No.
126634, January 25, 1999)
Forfeiture of seized goods in the Bureau of Customs is a proceeding
against the goods and not against the owner. (Asian Terminals, Inc. v.
Bautista-Ricafort, G .R. No. 166901, October 27, 2006 citingTransglobe)
42. The Collector of Customs upon probable cause that the
articles are imported or exported, or are attempted to be imported or
exported, in violation of the tariff and customs laws shall issue a
warrant of seizure. (Sec. 6, Title III, CAO No. 9-93)
If the search and seizure is to be conducted in a dwelling place, then a
search warrant should be issued by the regular courts not the Bureau of
Customs.
There may be instances where no warrants issued by the Bureau of
Customs or the regular courts is required, as in search and seizures of motor
vehicles and vessels.
43. Smuggled goods seized by virtue of a court warrant should
be surrendered to the court that issued the warrant and not to the
Bureau of Customs because the goods are in custodia legis.
44. Decisions of the Commissioner of Customs in cases
involving liability for customs duties, fees or other money charges
that must be appealed to the Court of Tax Appeals Division within
thirty (30) days from receipt specifically refer to his decisions
onadministrative tax protest cases, as stated in Section 2402 of the Tariff
and Customs Code of the Philippines (TCCP):
Section
2402. Review by Court of Tax Appeals.
The
party
aggrieved by a ruling of the Commissioner in any matter brought
before him upon protest or by his action or ruling in any case of
seizure may appeal to the Court of Tax Appeals, in the manner and
within the period prescribed by law and regulations.

Unless an appeal is made to the Court of Tax Appeals in the manner

and within the
period prescribed by laws and regulations, the action
or ruling of the Commissioner shall be
final and conclusive. [Emphasis
supplied.] (Pilipinas Shell Petroleum Corporation v. Commissioner of
Customs,G. R. No. 176380, June 18, 2009)
45. Administrative tax protest under the Tariff and Customs
Code (TCCP). A tax protest case, under the TCCP, involves a protest of the
liquidation of import entries. (Pilipinas Shell Petroleum Corporation v.
Commissioner of Customs, G. R. No. 176380, June 18, 2009)
46.
Liquidation,
defined. A
liquidation
is
the
final
computation and ascertainment by the collector of the duties on imported
merchandise, based on official reports as to the quantity, character, and
value thereof, and the collectors own finding as to the applicable rate of
duty; it is akin to an assessment of internal revenue taxes under the
National Internal Revenue Code where the tax liability of the taxpayer is
definitely
determined. (Pilipinas
Shell
Petroleum
Corporation
v.
Commissioner of Customs,G. R. No. 176380, June 18, 2009)
47. The following letters of demand can not be considered
as a liquidation or an assessment of Shells import tax liabilities that
can be the subject of an administrative tax protest proceeding
before the Commissioner of Customs whose decision is appealable to
the Court of Tax Appeals:
a.
the One Stop Shop Inter-Agency Tax Credit and Duty
Drawback Center (the Center)November 3 letter, signed by the Secretary of
Finance, informing it of the cancellation of the Tax Credit Certificates (TCCs);
b.
the Commissioner of Customs November 19 letter requiring
Shell to replace the amount equivalent to the amount of the cancelled TCCs
used by Shell; and
c.
the Commissioner of Customs collection letters, issued
through Deputy Commissioner Atty. Valera, formally demanding the amount
covered by the cancelled TCCs.
None of these letters, however, can be considered as a liquidation or
an assessment of Shells import tax liabilities that can be the subject of an
administrative tax protest proceeding before the respondent whose decision
is appealable to the CTA. Shells import tax liabilities had long been
computed and ascertained in the original assessments, and Shell paid these
liabilities using the TCCs transferred to it as payment.

It is even an error to consider the letters as a reassessment

because they refer to the same tax liabilities on the same importations
covered by the original assessments. The letters merely reissued the
original assessments that were previously settled by Shell with the use of
the TCCs. However, on account of the cancellation of the TCCs, the tax
liabilities of Shell under the original assessments were considered unpaid;
hence, the letters and the actions for collection.
When Shell went to the CTA, the issues it raised in its petition were
all related to the fact and efficacy of the payments made, specifically the
genuineness of the TCCs; the absence of due process in the enforcement of
the decision to cancel the TCCs; the facts surrounding the fraud in originally
securing the TCCs; and the application of estoppel. These are payment and
collection issues, not tax protest issues within the CTAs jurisdiction to rule
upon.
Shell never protested the original assessments of its tax liabilities and
in fact settled them using the TCCs. These original assessments, therefore,
have become final, incontestable, and beyond any subsequent protest
proceeding, administrative or judicial, to rule upon.
To be very precise, Shells petition before the CTA principally
questioned the validity of the cancellation of the TCCs a decision that was
made not by the Commissioner of Customs, but by the Center. As the CTA
has no jurisdiction over decisions of the Center, Shells remedy against the
cancellation should have been a certiorari petition before the regular courts,
not a tax protest case before the CTA. Records do not show that Shell ever
availed of this remedy.
Alternatively, as held in Shell v. Republic of the Philippines, G.R. No.
161953, March 6, 2008, 547 SCRA 701, the appropriate forum for Shell
under the circumstances of this case should be at the collection cases before
the RTC where Shell can put up the fact of its payment as a
defense. (Pilipinas Shell Petroleum Corporation v. Commissioner of
Customs, G. R. No. 176380, June 18, 2009)
48. A case becomes ripe for filing with the Regional Trial
Court (RTC), as a collection matter after the finality of the
Commissioner of Customs assessment. (Pilipinas Shell Petroleum
Corporation v. Commissioner of Customs, G. R. No. 176380, June 18, 2009
citing Shell v. Republic of the Philippines, G.R. No. 161953, March 6, 2008,
547 SCRA 701)
The assessment has long been final, and this recognition of finality
removes all perceived hindrances, based on this case, to the continuation of
the collection suits.

A suit for the collection of internal revenue taxes, where the

assessment has already become final and executory, the action to collect is
akin to an action to enforce the judgment. No inquiry can be made therein
as to the merits of the
In light of the conclusion that the present case does not involve a
decision of the Commissioner of Customs on a matter brought to him as a
tax protest, Atty. Valeras lack of authority to issue the collection letters and
to institute the collection suits is irrelevant. For this same reason, the
injunction against Atty. Valera cannot be invoked to enjoin the collection of
unpaid taxes due from Shell. (Pilipinas Shell Petroleum Corporation v.
Commissioner of Customs, supra)
LOCAL GOVERNMENT TAXATION
1. The fundamental principles of local taxation are:
a.
Uniformity;
b.
Taxes, fees, charges and other impositions shall be equitable
and based on ability to pay, for public purposes, not unjust, excessive,
oppressive or confiscatory, not contrary to law, public policy, national
economic policy or in restraint of trade;
c.
The levy and collection shall not be let to any private person;
d.
Inures solely to the local government unit levying the tax;
e.
The progressivity principle must be observed.
2. A law which deprives local government units of their
power to tax would be unconstitutional. The constitution has delegated
to local governments the power to levy taxes, fees and other charges. This
constitutional delegation may only be removed by a constitutional
amendment.
3. Under the now prevailing Constitution, where there is
neither a grant nor prohibition by statute, the taxing power of local
governments must be deemed to exist although Congress may
provide statutory limitations and guidelines in order to safeguard the
viability and self-sufficiency of local government units by directly granting
them general and broad tax powers. (City Government of San Pablo, Laguna,
et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)
4.
The Local Government Code explicitly authorizes
provinces and cities, notwithstanding any exemption granted by any
law or other special law to impose a tax on businesses enjoying a

franchise. Indicative of the legislative intent to carry out the constitutional

mandate of vesting broad tax powers to local government units, the Local
Government Code has withdrawn tax exemptions or incentives theretofore
enjoyed by certain entities. (City Government of San Pablo, Laguna, et al., v.
Reyes, et al., G.R. No. 127708, March 25, 1999)
5.
Philippine Long Distance Telephone Company, Inc., v.
City of Davao, et al., etc.,G. R. No. 143867, August 22, 2001, upheld
the authority of the City of Davao, a local government unit, to impose and
collect a local franchise tax because the Local Government has withdrawn all
tax exemptions previously enjoyed by all persons and authorized local
government units to impose a tax on business enjoying a franchise tax
notwithstanding the grant of tax exemption to them.
6.
Explain the concept of the paradigm shift in local
government taxation.
SUGGESTED ANSWER: Paradigm shift from exclusive Congressional
power to direct grant of taxing power to local legislative bodies. The power to
tax is no longer vested exclusively on Congress; local legislative bodies are
now given direct authority to levy taxes, fees and other charges pursuant to
Article X, section 5 of the 1987 Constitution. (Batangas Power Corporation v.
Batangas City, et al. G. R. No. 152675, and companion case, April 28, 2004
citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110,
April 9, 2003)
7. The fundamental law did not intend the direct grant to local
government units to be absolute and unconditional, the constitutional
objective obviously is to ensure that, while local government units are being
strengthened and made more autonomous, the legislature must still see to it
that:
a.
the taxpayer will not be over-burdened or saddled with
multiple and unreasonable impositions;
b.
each local government unit will have its fair share of
available resources;
c.
the resources of the national government will be unduly
disturbed; and
d.
local taxation will be fair, uniform and just. (Manila Electric
Company v. Province of Laguna, et al., G.R. No. 131359, May 5, 1999)

8.
Taxing power of the local government is limited. The
taxing power of local governments is limited in the sense that Congress can
enact legislation granting tax exemptions.
While the system of local government taxation has changed with the
onset of the 1987 Constitution, the power of local government units to tax is
still limited.
While the power to tax by local governments may be exercised by
local legislative bodies, no longer merely be virtue of a valid delegation as
before, but pursuant to direct authority conferred by Section 5, Article X of
the Constitution, the basic doctrine on local taxation remains essentially the
same, the power to tax is [still] primarily vested in the Congress. (Quezon
City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408,
October 6, 2008 citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169
in turn referring to Mactan Cebu International Airport Authority, v.
Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680)
9.
Further amplification by Bernas of the local
governments power to tax. What is the effect of Section 5 on the fiscal
position of municipal corporations? Section 5 does not change the doctrine
that municipal corporations do not possess inherent powers of
taxation. What it does is to confer municipal corporations a general power
to levy taxes and otherwise create sources of revenue. They no longer have
to wait for a statutory grant of these powers. The power of the legislative
authority relative to the fiscal powers of local governments has been reduced
to the authority to impose limitations on municipal powers. Moreover, these
limitations must be consistent with the basic policy of local autonomy. The
important legal effect of Section 5 is thus to reverse the principle that doubts
are resolved against municipal corporations. Henceforth, in interpreting
statutory provisions on municipal fiscal powers, doubts will be resolved in
favor of municipal corporations. It is understood, however, that taxes
imposed by local government must be for a public purpose, uniform within a
locality, must not be confiscatory, and must be within the jurisdiction of the
local unit to pass. (Quezon City, et al., v. ABS-CBN Broadcasting
Corporation, G. R. No. 166408, October 6, 2008 citing City Government of
Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015,
March 6, 2006, 484 SCRA 169)
10.
Reconciliation of the local governments authority to
tax and the Congressional general taxing power. Congress has the
inherent power to tax, which includes the power to grant tax

exemptions. On the other hand, the power of local governments, such as

provinces and cities for example Quezon City, to tax is prescribed by Section
151 in relation to Section 137 of the LGC which expressly provides that
notwithstanding any exemption granted by any law or other special law, the
City or a province may impose a franchise tax. It must be noted that
Section 137 of the LGC does not prohibit grant of future exemptions.
The Supreme Court in a series of cases has sustained the power of
Congress to grant tax exemptions over and above the power of the local
governments delegated power to tax. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City
Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R.
No. 162015, March 6, 2006, 484 SCRA 16)
Indeed, the grant of taxing powers to local government units under
the Constitution and the LGC does not affect the power of Congress to grant
exemptions to certain persons, pursuant to a declared national policy. The
legal effect of the constitutional grant to local governments simply means
that in interpreting statutory provisions on municipal taxing powers, doubts
must be resolved in favor of municipal corporations. [Ibid., referring
to Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of
Davao]
11. Professional tax may be imposed by a province or city
but not by a municipality or barangay.
a.
Transaction taxed: Exercise or practice of profession requiring
government licensure examination.
b.
Tax rate: In Accordance with a taxing ordinance which
should not exceed P300.00.
c.
Tax base: Reasonable classification by the sanggunian.
d.
Exception: Payment to one province or city no longer
subject to any other national or local tax, license or fee for the practice of
such profession in any part of the Philippine professionals exclusively
employed in the government.
e.
Date of payment: or on before January 31 or engaging in
the profession.
f. Place of payment: Province or city where the professional practices
his profession or where he maintains his principal office in case he practices
his profession in several places.
12. Requirements: 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.

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.
Exemption: Professionals exclusively employed in the government
shall be exempt from payment. (Sec. 139, LGC)
NOTE: For the purpose of collecting the tax, the provincial or city
treasurer or his duly authorized representative shall require from such
professionals their current annual registration cards issued by competent
authority before accepting payment of their professional tax for the current
year. The PRC shall likewise require the professionals presentation of proof of
payment before registration of professionals or renewal of their
licenses. (last par., Art. 228, Rules and Regulations Implementing the Local
Government Code of 1991)
13. Who are the professionals who, if they are in practice of
their profession, are subject to professional tax ?
SUGGESTED ANSWER: The professionals subject to the professional
tax are only those who have passed the bar examinations, or any board or
other examinations conducted by the Professional Regulation Commission
(PRC). for example, a lawyer who is also a Certified Public Accountant (CPA)
must pay the professional tax imposed on lawyers and that fixed for CPAs, if
he is to practice both professions. [Sec. 238 (f), Rule XXX, Rules and
Regulations Implementing the Local Government Code of 1991]
14.
X City issued a notice of assessment against ABC
Condominium
Corporation
for
unpaid
business
taxes. The
Condominium Corporation is a duly constituted condominium
corporation in accordance with the Condominium Act which owns and
holds title to the common and limited common areas of the
condominium. Its membership comprises the unit owners and is
authorized under its By-Laws to collect regular assessments from its
members for operating expenses, capital expenditures on the
common areas and other special assessments as provided for in the
Master Deed with ?Declaration of Restrictions of the Condominium.
ABC Condominium Corporation insists that the X City Revenue
Code and the Local Government Code do not contain provisions upon
which the assessment could be based. Resolve the controversy.
SUGGESTED ANSWER: ABC is correct. Condominium corporations are
generally exempt from local business taxation under the Local Government
Code, irrespective of any local ordinance that seeks to declare otherwise.

X City, is authorized under the Local Government Code, to impose a

tax on business, which is defined under the Code as trade or commercial
activity regularly engaged in as a means of livelihood or with a view to
profit. By its very nature a condominium corporation is not engaged in
business, and any profit that it derives is merely incidental, hence it may not
be subject to business taxes. (Yamane , etc. v. BA Lepanto Condominium
Corporation, G. R. No. 154993, October 25, 2005)
15.
Authority of Local Government Units (LGUs) such as
the City of Manila to impose business taxes. Section 143 of the LGC, is
the very source of the power of municipalities and cities to impose a local
business tax, and to which any local business tax imposed by cities or
municipalities such as the City of Manila must conform. It is apparent from
a perusal thereof that when a municipality or city has already imposed a
business tax on manufacturers, etc. of liquors, distilled spirits, wines, and
any other article of commerce, pursuant to Section 143(a) of the LGC, said
municipality or city may no longer subject the same manufacturers, etc. to a
business tax under Section 143(h) of the same Code. Section 143(h) may
be imposed only on businesses that are subject to excise tax, VAT, or
percentage tax under the NIRC, and that are not otherwise specified in
preceding paragraphs. In the same way, businesses such as
respondents, already subject to a local business tax under Section 14 of Tax
Ordinance No. 7794 [which is based on Section 143(a) of the LGC], can no
longer be made liable for local business tax under Section 21 of the same
Tax Ordinance [which is based on Section 143(h) of the LGC]. (The City of
Manila, et al., v. Coca-Cola Bottlers Philippines, Inc., G. R. No. 181845,
August 4, 2009)

REAL PROPERTY TAXATION

1.

The fundamental principles of real property taxation

are:
a.
Appraisal at current and fair market value;
b.
Classification for assessment on the basis of actual use;
c.
Assessment on the basis of uniform classification;
d.
Appraisal, assessment, levy and collection shall not be let to
a private person;
e.
Appraisal and assessment shall be equitable.
NOTES AND COMMENTS: Real properties shall be appraised at the
current and fair market value prevailing in the locality where the property is

situated and classified for assessment purposes on the basis of its actual
use. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G.
R. No. 154126, October 11, 2005)
2.
The reasonable market value is determined by the
assessor in the form of a schedule of fair market values.
The schedule is then enacted by the local sanggunian.
3.
Fair market value is the price at which a property may
be sold by a seller who is not compelled to sell and bought by a buyer
who is not compelled to buy, taking into consideration all uses to which
the property is adopted and might in reason be applied.
The criterion established by the statute contemplates a hypothetical
sale. Hence, the buyers need not be actual and existing purchasers. (Allied
Banking Corporation, etc., v. Quezon City Government, et al.,G. R. No.
154126, October 11, 2005 )
NOTES AND COMMENTS: In fixing the value of real property,
assessors have to consider all the circumstances and elements of value and
must exercise prudent discretion in reaching conclusions. (Allied Banking
Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126,
October 11, 2005)
Preparation of fair market values:
a.
The city or municipal assessor shall prepare a schedule of
fair market values for the different classes of real property situated in their
respective Local Government Units for the enactment of an ordinance by
the sanggunian concerned; and
b. The schedule of fair market values shall be published in a
newspaper of general circulation in the province, city or municipality
concerned or the posting in the provincial capitol or other places as required
by law. (Lopez v. City of Manila, et al., G.R. No. 127139, February 19, 1999)
Proposed fair market values of real property in a local
government unit as well as the ordinance containing the schedule
must be published in full for three (3) consecutive days in a newspaper of
local circulation, where available, within ten (10) days of its approval, and
posted in at lease two (2) prominent places in the provincial capitol, city,
municipal or barangay hall for a minimum of three (3) consecutive
weeks. (Figuerres v. Court of Appeals, et al,. G.R. No. 119172, March 25,
1999)
4.
Approaches in estimating the fair market value of real
property for real property tax purposes ?

a.
Sales Analysis Approach. The sales price paid in actual
market transactions is considered by taking into account valid sales data
accumulated from among the Registrar of Deeds, notaries public, appraisers,
brokers, dealers, bank officials, and various sources stated under the Local
Government Code.
b.
Income Capitalization Approach. The value of an incomeproducing property is no more than the return derived from it. An analysis of
the income produced is necessary in order to estimate the sum which might
be invested in the purchase of the property.
c.
Reproduction cost approach is a formal approach used
exclusively n appraising man-made improvements such as buildings and other
structures, based on such data as materials and labor costs to reproduce a
new replica of the improvement.
The assessor uses any or all of these approaches in analyzing the data
gathered to arrive at the estimated fair market value to be included in the
ordinance containing the schedule of fair market values. (Allied Banking
Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126,
October 11, 2005 citing Local Assessment Regulations No. 1-92)
5. An ordinance whereby the parcels of land sold, ceded,
transferred and conveyed for remuneratory consideration after the
effectivity of this revision shall be subject to real estate tax based on
the actual amount reflected in the deed of conveyance or the current
approved zonal valuation of the Bureau of Internal Revenue
prevailing at the time of sale, cession, transfer and conveyance,
whichever is higher, as evidenced by the certificate of payment of the
capital gains tax issued therefore is INVALID being contrary to public
policy and for restraining trade for the following reasons:
a.
It mandates an exclusive rule in determining the fair market
value and departs from the established procedures such as the sales analysis
approach, the income capitalization approach and the reproduction approach
provided under the rules implementing the statute. It unduly interferes with
the duties statutorily placed upon the local assessor by completely dispensing
with his analysis and discretion which the Local Government Code and the
regulations require to be exercised. An ordinance that contravenes any
statute is ultra vires and void.
b.
The consideration approach in the ordinance is illegal since
the appraisal, assessment, levy and collection of real property tax shall not
be let to any private person, it will also completely destroy the fundamental
principle in real property taxation that real property shall be classified,
valued and assessed on the basis of its actual use regardless of where

located, whoever owns it, and whoever uses it. Allowing the parties to a
private sale to dictate the fair market value of the property will dispense with
the distinctions of actual use stated in the Local Government Code and in the
regulations.
c.
The invalidity is not cured by the prhase whichever is
higher because an integral part of that system still permits valuing real
property in disregard of its actual use.
d.
The ordinance would result to real property assessments
more than once every three (3) years and that is not the congressional intent
as shown in the provisions of the Local Government Code and the
regulations. Consequently, the real property tax burden should not be
interpreted to include those beyond what the Code or the regulations
expressly clearly state.
e.
The proviso would provide a chilling effect on real property
owners or administrators to enter freely into contracts reflecting the
increasing value of real properties in accordance with prevailing market
conditions.
While the Local Government Code provides that the assessment of real
property shall not be increased once every three (3) years, the questioned
proviso subjects the property to a higher assessment every time a sales
transaction is made. Real property owners would therefore postpone sales
until after the lapse of the three (3) year period, or if they do so within the
said period they shall be compelled to dispose of the property at a price not
exceeding the last prior conveyance in order to avoid a higher tax
assessment.
In the above two scenarios real property owners are effectively
prevented from obtaining the best price possible for their properties and
unduly hampers the equitable distribution of wealth. (Allied Banking
Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126,
October 11, 2005)
6. Examples of personal property under the civil law that
may be considered as real property for purposes of taxes. Personal
property under the civil law may be considered as real property for purposes
of taxes where the property is essential to the conduct of the business.
a.
Underground tanks are essential to the conduct of the
business of a gasoline station without which it would not be
operational. (Caltex Phils., Inc. v. Central Board of Assessment Appeals, et
al., 114 SCRA 296)
b. Light Rail Transit (LRT) improvements such as buildings,
carriageways, passenger terminals stations, and similar structures do not

form part of the public roads since the former are constructed over the latter
in such a way that the flow of vehicular traffic would not be impaired. The
carriageways and terminals serve a function different from the public
roads. Furthermore, they are not open to use by the general public hence not
exempt from real property taxes.
Even granting that the national
government owns the carriageways and terminal stations, the property is not
exempt because their beneficial use has been granted to LRTA a taxable
entity. (Light Rail Transit Authority v. Central Board of Assessment Appeals,
et al., G. R. No. 127316, October 12, 2000)
c.
Barges on which were mounted gas turbine power plants
designated to generate electrical power, the fuel oil barges which supplied fuel
oil to the power plant barges, and the accessory equipment mounted on the
barges were subject to real property taxes.
Moreover, Article 415(9) of the Civil Code provides that [d]ocks and
structures which, though floating, are intended by their nature and object to
remain at a fixed place on a river, lake or coast are considered immovable
property by destination being intended by the owner for an industry or work
which may be carried on in a building or on a piece of land and which tend
directly to meet the needs of said industry or work. (FELS Energy, Inc., v.
Province of Batangas, G. R. No. 168557, February 16, 2007 and companion
case)
7. Unpaid realty taxes attach to the property and is chargeable
against the person who had actual or beneficial use and possession of
it regardless of whether or not he is the owner. To impose the real
property tax on the subsequent owner which was neither the owner not the
beneficial user of the property during the designated periods would not only
be contrary to law but also unjust.
Consequently, MERALCO the former owner/user of the property was
required to pay the tax instead of the new owner NAPOCOR. (Manila Electric
Company v. Barlis, G.R. No. 114231, May 18, 2001)
NOTES AND COMMENTS: The above May 18, 2001 decision was set
aside by the Supreme Court when it granted the petitioners second motion
for reconsideration on June 29, 2004. The author submits that the above
ruling in the May 18, 2001 decision is still valid, not on the basis of the May
18, 2001 decision but in the light of pronouncements of the Supreme Court in
other cases. Thus, do not cite the doctrine as emanating from the May 18,
2001 decision.
8. Secretary of Justice can take cognizance of a case involving
the constitutionality or legality of tax ordinances where there are

factual issues involved. (Figuerres v. Court of Appeals, et al., G.R. No.

119172, March 25, 1999)
Taxpayer files appeal to the Secretary of Justice, within 30
days from effectivity thereof. In case the Secretary decides the appeal, a
period also of 30 days is allowed for an aggrieved party to go to court. But if
the Secretary does not act thereon, after the lapse of 60 days, a party could
already seek relief in court within 30 days from the lapse of the 60 day
period.
These three separate periods are clearly given for compliance as a
prerequisite before seeking redress in a competent court. Such statutory
periods are set to prevent delays as well as enhance the orderly and speedy
discharge of judicial functions. For this reason the courts construe these
provisions of statutes as mandatory. (Reyes, et al., v. Court of Appeals, et
al., G.R. No. 118233, December 10, 1999)
9.
Public hearings are mandatory prior to approval of tax
ordinance, but this still requires the taxpayer to adduce evidence to show
that no public hearings ever took place. (Reyes, et al., v. Court of Appeals, et
al., G.R. No. 118233, December 10, 1999) Public hearings are required to
be conducted prior to the enactment of an ordinance imposing real property
taxes. (Figuerres v. Court of Appeals, et al., G.R. No. 119172, March 25,
1999)
10.
The concurrent and simultaneous remedies afforded
local government units in enforcing collection of real property taxes:
a.
Distraint of personal property;
b.
Sale of delinquent real property, and
c.
Collection of real property tax through ordinary court action.
11.
Notice and publication, as well as the legal
requirements for a tax delinquency sale, are mandatory, and the failure
to comply therewith can invalidate the sale. The prescribed notices must be
sent to comply with the requirements of due process. (De Knecht, et al,. v.
Court of Appeals; De Knecht, et al., v. Honorable Sayo, 290 SCRA 223,236)
12.
The reason behind the notice requirement is that tax
sales are administrative proceedings which are in personam in
nature. (Puzon v. Abellera, 169 SCRA 789, 795; De Asis v. I.A.C., 169 SCRA
314)

 13. FELS Energy, Inc., had a contract to supply NPC with

the electricity generated by FELS power barges. The contract also
stated that NPC shall be responsible for all real estate taxes and
assessments. FELS then received an assessment of real property
taxes on its power barges from the Provincial Assessor of
Batangas. If filed a motion for reconsideration with the Provincial
Assessor.
a.
Upon denial, FELS elevated the matter to the Local
Board of Assessment Appeals (LBAA), where it raised the following
issues:
1)
Since NPC is tax-exempt then FELs should also be taxexempt because of its contract with NPC.
2)
The power barges are not real property subject to real
property taxes.
b.
Upon the other hand the Local Treasurer insists that
the assessment has attained a state of finality hence the appeal to
the LBAA should be dismissed.
Rule on the conflicting contentions.
SUGGESTED ANSWER:
a.
All the contentions of FELS are without merit:
1)
NPC is not the owner of the power barges nor the operator of the
power barges. The tax exemption privilege granted to NPC cannot be
extended to FELS. the covenant is between NPC and FELs and does not bind
a third person not privy to the contract such as the Province of Batangas.
2)
The Supreme Court of New York in Consolidated Edison Company
of New York, Inc., et al., v. The City of New York, et al., 80 Misc. 2d 1065
(1975) cited in FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557,
February 16, 2007 and companion case, held that barges on which were
mounted gas turbine power plants designated to generate electrical power,
the fuel oil barges which supplied fuel oil to the power plant barges, and the
accessory equipment mounted on the barges were subject to real property
taxes.
Moreover, Article 415(9) of the Civil Code provides that [d]ocks and
structures which, though floating, are intended by their nature and object to
remain at a fixed place on a river, lake or coast are considered immovable
property by destination being intended by the owner for an industry or work
which may be carried on in a building or on a piece of land and which tend
directly to meet the needs of said industry or work.
b.
The Treasurer is correct. The procedure do not allow a
motion for reconsideration to be filed with the Provincial Assessor.

To allow the procedure would indeed invite corruption in the system of

appraisal and assessment. it conveniently courts a graft-prone situation
where values of real property ay be initially set unreasonably high, and then
subsequently reduced upon the request of a property owner. In the latter
instance, allusions of possible cover, illicit trade-off cannot be avoided, and in
fact can conveniently take place. Such occasion for mischief must be
prevented and excised from our system. (FELS Energy, Inc., v. Province of
Batangas,G. R. No. 168557, February 16, 2007 and companion case)
14. A special levy or special assessment is an imposition by a
province, a city, a municipality within the Metropolitan Manila Area, a
municipality or a barangay upon real property specially benefited by a
public works expenditure of the LGU to recover not more than 60% of such
expenditure.
15. If the ground for the protest is validity of the real property
tax ordinance and not the unreasonableness of the amount collected the tax
must be paid under protest, and the issue of legality may be raised to the
proper courts on certiorari without need of exhausting administrative
remedies.
16. If the ground for the protest is unreasonableness of the
amounts collected there is need to pay under protest and administrative
remedies must be resorted to before recourse to the proper courts.
17. Procedure for refund of real property taxes based on
unreasonableness or excessiveness of amounts collected.
a.
Payment under protest at the time of payment or within
thirty (30) days thereafter, protest being lodged to the provincial, city or in
the case of a municipality within the Metro Manila Area the municipal
treasurer.
b.
The treasurer has a period of sixty (60) days from receipt of
the protest within to decide.
c.
Within thirty (30) days from receipt of treasurers decision or
if the treasurer does not decide, within thirty (30) days from the expiration of
the sixty (60) period for the treasurer to decide, the taxpayer should file an
appeal with the Local Board of Assessment Appeals.
d.
The Local Board of Assessment Appeals has 120 days from
receipt of the appeal within which to decide.

e.
The adverse decision of the Local Board of Assessment
Appeals should be appealed within thirty (30) days from receipt to the Central
Board of Assessment Appeals.
f. The adverse decision of the Central Board of Assessment Appeals
shall be appealed to the Court of Tax Appeals (En Banc) by means of a
petition for review within thirty (30) days from receipt of the adverse decision.
g.
The decision of the CTA may be the subject of a motion for
reconsideration or new trial after which an appeal may be interposed by
means of a petition for review on certiorari directed to the Supreme Court on
pure questions of law within a period of fifteen (15) days from receipt
extendible for a period of thirty (30) days.
18.
The entitlement to a tax refund does not necessarily
call for the automatic payment of the sum claimed. The amount of the
claim being a factual matter, it must still be proven in the normal course and
in accordance with the administrative procedure for obtaining a refund of real
property taxes, as provided under the Local Government Code. (Allied
Banking Corporation, etc., v. Quezon City Government, et al., G. R. No.
154126, September 15, 2006)
NOTES AND COMMENTS: In the above Allied Banking case, the
Supreme Court provided for the starting date of computing the two-year
prescriptive period within which to file the claim with the Treasurer, which is
from finality of the Decision. The procedure to be followed is that shown
below.
19.
Procedure for refund of real property taxes based on
validity of the tax measure or solutio indebeti.
a.
Payment under protest not required, claim must be directed
to the local treasurer, within two (2) years from the date the taxpayer is
entitled to such reduction or readjustment, who must decide within sixty (60)
days from receipt.
b.
The denial by the local treasurer of the protest would fall
within the Regional Trial Courts original jurisdiction, the review being the
initial judicial cognizance of the matter. Despite the language of Section 195
of the Local Government Code which states that the remedy of the taxpayer
whose protest is denied by the local treasurer is to appeal with the court of
competent jurisdiction, labeling the said review as an exercise of appellate
jurisdiction is inappropriate since the denial of the protest is not the judgment
or order of a lower court, but of a local government official. (Yamane , etc. v.
BA Lepanto Condominium Corporation, G. R. No. 154993, October 25, 2005)

c.
The decision of the Regional Trial Court should be appealed
by means of a petition for review directed to the Court of Tax Appeals
(Division).
d.
The decision of the Court of Tax Appeals (Division) may be
the subject of a review by the Court of Tax Appeals (en banc).
e.
The decision of the Court of Tax Appeals (en banc) may be
the subject of a petition for review on certiorari on pure questions of law
directed to the Supreme Court.
20.
Charitable institutions, churches and parsonages
or convents appurtenant thereto, mosques, non-profit cemeteries,
and all lands, buildings and improvements that are actually, directly
and exclusively used for religious, charitable or educational purposes
are exempt from taxation. [Sec.28 (3) Article VI, 1987 Constitution]
21.
The constitutional tax exemptions refer only to
real property that are actually, directly and exclusively used for religious,
charitable or educational purposes, and that the only constitutionally
recognized exemption from taxation of revenues are those earned by nonprofit, non-stock educational institutions which are actually, directly and
exclusively used for educational purposes.(Commissioner of Internal Revenue
v. Court of Appeals, et al., 298 SCRA 83)
The constitutional tax exemption covers property taxes only. What is
exempted is not the institution itself, those exempted from real estate taxes
are lands, buildings and improvements actually, directly and exclusively used
for religious, charitable or educational purposes. (Lung Center of the
Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)
22.
The 1935 Constitution stated that the lands, buildings,
and improvements are used exclusively but the present
Constitution requires that the lands, buildings and improvements are
actually, directly and exclusively used. The change should not be
ignored. Reliance on past decisions would have sufficed were the words
actually as well as :directly are not added. There must be proof therefore
of the actual and direct use to be exempt from taxation. (Lung Center of the
Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)
23. The actual, direct and exclusive use of the property for
charitable purposes is the direct and immediate and actual
application of the property itself to the purposes for which the charitable
institution is organized. It is not the use of the income from the real property

that is determinative of whether the property is used for tax-exempt

purposes.
If real property is used for one or more commercial purposes, it is not
exclusively used for the exempted purpose but is subject to taxation,. The
words dominant use or principal use cannot be substituted for the words
used exclusively without doing violence to the Constitution and the law.
Solely is synonymous with exclusively. (Lung Center of the Philippines v.
Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)
24. Portions of the land of a charitable institution, such as a
hospital, leased to private entities as well as those parts of the
hospital leased to private individuals are not exempt from real
property taxes. On the other hand, the portion of the land occupied by the
hospital and portions of the hospital used for its patients, whether paying or
non-paying, are exempt from real property taxes. (Lung Center of the
Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)
25.
As a general principle, a charitable institution does
not lose its character as such and its exemption from taxes simply
because it derives income from paying patients, whether out-patient,
or confined in the hospital, or receives subsidies from the
government. So long as the money received is devoted or used altogether
to the charitable object which it is intended to achieve; and no money inures
to the private benefit of the persons managing or operating the
institution. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R.
No. 144104, June 29, 2004)
26.
Property that are exempt from the payment of
real property tax under the Local Government Code.
a.
Real property owned by the Republic of the Philippines or
any of its political subdivisions except when the beneficial use thereof has
been granted to a taxable person for a consideration or otherwise;
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 and educational purposes;
c.
Machineries and equipment, actually, directly and exclusively
used by local water districts; and government owned and controlled
corporations engaged in the supply and distribution of water and generation
and transmission of electric power;
d.
Real property owned by duly registered cooperatives;

e.
Machinery and equipment used for pollution control and
environmental protection.
27. Manila International Airport Authority (MIAA) it is not a
government owned or controlled corporation but an instrumentality
of the government that is exempt from taxation.
It is not a stock corporation because its capital is not divided into
shares, neither is it a non-stock corporation because there are no
members. It is instead an instrumentality of the government upon which
the local governments are not allowed to levy taxes, fees or other charges.
An instrumentality refers to any agency of the National
Government, not integrated within the department framework vested with
special functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. This term includes regulatory agencies
chartered
institutions
and
government-owned
or
controlled
corporations. [Sec. 2 (10), Introductory Provisions, Administrative Code of
1987] It is an instrumentality exercising not only governmental but also
corporate powers. It exercises governmental powers of eminent domain,
police power authority, and levying of fees and charges.
Finally, the airport lands and buildings are property owned by the
government that are devoted to public use and are properties of the public
domain. (Manila International Airport Authority v. City of Pasay, et al., G. R.
No. 163072, April 2, 2009)
28.
A telecommunications company was granted by
Congress on July 20, 1992, after the effectivity of the Local
Government Code on January 1, 1992, a legislative franchise with
tax exemption privileges which partly reads, The grantee, its
successors or assigns shall be liable to pay the same taxes on their
real estate, buildings and personal property, exclusive of this
franchise, as other persons or corporations are now or hereafter may
be required by law to pay. This provision existed in the companys
franchise prior to the effectivity of the Local Government Code. A
City then enacted an ordinance in 1993 imposing a real property on
all real properties located within the city limits, and withdrawing all
tax exemptions previously granted. Among properties covered are
those owned by the company from which the City is now collecting
P43 million. The properties of the company were then scheduled by
the City for sale at public auction.

The company then filed a petition for the issuance of a writ of

prohibition claiming exemption under its legislative franchise. The
City defended its position raising the following:
a.
There was no exhaustion of administrative remedies
because the matter should have first been filed before the Local
Board of Assessment Appeals;
b.
The companys properties are exempt from tax under
its franchise.
Resolve the issues raised.
SUGGESTED ANSWERS:
a.
There is no need to exhaust administrative remedies as the
appeal to the LBAA is not a speedy and adequate remedy within the
law. This is so because the properties are already scheduled for auction
sale.
Furthermore one of the recognized exceptions to the rule on
exhaustion is that if the issue is purely legal in character which is so in this
case.
b.
The properties are exempt from taxation. The grant of
taxing powers to local governments under the Constitution and the Local
Government Code does not affect the power of Congress to grant tax
exemptions.
The term exclusive of this franchise is interpreted to mean
properties actually, directly and exclusively used in the radio or
telecommunications business. The subsequent piece of legislation which
reiterated the phrase exclusive of this franchise found in the previous tax
exemption grant to the company is an express and real intention on the part
of Congress to once against remove from the LGCs delegated taxing power,
all of the companys properties that are actually, directly and exclusively
used in the pursuit of its franchise. (The City Government of Quezon City, et
al., v. Bayan Telecommunications, Inc., G. R. No. 162015, March 6, 2006)
29. The owner operator of a BOT and not the ultimate owner
is subject to real property taxes. Consistent with the BOT concept and as
implemented, BPPC the owner-manager-operator of the project is the
actual user of its machineries and equipment. BPPCs ownership and use of
the machineries and equipment are actual, direct, and immediate, while
NAPOCORs is contingent and, at this stage of the BOT Agreement, not
sufficient to support its claim for tax exemption. (National Power
Corporation v. Central Board of Assessment Appeals, et al., G, R. No.
171470, January 30, 2009)