These materials are copyrighted and/or based on the writers books
BAR STAR NOTES on Taxation and future revisions. It is prohibited to reproduce any part of
TAXATION
VER. 2010.06.12
copyrighted 2010
Prepared by Prof. Abelardo T. Domondon
(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.).
Lawyer-CPA-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 his 2010 Lectures on
TAXATION held at the University of the Philippines. 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.
WARNING:
these Notes in any form or any means, electronic or mechanical, including
photocopying without the written permission of the author. Unauthorized
users shall not be prosecuted but SHALL BE SUBJECT TO THE LAW
OF KARMA SUCH THAT THEY WILL NEVER PASS THE BAR OR
WOULD BE UNHAPPY IN LIFE for stealing the intellectual property of
the author.
THE BEST OF LUCK AND
ADVANCE CONGRATULATIONS
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
two-fold. 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.
 2
SUGGESTED ANSWER: Taxes are the and should not work to prejudice a taxpayers

lifeblood of the nation. Without revenue property.

raised from taxation, the government will not

5. Discuss briefly the
survive, resulting in detriment to society. basis/bases, or rationale of taxation.

Without taxes, the government would be SUGGESTED ANSWER: a.

Reciprocal duties of protection and
paralyzed for lack of motive power to activate support between the state and its citizens and
residents. Also called symbiotic relation
and operate it. (Commissioner of Internal Revenue between the state and its citizens.
b. Jurisdiction by the state over
v. Algue, Inc. et al., 158 SCRA 8, 16-17) persons and property within its territory.
6. Discuss briefly but
4. Marshall said that, the power comprehensively the objectives or
purposes of taxation.
to tax involves the power to destroy. On SUGGESTED ANSWER: The purposes
or objectives of taxation are the following:
the other hand, Holmes stated that the
a. The primary purpose:
1)
power to tax is not the power to Revenue purpose.
b. The secondary
destroy while the court sits. purposes
1) Sumptuary or regulatory
purpose. 2)
Compensatory purpose.
Reconcile the statements. 3) To implement
the power of eminent domain.
In the
7. Distinguish a tax from a
alternative, what are the implications that license fee. SUGGESTED
ANSWER: The following are the distinctions:
flow from the above statements ? a. Purpose: Tax imposed for revenue
while license fee for regulation. Tax for general
SUGGESTED public purposes while license fee for regulatory
purposes only.
ANSWERS: Marshalls view refers to a valid tax b. Basis: Tax
imposed under power of taxation while license
while the Holmes view refers to an invalid tax. fee under police power.
c. Amount:
a. The In taxation, no limit as to amount while license
fee limited to cost of the license and the
imposition of a valid tax could not be judicially expenses of police surveillance and regulation.

restrained merely because it would prejudice d. Time of

payment: Taxes normally paid after
taxpayers property. b. An commencement of business while license fee
before. e. Effect of
illegal tax could be judicially declared invalid 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
 3
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
 4
determine whether a tax system is able to meet privilege or the engaging in an occupation.
the purposes or objectives of taxation. They are: Example income tax, estate tax.
a. Fiscal adequacy.
b. Administrative feasibility. 16. What are the kinds of taxes
c. Theoretical justice. classified as to who bears the burden ?
Explain each briefly.
SUGGESTED ANSWER: Based on the
13. What are the elements or possibility of shifting the incidence of taxation, or
characteristics of a tax ? SUGGESTED as to who shall bear the burden of taxation,
ANSWER: taxes may be classified into:
a. Enforced contribution. a. Direct taxes. Those that are
b. Generally payable in money. extracted from the very person who, it is
c. Proportionate in character. intended or desired, should pay them
d. Levied on persons, property or (Commissioner of Internal Revenue v. Philippine Long
exercise of a right or privilege. Distance Telephone Company, G. R. No. 140230,
e. Levied by the state having December 15, 2005); they are impositions for
jurisdiction. which a taxpayer is directly liable on the
f. Levied by the legislature. transaction or business he is engaged in,
g. Levied for a public purpose. (Commissioner of Internal Revenue v. Philippine Long
h. Paid at regular periods or intervals. Distance Telephone Company, supra) which
liability cannot be shifted or transferred to
another. Example income tax, estate tax,
14. State the requisites of a valid
donors tax, etc.
tax. SUGGESTED ANSWER: b. Indirect taxes are those that are
a. A demanded in the first instance, from, or are paid
valid tax should be within the jurisdiction of the by, one person in the expectation and intention
taxing authority. that he can shift the burden to (Commissioner of
b. That the assessment and collection Internal Revenue v. Philippine Long Distance
of certain kinds (The same as the inherent Telephone Company, supra) to someone else not
limitations of the power of taxation) should be for as a tax but as part of the purchase price.
a public purpose. (Commissioner, of Internal Revenue v. American
c. The rule of taxation should be Express International, Inc. (Philippine Branch),
uniform. G. R. No. 152609, June 29, 2005 citing various
d. That either the person or cases and authorities) Example value added
property of taxes guarantees against injustice to tax (VAT), documentary stamp tax, excise tax,
individuals, especially by way or notice and percentage tax, etc.
opportunity for hearing be provided.
e. The tax must not impinge on the 17. Silkair (Singapore) PTE, Ltd.,
inherent and Constitutional limitations on the an international carrier, purchased
power of taxation. aviation gas from Petron Corporation,
which it uses for its operations. It now
15. claims for refund or tax credit for the
What are the classes or kinds of taxes excise taxes it paid claiming that it is
according to the subject matter or exempt from the payment of excise taxes
object ? under the provisions of Sec. 135 of the
SUGGESTED ANSWER:
NIRC of 1997 which provides that
a. Personal,
poll or capitalization imposed on all residents,
petroleum products are exempt from
whether citizen or not. Example Community excise taxes when sold to Exempt entities or
agencies covered by tax treaties, conventions, and
Tax.
other international agreements for their use and
b. Property - Imposed on property. consumption: Provided, however, That the country of
Example Real property tax. said foreign international carrier or exempt entities or
agencies exempts from similar taxes petroleum
products sold to Philippine carriers, entities or
c. Excise imposed upon the
agencies
performance of an act, the enjoyment of a
 5
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)
18. What are
 6
the different kinds of taxes classified as
to purpose ?
SUGGESTED ANSWER:
a. General,
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.
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
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
7
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
is 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)
 8
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) value-added tax collection
as a percentage of Gross Domestic
Product (GDP) of the previous year
exceeds two and four-fifth percent (2
4/5%) or (ii) national government deficit
as a percentage of GDP of the previous
year exceeds one and one-half percent (1
%).
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)
 9
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
sources within 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 an overseas 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
 10
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 on income 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 the
Philippines.
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 of stock 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
 11
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 citing Commissioner of Internal
Revenue v. British Overseas Airways Corporation
(British Overseas Airways), No. L-65773-74, 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
 12
going to picked up by Obama, Inc., planes 2) Three (3) readings on three
from the Diosdado Macapagal Intl. Airport separate days;
at Clark, Angeles, Pampanga, bound for 3) Printed copies in final form
Nairobi, Kenya ? Reason out your distributed three (3) days before passage.
h. Presidential power to grant
answer.
reprieves, commutations and pardons and
SUGGESTED ANSWER: No more. This
remittal of fines and forfeiture after conviction by
time Obama, Inc., would be subject to the
final judgment.
carriers tax based on Gross Philippine Billings.
(GPB).
Gross Philippine Billings refers to the 3. The specific or direct
amount of gross revenue derived from carriage constitutional limitation.
of persons, excess baggage, cargo and mail a. No imprisonment for non-payment of
originating from the Philippines in a continuous a poll tax;
and uninterrupted flight, irrespective of the place b. Taxation shall be uniform and
of sale or issue and the place of payment of the equitable;
ticket or passage document. [NIRC of 1997, Sec. c. Congress shall evolve a progressive
28(A)(3)(a)] system of taxation;
The place of sale is irrelevant; as long d. All appropriation, revenue or tariff
as the uplifts of passengers and cargo occur bills shall originate exclusively in the House of
from the Philippines, income is included in GPB. Representatives, but the Senate may propose
(South African Airways v. Commissioner of Internal and concur with amendments;
Revenue, G.R. No. 180356, February 16, 2010) e. The President shall have the power to
veto any particular item or items in an
19. No improper delegation of appropriation, revenue, or tariff bill, but the veto
legislative authority to tax. The power to shall not affect the item or items to which he does
tax is inherent in the State, such power being not object;
inherently legislative, based on the principle that f. Delegated power of the President to
taxes are a grant of the people who are taxed, impose tariff rates, import and export quotas,
and the grant must be made by the immediate tonnage and wharfage dues:
representatives of the people; and where the 1) Delegation by Congress
people have laid the power, there it must remain 2) through a law
and be exercised. (Commissioner of Internal 3) subject to Congressional
Revenue v. Fortune Tobacco Corporation, G. R. Nos. limits and restrictions
167274-75, July 21, 2008) 4) within the framework of
national development program.
CONSTITUTIONAL LIMITATIONS g. Tax exemption of charitable
institutions, churches, parsonages and convents
1. Constitutional limitations on appurtenant thereto, mosques, and all lands,
buildings and improvements of all kinds actually,
the power of taxation . The general or indirect
directly and exclusively used for religious,
constitutional limitations as well as the specific or
charitable or educational purposes;
direct constitutional limitations.
h. No tax exemption without the
concurrence of majority vote of all members of
2. The general or indirect Congress;
constitutional limitations on the power of i. No use of public money or property
taxation are: for religious purposes except if priest is assigned
a. Due process clause; to the armed forces, penal institutions,
b. Equal protection clause; government orphanage or leprosarium;
c. Freedom of the press; j. Money collected on tax levied for a
d. Religious freedom; special purpose to be used only for such purpose,
e. No taking of private property without balance if any, to general funds;
just compensation; k. The Supreme Court's power to
f. Non-impairment clause; review judgments or orders of lower courts in all
g. Law-making process: cases involving the legality of any tax, impose,
1) Bill should embrace only one assessment or toll or the legality of any penalty
subject expressed in the title thereof; imposed in relation to the above;
 13
l. Authority of local government units enforced. (Santos v. People, et al, G. R. No. 173176,
to create their own sources of revenue, to levy August 26, 2008)
taxes, fees and other charges subject to It is imperative to duly establish that the
guidelines and limitations imposed by Congress one invoking equal protection and the person to
consistent with the basic policy of local autonomy; which she is being compared were indeed
m. Automatic release of local similarly situated, i.e., that they committed
government's just share in national taxes; identical acts for which they were charged with
n. Tax exemption of all revenues and the violation of the same provisions of the NIRC;
assets of non-stock, non-profit educational and that they presented similar arguments and
institutions used actually, directly and exclusively evidence in their defense - yet, they were treated
for educational purposes; differently. (Santos, supra)
o. Tax exemption of all revenues and
assets of proprietary or cooperative educational 8. Tests to determine validity of
institutions subject to limitations provided by law classification. The United States Supreme
including restrictions on dividends and provisions Court has established different tests to
for reinvestment of profits; determine the validity of a classification and
p. Tax exemption of grants, compliance with the equal protection clause.
endowments, donations or contributions used The recognized tests are:
actually, directly and exclusively for educational a. The traditional (or rational basis)
purposes subject to conditions prescribed by law. test.
b. The strict scrutiny (or compelling
5. Equal protection of the law interest) test.
clause is subject to reasonable c. The intermediate level of scrutiny (or
classification. If the groupings are quasi-suspect class) test.
characterized by substantial distinctions that 9. The traditional (or rational
make real differences, one class may be treated basis) test used in order to determine the
and regulated differently from another. The validity of classification. The classification
classification must also be germane to the is valid if it is rationally related to a
purpose of the law and must apply to all those constitutionally permissible state interest.
belonging to the same class. (Tiu, et al., v. Court of The complainant must prove that the
Appeals, et al., G.R. No. 127410, January 20, 1999) classification is invidous, wholly arbitrary, or
capricious, otherwise the classification is
6. Requisites for valid presumed to be valid. (Lindsley v. Natural
classification. All that is required of a valid Carboinic Gas Co., 220 U.S. 61; McGowan v.
classification is that it be reasonable, which Maryland, 366 U.S. 420; United States Railroad
means that a. the classification should be Retirement Board v. Fritz, 449 U.S. 166)
based on substantial distinctions which make for
real differences, 10. The strict scrutiny (or
b. that it must be germane to the compelling interest) test used in order to
purpose of the law; determine the validity of the
c. that it must not be limited to existing classification. Government regulation that
conditions only; and intentionally discriminates against a suspect
d. that it must apply equally to each class such as racial or ethnic minorities, is
member of the class. subject to strict scrutiny and considered to
The standard is satisfied if the violate the equal protection clause unless found
classification or distinction is based on a necessary to promote a compelling state
reasonable foundation or rational basis and is interest.
not palpably arbitrary. [ABAKADA Guro Party List, A classification is necessary when it is
etc., v. Purisima, etc., et al., G. R. No. 166715, August narrowly drawn so that no alternative, less
14, 2008] burdensome means is available to accomplish
the state interest.
7. Equal protection does not Thus, it was held that denial of free public
demand absolute equality. It merely education to the children of illegal aliens
requires that all persons shall be treated alike, imposes an enormous and lasting burden based
under like circumstances and conditions, both as on a status over which the children have no
to the privileges conferred and liabilities control is violative of equal protection because
 14
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,
 15
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 v. Secretary of Finance, et
al., and companion cases, 235 SCRA 630)
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
 16
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
 17
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 1st element 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 2 nd 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.
 18
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 value-added 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. Distinguish tax from debt.
TAX DEBT
Basis based on law based on contract o
judgment
Failure to Pay may result in no imprisonment
 19
imprisonment Commissioner of Internal Revenue, G.R. No. 180356,
February 16, 2010 reiterating Caltex Philippines,
Mode of generally payable in payable in money, Inc. v. Commission on Audit, which applied
Payment money property or service Francia v. Intermediate Appellate Court)
Assignability not assignable assignable
Payment unless it becomes a may be a subject 4. Exceptions: When set-off or
debt is not subject to compensation allowed for local taxes.
compensation or set- a.
off Where both claims already become
overdue and demandable as well as fully
Interest does not draw interest draws interest if liquidated. Compensation takes place by
unless delinquent stipulated or delayed operation of law under Art. 1200 in relation to
Authority imposed by public can be imposed by Arts. 1279 and 1290 all of the Civil Code.
authority private individuals (Domingo v. Garlitos, 8 SCRA 443)
b. Compensation takes place
Prescription Prescriptive periods debt under the Civil by operation of law, where the government and
for tax under NIRC Code the taxpayer are in their own right reciprocally
debtors and creditors of each other, and that the
WARNING: Do not use the above debts are both due and demandable. This is in
arrangement in answering Bar questions. consequence of Article 1278 and 1279 of the
Civil Code. (Domingo v. Garlitos, 8 SCRA 443)
2. Compensation takes place by c.
operation of law, where the local government and ,The Supreme Court upheld the validity of
the taxpayer are in their own right reciprocally a set-off between the taxpayer and the
debtors and creditors of each other, and that the government. In both cases, the claims of the
debts are both due and demandable, in taxpayers therein were certain and liquidated.
consequence of Articles 1278 and 1279 of the The claims were certain since there were no
Civil Code. (Domingo v. Garlitos, 8 SCRA 443) doubts or disputes as to their refundability. In
fact, the government admitted the fact of over-
3. May there be compensation or payment. (Commissioner of Internal
Revenue v. Esso Standard Eastern, Inc., 172 SCRA
set-off between a national tax and a 364) d. In case of a tax
debt ? Reason out your answer. overpayment, the BIRs obligation to refund or
SUGGESTED ANSWER: As a off-set arises from the moment the tax was paid.
general rule, there could be no compensation or REASON: Solutio indebeti. (Commissioner of
set-off between a tax and a debt for the following Internal Revenue v. Esso Standard Eastern, Inc 172
reasons: SCRA 364)
a. Lifeblood e. While
theory. judgment should be rendered in favor of
b. Taxes are not contractual Republic for unpaid taxes, judgment ought at the
obligations but arise out of a duty to, and are the same time to issue for Sampaguita Pictures
positive acts of government, to the making and commanding payment to the latter by the
enforcing of which the personal consent of the Republic of the value of the backpay certificates
individual taxpayer is not required. (Republic v. which the Republic received. (Republic v. Ericta,
Mambulao Lumber Co., 4 SCRA 622) 172 SCRA 623)
c. Taxes cannot be the
subject of compensation because the 5. Gilbert obtained a judgment
government and taxpayer are not mutually for a sum of money against the
creditors and debtors of each other and a claim municipality of Camiling. The judgment
for taxes is not such a debt, demand, contract or has become final although execution has
judgment as is allowed to be set-off. not issued. Upon receiving an
Thus, it is correct to say that the
assessment for municipal sales taxes
offsetting of a taxpayers tax refund with its
alleged tax deficiency is unavailing under Art. from the Municipal Treasurer, Gilbert
1279 of the Civil Code. (South African Airways v. executed a partial assignment of his
judgment sufficient to cover the
 20
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
 21
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,
2001 which 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,
supra citing Commissioner of Internal Revenue v.
Firemans Fund Insurance Co., G.R. No. L-30644, 9
March 1987, 148 SCRA 315, 324-325; 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
citing Commissioner 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
 22
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
 23
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.
Purpose 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, joint-stock 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 Government. [1 st
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, 2nd 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.
 24
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
 25
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 as de 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
 26
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 gratuities, pensions, etc.
USVA benefits, SSS benefits and GSIS benefits.
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. [1 st
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.
 27
Nonresident alien individuals not Resident citizens, resident alien
engaged in trade or business in the Philippines individuals and nonresident alien individuals who
are not allowed to deduct this expense. are engaged in trade and business, on their
c. Taxes paid or incurred within the gross incomes other from compensation income
taxable year in connection with the taxpayers are allowed to deduct these expenses. Domestic
profession. corporations, estates and trusts may also deduct
Resident citizens, resident alien this expense. Nonresident citizens and foreign
individuals and nonresident alien individuals who corporations on their gross incomes from within
are engaged in trade and business, on their may also deduct this expense.
gross incomes other from compensation income Nonresident alien individuals not
are allowed to deduct these expenses. Domestic engaged in trade or business in the Philippines
corporations, estates and trusts may also deduct are not allowed to deduct this expense.
this expense. Nonresident citizens and foreign g. Depletion or deduction arising from
corporations on their gross incomes from within the exhaustion of a non-replaceable asset,
may also deduct this expense. usually a natural resource.
Nonresident alien individuals not Resident citizens, resident alien
engaged in trade or business in the Philippines individuals and nonresident alien individuals who
are not allowed to deduct this expense. are engaged in trade and business, on their
d. Ordinary losses, losses from gross incomes other from compensation income
casualty, theft or embezzlement; and net are allowed to deduct these expenses. Domestic
operating losses. corporations, estates and trusts may also deduct
Resident citizens, resident alien this expense. Nonresident citizens and foreign
individuals and nonresident alien individuals who corporations on their gross incomes from within
are engaged in trade and business, on their may also deduct this expense.
gross incomes other from compensation income Nonresident alien individuals not
are allowed to deduct these expenses. Domestic engaged in trade or business in the Philippines
corporations, estates and trusts may also deduct are not allowed to deduct this expense.
this expense. Nonresident citizens and foreign h. Charitable and other contributions.
corporations on their gross incomes from within Resident citizens, resident alien individuals and
may also deduct this expense. nonresident alien individuals who are engaged in
Nonresident alien individuals not trade and business, on their gross incomes other
engaged in trade or business in the Philippines from compensation income are allowed to deduct
are not allowed to deduct this expense. these expenses. Domestic corporations, estates
e. Bad debts due to the taxpayer, and trusts may also deduct this expense.
actually ascertained to be worthless and charged Nonresident citizens and foreign corporations on
off within the taxable year, connected with their gross incomes from within may also deduct
profession, trade or business, not sustained this expense.
between related parties. Nonresident alien individuals not
Resident citizens, resident alien engaged in trade or business in the Philippines
individuals and nonresident alien individuals who are not allowed to deduct this expense.
are engaged in trade and business, on their i. Research and development
gross incomes other from compensation income expenditures treated as deferred expenses paid
are allowed to deduct these expenses. Domestic or incurred by the taxpayer in connection with his
corporations, estates and trusts may also deduct trade, business or profession, not deducted as
this expense. Nonresident citizens and foreign expenses and chargeable to capital account but
corporations on their gross incomes from within not chargeable to property of a character which is
may also deduct this expense. subject to depreciation or depletion.
Nonresident alien individuals not Resident citizens, resident alien
engaged in trade or business in the Philippines individuals and nonresident alien individuals who
are not allowed to deduct this expense. are engaged in trade and business, on their
f. Depreciation or a reasonable gross incomes other from compensation income
allowance for the exhaustion, wear and tear are allowed to deduct these expenses. Domestic
(including reasonable allowance for corporations, estates and trusts may also deduct
obsolescence) of property used in trade or this expense. Nonresident citizens and foreign
business. corporations on their gross incomes from within
may also deduct this expense.
 28
Nonresident alien individuals not 30. What are the requisites for the
engaged in trade or business in the Philippines
deductibility of business expenses ?
are not allowed to deduct this expense.
SUGGESTED ANSWER: The following
j. Contributions to pension trusts.
are the requisites for deductibility of business
Resident citizens, resident alien individuals and
expenses:
nonresident alien individuals who are engaged in
a. Compliance with the business test:
trade and business, on their gross incomes other
1) Must be ordinary and
from compensation income are allowed to deduct
necessary;
these expenses. Domestic corporations, estates
2) Must be paid or incurred
and trusts may also deduct this expense.
within the taxable year;
Nonresident citizens and foreign corporations on
3) Must be paid or incurred in
their gross incomes from within may also deduct
carrying on a trade or business.
this expense.
4) Must not be bribes, kickbacks
Nonresident alien individuals not
or other illegal expenditures
engaged in trade or business in the Philippines
b. Compliance with the substantiation test.
are not allowed to deduct this expense.
Proof by evidence or records of the deductions
k. Insurance premiums for health and
allowed by law including compliance with the
hospitalization. Resident citizens, resident alien
business test.
individuals and nonresident alien individuals who
are engaged in trade and business, on their
gross incomes other from compensation income 31. What are the requisites for the
are allowed to deduct these expenses. deductibility of ordinary and necessary
Nonresident citizens and nonresident alien trade, business, or professional
individual engaged in trade or business in the expenses, like expenses paid for legal
Philippine on their gross incomes from within may and auditing services ?
also deduct these premiums. SUGGESTED ANSWER:
Nonresident alien individuals not a. the expense must be ordinary and
engaged in trade or business in the Philippines necessary;
are not allowed to deduct these premiums. b. it must have been paid or incurred
l. Personal and additional exemptions. during the taxable year dependent upon the
Resident citizens, and resident alien on their method of accounting upon the basis of which the
gross incomes and from compensation income net income is computed.
are allowed to deduct these premiums. c. it must be supported by receipts,
Nonresident citizens on their gross incomes from records or other pertinent papers.
within may also deduct this expense. (Commissioner of Internal Revenue v, Isabela
Nonresident alien individuals engaged in trade or cultural Corporation, G. R. No. 172231, February
business in the Philippines are allowed to deduct 12, 2007)
these exemptions under reciprocity.
Nonresident alien individuals not
engaged in trade or business in the Philippines 32. TMG Corporation is issuing
are not allowed to deduct this expense. the accrual method of accounting. In
2005 XYZ Law Firm and ABC Auditing
29. Distinguish ordinary Firm rendered various services which
expenses from capital expenditures. were billed by these firms only during the
SUGGESTED ANSWER: Ordinary following year 2006. Since the bills for
expenses are those which are common to incur in legal and auditing services were received
the trade or business of the taxpayer WHILE only in 2006 and paid in the same year,
capital expenditures are those incurred to improve TMG deducted the same from its 2006
assets and benefits for more than one taxable gross income. The BIR disallowed the
year. Ordinary expenses are usually incurred
deduction ?
during a taxable year and benefits such taxable
year. Necessary expenses are those which are Who is correct, TMG or BIR ?
appropriate or helpful to the business. 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
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
29
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;
the
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
 30
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
half-blood), 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:
 31
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. 10-2008]
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
 32
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)
 33
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. 4-99]
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
 34
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
government-appointed 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
 35
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.
 36
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
? c.
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.)
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. Items deductible from the
gross estate of a resident or nonresident
Filipino decedent or resident alien
decedent:
a. Expenses, losses, claims,
indebtedness and taxes;
b. Property previously taxed;
c. Transfers for public use;
d. The Family Home up to a value not
exceeding P1 million;
e. Standard deduction of P1 million;
f. 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
 37
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 years
prior to the death of the decedent, or if the
property was transferred to him by gift within the
same period prior to his death;
60% of the value if the prior decedent died
more than two years but not more than three
years prior to the death of the decedent, or if the
property was transferred to him by gift within the
same period prior to his death;
40% of the value if the prior decedent died
more than three years but not more than four
years prior to the death of the decedent, or if the
property was transferred to him by gift within the
same period prior to his death; and
20% of the value if the prior decedent died
more than four years but not more than five
years prior to the death of the decedent, or if the
property was transferred to him by gift within the
same period prior to his death. [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
 38
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. (4th 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
 39
non-resident aliens and took place outside of the
Philippines.
9. What is the concept of donation
or gift splitting ? Illustrate.
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. 2-2003)
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 VAT-
registered 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)
 40
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]
7. Who are liable for the value-
added tax.
a. 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. 16-
2005,Sec. 4.105-1, paraphrasing supplied)
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
 41
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.
 42
Magsaysay Lines, Inc., et al., G. R. No. 146984, July which was involuntary and made pursuant to the
28, 2006) declared policy of Government for privatization
could no longer be repeated or carried on with
18. Pursuant to a government regularity. It should be emphasized that the
program of privatization, NDC, a VAT- normal VAT-registered activity of NDC is leasing
registered entity created for the purpose personal property. This finding is
confirmed by the Revised Charter of the NDC
of selling real property, decided to sell to
which bears no indication that the NDC was
private enterprise all of its shares in its created for the primary purpose of selling real
wholly-owned subsidiary the National property. (Commissioner of Internal Revenue v.
Marine Corporation (NMC). The NDC Magsaysay Lines, Inc., et al., G. R. No. 146984, July
decided to sell in one lot its NMC shares 28, 2006)
and five (5) of its ships, which are 3,700
DWT Tween-Decker, "Kloeckner" type 19. Under the Value Added Tax
vessels. The vessels were constructed (VAT), the tax is imposed on sales, barter,
for the NDC between 1981 and 1984, then or exchange or goods and services. The
initially leased to Luzon Stevedoring VAT is also imposed on certain
Company, also its wholly-owned transactions deemed sales which
subsidiary. Subsequently, the vessels include:
were transferred and leased, on a a. Transfer, use or
bareboat basis, to the NMC. The consumption not in the course of business or
NMC shares and the vessels were properties originally intended for sale or for use
offered for public bidding. Among the in the course of business. xxx
stipulated terms and conditions for the
public auction was that the winning b. Distribution or transfer to:
bidder was to pay "a value added tax of 1) Shareholders or investors as
10% on the value of the vessels." share in the profits of the VAT- registered
Magsaysay Lines, Inc., offered to buy the person; xxx or
2) Creditors in payment of debt
shares and the vessels for
or obligation
P168,000,000.00. The bid was made by c. Consignment of goods if actual
Magsaysay Lines, purportedly for a new sale is not made within sixty (60) days following
company still to be formed composed of the date such goods were consigned.
itself, Baliwag Navigation, Inc., and FIM Consigned goods returned by the consignee
Limited of the Marden Group based in within the 60-day period are not deemed sold.
Hongkong . The bid was approved by the d. Retirement from or cessation of
Committee on Privatization, and a Notice business, with respect to all goods on hand,
of Award was issued to Magsaysay 1) whether capital goods, stock-
Lines. Is the in-trade, supplies or materials as of the
date of such retirement, or cessation,
sale subject to VAT ?
2) whether or not the business
SUGGESTED ANSWER: No. The term is continued by the new owner or
"carrying on business" does not mean the successor. xxx [Rev. Regs. No. 16-2005,
performance of a single disconnected act, but Sec. 4.106-7, paraphrasing, arrangement
means conducting, prosecuting and continuing and numbering supplied]
business by performing progressively all the acts
normally incident thereof; while "doing 20. Transactions considered
business" conveys the idea of business being
retirement or cessation of business
done, not from time to time, but all the time.
"Course of business" is what is usually done in deemed sale subject to VAT.
the management of trade or business. "Course a. Change of ownership of the
of business" or "doing business" connotes business. There is change in the ownership of
regularity of activity. In the instant case, the sale the business where a single proprietorship
was an isolated transaction. incorporates; or
The sale 1) the proprietor of a single
proprietorship sells his entire business.
 43
b. Dissolution of a partnership and after November 1, 2005, provided, That not later
creation of a new partnership which takes over than January 31, 2009 and every three (3) years
the business. [Rev. Regs. No. 16-2005, Sec. thereafter, the amounts stated herein shall be
4.106-7 (a), (4) paraphrasing, arrangement and adjusted to its present value using the Consumer
numbering supplied] Price Index, as published by the National
Statistics Office (NSO); provided, further, that
21. Sale of or lease of real such adjustment shall be published through
properties subject to VAT. Sale of real revenue regulations to be issued not later than
properties primarily for sale to customers or held March 31 of each year.
for lease in the ordinary course of trade or If two or more adjacent residential lots are
business of the seller shall be subject to VAT. sold or disposed in favor of one buyer, for the
(Rev. Regs. No. 16-2005, Sec. 4.106-3, 1st par.) purpose of utilizing the lots as one residential lot,
Thus, capital transactions of individuals the sale shall be exempt from VAT only if the
are not subject to VAT. Only real estate dealers aggregate value of the lots do not exceed
are subject to VAT. P1,500,000.00. Adjacent residential lots,
although covered by separate titles and/or
separate tax declarations, when sold or disposed
22. On
of to one and the same buyer, whether covered
September 4, 2009, XYZ, Inc., a domestic by one or separate Deed of Conveyance, shall
corporation engaged in the real estate be presumed as a sale of one residential lot.
business, sold a building for [Rev. Regs. No. 4.109-1 (B), (p), paraphrasing
P10,000,000.00. Is the sale subject to the and numbering supplied]
value-added tax (VAT)? If so, how much?
Explain. 24. VAT on services and lease of
SUGGESTED ANSWER: Yes. 12% on properties.
the gross selling price because the sale was a. There shall be levied, assessed,
made in the ordinary course of trade of business and collected,
of X, a domestic corporation engaged in the real b. a value-added tax equivalent to
estate business. twelve percent (12%) of gross receipts
c. derived from the sale or exchange
23. The following sales of real of services,
properties are exempt from VAT, namely: 1) including the use or lease of
a. Sale of real properties not properties. [NIRC of 1997, Sec. 108 (A), as
primarily held for sale to customers or held for amended by R.A. No. 9337, arrangement and
lease in the ordinary course of trade or business; numbering supplied]
b. Sale of real properties utilized for
low-cost housing as defined by RA No. 7279, 25. Sale or exchange of
otherwise known as the Urban and services, defined. The term sale or
Development Housing Act of 1992 and other exchange of services means the performance of
related laws, such as RA No. 7835 and RA No. all kinds of services in the Philippines for others
8763. for a fee, remuneration or consideration, whether
xxx xxx xxx in kind or in cash, including those performed or
c. Sale of real properties utilized for rendered by the following:
socialized housing as defined under RA No. a.
7279, and other related laws wherein the price construction and service contractors;
ceiling per unit is P225,000.00 or as may from b. stock, real
time to time be determined by the HUDCC and estate, commercial, customs and immigration
the NEDA and other related laws. brokers;
xxx xxx xxx c. lessors of
d. Sale of residential lot valued at property, whether personal or real;
One Million Five Hundred Thousand Pesos d. persons engaged in
(P1,500,000.00) and below, or house & lot and warehousing services
other residential dwellings valued at Two Million e. lessors or distributors of cinematographic
Give Hundred Thousand Pesos (P2,500,000.00) films; f. persons
and below where the instrument of engaged in milling, processing, manufacturing or
sale/transfer/disposition was executed on or repacking goods for others;
 44
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, 1st 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 zero-rated 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
 45
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 VAT-exempt 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 export-sale. Notably,
while an ecozone is geographically within the
 46
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
 47
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
zero-rating. 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 transactions
distinguished from VAT-exempt entities.
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
 48
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) product of a refining process,
(2) 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)
 49
(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 the Department of Education (DEPED), the
Commission on Higher Education (CHED), the
Technical Education And Skills Development
Authority (TESDA) and those rendered by
government educational institutions;
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 employer-employee relationship;
(J) Services rendered by regional or
area headquarters established in the Philippines
by multinational corporations which act as
supervisory, communications and coordinating
centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region and do not
earn or derive income from the Philippines;
(K) Transactions which are exempt
under international agreements to which the
Philippines is a signatory or under special laws,
except those under Presidential Decree No. 529
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 non-
members; their importation of direct farm inputs,
machineries and equipment, including spare
parts thereof, to be used directly and exclusively
in the production and/or processing of their
produce;
(M) Gross receipts from lending
activities by credit or multi-purpose cooperatives
duly registered 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,
 50
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 to their present values using the
Consumer Price Index, as published by the
National Statistics Office (NSO);
(Q) Lease of a residential unit with a
monthly rental not exceeding Ten thousand
pesos (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 the National
Statistics Office (NSO);
(R) Sale, importation, printing or
publication of books and any newspaper,
magazine, review or bulletin which appears at
regular intervals with fixed prices for subscription
and sale and which is not devoted principally to
the publication of paid advertisements;
(S) Sale, importation or lease of
passenger or cargo vessels and aircraft,
including engine, equipment and spare parts
thereof for domestic or international transport
operations; 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 VAT-exempt
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 the National Statistics
 51
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 purely compensation income
allowed to file separate returns.
4. Married individuals, whether
citizens, resident or non-resident 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
 52
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.
 53
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,
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 ?
SUGGESTED 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.
54
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
IN
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
 55
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)
 56
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.
 57
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
 58
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 self-assessing 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;
 59
(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 pre-assessment 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
 60
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)
 61
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
 62
xxxx
3.
Commissioner
For tax cases
involving more than P1M B.
In the Regional Offices
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.
xxxx
d. The waiver
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. The 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
 63
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 re-evaluation 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 re-evaluation 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, 230-231)
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]
 64
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
 65
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
 66
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 sub-paragraph 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
 67
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;
d. Delinquent accounts with duly
approved schedule of installment 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 )
 68
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 therefrom xxx
(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 ?
 69
SUGGESTED ANSWER: Filing of a suit or 89 SCRA 586 (1979)]. It is an ancient principle
proceeding with the Court of Tax Appeals that no one, not even the state, shall enrich
a. before the expiration of two (2) years oneself at the expense of another. Indeed,
from the date of payment of the tax regardless of simple justice requires the speedy refund of the
any supervening cause that may arise after wrongly held taxes. (Ibid.)
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 56. What are the reasons for
applied on a whichever comes first basis. requiring the filing of an administrative
Thus, if the 30 days is within the 2 years, the 30 application for refund or credit with the
days applies, if the 2 year period is about to lapse
but there is no decision yet by the Commissioner BSUGGESTED 8.
which would trigger the 30-day period, the Why is it necessary to file an
taxpayer should file an appeal, despite the administrative claim for refund with the
absence of a decision. (Commissioners, etc. v. BIR, before filing a case with the Court of
Court of Tax Appeals, et al., G. R. No. 82618, March Tax Appeals ?
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 a. a.
can be claimed based on the adjusted and To afford the Commissioner an
audited figures. (Bank of the Philippine Islands v. opportunity to correct his errors or that of
Commissioner of Internal Revenue, G.R. No. 144653, subordinate officers. (Gonzales v. Court of Tax
August 28, 2001) Appeals, et al., 14 SCRA79)

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
b. To notify the Government that such
and Commissioner of Internal Revenue, G.R.
taxes have been questioned and the notice
No. 107434, October 10, 1997, 280 SCRA 459,
should be borne in mind in estimating the revenue
in turn citing Ramie Textiles, Inc. v. Mathay, Sr.,
 70
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
? disputed assessment. There is no need for a
SUGGESTED ANSWER:
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
prior application for refund or credit, if the refund
is merely a consequence of the resolution of the
BIRs denial of a protested assessment.
 71
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
 72
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
 73
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
juris against 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 pre-marked 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
1
 74
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 of P2,838,335.84. 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,
 75
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 anti-dumping 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, Anti-Dumping 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 anti-dumping 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),
 76
TCC, as amended by Rep. Act No. 8752, Anti-
Dumping 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.
 77
accordance with law, shall certify the same to the
23. Imposing authority for Commissioner of Customs with his
safeguard measures. The imposing recommendation together with all necessary
authority for the countervailing duties is papers and documents. Upon receipt by the
the Secretary of Trade and Industry in the Commissioner of such certified claim he shall
cause the same to be paid if found correct. (Sec.
case of non-agricultural product, 1708, TCC)
commodity, or article or the Secretary of
Agriculture, in the case of agricultural 28. What is mean by the term
product, commodity or article, after formal entry in Customs Law ?
investigation and affirmative finding of the Tariff SUGGESTED ANSWER: It has a triple
Commission. meaning.
a. the documents filed at the Customs
24. Safeguards measures that house;
may be imposed. Additional tariffs, import b. the submission and acceptance of
quotas or banning of imports. the documents; and
c. Customs declaration forms or
25. The basis of dutiable value of customs entry forms required to be
merchandise that is subject to ad valorem accomplished by passengers of incoming
vessels or passenger planes as envisaged under
customs duties is the transaction value,
Sec. 2505 of the TCCP (Failure to declare
which shall be the price actually paid or payable
baggage). (Jardeleza v. People, G.R. No.
for the goods when sold for export to the
165265, February 6, 2006)
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 29. A flight stewardess arrived from
paid or payable for the imported goods, and may Singapore. Upon her arrival she was
include the following: asked whether she has anything to
a. Cost of containers and packing, declare. She answered none, and she
b. Insurance, and submitted her Customs Baggage
c. Freight. (Sec. 201, TCC as Declaration Form which she
amended by Sec. 1, Rep. Act No. 9135) accomplished and signed with nothing or
written on the space for items to be
26. The above transaction value is declared. When her hanger bag was
the primary method of determining examined some pieces of jewelry were
dutiable value. If the transaction value of found concealed within the lining of said
the imported article could not be bag.
determined using the above, the She was then convicted of violating
following alternative methods should be of Sec. 3601 of the Tariff and Customs
used one after the other: Code for unlawful importation which
a. Transaction value of identical goods penalizes any person who shall
b. Transaction value of similar goods fraudulently import or bring into the
c. Deductive method Philippines any article contrary to law.
d. Computed method She now appeals claiming that
e. Fallback method
lower court erred n convicting her under
Sec. 3601 when the facts alleged both in
27. How and to whom should
the information and those shown by the
claims for refund of customs duties be
prosecution constitute the offense under
made ?
SUGGESTED ANSWER: All claims for Sec. 2505 Failure to Declare Baggage,
refund of duties shall be made in writing and of which she was acquitted. Is she
forwarded to the Collector of Customs to whom correct ?
such duties are paid, who upon receipt of such SUGGESTED ANSWER: No. Sec. 3601
claim, shall verify the same by the records of his does not define a crime. It merely provides, inter
Office, and if found to be correct and in alia, the administrative remedies which can be
 78
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])
 79
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)
 80
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 citing Transglobe)
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.
 81
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 on
administrative 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 Shell under the original assessments were
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
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
 82
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,
 83
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)
 84
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
 85
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
 86
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 income-producing 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.
 87
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
 88
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 tax-
exempt 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
 89
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.
 90
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 non-profit, 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
 91
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:
 92

AND SEE YOU IN

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 COURT
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)

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