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NATIONAL INTERNAL REVENUE CODE OF 1997 2. Four deputy commissioners, who shall each act as his assistants, and who shall
 Revenue generation has undoubtedly been a major consideration in the passage of
the Tax Code.
Powers and duties of the BIR
 The powers and duties of the BIR shall comprehend:
1. The assessment and collection of all national internal revenue taxes, fees and
charges;
2. The enforcement of all forfeitures, penalties and fines connected therewith;
3. The execution of judgments in all cases decided in its favor by the CTA and the
ordinary courts; and
4. Effecting and administering the supervisory and police powers conferred to it by
the Tax Code and other laws.
 The power of taxation is sometimes called also the power to destroy. Therefore, it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally, and uniformly, lest the tax collectors
kill the hen that lays the golden egg. And, in order to maintain the general public’s
trust and confidence in the Government, this power must be used unjustly and not
treacherously.
 The term “all national internal revenue taxes, fees, and charges, is used in the Tax
Code in a broad sense as encompassing all government revenues collectible by the
CIR.
 As applied to taxation, revenue is the product or fruit of taxation.
 The BIR shall be under the supervision and control of the DOF.
Chief Officials of the BIR
 The chief officials are the following:
1. Commissioner of Internal Revenue, who shall act as the chief; and
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each be the head of the following groups, viz:
a. Legal and enforcement group
b. Operations group
c. Information systems group
d. Resource management group
 The offices of the chief officials of the BIR are all located in the National Office, the
functions of which are confined to the national policy formulation and program
planning for efficient and effective implementation of internal revenue laws and
regulations, including other special tax laws, and the general direction, guidance,
and control of the entire operations of the Bureau.
Power of the Commissioner to interpret tax laws and decide tax cases
1. The CIR shall have the exclusive and original jurisdiction to interpret the
provisions of the Tax Code and other special tax laws, subject to review by the
SOF.
2. The CIR shall also have the power to decide the following tax cases but subject
to the exclusive appellate jurisdiction of the CTA:
a. Disputed assessments,
b. Refunds of internal revenue taxes, fees or other charges;
c. The penalties imposed in relation thereto, or
d. Other matters arising under the Tax Code, other tax laws or portions thereof
administered by the BIR.
 In the exercise of his jurisdiction to interpret the provisions of the Tax Code, the CIR
shall have the exclusive and original jurisdiction to recommend to the SOF the
promulgation of Revenue Regulations, the issuance of BIR rulings and other
revenue issuances:
1. Revenue Regulations (RRs) – These are issuances signed by the SOF, upon
recommendation of the CIR, that specify, prescribe or define rules and

regulations for the effective enforcement of the provisions of the NIRC and
related statutes.
2. BIR Rulings – these are official positions of the CIR to queries raised by taxpayers
and other stakeholders relative to clarification and interpretation of tax laws.
BIR rulings may in the form of BIR Rulings issued by the Law Division, VAT rulings
issued by the VAT Review Committee and ITAD Rulings issued by the
International Tax Affairs Division (ITAD).
- They are administrative interpretations of the tax laws as applied and
implemented by the BIR. They can be relied upon by taxpayers and are valid
until otherwise determined by the courts or modified or revoked by a
subsequent ruling or opinion. They are accorded great weight and respect,
but not binding on the courts.
3. Revenue Memorandum Circulars (RMCs) – These are issuances that publish
pertinent and applicable portions, as well as amplifications of laws, rules,
regulations and precedents issued by the BIR and other agencies/offices.
- These are considered as administrative rulings (in the sense of more specific
and less general interpretations of tax laws) which are issued from time to
time by the CIR.
4. Revenue Memorandum Order (RMOs) – these are issuances that provide
directives or instructions; prescribe guidelines; and outline processes,
operations, activities, workflows, methods, and procedures necessary in the
implementation of stated policies, goals, objectives, plans and programs of the
Bureau in all areas of operations, except auditing.
5. Revenue Audit Memorandum Orders (RAMOs) – These are revenue
memorandum orders issued specifically stating the audit programs of the BIR
for a particular taxable year.
6. Revenue Memorandum Rulings (RMRs) – These are rulings, opinions, and
interpretations of the CIR with respect to the provisions of the Tax Code and
other tax laws, as applied to a specific set of facts, with or without established
precedents, and which the CIR may issue from time to time for the purpose of
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providing taxpayers guidance on the tax consequences in specific situations. BIR
rulings, therefore, cannot contravene duly issued RMRs; otherwise, the Rulings
are null and void ab initio.
7. Revenue Bulletins (RBs) – These are periodic issuances, notices and official
announcements of the CIR that consolidate the BIR’s position on certain specific
issues of law and administration in relation to the provisions of the Tax Code,
relevant tax laws and other issuances for the guidance of the public.
8. Revenue Travel Assignment Orders (RTAOs) – These are administrative orders
issued by the CIR transferring, assigning or re-assigning revenue officers and
employees to other or special duties connected with the enforcement or
administration of revenue laws as the exigencies of the service may require,
provided, however, that revenue officers assigned to perform assessment or
collection functions shall not remain in the same assignment for more than
three years.
9. Revenue Special Orders (RSOs) – These are administrative orders issued by the
CIR assigning revenue officers and employees to special duties which shall not
exceed one year.
 It is widely accepted that the interpretation placed upon statute by executive
officers, whose duty is to enforce it, is entitled great respect by the courts.
Nevertheless, such interpretation is not conclusive and will be ignored if judicially
found to be erroneous.
 BIR ruling can be invoked only by the taxpayer who sought the same.
 Taxpayers should exhaust all administrative remedies before questioning the
validity of a revenue issuance in the court.
 The party with an administrative remedy must not only initiate the prescribed
administrative procedure to obtain relief but also to pursue it to its appropriate
conclusion before seeking judicial intervention in order to give the administrative
agency an opportunity to decide the matter itself correctly and prevent
unnecessary and premature resort to the court.

 A ruling of the CIR shall be presumed valid until overturned or modified by the SOF.
 A taxpayer who receives adverse ruling from the CIR may, within 30 days from the
date of receipt of such ruling, seek its review by the SOF. The request for review
must be in writing and under oath.
 The SOF may, of his own accord, review the ruling issued by the CIR. In such a case,
the SOF shall order the CIR to transmit a duplicate copy of the BIR records. The CIR
shall transmit such records within 15 days from receipt of notice of the request for
transmittal.
 The SOF may affirm, reverse or modify a ruling of the CIR.
 In the case of an affirmation, the SOF may rely wholly on the reasons stated in the
ruling of the CIR.
 Subject to Section 246 of RA 8424, a reversal or modification of the ruling shall
terminate its effectivity upon the date of the receipt of written notice of such
reversal or modification by the taxpayer or by the BIR.
 The expanded jurisdiction under RA 9282 transferred to the CTA the jurisdiction of
the RTCs and the CAs over matters involving criminal violation and collection of
revenues under the NIRC.
 An original action for refund cannot be brought directly to the CTA. It has to be filed
first with the CIR and it can be brought only to the CTA incase of the CIR’s denial of
the claim or because of inaction for a period of 180 days from the time of the filing
of the supporting documents.
 Original jurisdiction is the power of the court to take judicial cognizance of a case
instituted for judicial action for the first time under conditions provided by law.
 Appellate jurisdiction is the authority of a Court higher in rank to re-examine the
final order or judgment of a lower court which tried the case now elevated to
judicial review.
 The court in division shall exercise exclusive original or appellate jurisdiction to
review by appeal the following:
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1. Decisions of the CIR in cases involving disputed assessments, refunds of internal
revenue taxes, fees, or other charges, penalties in relation thereto, or other
matters arising under the NIRC or other laws administered by the BIR;
2. Inaction by the CIR in cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the NIRC or other laws administered by the BIR, where
the NIRC or other applicable law provides a specific period for action
- In case of disputed assessments, the inaction of the CIR within the 180-day-
period under Section 228 of the NIRC shall be deemed a denial for purposes
of allowing the taxpayer to appeal his case to the Court and does not
necessarily constitute a formal decision of the CIR on the tax case.
- Should the taxpayer opt to await the final decision of the CIR on the
disputed assessments beyond the 180-day-period abovementioned, the
taxpayer may appeal such final decision to the Court.
- In the case of claims for refund of taxes erroneously or illegally collected,
the taxpayer must file a petition for review with the court prior to the
expiration of the two-year-period.
 The court in division shall exercise exclusive jurisdiction over cases involving
criminal offenses:
1. Original jurisdiction over all criminal offenses arising from violations of the NIRC
and other laws administered by the BIR, where the principal amount of taxes
and fees, exclusive of charges and penalties, claimed is P1,000,000 or more; and
2. Appellate jurisdiction over appeals from the judgments, resolutions or orders of
the RTCs in their original jurisdiction in criminal offenses arising from violations
of the NIRC and other laws administered by the BIR, where the principal amount
of taxes and fees, exclusive of charges and penalties, claimed is less than
P1,000,000 or where there is no specified amount claimed.
 The court in division shall have exclusive jurisdiction over tax collection cases:
1. Original jurisdiction over tax collection cases involving final and executory
assessments for taxes, fees, charges and penalties, where the principal amount

of taxes and fees, exclusive of charges and penalties, claimed is P1,000,000 or
more; and
2. Appellate jurisdiction over appeals from the judgments, resolutions or orders of
the RTCs in tax collection cases originally decided by them within their
respective territorial jurisdiction.
 The CTA en banc shall exercise exclusive appellate jurisdiction to review by appeal
the following:
1. Decisions or resolutions on motions for reconsideration or new trial of the court
in division in the exercise of its exclusive appellate jurisdiction over tax
collection cases decided by the RTCs in the exercise of their original jurisdiction
involving final and executory assessments for taxes, fees, charges and penalties,
where the principal amount of taxes and penalties claimed is less than
P1,000,000.
2. Decisions, resolutions or orders of the RTCs in tax collection cases decided or
resolved by them in the exercise of their appellate jurisdiction.
3. Decisions, resolutions or orders on motions for reconsideration or new trial of
the Court in division in the exercise of its exclusive original jurisdiction over tax
collection cases.
4. Decisions, resolutions or orders on motions for reconsideration or new trial of
the court in division in the exercised of its exclusive original jurisdiction over
cases involving criminal offenses arising from violations of the NIRC and other
laws administered by the BIR.
5. Decisions, resolutions or orders on motions for reconsideration or new trial of
the court in division in the exercise of its exclusive appellate jurisdiction over
criminal offenses mentioned in the preceding subparagraph.
6. Decisions, resolutions or orders of the RTCs in the exercise of their appellate
jurisdiction over criminal offenses.
 In criminal cases where the CTA has exclusive original jurisdiction, the right to file a
separate civil action for the recovery of taxes may not be reserved.
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 The filing of the criminal action shall necessarily carry with it the filing of the civil
action. No right to reserve the filing of such action separately from the criminal
action shall be allowed or recognized.
 Proceedings before the CTA in the exercise of its exclusive original jurisdiction are in
the nature or trial de novo.
 Trial de novo is the conduct of a formal trial to prove every minute aspect of the
claim. It is a type of appeal in which the appeals court holds a trial as if a prior trial
had never been held.
 Trial de novo means trial anew or trial for the second time. When a new trial is
granted, the original judgment is vacated and the action stands for trial de novo and
the case is reverted back to its status prior to the promulgation of the judgment.
 CTA, not he RTC, exercises exclusive appellate jurisdiction over all issuances and
rulings issued by the CIR.
 A taxpayer should first file a motion for reconsideration to the CIR and exhaust all
administrative remedies available to him before proceeding to the CTA.
 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 CTA has no jurisdiction to try an assessment case which was never appealed to
it. In hearing a refund case, the CTA cannot hear in the same case an assessment
dispute even if the parties involved are the same parties.
 Section 7, RA 1125. The CTA shall have exclusive jurisdiction to review, by appeal,
decisions of the CIR in cases involving disputed assessments, refunds of internal
revenue taxes, fees, or other charges, penalties in relation thereto, or other matters
arising under the NIRC or other laws administered by the BIR.
 PNOC vs. CA. RA 1125, specifically section 7 on the jurisdiction of the CTA, is an
exception to PD 242. Thus, CTA shall exercise exclusive appellate jurisdiction over
tax disputes and controversies enumerated therein.

 Disputes, claims and controversies, falling under Section 7 of RA 1125, even though
solely among government offices, agencies, and instrumentalities, including GOCCs,
remain in the exclusive appellate jurisdiction of the CTA.
 Appeal from the CIR’s decision to CTA should be done within 30 days from receipt
of the decision. This requirement is jurisdictional and failure to comply therewith
may be raised in a motion to dismiss.
 The findings of fact of the CTA are entitled to great weight and will not be disturbed
on appeal unless it is shown that the lower courts committed gross error in the
appreciation of facts. Said findings shall be binding on the SC unless such findings
are not supported by substantial evidence.
 Under RA 9282, appeals from the decisions of CTA en banc are now brought to the
SC. File a verified petition on certiorari within 15 days from receipt of copy of the
decision or resolution. If such party has filed a motion for reconsideration or for
new trial, the period herein fixed shall run from the party’s receipt of a copy of the
resolution denying the motion for reconsideration or for new trial.
Power of the Commissioner to access information, and to summon, examine, and
take testimony of persons.
 In the exercise of the above power, the CIR is authorized to do the following:
1. To examine any book, paper, record or other data which may be relevant or
material to such inquiry:
2. To access third party information to be able to ascertain the correctness of any
return:
3. To summon the following:
a. The person liable for tax;
b. The person required to file a return;
c. Any officer or employee of such person;
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d. Any person having possession, custody or care of the books of accounts and
other records containing entries relating to the business of the person liable
for tax; or
e. Any person to appear before the CIR or his duly authorized representative at
a time and place specified in the summons; and
f. Any person to produce such books, papers, records, or other data, and to
give testimony;
4. To take such testimony of any person concerned, under oath, as may be
relevant or material to such inquiry.
5. To conduct tax mapping from time to time of any revenue district or region.
 All of these powers shall not be construed as granting the CIR the authority to
inquire into the taxpayer’s bank deposits because said power can only be exercised
by the CIR under the provisions of Section 6(F) of the NIRC.
 CIR vs. Gonzales. The lack of consent of the taxpayer under investigation does not
imply that the BIR obtained the information from third parties illegally or that the
information received is false or malicious. Nor does the lack of consent preclude the
BIR from assessing deficiency taxes on the taxpayer based on the documents. To
require consent of the taxpayer would defeat the intent of the law to help the BIR
assess and collect the correct amount of taxes.
Power to examine returns and determine the tax due
 This is the authority given to the CIR or his duly authorized representative to
examine the return filed and assess the correct amount of tax due whether or not a
return has been filed by such taxpayer.
 The tax or deficiency tax so assessed shall be paid upon notice and demand from
the CIR or from his duly authorized representative.
 The CIR can delegate his power to make tax assessments to subordinate officers.
 Any tax return, statement, or declaration filed in any office authorized to receive
the same shall not be withdrawn.

 But said tax return, statement or declaration filed may be modified, changed or
amended within three years from the date of such filing, provided that no notice for
audit or investigation of such return, statement or declaration has, in the
meantime, been actually served upon the taxpayer.
 The CIR may use the power to assess the proper tax based on the best evidence
obtainable in the following instances:
1. When a report required by law as a basis for the assessment of any national
internal revenue tax shall not be forthcoming within the time fixed by laws or
rules and regulations, such as when the taxpayers have neglected or refused to
make returns; or
2. When there is reason to believe that any such report is false, fraudulent,
incomplete or erroneous.
 Best evidence obtainable shall refer to any book, paper, record, data or other
information or evidence obtained by the internal revenue officers from any person
other than the person whose internal revenue tax liability is subject to audit or
investifation, or from any officer or officer of the national and local governments,
government agencies, and instrumentalities, government-owned or –controlled
corporations, and from all other sources with whom the taxpayer had previous
transactions or from whom he received any income, which the internal revenue
officer may use as basis for his assessment when the report required by law as basis
for the assessment is not forthcoming within the time fixed by law, or when there is
reason to believe that any return filed by the taxpayer is false, fraudulent,
incomplete, or erroneous.
 The assessment made by the CIR or by his duly authorized representative shall be
prima facie presumed correct and the burden of proof of showing the incorrectness
or inaccuracy shall of such assessment or its details lies with the taxpayer.
 CIR vs. Kudos Metal Corp. As to the alleged delay of the taxpayer to furnish the BIR
of the required documents, this cannot be taken against him. neither can the BIR
use this as an excuse for issuing the assessments beyond the three-year period
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because with or without the required documents, the CIR has the power to make
assessments based on the best evidence obtainable.
Power to conduct inventory taking, surveillance, and benchmarking
 This power is the basis of the conduct of performance bench-marking method
which may be used as the basis for assessing the taxes.
 When it is found that the taxpayer has failed to issue receipts and invoices, or when
there is reason to believe that the books of accounts or other records of the
taxpayer do not correctly reflect the declarations made, then the CIR has the power
to prescribe presumptive gross sales and receipts.
 Inventory taking is the stock-taking at any time during the taxable year which
consists of the verification of the actual volume, number or level of inventory or
stock so as to ascertain the flow or average trend of business transactions for
purposes of determining the correct internal revenue tax liabilities of the subject.
 Open-surveillance – where the monitoring of the sales or receipts of a subject
taxpayer is done by assigning Revenue Officers to the subject business
establishment or premises if there is reason to believe that the taxpayer is not
declaring his correct income, sales or receipts for tax purposes.
Authority to terminate taxable period
 The following are the instances when the CIR may terminate the taxable period and
order the immediate payment of the tax for the terminated period and any
remaining tax that is unpaid:
1. When the taxpayer is retiring from business subject to tax;
2. The taxpayer intends to leave the Philippines or to remove his property
therefrom or to hide or conceal his property; or
3. The taxpayer is performing any act tending to obstruct the proceedings for the
collection of the tax for the past or current quarter or year or to render the

same totally or partially ineffective unless such proceedings are begun
immediately.
 Because of the termination of the taxable period, said taxes shall be due and
demandable immediately.
Authority to prescribe real property values
 The CIR has the power to divide the Philippines into different zones or areas, and
determine the fair market value or real properties in each zone or area, upon
consultation with competent appraisers from private and public sectors.
 For purposes of computing any internal revenue tax, the value of the property shall
be, whichever is the higher of:
1. The fair market value as determined by the CIR; or
2. The fair market value as shown in the schedule of values of the Provincial and
City Assessors.
 RDO has no authority to unilaterally use the FMV as basis for determining the
capital gains tax and not the zonal value as determined by the Commissioner.
 The CIR’s act of re-classifying the subject properties from residential to commercial
cannot be done without first complying with the procedures prescribed by law.
 Section 1(b) of the 1995 Zonal Valuation Guidelines operates only when no zonal
valuation has been prescribed. If the properties located in a certain place were
already subject to a zonal valuation, such as when the schedule of zonal values in a
place where the subject lots are situated, ahs a single classification only – that of a
residential area, then Section 1(b) of the Zonal Valuation Guidelines does not apply
because it is clear that a zonal value has already been prescribed.
 Certain guidelines in the Implementation of Zonal Valuation of Real Properties for
RDO No. 38, applying the predominant use of property as the basis for the
computation of the CGT and DST shall apply only when the real property is located
in an area or zone where the properties are not yet classified and their respective
zonal valuation are not yet determined.
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 Zonal valuation was established with the objective of having an efficient tax
administration by minimizing the use of discretion in the determination of the tax
based on the art of the administrator on one hand and the taxpayer on the other
hand. Zonal value is determined for the purpose of establishing a more realistic
basis for real property valuation. Since internal revenue taxes, such as CGT and DST,
are assessed on the basis of valuation, the zonal valuation existing at the time of
the sale should be taken into account.
 The burden of proof is on the BIR to prove that the classification and zonal valuation
in a certain place have been revised in accordance with the prevailing
memorandum. In the absence of proof to the contrary, the Zonal Values of Real
Properties must be followed.
 Actual use is not considered in zonal valuation, but the predominant use of other
classification of properties located in the zone.
Authority to inquire into bank deposit accounts and other related information held by
financial institutions, and authority to supply information requested by Foreign Tax
Authority.
 Under Section 6(f) of the Tax Code, the CIR or his duly authorized representative
has been allowed, in certain cases, to inquire or look into the bank deposits of a
taxpayer, viz:
1. To determine the gross estate of a decedent;
2. Whenever a taxpayer filed an application for compromise of his tax liability
under Section 204(A)(2) of the Code by reason of financial incapacity to pay his
tax liability, wherein his application shall not be considered unless and until he
waives in writing his privilege under RA 1405, RA 6426, otherwise known as the
Foreign Currency Deposit Act of the Philippines, or under other general or
special laws, and such waiver shall constitute the authority of the CIR to inquire
into the bank deposits of the taxpayer.

3. Upon request for the supply of tax information for a specific taxpayer or
taxpayers from a foreign tax authority pursuant to an international convention
or agreement on tax matters to which the Philippines is a signatory or a party
of: Provided, That the information obtained from the banks and other financial
institutions may be used by the BIR for tax assessment, verification, audit and
enforcement purposes.
 Even a joint account deposit of a decedent will not preclude the CIR from inquiring
thereon because the law mandates that if a bank has knowledge of the death of a
person, who maintained bank deposit account alone, or jointly with another, it shall
not allow any withdrawal from the said deposit account unless the CIR has certified
that the taxes imposed thereon have been paid.
 The provisions of the Tax Code granting this power is an exception to the Secrecy of
Bank Deposits Law.
 The CIR may obtain information on bank deposits held by financial institution to
respond to request of foreign tax authority.
 Once the information is gathered pursuant to a request for exchange of information
under an international convention or agreement on tax matters, the BIR is likewise
authorized to use, for tax assessment, verification, audit and enforcement
purposes, any such information obtained from financial institutions.
 For the purpose of exchanging information pursuant to an international convention
or agreement on tax matters, the CIR is hereby designated as the competent
authority. Any such exchange of information shall not constitute an unlawful
divulgence of information under the NIRC.
 Income tax returns of specific taxpayers subject to a request for exchange of
information by a foreign tax authority pursuant to an international convention or
agreement on tax matters shall be open to inspection upon the order of the
President of the Philippines, under rules and regulations as prescribed by the SOF,
upon the recommendation of the CIR.
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 An information received by a foreign tax authority from the BIR shall be absolutely
confidential.
 In order for the BIR to promptly act upon a request, the following should be clearly
stated in the request:
1. The identity of the person under examination or investigation;
2. A statement of the information being sought including its nature and the form
in which the said foreign tax authority prefers to receive the information from
the CIR;
3. The tax purpose for which the information is being sought;
4. Grounds for believing that the information requested is held in the Philippines
or is in the possession or control of the a person within the jurisdiction of the
Philippines;
5. To the extent known, the name and address of any person believed to be in
possession of the requested information;
6. A statement that the request is in conformity with the law and administrative
practices of the said foreign tax authority such that if the requested information
was within the jurisdiction of the said foreign tax authority, then it would be
able to obtain the information under its laws or in the normal course of
administrative practice and that it is in conformity with an international
convention or agreement on tax matters;
7. A statement that the requesting foreign tax authority is also allowed under its
domestic laws to exchange or furnish the information subject of the request;
and
8. A statement that the requesting foreign tax authority has exhausted all means
available in its own territory to obtain the information, except those that would
give rise to disproportionate difficulties.
 All request for information pursuant to an international convention or agreement
on tax matters shall be coursed through the ITAD.

 A taxpayer shall be duly notified in writing by the CIR that a foreign tax authority is
requesting for exchange information held by financial institutions pursuant to an
international convention or agreement on tax matters, within 60 days from receipt
of such request.
Authority to accredit and register tax agents/practitioners
 Tax agent/practitioners are those who are engaged in the regular preparation,
certification, audit and filing of tax returns, information returns or other statements
or reports required by the Code or Regulations; those who are engaged in the
regular preparation of requests for ruling, petitions for reinvestigation, protests,
requests for refund or tax credit certificates, compromise settlement and/or
abatement of tax liabilities and other official papers and correspondence with the
BIR, and other similar or related activities, or those who regularly appear in
meetings, conferences, and hearings before any office of the BIR officially on behalf
of a taxpayer or client in all matters relating to a client’s rights, privileges, or
liabilities under laws or regulations administered by the BIR, shall be deemed to be
engaged in tax practice and are required to apply for accreditation.
Powers and functions of the Accreditation Boards
 It shall be the duty of the Accreditation Boards to act upon all applications to
practice before the BIR, to institute and provide for the conduct of accreditation,
suspension and disaccreditation proceedings and to perform such other functions
as prescribed by the SOF.
 Any adverse decision of the RRAB and RNAB shall be appealable to the CIR.
 Any adverse decision of the CIR may be appealed to the SOF, who shall rule on the
appeal within 60 days from receipt of such appeal. Failure of the SOF to rule on the
appeal within the prescribed period shall be deemed an affirmation of the decision
of the CIR denying the accreditation.
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 The RRAB and the RNA shall have the jurisdiction over and shall require
accreditation with the BIR of the following persons:
1. Individual tax practitioners engaged in private practice who are CPAs; CPA-
Lawyers who issue/sign auditor’s certificate or otherwise perform functions
exclusively pertaining to a CPA; and individuals other than CPAs who meet the
qualifications prescribed in these Regulations;
2. Partners of a GPP engaged in the practice of taxation accountancy, and/or
auditing; their duly authorized officers or representatives who regularly appear
or otherwise engaged in tax practice before the BIR;
3. GPP engaged in the practice of taxation, accountancy, and/or auditing who
regularly appears or otherwise engaged in tax practice before the BIR;
4. Officers or duly authorized representatives of incorporated business entities
engaged in accounting, auditing or tax consultancy services.
 The following individuals are allowed to appear and practice before the BIR without
undergoing accreditation proceedings:
1. Individual-taxpayers acting on their own behalf provided they present
satisfactory identification;
2. Members of the Philippine Bar not suffering from suspension/disbarment.
However, they may at their option, to apply for accreditation;
3. Other individuals presenting satisfactory roof of identification or authority in
any of the following circumstances of limited practice or special appearances:
a. An individual representing a member of his or her immediate family;
b. A regular full-time employee representing an individual employer;
c. A bona fide officer or a regular full-time employee in representation of his
employer-corporation, association or organized group;
d. A trustee, receiver, guardian, administrator, executor, or regular full-time
employee in representation of a trust, receivership, guardianship or estate;
e. An officer or a regular employee of a government unit, agency, or
instrumentality representing said unit, agency or instrumentality in the
course of his or her official duties.

 In general, the grant of accreditation shall be based on the applicant’s professional
competence, integrity and moral fitness. The following are the minimum
qualifications:
1. For individual tax agents (other than a member of the Philippine bar)
a. He must be a CPA or good standing with current professional license from
the PRC;
b. If not a CPA, he must have obtained at least a degree in Law, Juris Doctor or
its equivalent, or a Bachelor’s degree in arts, commerce or Business
Administration with at least 18 units in accounting and/or taxation in a
college or university recognized by DepEd/CHED or in a foreign school of
known repute or one duly recognized by its government.
c. Must be of good moral character
d. Must not have been charged with and convicted by final judgment of a
crime involving moral turpitude, or found guilty of any act or omission
penalized under the Tax Code, or found guilty of aiding or abetting or
causing the commission of any of the offense by another;
e. Must be a citizen of the Philipines;
f. Must have completed six hours per year or a total of 18 hours for the 3 years
of continuing professional education in taxation from trainings/seminars
conducted by the BIR or from private institutions.
2. For General Professional Partnerships (GPPs). The partners and/or the duly
authorized officers and representatives thereof shall conform with the
following:
a. The partners and duly authorized officers or representatives thereof must
meet all the qualifications of an individual tax agent prescribed above. In
lieu of the submission of documents or proof thereof, said qualifications
may be certified to under oath by the managing partner of the firm; and
b. The partnership is one registered with the SEC.
3. In the case of incorporated entities engaged in accounting and tax consultation
other than GPPs:
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a. The firm must be registered with the SEC; and
b. The applicant-officer or duly authorized representatives thereof must meet
all the qualifications of an individual as prescribed hereof.
 All accredited Tax Agents shall be registered.
Authority to prescribe additional procedural or documentary requirements
 The CIR shall prescribe the manner of compliance with any documentary or
procedural requirement in connection with the submission or preparation of
financial statements accompanying the tax returns.
Authority of the CIR to delegate power
 GR. The CIR may delegate the powers the powers vested in him to any or such
subordinate officials with the rank equivalent to a division chief or higher, subject to
certain limitations and restrictions.
 XPN. The following cannot be delegated:
1. The power to recommend the promulgation of rules and regulations by the SOF.
2. The power to issue rulings of first impression or to reverse, revoke or modify
any existing ruling of the Bureau.
3. The power to compromise or abate any tax liability.
 XPNs to the XPNs:
1. The assessments issued by the regional offices involving basic deficiency taxes
of P500,000 or less; and
2. Minor criminal violations, discovered by the regional and district officials, may
be compromised by the REB.
 The power to assign or reassign internal revenue officers to establishments where
articles subject to excise tax are produced or kept, as often as the exigencies of the
revenue service may require, provided that in no case the stay of the said revenue
officer in his assignment shall not be more than two years.

 The power to assign or reassign Internal Revenue Officers and other employees to
other duties, without change in their official rank and salary, connected with the
enforcement or administration of the revenue laws as the exigencies of the service
may require.
 The internal revenue officers assigned to perform assessment or collection
functions shall not remain in the same assignment for more than three years while
the assignment of internal revenue officers and employees of the Bureau to special
duties shall not exceed one year.
 BIR Rulings of first impression are the official positions of the CIR to queries raised
for the first time by a taxpayer or other stakeholders relative to clarification and
interpretation of tax laws.
 In order to be considered as a valid BIR ruling of first impression, the ruling must be
the first ever ruling issued by the CIR on that particular tax issue. It must also be
issued within the scope of the authority granted by the CIR, and should not
contravene any law or regulation or any decision of the SC.
Modes of payment of internal revenue taxes through Authorized Agent Banks
 Aside from the electronic payment system currently used by some taxpayers in
paying their BIR taxes, the rest shall pay their tax liabilities through any of the
following modes:
1. Over-the-counter cash payment – refers to the payment of tax liabilities to
authorized agent bank in currencies that are legal tender in the Philippines.
2. Bank debit system – refers to the system whereby a taxpayer, through a bank
debit memo/advice, authorizes withdrawals from his/its existing bank accounts
for payment of tax liabilities.
- This system is allowed only if the taxpayer has a bank account with the AAB
taxpayer has a bank account with the AAB branch where he/it intends to file
and pay his/its tax return/form/declaration, provided said AAB branch is
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within the jurisdiction of the BIR RDO/LTDO where the tax payment is due
and payable.
3. Checks – refers to a bill of exchange or order instrument drawn on a bank
payable on demand.
 In the issuance and accomplishment of checks for the payment of internal revenue
taxes, the taxpayer shall indicate in the space provided for “Pay to the order of” the
following data:
1. Presenting/collecting bank or the bank where the payment is to be coursed; and
2. For account of BIR as payer;
3. Under the account name the TIN.
 The following checks are not acceptable as payments for internal revenue taxes:
1. Accommodation check – one issued or drawn by a party other than the taxpayer
making the payment.
2. Second endorsed check – one issued to the taxpayer as payee who indorses the
same as payment for taxes.
3. Stale check – one dated more than six months prior to presentation to the
authorized agent bank.
4. Post-dated check – one dated a day or several days after the date of
presentation to the authorized agent bank.
5. Unsigned check – one with no signature of the drawer.
6. Checks with alterations/erasures.
 Second indorsement of checks which are payable to the BIR or CIR is absolutely
prohibited.
 Taxpayers shall see to it that their tax returns/payment forms with payment are
filed with and internal revenue taxes paid to legitimate AABs of the BIR.
Nonetheless, they may confirm their tax payments with their home RDO/LTDO or
LTDO/RDO where they are required to file tax returns/payment form and payment
internal revenue taxes.

 Effect of failure of the tax agent to pay the tax, in case a taxpayer entrusts the
payment of his tax to a collection agent.
- The principal is not relieved from liability for the tax with the corresponding
penalties. Such liability is not affected by the fact that misappropriation of
the amount intended for payment of the tax was made with the connivance
of the collecting officer.
 The CIR cannot reclassify and split revenue districts at his whim and caprice, but he
may be allowed to divide/split or classify certain revenue districts for administrative
purposes and upon the approval of the SOF.
Regional Directors in the Revenue Region
 The Philippines has been divided into 19 Revenue Regions, headed by 19 Revenue
Directors.
 These RDs directly execute and implement the policies, plans, programs, rules and
regulations promulgated by the SOF as recommended by the CIR in the regional
areas, and district offices under their respective jurisdiction.
 Powers:
1. Implement laws, policies, plans, programs, rules and regulations of the
department or agencies in the regional area.
2. Administer and enforce internal revenue laws, and rules and regulations,
including the assessment and collection of all internal revenue taxes, charges
and fees;
3. Issue letters of Authority for the examination of taxpayers within the region;
4. Provide economical, efficient and effective service to the people in the area;
5. Coordinate with regional offices or other departments, bureaus and agencies in
the area;
6. Coordinate with local government units in the area;
7. Exercise control and supervision over the officers and employees within the
region; and
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8. Perform such other functions as may be provided by law and as may be
delegated by the RDs.
Duties of Revenue District Officers (RDO) and other Internal Revenue Officers
1. Ensure that all laws, rules and regulations affecting national internal revenue
taxes are faithfully executed and complied with;
2. Aid in the prevention, detection and punishment of frauds and delinquencies in
connection therewith;
3. Examine the efficiency of all officers and employees of the BIR under his
supervision;
4. Report in writing to the CIR, through the RD, any neglect of duty, incompetency,
delinquency, or malfeasance in office of any internal revenue officer of which he
may obtain knowledge, with a statement of will the facts and any evidence
sustaining each case;
5. In the performance of his assessment functions pursuant to a Letter of
Authority issued by the RD, examine taxpayers within the jurisdiction of the
district in order to collect the correct amount of tax; and
6. Recommend the assessment of any delinquency tax due in the same manner
that the said acts could have been performed by the Revenue Regional Director
himself.
 The following are constituted as agents of the Commissioner:
1. The Commissioner of Customs and his subordinates with respect to the
collection of national internal revenue taxes on imported goods;
2. The head of the appropriate government office and his subordinates with
respect to the collection of energy tax; and
3. Banks duly accredited by the CIR with respect to receipt of payments of internal
revenue taxes authorized to be made thru banks.
 The national internal revenue taxes being collected by the BOC for and in behalf of
the BIR on imported foods are the VAT and Excise Tax, if any.
 13

 It should be noted that the energy tax on electric power consumption, which is  The power to administer oaths and to take testimony shall only be performed in
mandated under P 36 should be withheld by electric utilities from their respective any official matter or investigation conducted by them regarding matters within the
residential consumers. jurisdiction of the Bureau.

Authority of a Revenue Officer

 A letter of authority is the authority given tot eh appropriate revenue officer
assigned to perform assessment functions in any district. It empowers or enables
said revenue officer to examine the books of account and other accounting records Authority of the Internal Revenue Officers to Make Arrests and Seizures
of a taxpayer for the purpose of collecting the correct amount of tax.  This does not require previous warrant but it must cover only violations within the
 There must be a grant of authority before any revenue officer can conduct an view of the internal revenue officials and employees when the taxpayer violates any
examination or assessment. penal law, rules or regulations administered by the BIR.
 The revenue officer so authorized must not go beyond the authority given.
 In the absence of such authority, the assessment or examination is a nullity. When violation of tax laws and regulations should be reported to the CIR
1. The internal revenue officer discovers evidence of violation of this Code or of
Authority of Officers to Administer Oaths and take testimony any law, rule or regulation administered by the BIR;
 Revenue officials who can administer oaths and take testimony: 2. The violation is of such character as to warrant the institution of criminal
1. The CIR proceedings;
2. Deputy Commissioners 3. He shall immediately report the facts to the CIR, through his immediate
3. Assistant commissioners superior, giving the name and address of the offender and the names of the
4. Head revenue executive assistants witnesses, if possible;
5. Revenue regional directors 4. In urgent cases, the Revenue Regional Director or the RDO, as the case may be,
6. Assistant revenue regional directors may send the report to the corresponding prosecuting officer, but a copy of his
7. Division chiefs report shall be sent to the CIR.
8. Assistant chiefs
9. Revenue district officers Sources of National Internal Revenue Taxes
10. Special deputies of the commissioner 1. Income tax – based on income, gross or net. Except in cased of income/earnings
11. Internal revenue officers and any other employee of the Bureau thereunto which are subject to the final withholding tax which are based on the gross
specially deputized by the Commissioner. income, income tax is a tax on the taxable income.
2. Estate tax – a tax levied, assessed, collected and paid upon the transfer of the
net estate of every decedent, whether resident or nonresident of the
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Philippines, based on the value of such net, by including the value at the time of - Specific tax – based on weight or volume capacity or any other physical unit
his death of all property, personal or real, tangible or intangible, wherever of measurement
situated. - Ad valorem tax – excise tax imposed and based on selling price or other
- In case of nonresident decedent who at the time of his death was not a specified value of the goods.
citizen of the Philippines, only that part of the estate which is situated in the - As used in the NIRC, excise taxes may be considered taxes on production as
Philippines shall be included in his taxable estate. they are collected only from manufacturers and producers.
3. Donor’s tax – tax levied, assessed and collected and paid upon the gratuitous - Basically an indirect tax, excise taxes are directly levied upon the
transfer by any living person, resident or nonresident, of the property by gift, manufacturer or importer upon removal of the taxable goods from its place
whether the transfer is in trust or otherwise, whether the gift is direct or of production or from the customs custody. These taxes, however, may be
indirect, and whether the property is real or personal, tangible or intangible actually passed on to the end consumer as part of the transfer value or
based on the total net gifts made during the calendar year. selling price of the goods sold, bartered, or exchanged.
- It is also a tax on the privilege of transmitting one’s property or property 7. Documentary Stamp Tax – levied on the exercise by persons of certain privileges
rights to another or others without adequate and full valuable conferred by law for the creation, revision, or termination of specific legal
consideration. relationships through the execution of specific instruments.
4. Value Added Tax – a business tax mandatorily imposed on any person or entity - It is not a tax on the business transaction but an excise on the privilege,
with gross sales or receipts exceeding P1,919,500, who, in the course of trade or opportunity or facility offered in exchange for the transaction of the
business, sells, barters, exchanges, leases VATable goods or properties, or business, separate and apart from the business itself.
renders VATable services, and on any person who imports goods, whether the
importation is for personal use or business use.
- It is an indirect tax and the amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services.
5. Percentage Tax – a business tax imposed on any person or entity who is not
VAT-registered and who, in the course of trade or business, sells, barters,
exchanges, leases goods or properties, renders services which are exempt from
VAT, but whose gross annual sales or receipts do not exceed P1,919,500.
- Indirect tax which can be passed on to the buyer.
6. Excise tax – tax on goods manufactured or produced in the Philippines for
domestic sale or consumption or for any other disposition and to things
imported, which tax shall be in addition to the VAT.

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TAX ON INCOME
Income – any wealth which flows into the taxpayer other than a mere return of capital.
Cash received or its equivalent, the amount of money coming to a person within a
specific time, or something distinct from principal or capital
Income Tax – a tax based on income, gross or net. It refers to the tax on earnings
derived by a taxpayer for each taxable year arising from employment or services
rendered or for engaging in trade or business or for exercising a profession.
CRITERIA USES IN IMPOSING PHILIPPINE INCOME TAX
1. Citizenship principle. The basis of the imposition of income tax is the taxpayer’s
citizenship. In case of resident citizens, they are subject to the income tax on
income derived within and without the Philippines, while nonresident citizens
are only subject to the income tax on the income derived from within the
Philippines.
2. Residence Principle. The basis of imposition of income tax is the residence of
the taxpayer. This follows territoriality principle.
3. Source Principle. The basis of the imposition of income tax is the source of
income. All income derived from sources within the Philippines shall be subject
to income tax.
GENERAL PRINCIPLES OF INCOME TAXATION
1. A resident citizen of the Philippines is taxable on all income derived from
sources within and without the Philippines.
2. A nonresident citizen is taxable only on income derived from sources within the
Philippines. (includes seaman engaged exclusively on international trade).
3. An alien individual, whether a resident or not of the Philippines, is taxable only
on income derived from sources within the Philippines.
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4. A domestic corporation, just like a resident citizen, is taxable on all income
derived from sources within and without the Philippines.
5. 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.
CLASSIFICATION OF CITIZENS OF THE PHILIPPINES FOR PURPOSES OF INCOME
TAXATION
1. Residents citizens
2. Nonresident citizens
Resident citizens – a citizen in the Philippines residing therein.
G.R. taxable on all income derived from all sources within and without the
Philippines subject to the following tax rates:
1. his regular taxable income for each taxable year shall be subject to scheduler
tax rates of 5% to 32%
2. His passive incomes shall be subject to the applicable final withholding taxes
depending on the kind of passive income received by him.
*Estates and trusts are taxable in the same manner as a resident citizen.
Nonresident citizens
1. A Citizen of the Philippines who establishes his physical presence abroad with a
definite intention to reside therein.
2. A citizen of the Philippines who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for employment on a permanent basis.

3. A citizen of the Philippines who works and derives income tax abroad and
whose employment thereat requires him to be physically present abroad most
of the time during the taxable year.
4. A citizen who has been previously considered as nonresident citizen and who
arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines.
*OCW or OFWs are also considered as nonresident citizens for income tax
purposes.
OCW or OFW – an individual citizen of the Philippines who is working and deriving
income from abroad. He is taxable only on income derived from all sources within
the Philippines. To be considered as one, he must be duly registered with the POEA.
Income arising out of his overseas employment is exempt from income tax.
The income of a nonresident citizen derived from all sources within the Philippines
for each taxable year shall be subject to the following tax rates:
1. His regular taxable income shall be subject to the scheduler tax rates of 5% to
32%
2. However, his passive incomes shall be subject to the applicable withholding
taxes depending on the kind of passive income received by him.
TAXATION OF INCOME OF RESIDENT ALIENS
 An alien actually present in the Philippines who is not a mere transient or sojourner
is a resident of the Philippines for the purposes of income tax. Where he is a
transient of not is determined by his intentions with regard to the length and
nature of his stay.
 A mere floating intention, indefinite as to time, to return to another country is not
sufficient to constitute him a transient.
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 An alien who acquired his residence in the Philippines retains his status as a
resident until he abandons the same and actually departs from the Philippines.
 The income of a resident alien individual derived during the taxable year from all
sources within the Philippines shall be subject to the following tax rates:
1. His regular taxable income shall be subject to the scheduler tax rates of 5% to
32%
2. However, his passive incomes shall be subject to the applicable withholding
taxes depending on the kind of passive income received by him.
TAXATION OF INCOME OF RESIDENT ALIENS
 Married individuals are required by law to file a consolidated income tax return,
but they shall compute separately their individual income tax on their income from
employment based on their respective total taxable income.
 It they have income derived from business, or there is any income which cannot be
definitely attributed to or identified as income exclusively earned or realized by
either of the spouses, the same shall be equally divided between the spouses for
purposes of determining their respective taxable income.
 They will be entitled to certain deductions like the basic personal exemption and
the additional exemption, whenever applicable, plus they may choose between the
itemized deductions incurred for engaging in business or the 40% optional standard
deduction, at the option of the spouses.
 If they are physically separated but no judicial decree they are still required to file
consolidated returns.
 They file separate, additional husband shall be allowed only to the husband.
TAXATION OF INCOME OF MINIMUM WAGE EARNERS
 17

 Compensation income being paid the statutory minimum wage, as fixed by the The following are the passive investments income and the corresponding final
regional tripartite wage and productivity board/NWPC shall be exempted from withholding tax rates of citizens of the Philippines, including resident alien individuals:
income tax.
 A senior citizen whose salary is equivalent to the SMW shall be considered as a On interest income from any currency 20%
MWE entitled to the exemption. bank deposit in regular domestic banks,
and yield or any other monetary benefit
 Holiday pay, overtime pay, night shift differential pay and hazard pay shall also be
from deposit substitutes, and trust funds
covered by the exemption.
and similar arrangements.
 However, an employee who receives/earns additional compensation such as
Interest income received from a 7.5%
commissions, honoraria, fringe benefits, benefits in excess of the allowable
depository bank under the expanded
statutory amount of P30,000, taxable allowances and other taxable income shall
foreign currency deposit system, except
not enjoy the exemption.
those received by nonresident individuals.
 MWEs receiving other income except income subject to final tax, in addition to the
Interest income from a 5-year long-term Exempted
compensation income are not exempted from income tax on their entire income.
deposit of investment in the form of
TAXATION OF PASSIVE INCOME OF CITIZENS AND RESIDENT ALIENS savings, common or individual trust funds,
deposit substitutes, investment
 The passive income of a citizen or a resident alien may either be: management accounts and other
1. Passive income subject to the final tax. This refers to an income which tax due investment certificates prescribed by the
is fully collected through the withholding tax system in the form of final BSP.
withholding tax. The payor of the income withholds the tax and remits it to the
government. The recipient is no longer required to include the item of the In case of pre-termination of said long-
income subjected of the final tax as part of his gross income in his income tax term deposit before the 5th year, rates are
returns. based on the remaining maturity: 5%
2. Passive income not subject to the final tax. This is the passive income not 4 years to less than 5 years 12%
subject to the final withholding tax and therefore should be included in the 3 years to less than 4 years 20%
determination of the gross income which will be subject to the regular income Less than 3 years
tax rates. Royalties from books as well as other 10%
literary works and literary works and
musical composition
Regular royalties 20%
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Prizes, except prizes amounting to
P10,000 or less
Other winnings, except PCSO and lotto
winnings (exempt)
Cash and property dividends from a
domestic corporation or from an ROHQ of
a multinational company or on the share
of an individual in the distributable net
income after tax of a partnership, except
GPP, of which he is a partner; or his share
in the net income after tax in a joint
venture
Net capital gains from sale of shares of
stock in a domestic corporation, not listed
and traded in the stock exchange except
shares sold or disposed thru the stock
exchange.
Not over P100,000
On any amount excess in P100,000
On presumed capital gains from sale of
real property located in the Philippines
except sale of principal residence
Gross income derived from contracts by
sub-contractors from service contractors
engaged in petroleum operations.
Royalties – refers to a fixed sum either in cash or property equivalent, to be paid at a
definite period for the use or enjoyment of the thing or right.
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20% Prize – result of an effort made
20% Winnings - result of a transaction where the outcome depends upon luck or chance.
Dividends – refers to the distribution made by a corporation, to its shareholders out of
10% its unrestricted retained earnings and payable, whether in money or property.
Net Capital gains – selling price less cost. Selling price refers to the consideration on
the sale or fair market value of the shares of stock at the time of the sale, whichever is
higher. Cost means the original purchase price plus other costs.
Presumed – means there is a presumed fain on the sale regardless of whether there is
a loss. The conclusive presumption of law is that there is a gain whenever somebody
sells a real property considered as capital asset
CAPITAL GAINS FROM SALE OF SHARES OF STOCKS
 Dealings on shares of stock of domestic corporations
5% 1. Net capital gains from sale, barter, exchange or other disposition of shares of
10% stock not listed and not traded in the local stack exchange held as capital asset
shall be subject to the Capital gains tax of 5% on the net capital gains not over
6% P100,000 plus 10% on any amount in excess of P100,000.
2. In the case, however, of sale, barter or exchange of shares of stock of domestic
corporation which are traded and listed in the local stock exchange also held
8% as capital asset, the same shall be subject to the ½ of 1% stock transaction tax
3. If the sale is made by a dealer in securities, the resulting gains is considered as
ordinary income.
 Dealings in the shares of stock of a foreign corporation
 Not subject to capital gains tax but to the scheduler rates of 5% to 32% in
the case of individual seller and the normal corporate income tax rate of
30% in the case of corporate-seller.
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CAPITAL GAINS FROM SALE OF REAL PROPERTY CLASSIFIED AS CAPITAL ASSETS
 The sale by an individual will be subject to the capital gains tax if the said property
is considered as his capital asset, including pacto de retro sales and other forms of
conditional sales. (6% on the presumed gain which is the higher value between the
current fair market value or the gross selling price)
 Gross selling price – the actual selling price. For capital gains tax purposes, the tax
base is whichever is the higher value between the gross selling price or the current
fair market value
 The essence of pacto de retro sale is that the title and ownership of the party sold
are immediately vested in the vendee a retro, subject to the resolutory condition
of repurchase by the vendor a retro within the stipulated period.
 In case of disposition of real property classified as capital asset by individuals to
the government, the capital gains shall be added to the gross income earned
during taxable year subject to scheduler rates imposed therein, or for the final tax
on the presumed capital gains from sale of real property at 6%, at the option of
the seller.
 In case of sale on installment of real property
1. If the buyer is an individual not engaged in trade or business, the following
rules apply:
a. If the sale is a sale on the installment plan, no withholding of tax is
required to be made on the periodic installment pays.
b. If the sale is on a cash basis or a deferred-payment sale not on the
installment plan, the buyer shall withhold the tax based on the gross selling
price or fair market value of the property, whichever is higher, on the first
installment.
2. If the buyer is engaged in trade or business, these rules shall apply:
a. On installment plan – the tax shall be deducted and withheld by the buyer
on every installment which tax shall be based on the ratio of actual
collection of the consideration against the agreed consideration appearing
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in the contract to sell applied to the gross selling price or fair market value
of the property at the time of the execution of the contact to sell,
whichever is higher.
- consideration – refers to the selling rice exclusive of interest
b. If the sale is cash basis, the buyer shall withhold the tax based on the gross
selling rice or fair market value of the property whichever is higher, on the
first installment.
 The sale of interest in real property shall be taxable on the part of the original
buyer based on the realized gain thereon which is measured by the difference
between the agreed consideration and the amount actually paid by the said
original buyer.
SALE OF PRINCIPAL RESIDENCE
 If the purpose for the sale of principal residence is not to buy a new principal
residence, the sale, barter, or exchange of the said residence is subject to the
capital gains tax based on the presumed gain on the sale.
 May not be subject to capital gains tax, conditions:
1. Must be the principal residence of a natural person
2. The proceeds of the sale must be fully utilized to acquire or construct a new
principal residence within the 18 calendar months from the date of sale or
disposition
3. The historical cost or adjusted basis of the real property sold or disposed
shall be carried over to the new principal residence built or acquired.
4. The owner/seller must duly notify the Commissioner within 30 days from
the sale
5. The tax exemption can only be availed once every 10 years
6. If there is no full utilization, the portion of the fain presumed to have been
realized shall be subject to capital gains tax.
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7. The buyer/transferee shall withhold from the seller and shall deduct from deposit substitutes
the agreed selling price/consideration the 6% capital gains tax Interest income and yield from trust 20%
8. The buyer/transferee shall file within 30 days the final capital gains tax funds and similar arrangements
return covering the property bought Royalties 20%
Royalties on books, literary works and 10%
Escrow – scroll, writing or deed, delivered by the grantor, promisor, or obligor into the
musical compositions
hands of a third person, to be held by the latter until the happening of the condition
Prizes exceeding P10,000 20%
 If within the 30 days period after the lapse of the 18-month period, the seller Winnings, except PCSO and lotto 20%
fails to submit the documentary evidence showing that he has utilized the proceeds, Gross income from all sources with the 25%
he shall be treated as deficient in the payment of his capital gains tax on the sale, and Philippines derived by nonresident
shall be assessed for deficiency capital gains tax, inclusive of penalties and the 20% cinematographic film owners, lessors or
interest per annum distributos.
Interest income from the 5-year long- Exempt
NONRESIDENT ALIEN INDIVIDUAL term deposit.
 Classification
In case of pre-termination
1. Those engage in trade and business in the Philippines
4 years to less than 5 years 5%
2. Otherwise
3 years to less than 4 years 12%
 A nonresident alien individual who shall come to the Philippines and stay for an
Less than 3 years 25%
aggregate period of more than 180 days during any calendar year shall be
Cash and/or property dividends actually 20%
deemed a nonresident alien doing business in the Philippines.
or constructively received from
 In case of regular income, a nonresident alien individual engaged in trade or domestic corporations
business in the Philippines shall be subject to the schedular rates of 5% to 32%
On net capital gains of sales of shares of
 In case of passive investment derived from sources within the Philippines, the stock in a domestic corporation not
same shall be subject to the following rates: listed and traded in the stock exchange,
Interest income from any currency bank 20% held as capital asset
deposit in regular banking units in the Not over P100,000 5%
Philippines On any amount in excess of P100,000 10%
Yield or any monetary benefit from 20% On the presumed capital gains from sale 6%

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of real property considered as capital listed and traded as stock exchange,

assets. held as capital asset by individuals
Gross income from petroleum contracts 8% in Not over P100,00 5%
(engaged in petroleum operations lieu of In excess of P100,000 10%
any and On the presumed capital gains from 6%
all sale of real property considered as
taxes, capital assets
national
and
local TAXATION OF INCOME OF ALIENS INDIVIDUALS SUBJECT TO THE PREFERENTIAL TAX
RATE

 Only a nonresident alien individual engaged in trade, business or in the exercise  Taxation of income on alien individual employed by RHQs and ROHQs of
of a profession in the Philippines shall be entitled to a personal exemption. He Multinational Companies
should file a true and accurate return of the total income received by him from  Levied, collected and aid for each taxable year upon the gross income
all sources in the Philippines. received.
 Multinational company – a foreign firm or entity engaged in international
Taxation of income of nonresident alien individuals not engaged in trade or business trade with affiliates or subsidiaries or branch offices in the Asia-Pacific
in the Philippines. region and other foreign markets.
 Filipinos exercising the option to be taxed at 15% preferential rate for occupying
 A nonresident alien individual whose aggregate stay in the Philippines for any the same managerial or technical position as that of an alien employed in an ROHQ
one calendar year is 180 days or less is considered as a nonresident alien not or RHQ must meet all the following requirements:
engaged in trade or business within the Philippines. 1. Position and function test – the employee must occupy a managerial position or
 Rules on taxation technical position and must actually be exercising such functions pertaining to
on the gross amount of interest, cash 25% said positions
and/or property dividends, rents, 2. Compensation Threshold test – in order to be considered managerial or
salaries, wages, premiums, annuities, technical employee for income tax purposes, the employee must have received,
compensation… or is due to receive under a contract of employment, a gross annual taxable
On net capital gains from shares of compensation of at least P975,000
stock of domestic corporation not

21

3. Exclusivity test – the Filipino managerial or technical employee must be
exclusively working for the RHQ or ROHQ as a regular employee and not just a
consultant or contractual personnel
 Rank and file employees – who are holding neither managerial nor supervisory
position
 Managerial - who is vested with powers or prerogatives to lay down and execute
management policies and/or to hire, transfer, suspend, lay-off, recall, discharge,
assign or discipline employees
 Supervisory – those who effectively recommend such managerial actions if the
exercise of such authority is not merely routinary or clerical in nature but requires
the use of independent judgment.
 There shall be levied, collected and paid for each taxable year upon the gross
income received by any alien individual employed by offshore banking units
established in the Philippines as salaries, wages, annuities, compensation,
remuneration and other emoluments, a tax equal to 15% of such gross income.
TAXATION OF INCOME OF GENERAL PROFESSIONAL PARTNERSHIPS AND THE
PARTNERS THEREOF
 General Professional Partnership – a partnership forms by professionals for the sole
purpose of exercising their common profession, no part of income of which is
derived from engaging in any trade or business.
 GGP not subject to income tax. But they are required to file returns of their income
for the purpose of furnishing information. Partners are taxable upon their
distributive shares of the net income. However, drawings, advances, sharings,
allowances, stipends and the like, are subject to the 15%, if the payment to the
partner for the current year exceeds P720,000; and 10% EWT if otherwise.
 Pass-through entity – where its income is ultimately taxed to the partners
compromising it.
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TAXATION OF INCOME OF OTHER KINDS OF PARTNERSHIP
 GR. Partnerships are taxable just like a corporation.
 Their distributive shares are taxed as dividends subject to the final withholding tax
of 10%.
 All other partnerships, no matter how created or organized, which include
unregistered joint ventures and business partnerships, are considered as a taxable
corporations subject to the corporate income tax.
 Co-ownership occurs when two or more heirs inherit an undivided property from a
decedent, or a donor makes a gift of an undivided property in favor of two or more
donees. It is automatically converted into an unregistered partnership the moment
the said common properties and/or income derived therefrom are used as a
common fun with the intern to make profits.
 Requisites of a joint venture
1. Each part must make a contribution
2. There must be an intent to make profits which must be shared among the
parties
3. There must be a joint proprietary interest and right of mutual control over the
subject matter of the enterprise
4. There is a single business transaction.
 GR. a joint venture is not taxed as a corporation and is taxed just like a GPP.
1. The joint venture should be for the undertaking of a construction project
2. Involve joining or pooling of resources by licensed local contractors
3. These local contractors are engaged in construction business
4. The joint venture itself must likewise duly licensed
 Joint ventures involving foreign contractors may also be treated as a non-taxable
corporation only if the member foreign contractor is covered by a special license as
contractor by the PCAB of the DTI.
 Absence any of the above requirements, the joint venture is taxable as a
corporation.

TAX ON CORPORATIONS
Domestic Corporations – those created or organized under the Philippine laws.
 As a general rule, the law imposes a 30% normal corporate income tax rate on the
taxable income received by domestic corporations and taxable partnerships.
 Sources within and without the Philippines.
Proprietary educational institutions and hospitals
 Proprietary educational institutions and hospitals which are non-profit shall pay a
tax of 10% on their taxable income, except those covered by section 27(d).
However, if the gross income from unrelated trade, business or other activity
exceeds 50% of the total gross income derived by such educational institutions or
hospitals from all sources, the tax rate of 30% shall be imposed on the entire
taxable income.
 Predominance test – if the gross income from unrelated trade, business or other
activity of the non-profit institution exceeds 50% of the total gross income from all
sources, then the entire taxable income shall be subject to the regular corporate
income tax rate of 30%.
 Unrelated trade, business or other activity – the conduct of which is not
substantially related to the exercise or performance of its primary purpose or
function.
 Proprietary educational institution – any private school maintained and
administered by private individuals or groups with an issued permit to operate
 Section 27 (b) of the NIRC imposes a 10% preferential tax rate on the income of
proprietary non-profit educational institutions and hospitals.
 Proprietary – private with a government permit
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 Nonprofit – no net income or asset accrues to or benefits any member or specific
person, with all the net income or asset devoted to the institution’s purposes and
all it activities conducted not for profit.
 Subject to 30% tax
1. When gross income from unrelated trade, business or other activity exceeds
50% of their total gross income derived from all sources
2. Those claiming to be within the coverage of section 27 (b) of the NIRC that fails
to meet above definition of proprietary and nonprofit.
CIR vs. St. Luke’s Medical Center
 Revenues from paying patients are income received from activities conducted for
profit. The total revenues from paying patients are not even incidental to its charity
expenditure for non-paying patients. Being a non-stock, non-profit corporation
does not, by this reason alone, completely exempt an institution from tax. An
institution cannot use its corporate form to prevent its profitable activities from
being taxed. St Luke’s is not operated exclusively for charitable or social welfare
purposes insofar as its revenues from paying patients are concerned. However, it
remains a proprietary nonprofit as long as it does not distribute any of its profits to
its members and such profits are reinvested pursuant to the corporate purposes.
Government-Owned or Controlled Corporations
 Exempt from paying income tax
 PD 1177
 RA 8424, 5 GOCCs were expressly give the exemption from payment of the
corporate income tax
1. GSIS
2. SSS
3. PHIC
4. PCSO
 24

5. PAGCOR Unit.
 RA 9337 eliminated PAGCOR Interest income from foreign currency 10%
 RA 10026 added local water district. loans granted by depository bank under
 Philippine Health Insurance Corp. is not exempt from its responsibilities of being a the expanded foreign currency deposit
withholding agent of the BIR. Among those responsibilities include the withholding system to residents other than the OBUs in
of the correct tax on its income payments, ranging from the payment of the Phil. or other depository banks under
compensation to its employees to the payment of its operating expenses such as the expanded depository system
acquisition of goods and equipment, payments for services rendered to the On net capital gains from sale of shares of
corporations. Under existing issuances, PHIC payments to medical practitioners are stock of a domestic corporation not listed
subjected to EWT rates of 10% or 15%, whichever is appropriate, based on the and traded in the stock exchange.
medical practitioner’s declared gross income in a year. Payment of hospitals for Not over P100,000 5%
medical services provided to PHIC members are subjected to EWT rate of 2%. On any amount in excess of P100,000 10%
Professional fees, talent fees, etc. for services rendered by professionals are On resumed capital gains from sale of lands 6%
subject to expanded withholding tax of either 10%, if the gross income of the and/or buildings located in the Phil.
professional does not exceed P720,000 in a year, or 15%, if the professional’s gross classified as capital assets.
income exceeds P720,000 in a year. The facilities paid to the hospitals or clinic, the Gross income from contracts engaged in 8% in
EWT rate shall be 2%. petroleum operations. lieu
of
Passive Income of Domestic Corporation which are subject to Final Withholding Tax any
Interest income from any currency bank 20% and
deposit in regular banking units. all
Yield or any monetary benefit from deposit 20% taxes,
substitutes nat’l
or
Interest income and yield from trust funds 20%
local
and similar arrangements
Royalties derived from sources within the 20%
Phil.  The dividends received by a domestic corporation from another domestic
Interest income derived from a depository 7.5% corporation are not subject to income tax, but the dividends received by a
bank under the Foreign Currency Deposit
24

domestic corporation from a foreign corporation are subject to income tax and
shall form part of the gross income tax.
Minimum Corporate Income Tax (MCIT)
 A MCIT of 2% of the gross income as of the end of the taxable year (whether fiscal
or calendar year) is imposed upon any domestic corporation beginning on the 4th
taxable year immediately following the taxable year in which such corporation
commenced its business operations. The MCIT shall be imposed whenever such
corporation has zero or negative taxable income or whenever the amount of MCIT
is greater than the normal income tax computed due from such corporation.
 Normal income tax – the income tax rates at 345 on Jan. 1, 1998; 33% effective
Jan. 1, 1999; 32% effective Jan. 1, 2000 and 35% effective Nov. 5, 2005
 In the case of a domestic corporation whose operations or activities are partly
covered by the regular income tax system and partly covered under a special
income tax system, the MCIT shall apply on operations covered by the regular
income tax system.
 Any excess of the MCIT over the normal income tax shall be carried forward on an
annual basis and credited against the normal income tax for 3 immediately
succeeding taxable years.
 The SOF may, upon the recommendation of the Commissioner, suspend the
imposition of the MCIT upon submission of proof by the corporation, duly verified
by the Commissioner’s authorized representative, that the corporation sustained
substantial losses on account of prolonged labor dispute or because of force
majeure, or because of legitimate business reverses.
 For purposes of MCIT, the taxable income in which business operations
commenced shall be the year in which the domestic corporation registered with
the BIR.
 MCIT payable on a quarterly basis and on a yearly basis.
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GR. MCIT is applicable only to domestic corporations that are subject to the normal
corporate income tax.
Domestic Corporations which are not subject to MCIT
1. Those operating as proprietary educational institutions subject to tax at 10% on
their taxable income.
2. Those engaged in hospital operations which are non-profit subject to tax at 10% on
their taxable income
3. Those engaged in business as depositary banks
4. Firms that are taxed under a special income tax regime
 The imposition of MCIT is designed to forestall the prevailing practice of domestic
corporations and resident foreign corporations of overclaiming deductions in order
to reduce their income tax payments.
 As a tax on gross income, MCIT prevents tax evasion and minimizes tax avoidance
schemes achieved through sophisticated and artful manipulations of deductions
and other stratagems.
TAXATION OF INCOME OF RESIDENT FOREIGN CORPORATION
Resident foreign corporation – organized, authorized, or existing under the laws of any
foreign country, but engaged in trade or business within the Philippines.
 A resident foreign corporation shall be subject to the regular/normal corporate
income tax rate of 30% of the taxable income derived within the Philippines
effective Jan. 1, 2009.
 A foreign corporation transacting business in the Philippines independently from its
branch is not considered the same juridical entity as its branch office in the
Philippines.

 If the business transaction is conducted through the branch office, the latter
becomes the taxpayer, and not the foreign corporation.
 Engaged connotes more than a single act or a single transaction; involves some
continuity of action.
 To engage in business – signifying an employment or occupation which occupies
one’s time, attention and labor for the purpose of a livelihood or profit.
 Taxable because they do activity in the Philippines.
MCIT on Resident foreign corporation
 An MCIT of 2% of the gross income from sources with the Philippines is imposed
beginning on the 4th taxable year immediately following the taxable year in which
the corporation commenced its business operations, whenever the amount of the
minimum corporate income tax is greater than the normal income tax due for such
year.
 MCIT shall not apply to resident foreign corporations which are subject to normal
income tax.
1. Resident foreign corporations engaged in business as international carrier
subject to tax at 2 ½ of their gross Philippine billings
2. Resident foreign corporations engaged in business as Offshore Banking Units on
their income from foreign currency transactions with local commercial banks
3. Resident foreign corporations engaged in business as ROHQs subject to tax at
10% of their taxable income
4. Firms that are taxed under special income tax regime
TAXATION OF INCOME OF INTERNATIONAL CARRIERS
 Gross of Philippine Billings of International Carriers – those carriers doing business
in the Philippines who shall pay a tax of 2.5% on its Gross Philippine Billings.
1. International air carrier – a foreign airline corporation doing business in the
Philippines having been granted landing rights in any Philippine port to perform
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air transportation which is subject to the Gross Philippine Billings tax of
2.5%.GPB refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating from the Philippines.
2. International shipping - a foreign shipping corporation doing business in the
Philippines having been granted landing rights in any Philippine port to perform
international shipping activities subject to GPB of 2.5%.
 May avail of exemption on the basis of an applicable tax treaty or
international agreement
 GPB – gross revenue whether for passenger, cargo or mail originating
from the Philippines up to final destination, regardless of the place of
sale or payments of the passage or freight documents.
Different Kinds of International Air Carriers
1. Off-line carrier – having no flight operation to and from the Philippines. Not
subject to any tax in the Philippines but without prejudice to classifying such
taxpayer under a different category pursuant to a separate provision under this
code.
2. On-line Carrier – having or maintaining flight operations to and from the
Philippines.
3. Chartered flight – flight operation which includes operations between ports or
point situated in the Philippines and ports and points outside the Philippines,
which include block charter, placed under the custody or control of a charterer
by a contract/charter for rent or hire relating to a particular airplane.
Classification of Passengers of an International Air Carrier
1. Transient Passengers – who originated from outside of the Philippines towards
a final destination also outside of the Philippines but stops in the Philippines for
a period of less than 48 hours, or even more than 48 hours, if the delay is due to
force majeure or reasons beyond his control.

2. Non-revenue passengers – Resolution No. 788 regarding Free and Reduced fare
or rate transportation and any other free/reduced rate mileage programs
administered by individual international air carriers.
3. Adult passenger – who has attained his 12th birth
4. Children – attained their 2nd but not their 12th birthday
5. Infant – who has not attained his 2nd birthday
 Any international air carrier having flights originating from any port or point in the
Philippines is subject to the Gross Billings Tax of 2.5%, unless subject to a different
tax rate under the applicable tax treaty to which the Philippines is a signatory.
 In computing the GPB, there shall be included the total amount of gross revenue
derived from:
1. Passage of persons
 The gross revenue for passengers whose tickets are sold in the Philippines
shall be the actual amount derived from transportation services on its
uninterrupted flight from the Philippines to its final destination as reflected
in the remittance area of the tax coupon forming an integral part of the
plane ticket. For this purpose the GPB shall be determined by computing
the monthly average net fare of all the tax coupons issued for the month
and multiplied by the corresponding total number of passengers flown for
the month as declared in the flight manifest.
 For tickets sold outside the Philippines, the gross revenue on a continuous
and uninterrupted flight from the Philippines to final destination shall be
determined using the locally available net fares applicable to such flight
taking into consideration the seasonal fare rate established at the time of
the flight, the class or passage the classification of passenger, the date of
embarkation, and the place of final destination.
2. Excess baggage
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 Gross revenue shall be computed based on the actual revenue derived as
appearing on the official receipt or any similar document for the said
transaction.
3. Cargo
4. Mail
 Gross revenue for cargo and mail shall be determined based on the
revenue realized from the carriage thereof. It appears on the airway bill
after deducting therefrom the amount of discounts granted.
Excluded from the computation of taxable base of Gross Philippine Billing
1. Non-revenue passengers
2. Refunded tickets
- In case of a flight that originated from the Philippines but transshipment takes place
elsewhere in another aircraft belonging to a different airline company, the GPB shall be
that portion of the revenue corresponding to the leg flown from any point in the
Philippines to the point of transshipment.
- In computing the taxable amount, the foreign exchange conversion rate to be used
shall be the average monthly airline rate as provided in the Bank Settlement Plan
monthly sales report or the bankers association of the Philippines rate, whichever is
higher.
- If an international carrier maintains flights to and from the Philippines, it shall be
taxed at the rate of 2.5% of its GPB, which international air carriers that do not have
flights to and from the Philippines but nonetheless earn income from other activities in
the country will be taxed at the rate of 30% of such income.

- We have jurisdiction over the sales of tickets in the Philippines by the general sales
agents or offline air carriers because the sale of the tickets is the activity that produces
income.
GR. Resident foreign corporations shall be liable for 30% income tax on their income
from within the Philippines.
XPN. Those resident foreign corporations that are international carriers – 2.5% of their
GPB
NOTE: offline international carrier is an exception to the exception.
TAXATION OF INCOME OF OFFSHORE BANKING UNITS (OBU)
 OBU – a branch, subsidiary or affiliate of a foreign banking corporation which is duly
authorized by the BSP as a separate accounting unit to transact offshore banking
business in the Philippines.
 Offshore Banking – the conduct of banking transactions in foreign currencies
involving the receipt of funds principally from external sources and the utilization of
such funds.
 Foreign currency deposit unit (FCDU) – an accounting unit or department in a local
bank or in an existing local branch or foreign banks, which is authorized by the BSP
to operate under the expanded foreign currency deposit system.
 Deposits – funds in foreign currencies which are accepted and held by an OBU in the
regular course of business, with the obligation to return equivalent amount to the
owner thereof, with or without interest.
 Gross offshore income – all income arising from transactions allowed by the BSP
conducted by and between
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1. In the case of an OBU with another OBU or with an expanded FCDU or with
a nonresident
2. In the case of an expanded FCDU with another expanded FCDU or with an
OBU or with a nonresident
 Gross onshore income – gross interest income arising from foreign currency loans
and advances to and/or investments with residents made by OBUs or EFCDUs.
 Taxation of income of OBU
1. Income derived from foreign currency transactions with nonresidents, other
OBUs, local commercial banks, including branches of foreign banks authorized by
BSP to transact business with OBUs are exempt from income tax
2. Any income or nonresidents from transactions with depository banks under the
expanded system are exempt from income tax
3. The net income from such transactions shall be subject to the regular income tax
rate of 30%
4. Interest income derived from foreign currency loans granted to residents are
subject to the final withholding tax of 10%
 The income earner cannot evade its liability for FCDU onshore tax by shifting the
blame on the payor-borrower as the withholding agent. As such, it is liable for
payment of deficiency onshore tax.
 Taxable income derived from RBUs is subject to corporate income tax rate of 30%.
 Only costs and expenses attributable to the operations of the RBU can be claimed as
deduction to arrive at the taxable income of the RBU subject to the regular income
tax. In computing for amount allowable as deduction from RBU operations, all costs
and expenses should be allocated between the RBU and FCDU/EFCDU or OBU using
the following basis:
1. By specific identification
 Expenses which can be specifically identified to a particular unit shall be
reported and declared as the cost or expenses of that unit.
2. By allocation
 29

 Common expenses or expenses that cannot be specifically identified for a coordinating center for their affiliates, subsidiaries, or branches in the Asian-Pacific
particular unit shall be allocated based on percentage share of gross Region and other foreign markets.
income earnings of a unit to the total gross income earnings subject to  Not subject to income tax
regular income tax and final tax.  Regional Operating Headquarters (ROHQs) – a foreign business entity which is
allowed to derive income in the Philippines by performing qualifying services to its
BRANCH PROFIT REMITTANCE TAX affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and
 The rationale for the imposition of the Branch Profit Remittance Tax is in order to other foreign markets.
 Pay a tax of 10% of their taxable income
equalize the tax burden of foreign corporations maintaining, on one hand, local
branch offices, and organizing, on the other hand, a subsidiary domestic PASSIVE INCOME OF RESIDENT FOREIGN CORPORATIONS SUBJECT TO FINAL
corporation. WITHHOLDING TAX
 The branch profit remittance tax of 15% shall be based on the total profits applied or
earmarked for remittance without any deduction for the tax component thereof. Income tax from any currency bank 20%
 Interests, dividends, rents, royalties, including remuneration for technical services, deposit and yield or any other monetary
salaries, wages, premiums, annuities, emoluments, or other fixed or determinable benefit from deposit substitutes and from
annual, periodic or causal gains, profits, income and capital gains received by a trust funds and other similar arrangements
foreign corporation during taxable year from all sources within the Philippines shall derived from sources within the
not be treated as branch profits unless the same are effectively connected with the Philippines
conduct of its trade r business in the Philippines. Royalties derived from sources within the 20%
 Only profits remitted abroad by a branch office to its head office which are Philippines
effectively connected with its trade or business in the Philippines are subject to the Interest income derived from a depository 7.5%
15% branch profit remittance. bank under the expanded FCD system
Interest income derived by a resident 10%
TAXATION OF INCOME OF RHQs AND ROHQs OF MULTINATIONAL COMPANIES depository bank under the expanded FCD
system from foreign currency loans
 Multinational company – foreign firm or entity engaged in international trade with
granted by such depository banks to
affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other
residents, other than OBUs in the
foreign markets.
Philippines or other depository banks
 Regional or Area Headquarters (RHQs) – a branch established in the Philippines by
under the expanded system.
multinational companies and which headquarters do not earn or derive income
On the net capital gains during the taxable
from the Philippines and which act as supervisory, communications and
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year from sale of shares of stock in a TAX ON NON-RESIDENT FOREGN CORPORATION

domestic corporation not traded in the tax
exchange, except shares sold or disposed  Applies to foreign corporation not engaged in trade or business with the Philippines.
of through the stock exchange  Income derived from all sources in the Philippines shall be subject to the 30% final
Not over P100,000 5% withholding tax based on the gross income received during each taxable year.
On any amount in excess of P100,000 10%  Taxation of other income:
Gross income derived from contracts by 8% of the On gross income of nonresident 25%
subcontractors from service contractors gross cinematographic film owner, lessor,
engaged in petroleum operations. income or distributor
derived On gross rental income or charter 4.5%
from fees derived by nonresident owner or
such lessor of vessels from the leases or
contracts, charters to Filipino citizens or
in liew of corporations approved by MARINA
any and On gross rental income of 7.5%
all taxes, nonresident lessor of aircraft,
national machineries and other equipment
and local On interest income on foreign loans 20%
derived by nonresident foreign
corporation
 Dividends received by a resident foreign corporation from a domestic corporation Incorporate dividends from a 15%
liable to tax under this code shall not be subject to dividends tax. domestic corporation.
On capital gains from sale of shares
of stock not traded in the local stock
exchange
Not over P100,000 5%
On any amount in excess of 10%
P100,000

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 While the general rule is that a foreign corporation is the same juridical entity as its
branch in the Philippines, however, when the corporation transacts business in the
Philippines directly and independently of its branch, the taxpayer would be the
foreign corporation itself and subject to the dividends tax similarly imposed on
nonresident foreign corporation.
 Condition for the preferential tax rate of 15% on dividends
 Foreign corporation must show that the country of origin grants a tax credit
to the nonresident foreign corporation, taxes deemed to have been paid in
the Philippines equivalent to at least 15% against the tax due from the said
nonresident foreign corporation.
 CIR vs. Procter and Gamble. Normally, the Philippines imposes a higher 30%
tax rate on corporations. But since the Philippines seeks to lessen the impact
of double taxation between countries, we impose only the lower tax rate of
15% on dividends subject to the condition that the country in which the
nonresident foreign corporation is domiciled allows a tax credit of 15%.
IMPROPERLY ACCUMULATED EARNINGS TAX
 Imposed for each taxable year in the improperly accumulated earnings taxable
income by closely-held domestic corporations. Shall not apply to the following:
1. Banks and other non-bank financial intermediaries
2. Insurance companies
3. Publicly-held corporations
4. Taxable partnerships
5. Genereal rofessional partnershis
6. Non-taxable joint ventures
7. Enterprises duly registered with PEZA, and enterprises registered pursuant to
the Bases Conversion and Development Act of 1992
 Purpose: to avoid the income tax with respect to its shareholders or the
shareholders of any corporation, by permitting the earnings and profits of the
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corporation to accumulate instead of dividing them among or distributing them to
the shareholders.
 The 10% IAET shall only apply to corporations formed or availed for the purpose of
avoiding income tax, be permitting earnings and profits to accumulate beyond
reasonable needs of the business, instead of dividing or distributing said profits to
its shareholders.
 Closely-held corporations – those corporations at least 50% of the total combined
voting power of all classes of stock entitled to vote is owned directly or indirectly by
or for not more than 20 individuals. Those not falling herein are considered publicly-
held corporations. The following rules shall apply in determining whether a
corporation is a closely-held one:
1. Stock not owned by individuals – stock owned directly or indirectly by or for
a corporation, partnership, estate or trust shall be considered as being
owned proportionately by its shareholders, partners or beneficiaries
2. Family and partnership owners – an individual shall be considered as owing
the stock owned directly or indirectly by or for his family or partner.
3. Option to acquire stocks – if any person has an option to acquire stock, such
stock shall be considered as owned by such person
4. Constructive ownership as actual ownership
 For corporations found subject to IATaxable Income is first determined by adding to
the taxable year’s the following:
1. Income exempt from tax
2. Income excluded from gross income
3. Income subject to final tax
4. The amount of operating loss carry-over deducted
 The taxable income as thus determined shall be reduced by the sum of:
1. Income tax paid/payable for the taxable year
2. Dividends actually or constructively paid/issued from applicable year’s taxable
income

3. Amount reserved for the reasonable needs of the business emanating from the
covered year’s taxable income.
 The resulting IATI is thereby multiplied by 10% to get the IAET.
 The amount that may be retained, taking into consideration the accumulated
earnings within the reasonable needs of business shall be 100% of the paid up
capital or the amount contributed to the corporation representing the par value of
the share of stock.
 Once the profit has been subjected to IAET, the same shall no longer be subjected
to IAET in later years even if not declared as dividend.
 Notwithstanding the imposition of IAET, profits which have been subjected to IAET,
when finally declared as dividends, shall nevertheless be subject to tax on
dividends, shall nevertheless be subject to tax on dividends except in those
instances where the recipient is not subject thereto.
 An accumulation of earnings or profits is unreasonable if it is not necessary for the
purpose of the business.
 Immediacy test
 Reasonable needs of business – the immediate needs of the business,
including reasonable anticipated needs.
 If not for reasonable needs, penalty tax would apply.
 The following constitute accumulation of earnings for the reasonable needs
of the business:
1. Allowance for the increase in the accumulation of earnings up to 100%
of the aid-up capital of the corporation as of Balance sheet date,
inclusive of accumulations taken from other years
2. Earnings reserved for definite corporate expansion projects or programs
requiring considerable capital expenditure as approved by the Board of
Directors or equivalent body
3. Earnings reserved for buildings, plants or equipment acquisition as
approved by the Board of Directors or equivalent body
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4. Earnings reserved for compliance with any load covenant or pre-existing
obligation established under a legitimate business agreement
5. Earnings required by law or applicable regulations to be retained by the
corporation or in respect of which there is legal prohibition against its
distribution
6. In the case of subsidiaries of foreign corporation in the Philippines, all
undistributed earnings intended or reserved for investments within the
Philippines as can be proven by corporate records and/or relevant
document evidence.
 The dividends must be declared and paid or issued not later than one year
following the close of the taxable year, otherwise, the IAET, if any, should be paid
within 15 days thereafter.
 The fact that a corporation is a mere holding company or investment company
shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or
members. Likewise, the fact that the earnings or profits of a corporation are
permitted to accumulate beyond the reasonable needs of the business shall be
determinative of the purpose to avoid the tax. – preponderance of evidence.
 Holding or investment company – a corporation having practically no activities
except holding property, and collecting the income therefrom or investing the
same.
 The following are prima facie avoidance of income tax upon shareholders:
1. Investment of substantial earnings and profits of the corporation in unrelated
business or in stock or securities of unrelated business
2. Investment in bonds and other long-term securities
3. Accumulation of earnings in excess of 100% of paid-up capital, not otherwise
intended for the reasonable needs of the business.
 It is unreasonable if it is not required for the purpose of the business
 Immediate test - The reasonable needs of business mean the immediate needs of
the business, and it is generally held that if the corporation did not prove an

immediate need for the accumulation of the earnings and profits, the accumulation
was not for the reasonable needs of the business and the penalty tax would apply.
EXEMPTIONS FROM TAX ON CORPORATIONS
1. Labor, agriculture or horticultural organization not organized principally for
profit
2. Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual
purposes and without profit
3. A beneficiary society, order or association, operating for the exclusive benefit of
the members
4. Cemetery company owned and operated exclusively for the benefit of its
members
5. Nonstick corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income or asset shall belong to or
inure to the benefit of any member, organizer, officer or any specific person
6. Business league, chamber of commerce, or board of trade, not organized for
profit and no part of the net income which inures to the benefit of any private
stockholder or individual
7. Civil league or organization not organized for profit but operated exclusively for
promotion of social welfare
8. A non-stock and nonprofit educational institution
9. Government educational institutions
10. Farmers or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, or like organization of a purely local character, the income
of which consists solely of assessments, dues, and fees collected from members
for the sole purpose of meeting its expenses
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11. Farmers’, fruit growers’ or like association organized and operated as a sales
agent for the purpose of marketing the products of its members and turning
back to them the proceeds of sales, less the necessary selling expenses on the
basis of the quantity of produce furnished by them.
 Exemptions are construed strictly against the grantee and liberally in favor of the
government.
 A corporation is nonstick where no part of its income is distributable as dividends to
its members, trustees or officers.
 It is a nonprofit if no income accrues to the benefit of any member of the
corporation.
 It is necessary that every organization claiming exemption file an affidavit with the
Commissioner showing the character of the organization.
 When an organization has established its right to exemption, it need not make and
a file a return of income. However, the organization should file on or before April 15
of each year, an annual information return under oath, stating its gross income and
expenses incurred during the preceding year and a certificate shoeing that there
has not been any substantial change in its by-laws, articles of incorporation, manner
of operation and activities as well as sources and dispositions of income.
 Tax exemptions of corporations does not extend to members
 Organized and operated exclusively – refers to the real substance and not merely
to form.
 Exempt corporations are subject to income tax on their income from any of their
properties, real or personal, or from any of their activities conducted for profit,
regardless of the disposition made of such income.
 Clubs which are organized and operated exclusively for pleasure, recreation and
other non-profit purposes are subject to income tax. According to the doctrine of
casus onissus pro omisso habendus est, a person, object or thing omitted from the
enumeration must be held to have been omitted intentionally.

Exempt Mutual Savings Bank
1. Has no capital stock represented by shares; and
2. Whose earnings less only the expenses of operation, are distributable wholly
among depositors.
Exempt fraternal beneficiary societies
 Exempt only if operated under lodge system or for the exclusive benefit of a
society operating it.
 Operating under the lodge system – carrying on its activities under form of
organization that comprises local branches, chartered by a parent organization
and largely self-governing
Exempt cemetery companies
1. It is owned by and operated exclusively for the benefit of its owners, or
2. It is not operated for profit
 A cemetery company which fulfills the other requirement of the statute may be
exempt, even though it issues preferred stock entitling the holders to dividend at a
fixed rate, provided that its articles of incorporation require:
1. That the preferred stock shall be retired at par as soon as sufficient funds are
realized from sales, and
2. That all funds not required for the payment of dividends upon or for the
retirement of preferable stock shall be used by the company for the care and
improvement of the cemetery.
Exempt religious, charitable, scientific, athletic, and cultural corporations
1. It must be organized and operated for one or more the specified purposes, and
2. No part of its net income must inure to the benefit of private individuals.
 Charitable institutions must be:
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1. A non-stock corporation or association
2. Organized exclusively for charitable purposes
3. Operated exclusively for charitable purposes, and
4. No part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person
 Corporation sole – a special form of corporation usually associated with clergy. It
consists of only one person, and his successor
Exempt business leagues
 A business league is an association of persons having some common business
interest, which limits its activities to work for such common interest and does not
engage in a regular business of a kind ordinarily carried on for profit.
 If it engages in a regular business of a kind ordinarily carried on for profit, the fact
that the business is conducted on a cooperative basis or produces only sufficient
income to be self-sustaining, is not ground for exemption.
Exempt Civic leagues
 Comprise those not organized for profit but operated exclusively for purposes
beneficial to the community as a whole.
Exempt nonstick, nonprofit educational institutions
 Article XIV, Section 4(3), Constitution
1. It falls under the classification of nonstick, nonprofit educational institution
2. The income it seeks to be exempted from taxation is actually, directly and
exclusively used for educational purposes
 The interest income on bank deposits and yields from deposit substitutes are not
automatically exempt from taxation. There must be a showing that the incomes are
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included in the school’s annual information return and duly audited financial
statements together with:
1. Certification from depository banks as to the amount of interest income earned
from passive investments not subject to the 20% final withholding tax
2. Certification of actual, direct and exclusive utilization of said income for
educational purposes
3. Board resolution on proposed project to be funded out of the money deposited
 Same rule is used for income derived from dormitories, canteens and bookstores –
must be actual, direct and exclusive for educational purposes

Exempt mutual insurance companies and similar organizations

 It is necessary that the income of the company be derived solely from assessments,
dues and fees collected from members.
 An organization may be entitled to exemption, although it makes advance
assessment for the sole purpose of meeting its future losses and expenses,
provided that the balance of such assessments remaining on hand at the end of the
year is retained to meet losses and expenses or is returned to members.
 An organization of a purely local character is one whose business activities are
confined to a particular community, place, or district, irrespective, however, of
political subdivisions.

Exempt farmers’ cooperative marketing and purchasing associations

 Must establish that for their own account, they have no net income
 Cooperative associations acting as purchasing agents are not expressly exempt from
tax, but rebates made to purchases may be excluded from the gross income.

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COMPUTATION OF TAXABLE INCOME
 Taxable income refers to the gross income subject to tax, less the deductions,
whether itemized or optional standard deductions, and/or personal and
additional exemptions, if any, authorized for such type of income.
 Refers to the tax base.
 For individuals who are employed, it is the income after deducting the
exclusions and the exemptions
 For individuals engaged in trade or business or in the practice of their
profession, it is the income after deducting exemptions.
 For corporations and other juridical entities, it is the net income after deducting
the itemized deduction or the optional standard deductions of 40%, at the
option of the seller.
 In the computation of the tax, various classes of income must be considered:
1. Income – all wealth which flows into the taxpayer other than as a mere
return of capital.
2. Gross income – income less income which is by statutory provision or
otherwise is exempt from the tax imposed by law.
3. Taxable income – gross income less statutory deductions.
 Taxable income is to be computed in accordance with the method of accounting
regularly employed in keeping books of the taxpayer.
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Computation of the Taxable Income
 Must be computed with respect to a fixed period. That is twelve months ending
December 31st of every year, except in the case of corporation filing returns on
a fiscal year basis in which case taxable income will be computed on the basis of
such fiscal year.
 Items of incomes and expenditures need not be in the form of cash
 If the method of accounting regularly employed by the taxpayer in keeping his
books clearly reflects his income, it is to be followed with respect to the time as
of which items of gross income and deductions are to be accounted for,
otherwise the computation of taxable income shall be made in such manner as
in the opinion of the Commissioner would clearly reflect it.
Bases of Computation of Taxable Income
 Approved standard methods of accounting will be ordinarily regarded as clearly
reflecting income. A method of accounting will not, however, be regarded as
clearly reflecting income unless all items in the gross income and all deductions
are treated with reasonable consistency.
 All items in the gross income shall be included in the gross income for the
taxable year in which they are received by the reflect income, such amounts are
to properly accounted for as of a different period.
Methods of Determining the Net Taxable Income

1. Expenditure method – the aggregate yearly expenditures are deducted from the
declared yearly income, not the expenditures incurred each month and declared
thereafter, to arrive at the net taxable income.
2. Net worth or inventory method – a form of determining income from any other
available facts or evidence, so that the tax may be assessed and collected.
 Based on assets or properties appearing in the name of the taxpayer or
in the name of his dummies or friends, without the taxpayer being able
to give a definite reasonable explanation for their existence.
 After determining the assets, liabilities are subtracted to arrive at the net
worth.
 Any decrease or increase in the net worth is adjusted by adding all non-
deductible items and subtracting the non-taxable receipts.
3. Sales Method or Percentage of Receipts Method – in the absence of adequate
records, the Commissioner can reconstruct gross profit by ascertaining the total
sales or receipts and then applying an average of gross profit to such sales and
receipts.
 He can also reconstruct taxable income by applying an average
percentage of taxable income to gross income.
Taxable Income from Sources within the Philippines
GR. From the items of gross income, there shall be deducted the expenses , interests,
losses and other deductions properly allocated thereto and a ratable part of expenses,
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interests, losses and other deductions effectively connecter with the business or trade
conducted exclusively within the Philippines which cannot definitely be allocated to
some items or class of gross income. Such items of deductions shall be allowed only if
fully substantiated by all the information necessary for its calculation.
XPN. No deductions for interest aid or incurred abroad shall be allowed from unless
indebtedness was actually incurred to provide funds for use in connection with the
conduct or operation of trade or business.
Taxable Income from Sources without the Philippines
 From the items of gross income, there shall be deducted the expenses, losses, and
other deductions properly apportioned or allocated thereto and a ratable part of
any expense, loss or other deduction which cannot definitely be allocated to some
items or classes of gross income. The remainder, if any, shall be treated in full as
taxable income from sources without the Philippines.
COMPUTATION OF GROSS INCOME
 Gross income means all income derived from whatever sources, including, but not
limited to, the following items:
1. Compensation for services in whatever form paid, including, but not limited
to fees, salaries, wages, commissions, and similar items
2. Gross income derived from the conduct of trade or business or the exercise
of a profession
3. Gains derived from dealings in property
4. Interests

5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner’s distributive share from the net income of the GPP
 Passive income, not included – they are already subject to different rates and taxed
finally at source.
 Income differs from capital in that income is any wealth which flows into the
taxpayer other than a return of capital, while capital constitutes the investment
which is the source of income. Capital is fund, while income is flow. Capital is
wealth, while income is service of wealth. Capital is the tree, income is the fruit.
 Net income or taxable income refers to the gross income less allowable deductions
and/or personal and additional expenses.
Compensation for Services in Whatever Form Paid
 Compensation means all remuneration for services performed by an employee for
his employer under an ee-er relationship, unless specifically excluded by the code.
 The name by which the remuneration for services is designated is immaterial.
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 Salaries, wages, emoluments and honoraria, allowances, commissions, fees,
including director’s fees, taxable bonuses and fringe benefits, taxable pensions, and
retirement pay and other income of a similar nature constitute compensation
income.
 Honoraria refers to payments given in recognition for services performed for which
the established practice discourages charging a fixed fee.
 Commission refers to a percentage of total sales or on certain quota f sales volume
attained as part of incentive.
 Fees refer to the amount received by an ee for the services rendered to the er over
and above their regular salaries.
 The basis upon which the remuneration is paid is immaterial in determining
whether the remuneration constitutes compensation.
 Remuneration for services constitutes compensation even if the relationship of er
and ee does not exist any longer at the time when payment is made between the
person in whose employ the services had been performed and the individual who
performed them.
 The term remuneration or wage, which is subject to withholding tax on
compensation, does not include remuneration paid to:
1. For agricultural labor paid entirely in products of the farm where the labor is
performed
2. For domestic service in a private home
3. For casual labor not in the course of the er’s trade or business

4. For services by a citizen or resident of the Philippines for a foreign
government or an int’l organization
 If the compensation is paid in cash, the full amount received is the measure of the
income subject to tax.
 Where services are paid for with something other than money, the fair market
value of the thing taken in payment is the amount to be included as income.
 If the services were rendered at a stipulated price, in the absence of evidence to the
contrary, such price is presumed to be the fair value of the compensation received.
 When living quarters are furnished in addition to cash salary, the rental value of
such quarters should be reported as income.
 If the shares of stock were given as salary, such shall constitute as taxable income to
the recipient. The par value or the stated value of the shares issued shall constitute
as deductible expense to the corporation provided it has been subjected to the
withholding tax on compensation.
 Promissory notes or other evidences of indebtedness received in payment of
services, and not merely as security for such payment, constitute income to the
amount of their fair market value.
 A taxpayer receiving as compensation a note regarded as food for its face value at
maturity, but not bearing interest, shall be treated as income as of the time of
receipt of the fair discounted value of the note at that time.
 If the payment due on note so accounted for is met as they become due, there
should be included as income in respect of each payment so much thereof as
represents recovery for the discount originally deducted.
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 Any amount paid specifically, either as advances or reimbursement for traveling,
representation and other bona fide ordinary and necessary expenses incurred or
reasonably expected to incur by the ee in the performance of his duty are not
subject withholding, if the ff conditions are satisfied:
1. It is for ordinary and necessary traveling and representation or
entertainment expenses aid or incurred by the ee in the pursuit of trade,
business or profession
2. The ee must account/liquidate the expenses. The excess of advances made
over actual expenses shall constitute taxable income if such amount is not
returned to the er. Reasonable amounts which are pre-computed on a daily
basis and are aid to an ee while on an assignment of duty need not be
subject to the requirements of substantiation and to withholding.
Gross Income Derived from the Conduct of Trade or Business or Exercise of Profession
 The term gross income derived from doing business shall be equivalent to the gross
sales returns, discounts and allowances and cost of goods sold.
 Cost of goods sold shall include all business expenses directly incurred to produce
the merchandize to bring them to their present location and use.
 For trading and merchandising, cost of goods sold shall include the invoice cost of
the goods sold, plus import duties, freight in transporting the goods to the place
where the goods are actually sold, including insurance while the goods are in
transit.
 Cost of goods manufactures and sold shall include all costs of production.
 In the case of taxpayers engaged in the sale of service, gross income means gross
receipts less sales returns, allowances, discounts and cost of services.

 Cost of services shall mean all direct costs and expenses necessarily incurred to
provide all services required by the customers and clients including salaries and
benefits of personnel, consultants and specialists directly rendering the service and
cost of facilities directly utilized in providing the service, provided, however, that in
the case of banks, cost of services shall include interest expense.
 A taxpayer engaged in the exercise or practice of profession is subject to income
derived from such. There should be no ee-er relationship between him and his
client.
 In computing the income of partners of a GPP, all expenses which are ordinary and
necessary, incurred or aid for the practice of profession are allowed as deductions.
 Since the taxable income is in the hands of the partner, as a rule, apart from the
expenses claimed by the GPP in determining its net income, the individual partner
can still claim deductions incurred or paid by him that contributed to the earning of
the income taxable to him which were not deducted from the gross income of the
GPP.
Gains Derived from Dealings in Property
 Gains derived from dealings in property, such as sales or exchanges of property,
may result in the gain or loss, depending on the nature of the property as to
whether said property is a capital asset or an ordinary asset.
Dealings in Shares of Stocks of Domestic Corporations
 Net capital gains from sale, barter, exchange or other disposition held as capital
stock not listed and traded in the local stock exchange shall be subject to the capital
gains tax of 5% on the net capital gains not over P100,000 plus 10% on any amount
in excess of P100,00.
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 Sale, barter or exchange of stock held as capital assets which are traded and listed
in the local stock exchange, the same shall not be subject to capital gains tax but to
the ½ of 1% stack transaction tax based on the gross selling price or gross value in
money of the shares of stock sold or transferred.
 If the shares of stock are held as ordinary assets and the sale is made by a dealer in
securities, the resulting gain or loss is considered as ordinary income.
 Whether the acquisition of disposition by a corporation of its own capital stock
gives rise to taxable gain or deductible loss depends upon the real nature of the
transaction.
 The receipt by a corporation of the subscription price of shares of its capital stock
upon their original issuance fives rise to neither taxable gain nor deductible loss,
when the subscription or issue rice be in excess of, or less than, the par or stated
value of such stock.
 If the corporation deals in its own shares as it might in the shares of another
corporation, the resulting gain or loss is to be computed in the same manner as
though the corporation were dealing in the shares of another.
 If the corporation receives its own stock as consideration upon the sale of property
by it, or in satisfaction of indebtedness to it, the gains or loss resulting is to be
computed in the same manner as though the payment had been made in any other
property.
 In the event that ees who obtained shares of stack subsequently sell, barter,
exchange or otherwise dispose of the said shares of stock, the tax treatment is as
follows:
1. If the shares involves are shares of stock in a domestic corporation not
traded in the stock exchange, the gain is subject to capital gains tax. The
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gain shall be the difference between the selling price or book value or fair  The CWT/CGT/VAT/DST shall be based on the bid price of the highest bidder or
market value of the shares, whichever is higher, at the date of the sale and the FMV or the ZV, whichever is higher.
the price at the time of exercise if the option
 Gains derived from expropriation of property are taxable since there is a
2. If the shares involved are shares of stock listed and traded through the Local material gain in the transaction.
Stock Exchange, the transaction is subject to stock transaction tax
 Generally, income realized from the sale of capital assets are not to be reported
3. If the shares involved are shares of stock in a foreign corporation, the gain is as part of the gross income of an individual in the income tax returns as they are
subject to ordinary income tax. already subject to the final withholding tax.
Dealings in Real Property  Income or capital gains derived from the sale of other capital assets of an
individual taxpayer, which are not subject to final withholding tax, should be
 In case of non-redemption of properties sold during involuntary sales, 6% final
declared or reported as part of the gross income in an annual income tax
tax based on the gross selling price or current fair market value, if the property
returns of the individual taxpayer.
is a capital asset, or the Credible tax withholding (section 57), in case of an
ordinary asset, VAT, stamp tax.  Income realized from the sale of ordinary assets is subject to the ordinary
income tax and the said income shall be declared in the quarterly/annual
 The buyer of the subject property, who is deemed to have withheld the CGT or
income tax return.
CWT due from the sales, shall then file the CGT return and remit the said tax to
the Bureau within 30 days from the expiration of the applicable statutory INTEREST INCOME
redemption period, or file within 10 days following the end of the month after
the expiration of the applicable statutory redemption; provided that the taxes  Interest – compensation allowed by law or fixed by the parties for the use or
withheld in Dec, the CWT return shall be filed and the taxes remitted before Jan. forbearance of money or as damages for its detention.
15 the ff year.
 The term public means borrowing from 20 or more individual or corporate
 If the property sold through involuntary sale is under the circumstances which lenders at any one time.
warrant the imposition of VAT, said tax must be paid before the 20 th or the 25th
 19 Lender rule – in order for an instrument to qualify as a deposit substitute,
day, whichever is applicable, of the month following the month when the right
the borrowing must be made from 20 to more individual or corporate lenders at
of redemption prescribes.
any one time.
 The DST return shall be filed and the tax paid within 5 days after the close of the
month after the lapse of the applicable statutory redemption period.
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 Deposit substitutes – an alternative form of obtaining funds from the public,
other than deposits, through the issuance, endorsement, or acceptance of debt
instruments for the borrower’s own account, for the purpose of re-lending or
purchasing of receivables and other obligations, or financing their own needs or
the needs of their dealer.
 The tax treatment of interest income derived from the government:
1. Government debt instruments and securities, including BOT issued
instruments and securities, shall be considered as deposit substitutes
irrespective of number of lenders at the time of origination if such debt
instruments and securities are to be traded or exchanged in the secondary
market
2. Interest income derived therefrom is subject to FWT.
3. The mere issuance of government debt instruments and securities is
deemed as falling within the coverage of deposit substitutes – FWT
 Long-term deposit or investment certificate refers to certificate of time deposit
or investment in the form of savings, common or individual funds, deposit
substitutes, investment management accounts and other investments with a
maturity period of not less than 5 years. The form of which shall be prescribed
by the BSP only.
 The tax treatment from long term deposits of investment certificates:
1. Interest income shall be exempt from income tax, provided that the ff
characteristics/conditions are present:
a. The depositor or investor is an individual, not a corporation
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b. Said certificates should be under the name of the individual
c. Said certificate must be in the form of savings, common trust funds,
individual trust funds, investment management accounts, deposit
substitutes, other investments evidenced by certificates in such form
prescribed by the BSP
d. Certificates must be issued by banks only
e. The maturity period must be not less than 5 years
f. They should be in denominations of P10,000 and other denominations
as may be prescribed by the BSP
g. They should not be terminated by the original investor before the 5 th
year, otherwise it shall be subjected to the graduated rates of 5%, 12%
or 20% on interest income earnings
h. Except those specifically exempted by law or regulations, any other
income such as gains from trading, foreign exchange gain, shall not be
covered by income exemption.
2. Absent the above, interest income from long term deposit or investment
shall be subject to FWT at the rate of 20%
3. Interest income from long term deposit or investment that is pre-terminated
by the depositor of investor before the 5th year shall be subject to FWT on
the entire income and shall be withheld by the depository bank
a. Interest income from LTD/I shall be subject to FWT at 25% if received by
a nonresident alien not engaged in trade or business in the Philippines.
b. 30% if received by a nonresident foreign corporation

c. 30% if received by a domestic corporation and resident foreign
corporation.
4 years to less than 5 years 5%
3 years to less than 4 years 12%
Less than 3 years 20%
 Interest income derived from currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar
arrangements derived from sources with the Philippines.
1. Subject to a FWT of 20% if received from citizens, resident aliens,
nonresident aliens engaged in trade or business in the Philippines, domestic
corporations and resident foreign corporations
2. Subject to FWT of 25% if the interest income is received by nonresident
aliens engaged in trade or business in the Phil.
3. Subject to FWT of 30% if received by nonresident foreign corporation, unless
the interest income is from foreign loans contracted on or after Aug. 1, 1986
– 20%
 Interest income derived from a depository bank under the expanded foreign
currency deposit system
1. Subject to FWT of 7 ½ % if the interest income is received by citizens,
resident aliens, domestic corporations and resident foreign corporations.
2. Any income from nonresident, I or C, from transactions with depository
banks under the expanded system shall be exempt from income tax
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3. If a bank account is jointly in the name of a nonresident citizen, 50% of the
interest income shall be subject to 7 1/2 % while the other haft shall be
exempt
4. Derived by a depository bank under the expanded foreign currency
transactions with nonresidents, OBUs, local commercial banks that may be
authorized by the BSP – exempt from all taxes , except net income from
such transactions
5. Interest income from foreign currency loans granted by such depository
banks under the expanded system to residents shall be subject to final tax
rate of 10%
 Interest income derived by OBUs
1. From foreign currency transactions with nonresidents, other OBUs, local
commercial banks, including foreign banks that may be authorized by the
BSP – exempt from all taxes except net income from such transactions
2. Derived from foreign currency loans granted to residents – FWT of 10%
3. Any income of nonresidents, I or C – exempt from income tax.
 Interest income derived from all other instruments
 Any other debt instruments not within the coverage of deposit
substitutes – CWT at the rate of 20%
 Interest income received by banks from payors belonging to the top 20,000
corporations strictly arising from individual loans obtained from banks that are
not securitized, assigned or participated out remains to be subject to CWT at

2%. The 20% FWT and CWT imposed under the Tax Code cover interest arising
from and paid out of debt securities.
 If there is no stipulation between the parties regarding the application of
compounded interest, apply simple interest only.
 Under Art. 1959 of the CC, unless there is a stipulation to the contrary, interest
due should not further earn interest.
 Arm’s length interest from advances – not subject to income tax
Rental income
 The amount paid for the use or lease or enjoyment of personal or real property.
 Any additional amount paid, directly or indirectly, by the lessee in consideration
for the said lease, also considered as rental
 If the rented property is being used in business, said rental income shall be
subject to EWT of 5% to be withheld by the lessee. Failure of the lessee to
withhold and remit the same shall not entitle him to claim the rental expense as
deduction from his gross income.
 Where a corporation has leased its property in consideration that the lessee
shall pay in lieu of other rental an amount equivalent to a certain rate of
dividend on the lessor’s capital stock or interest on the lessor’s outstanding
indebtedness, such payments shall be considered rental payments.
 When buildings are erected or improvements made by the lessee in pursuance
to the lease agreement, and such are not subject to removal, the lessor may at
his option report the income:
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1. Outright method – the lessor may report as income at the time when such B
or I are completed – fair market value
2. Spread-out method – the lessor may spread over the life of the lease and
estimated depreciated value of such B or I at the termination of the lease
and report as income for each year of the lease an aliquot art thereof.
 Halvering vs. Brunn. If improvements are in lieu of rent, the value thereof is
income to the landlord only in the year of termination of the lease.
 The VAT added rental paid by the lessee is not art of the gross income if the
lessor is VAT-registered by shall be considered as the output tax of the lessor.
The VAT may be passed on by the lessor to the lessee. The passed on VAT shall
be considered as an input tax by the lessee if the lessee is VAT-registered or it
will become part of the cost of the lease, if the lessee is not VAT-registered.
 Prepaid or advance rental shall only be considered as rental income of the lessor
once the advance rental is utilized by the lessee. Otherwise, it will only be
treated as security deposit which is not considered as income.
 Entire amount of advance rental is considered as taxable income to the lessor in
the year received, if so received under a claim of right and without restriction as
to its use.
 Security deposit applied to the rental of the terminal month or period of
contract must be recognized as income at the time it is applied. Security deposit
is to ensure faithful performance of certain obligations of the lessee, it is not
income to the lessor until the lessee violates any provision of the contract.
 Income from long-term contracts is taxable for the period in which the income
is determined.

 Long term contract – building, installation or construction contracts covering
period in excess of one year. Report income upon the basis of percentage
completion. The return should be accompanied by a return certificate.
Royalty Income
 Royalties mean a payment or a portion of the proceeds paid to the owner of a
right for the use of such rights.
 Royalty is a valuable property that can be developed and sold on a regular basis
for a consideration. Any gain derived therefrom is considered as an active
business income subject to normal income tax.
 When a person pays royalty to another for the use of its intellectual property,
such as copyrights, patents, trademarks, such royalty is a passive income of the
owner subject to withholding tax.
 The payor is required to deduct and withhold final taxes on royalty payments
when the royalty is paid or is payable. After which, the corresponding return or
remittance must be made within 10 days after the end of each month.
Dividend Income
 Dividends mean any distribution made by a corporation to its shareholders out
of its unrestricted retained earnings payable to its shareholders, whether in
money or in other property.
 Where a corporation distributes all its assets in complete liquidation or
dissolution, the gain realized or loss sustained by the stockholder is taxable
income or a deductible loss.
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 While liquidation gains are characterized as gains from sale or exchange of
shares, they are still subject to the ordinary income tax rates depending on the
status of the stockholder.
 Cash and/or property dividends declared or distributed on or after Jan. 1, 1998
shall be subject to the 10% withholding tax.
 Cash dividends are paid in cash. The dividends belong to the shareholder at the
time of declaration.
 Property dividends are paid in securities or other property, in which the
earnings of a corporation have been invested, which are income to the
recipients to the amount of the full market value of such property when
receivable by individual stockholders. When receivable by corporations, the
amount of such dividends includible for purposes of the tax on corporations is
specified.
 A dividend paid in stock of another corporation is not a stock dividend, the
income arising to the recipients of such stock is its market value at the time the
dividend becomes payable.
 Scrip – a certificate representing fractions of a share of stock.
 Scrip dividend – in the form of a promissory note taxable to the extent of its fair
market value in the year when the warrant is issued.
 Warrant is a type of security which entitles the holder the right to subscribe to,
the unissued stock of a corporation or to purchase issued shares in the future.
 Scrip dividend is subject to tax in the year in which the warrants are issued.

 The rationale for the imposition of the 10% withholding final tax on cash and
property dividends received by citizens and resident aliens from domestic
corporation is to ensure that the taxes will be fully collected from the dividends
earned by the said taxpayers. Subjecting the same to the progressive tax rated
would mean that there is a need to include the same in the ITRs of the
individuals, hence, there is no assurance that the said income will be declared.
 The responsibility for the remittance of the tax is shifted to the corporations.
 Intercorporate dividends received by a domestic corporation from another
domestic corporation are exempt from income tax.
 Dividends received by a domestic corporation from a foreign corporation are
included in the computation of the gross income because there is no law
exempting the same.
 Since the Philippines seeks to lessen the impact of double taxation between
countries, it imposes only the lower tax rate of 15% on intercorporate dividends
received by a non-resident foreign corporation from a domestic corporation
subject to the condition that the country in which the nonresident foreign
corporation is domiciled allows a tax credit of 15%. The fact that the country in
which the nonresident foreign corporation is domiciled does not impose any tax
on the dividends received by such corporation should be held as full satisfaction
of the condition for the availment of the 15% final tax.
 A stock dividend which represents the transfer of surplus to capital account is
not subject to income tax because they are not realized income. – exempt from
income tax.
 A stock dividend constitutes income if it gives the shareholder an interest
different from that which has former stockholdings represented.
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 A stock dividend does not constitute income if the new shares confer no
different rights or interest than did the old.
 If a corporation or redeems stock issued as a dividend in such manner as to
make the distribution and cancellation or redemption essentially equivalent to
the distribution of a taxable dividend, the amount so distributed is taxable
income.
 Dividends declared in the guise of treasury stock dividend to avoid the effects of
income taxation is taxable.
 Liquidating dividends – the share of each stockholder in the assets upon
liquidation. – subject to tax in Section 39.
 Complete liquidation includes any one of a series of distributions made by a
corporation in complete cancellation or redemption of all its stock in
accordance with a bona fide plan of liquidation under which the transfer of all
the assets under liquidation is to be complete within a reasonable time, usually
not to exceed one year.
 If the amount received by the stockholder in liquidation is less than the cost or
other basis of the stock, deductible
 During liquidation, any sales of property by them are to be treated as if made by
the corporation for the purpose of ascertaining the gain or loss.
 Disguised dividends are those income payments made by a domestic
corporation, which is a subsidiary of a nonresident foreign corporation, to the
latter ostensible for services rendered by the latter to the former, but which
payments are disproportionately larger than the actual value of the services
rendered. – subject to normal tax rate or preferential tax rate if there is a treaty

 Income which is credited to the account of or set aside for a taxpayer and which
may be drawn upon by him at any time is subject to tax for the year during
which so credited or set apart although not then actually reduced to possession.
 If the income is not credited, but is set apart, such income must be unqualifiedly
subject to the demand of the taxpayer.
 Where a corporation contingently credits its ees with bonus stock, but the stock
is not available until some future date, the mere crediting on the books of the
corporation does not constitute receipt.
 A mere increase or appreciation in the value of shares of stock cannot be
considered income for taxation purposes. The same must be sold at a profit to
constitute taxable income.
Annuities and Proceeds from Insurance
 Annuity – refers to annuity policies sold by insurance companies, which provides
installment payments for life, or for a guaranteed fixed period of time,
whichever is longer.
 If the annuity is a return of premium, it is not taxable.
 Annuities paid be religious, charitable and educational corporations are subject
to tax to the extent that the aggregate amount of the payments to the
annuitant exceeds the amounts paid by him as consideration for the contract.
 An annuity charged upon devised land is taxable taxable to a donee-annuitant,
whether paid by the devisee out of the rents of the land or from other sources.
The devisee is not required to return as gross income the amount of rent paid to
the annuitant, and he is not entitled to deduct from his gross income any sum
paid to the annuitant.
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 Failure to comply with the requirements of a tax-exempt annuity makes it
taxable and included in the gross income.
 Proceeds from life insurance received by the beneficiaries or other types of
insurance are not subject to income tax if they are just mere return of capital. If
it is subject to interest, the interest payment is included in the gross income.
Prizes and Winnings
 When prizes and awards considered taxable income
1. Contest awards and prizes received from an er or another are generally
taxable. Si also are prizes won in a competitive contest conducted for non-
commercial or commercial purposes. Amounts received as prizes and
awards made primarily for religious, charitable, scientific, educational,
artistic, literary or civic achievement are not taxable if:
a. The recipient was selected without any action on his part to enter the
contest or proceeding
b. The recipient is not required to render substantial future services as a
condition to receiving the prize or award.
2. All prizes and awards granted to athletes in local and international
competitions whther held in the Philippines or abroad and sanctioned by
their national sports association shall be excluded from the gross income.
 If the prizes are derived from sources without the Philippines, the same shall be
included in the gross income for taxpayers whose income derived within and
without the Philippines are taxable in the Philippines.

Pensions
 Retirement benefits and pensions received, other than those received under
RAs 4917, 7641, 8282, 8291 and other laws on pension benefits excluded from
gross income, are considered as taxable income.
 Pension is either a lump sum payment or on a staggered basis payment in
consideration of services rendered given to an ee after an individual reaches the
age of retirement.
Partner’s Distributive Share from the Net Income of a GPP
 For purposes of computing the distributive share of the partners, the net
income of the partnership shall be computed in the same manner as a
corporation.
 Each partner shall repost as gross income his distributive share, actually and
constructively received, in the net income of the partnership in his individual
return.
 GPPs are required to render, in duplicate, a return of their earnings, profits and
income, setting forth the items of gross income and the deductions allowable,
and the names and addresses of the individuals who would be entitled to the
net income if distributed.
 Taxable business partnership – normal income tax. The share of a partner in the
distributable net income after tax of a taxable business partnership is subject to
the 10% final withholding tax on cash or property dividends and is not included
in the taxable gross income.
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Gross Income from Whatever Source Derived
 For whatever source – includes whether coming from legal or illegal sources.
 Theory underlying the taxability of income derived from illegal sources is based
on the principle that an unlawful or prohibited business is not exempt from the
payment of taxes that it would have to pay if it were a lawful business.
 The liability to pay the tax is based on the swindler’s having realized a taxable
income from his swindling activities and will not affect his obligation to make
restitution. Payment of tax is a civil liability imposed by law while restitution is a
civil liability arising from a crime.
 Recovery of bad debts previously charged off is taxable to the extent of income
tax benefit of said deduction. The general rule is that recovery of amounts
deducted in prior years would result to an income.
 Tax-benefit rule – when the deduction did not result in tax benefit, the
subsequent recovery is not taxable income.
 Taxes paid which are allowed as deductions from gross income are taxable
when subsequently refunded only to the extent of the income tax benefit of
said deduction. Taxes paid which are not allowed as deduction from gross
income are not taxable even if refunded.
 Campaign contributions are not included in the taxable income of the candidate
to whom they were given. Reason: such contributions for his/her campaign
were not given for the personal benefit of the candidate.
 Unutilized or excess funds of campaign contributions are taxable to the
candidate.

 If failed to file SOCE, he is automatically precluded from claiming expenditures
as deductions. The entire amount of such campaign contributions shall be
subject to income tax.
 Subsidy may be considered as income, subject to tax.
 The cancellation and forgiveness of indebtedness may amount to payment of
income, to a gift, or to a capital transaction.
EXCLUSIONS FORM GROSS INCOME
 Exclusions from gross income are in the nature of tax exemptions and it
behooves upon the taxpayer to establish them as convincing.
 Exclusions from the gross income are items of income which are not included in
the taxable income.
 Excluded by the Consti, tax treaties, tax code or by special tax laws.
 The term gross income as used in the Tax Code does not include those items of
income exempted by statute or fundamental law. The exclusion of such income
should not be confused with the reduction of gross income by the application of
allowable exemption.
 Exclusions from gross income are actually income received or earned by the
taxpayer but is not taxable as income because of the exemption provided for by
law or by treaties.
 Deductions from gross income are the expenses and other allowable deductions
as provided by law which are incurred for engaging in trade or business or
exercise of a profession.
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 Tax credits are amount of tax previously paid by the taxpayer, whether
erroneously. Illegally or excessively paid, or thru the withholding tax system, but
which later on can be claimed as tax credit deductible from the tax liability of
the taxpayer.
 The rationale for the exclusions from gross income are:
1. It merely represent return of capital
2. Some items may be subject to another kind of internal revenue tax
3. Some items are income, gains or profits that are expressly exempt from
income tax.
Proceeds of Life Insurance Paid to the Heirs
 Exempt – return of capital only. It is immaterial whether the proceeds are
received in a single sum or in installments.
 If such proceeds are held by the insurer under an agreement to pay interest
thereon, the interest payments must be included in gross income.
 Proceeds of life insurance received by a child as an irrevocable beneficiary is
considered return of capital.
Amount Received by Insured as Return of Premium
 Excluded from gross income.
 If such amounts, when added to amounts received before the taxable year
under such contract, exceed the aggregate premiums or consideration paid,
then the excess shall be included in the gross income.

 In case of transfer of a life insurance, endowment or annuity contract, only the
actual amount of the premiums paid is exempt from tax.
Value of Property Acquired by Gifts, Bequests and Devises
 Bequest – something which is bequeathed by virtue of a will usually in the form
of personal property
 Devise – a gift of real property given by virtue or a will
 Property received as a gift or received under a will or testament or through legal
succession, is exempt from income tax, although the income therefrom or
income derived from its investment or sale shall be included in the gross
income.
 An amount of principal paid under a marriage settlement is a gift.
 Neither alimony nor allowance based on a separation agreement is taxable
income.
 Where there was no prior agreement or negotiations between two parties that
one party will be compensated for services rendered, the transfer having been
made gratuitously should be treated as gift, subject to donor’s tax.
Compensation for Injuries or Sickness
 Excluded
1. Amounts received through accident or health insurance or under the
workmen’s compensation act
2. Damages recovered by suit or agreement on account of such injuries or
sickness
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 It is based on incapacity to work.
 The payments being in lieu of wages or based on the loss thereof.
 Considered by law as mere return of capital
Income Exempt Under Tax Treaty
 Treaty – an international compact negotiated between the representatives of
two sovereign nations and made in the name and on behalf of the contracting
parties and dealing with important relations between 2 countries
 International convention or tax treaty – only refer to the double taxation
Convention or double taxation Agreements negotiated between Philippines and
other countries
 Income of any kind to the extent required by any treaty obligation binding upon
the government may be excluded from gross income.
 Business profits of a foreign corporation organized under the laws of a treaty
country from sources within the Philippines are not subject to income tax,
unless such profits are attributable to a permanent establishment of the foreign
corporation created or deemed created in the Philippines.
Retirement Benefits, Pensions, Gratuities, etc.
 Purpose of retirement laws: to entice competent women and men to enter the
government service and to permit them to retire therefrom with relative
security.

 Retirement laws are construed liberally in favor of the retiree because their
intention is to provide for his sustenance, and hopefully even comfort, when he
no longer has the stamina to continue earning his livelihood.
 In order to avail of the exemption of retirement benefits under RA 7641 from
private employers without any retirement plans, the following must be met:
1. The retirement benefits must be received under existing CBA or other
agreement
2. This is given in the absence of retirement plan or agreement providing for
retirement benefits
3. The retiring ee has served at least 5 years in the said establishment
4. That he is not less than 60 years of age but not more than 65
5. He shall be entitled to retirement pay equivalent to at least ½ month salary
for every year of service
 RA 4917 exempts from all taxes the retirement benefits received by officials and
ees of private firms under a reasonable private benefit plan. The following
requirements must be met:
1. The plan must be reasonable.
2. The benefit plan must be approved by the BIR
3. The retiring official or ee must have been in the service of the same er for at
least 10 years and at least 50 years old at the time of the retirement
4. The retiring official or ee should not have previously availed of the privilege
under the retirement benefit plan of the same or another er.
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 Reasonable private benefit plan – a pension, gratuity, stock bonus or profit-
sharing plan maintained by an er for the benefit of some or all of his officials or
ees, wherein contributions are made by such er for the officials or ees, or both,
for the purpose of distributing to such officials and ees the earnings and
principal of the fund thus accumulated, and wherein it is provided in the said
plan that at no time shall any part of the corpus or income of the fund be used
for, or be diverted to, any purpose other than for the exclusive benefit of the
said officials and ees.
 Additional payments in the form of gifts for loyalty and valuable services given
by private ers on top of the retirement benefits under a reasonable private
benefit plan – taxed as taxable gift to the donor who/which is subject to the
donor’s tax.
 If the gift falls within the provision of de minimis benefits, excluded from the
gross income
 Gratuity is the amount paid to the beneficiary for past services purely out of
generosity of the giver of grantor. It is a bounty given by the gov’t in
consideration or recognition of meritorious services and springs from the
appreciation and graciousness of the gov’t.
 Terminal leave pay or the commutation of leave credits is cash value of the
officer’s or ee’s accumulated leave credits. It is not salary, but a retirement
gratuity and is thus not subject to income tax.
 Right to pension is a vested right and cannot be revoked or impaired.
 The law exempts retirement and pension benefits from attachment,
garnishment, levy or execution.
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 Separation ay – the amount that an ee receives at the time of his severance 4. WON the separation is beyond the control of the official or ee shall be
from the service and is designed to provide the ee with the wherewithal during determined on the basis of prevailing facts and circumstances and shall be
the period that he is to look for another employment. duly established by the er

 Ee is entitled to separation pay when his services are terminated as a result of 5. Amounts received by reason of involuntary separation remain exempt from
retrenchement, closure of business or disease, or when as a measure of social income tax even if the official or ee, at the time of separation, had rendered
justice, the ee is validly dismissed for causes other than serious misconduct of less than 10 years of service and/or is below 50 years of age.
those involving moral turpitude.
 But any payment made by an er to an ee on account of dismissal, constitutes
 GR. An ee lawfully dismissed is not entitled to separation pay. compensation.

 XPNs.  Separation pay of an ee who offered to resign to take advantage of the Firm’s
offer of voluntary redundancy program - taxable. What is excluded is the
1. The installation of labor-saving device separation pay for any cause beyond the control of the official or ee.
2. Redundancy  The ex gratia payments given to ees who were lawfully separated and the cash
equivalent of unused vacation and sick leave credits are exempt from income
3. Retrenchment
tax.
4. Cessation of the er’s business
 It is in nature of separation due to causes beyond the ee’s control
5. When the ee is suffering from an disease and his continued employment is
prohibited  Social security benefits, retirement gratuities, pensions and other similar
benefits received by residents or nonresident citizens or aliens who come to
 Requisites in order that a separation pay may be excluded from gross income reside to the Philippines permanently form foreign government are not taxable
in the Philippines.
1. Amount received must be due to death, sickness or other physical disability
or for any cause beyond the control of the official or ee, such as  Benefits received from SSS – not taxable
retrenchment, redundancy or cessation of business
 Benefits received from GSIS – not taxable. Option to retire:
2. The separation from the service must not be asked for or initiated by him
1. Upon completion of 30 years of total service and attainment of age 57
3. The separation was not of his own making
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2. After rendering a total service of 30 years regardless of age
3. After having rendered a total of at least 20 years of service, the last 3 years
continuous regardless of age.
 Interest income derived from depositing in the bank the monthly pension
received from GSIS of a retiree is subject to the 20% final withholding tax. –
passive investment income
Miscellaneous Items
 Income derived from investments in the Philippines in loans, stocks, bonds or
other domestic securities, or from interest deposits in banks in the Philippines
by:
1. Foreign governments
2. Financing institutions owned, controlled, or enjoying refinancing from
foreign governments
3. International or regional financial institutions established by foreign
governments
 are excluded from gross income
 The stipulation in a loan agreement between a government agency and a
private international bank that the interest income to be derived by the lender
shall be made free from all Philippine taxes is valid.
 A mere executive agreement cannot provide for a tax exemption.
 Interest loans which would be granted by a private foreign financial institution
entered into in an executive agreement would not be exempt from income tax.
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 Income derived by the Government from any public utility or from the exercise
of any essential Government function accruing to the Government of the
Philippines, or to any political subdivision thereof shall be excluded from gross
income. In order that the income derived by the Government will be exempt
from income tax, the income should accrue to the government and must be
derived:
1. From any public utility
2. From the exercise of any essential governmental function.
 An award received by a person for an outstanding short story writing definitely
requires on the part of the taxpayer concerned to enter the said contest –
taxable.
 If the sports association which sanctioned the sports competition or
tournament is not the Philippine Sports Commission thru its Philippine Olympic
Committee, the prize received in the sports competition shall be subject to
income tax. Donors – exempt from donor’s tax
 13th month pay- 1/12 if the basic salary within a calendar year, excluded in the
computation of fringe benefits.
 The gross benefits received by officials and ees of public and private entities in
the form of 13th month pay and other benefits are excluded from the gross
income for income tax purposes to the extent of P30,000. Any excess will be
included in the gross income per income tax return as part of gross
compensation income.
 The amount of de minimis benefits given to ees shall also be excluded from the
gross income

 The ff shall be considered as de minimis benefits
1. Monetized unused vacation leave credits or private ees not exceeding 10
days during the year
2. Monetized unused leave credits of government officials and ees during the
year
3. Medical cash allowance to dependents of ees not exceeding P750 per ee per
semester or P125 per month
4. Rice subsidy of P1,500 or 1 sack of 50-kg. rice per month amounting to not
more than P1,500
5. Uniform and clothing allowance not exceeding P5,000
6. Actual yearly benefits not exceeding P10,000 per annum
7. Laundry allowance not exceeding P300 per month
8. Ees achievement awards which must be in the form of a tangible personal
property other than cash or gift certificate, with an annual monetary value
not exceeding P10,000 received by the ee under an established written plan
9. Gifts given during Christmas and major anniversary celebrations not
exceeding P5,000 per ee per annum
10. Daily meal allowance for overtime work not exceeding 25% of the basic
minimum wage
 De minimis benefits are actually fringe benefits which are not taxable. They
need not be reported in the preparation of income tax return because they are
exempt.
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 These benefits shall constitute a deductible expense upon the er.
 GSIS, SSS, Medicare and Pag-ibig contributions – exempt from tax
 Gains realized from the sale or exchange or retirement of bonds, debentures or
other certificate of indebtedness with a maturity of more than 5 years shall be
excluded from gross income
 Gains realized by an investor upon redemption of shares of stock in a mutual
fund company shall be excluded from the gross income.
SPECIAL TREATMENT OF FRINGE BENEFITS
 Fringe benefits – any goods, services, or other benefit furnished and granted in
cash or in kind by an er to an ee, except rank and file ee
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel
5. Interest on loan at less than market rate to the extent the difference
between the market rate and actual rate granted
6. Membership fees, dues and other expenses borne by the er for the ee in
social and athletic clubs or other similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses

9. Educational assistance to the ee or his dependents
10. Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows.
 The tax imposed on the fringe benefits received by managerial or supervisory
ees shall be treated as a final income tax on the ee, but shall be withheld and
paid by the er on a calendar quarterly basis.
 It is the er who is legally required to pay the fringe benefits tax.
 If the tax is not paid, the legal recourse of the BIR is to go against the er
 Convenience of the er Rule. A final withholding tax of 32% is imposed on the
grossed-up monetary value of fringe benefit furnished, granted and paid by the
er to the ee, except when:
1. The fringe benefit is required by the nature of or necessary to the trade,
business or profession of the er
2. When the fringe benefit is for the convenience or advantage of the er.
 The grossed-up monetary value of fringe benefit shall be determined by dividing
the monetary value of the fringe benefit by 68%.
 The grossed-monetary value of the fringe benefit represents the whole amount
of income realized by the ee which includes the net amount of money or net
monetary value of property which has been received plus the amount of the
fringe benefit tax thereon.
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 Managerial ee – one who is vested with powers or prerogatives to lay down and
execute management policies and/or to hire, transfer, suspend, lay-off, recall,
discharge, assign, discipline ees.
 Supervisory – those whom in the interest of the er, effectively recommend such
managerial actions if the exercise of such authority is not merely routinary or
clerical in nature but requires the use of independent judgment.
 Rank-and-file ees – who are holding nether managerial nor supervisory position.
 Taxation of fringe benefits granted to nonresident alien individuals
1. Not engaged in trade or business in the Philippines, 25% of the grossed up
monetary value of the fringe benefit. The tax base shall be computed by
dividing the monetary value of the fringe benefit to 75%.
2. Fringe benefit tax of 15% shall be imposed upon the grossed-up monetary
value of the fringe benefit of the ff alien individuals. The tax base shall be
computed by dividing the monetary value of the fringe benefit be 85%.
a. Alien individual employed by RHQ and ROHQ, including any of its Filipino
ees occupying the same positions
b. Alien individual employed by OBU, including any of its Filipino ees
occupying the same positions
c. Alien individual employed by a contractor or subcontractor engaged in
petroleum operations in the Philippines, including any of its Filipino ees
occupying the same positions
 In general, the computation of the fringe benefits tax would entail:
1. Valuation of the benefit granted

2. Determination of the proportion or percentage of the benefit which is
subject to the fringe benefit tax.
 Fringe benefits which are required by the nature of, or necessary to the trade,
business or profession of the er, or when the fringe benefit is for the
convenience or advantage of the er – not subject to the FBT.
 Unless otherwise provided in the Regulations, the valuation of fringe benefits
shall be as follows:
1. If the fringe benefit is granted in money, or is directly aid for by the er, then
the value is the amount granted or paid for
2. If the fringe benefit is granted or furnished by the eer in property other than
money and ownership is transferred to the ee, then the value of the fringe
benefit shall be equal to fair market value of the property
3. If the fringe benefit is granted or furnished by the er in property other than
money but ownership is not transferred to the ee, the value of the fringe
benefit is equal to the depreciation value of the property
Guidelines for valuation
Housing Privilege
1. If the er leases a residential property for the use of his ee and the said property
is the usual place of residence of the ee, the value of the benefit shall be the
rental paid thereon to the er. The monetary value of the fringe benefit shall be
50% of the value of the benefit
2. If the er owns a residential property and the same is assigned for the use of his
ee as his usual place of residence, the annual value of the benefit shall be 5% of
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the market value of the land and improvement, as declared in the Real property
tax declaration form, or zonal value as determined by the Commissioner,
whichever is higher. The monetary value of the fringe benefit shall be 50% of
the value of the benefit
3. If the er purchases a residential property on installment basis and allows the ee
to use the same as his usual place of residence, the annual value of the benefit
shall be 5% of the acquisition cost, exclusive of interest. The monetary value of
the fringe benefit shall be 50% of the value of the benefit
4. If the employer purchases a residential property and transfers the ownership to
the ee, the value of the benefit shall be the er’s acquisition cost or zonal value,
whichever is higher. The monetary value of the fringe benefit shall be the entire
value of the benefit.
5. If the er purchases a residential property and transfers ownership thereon to his
ee for the latter’s residential use, at a price less than the er’s acquisition cost,
the value of the benefit shall be the difference between the fair market value
and the cost of the ee. The monetary value of fringe benefit shall be the entire
value of the benefit.
6. Housing privilege of the AFP shall not be treated as taxable fringe benefit. The
state shall provide its soldiers with necessary quarters which are within or
accessible from the military camp.
7. A housing unit which is situated inside or adjacent to the premises of a business
or factory shall not be considered as a taxable fringe benefit. Must be located
within the maximum 50 meters from the perimeter of the business premises.
8. Temporary housing for an ee who stays for 3 months shall not be considered as
taxable fringe benefit.

Expense Account
1. In general, expenses incurred by the ee but which are paid by the er are
taxable fringe benefits, except when the expenditures do not partake the
nature of a personal expense attributable to the ee
2. Expenses paid for by the ee but reimbursed by his er shall be treated as
taxable income except only when the expenditures do not partake the
nature of a personal expense attributable to the said ee
3. Personal expenses of the ee paid for or reimbursed by the er to the ee shall
be treated as taxable fringe benefits of the ee WON the same are duly
receipted for and in the name of the er
4. Representation and transportation allowances which are fixed in amounts
and are regularly received by the ees as part of their monthly compensation
income shall not be treated as taxable fringe benefits – but subject to
income tax
Motor Vehicle of Any Kind
1. If the er purchases the motor vehicle in the name of the ee, the value of the
benefit is the acquisition cost thereof. The monetary value of the fringe benefit
shall be the entire value of the benefit.
2. If the er provided the ee with cash for the purchase of the vehicle, the
ownership of which is placed in the name of the ee, the value of the benefit
shall be the amount of cash received by the ee. The monetary value of the
fringe benefit shall be the entire value of the benefit, unless the same is
subjected to a withholding tax as compensation income.
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3. If the er purchases the car on installment basis, the ownership of which is laced
in the name of the ee, the value of the benefit shall be the acquisition cost
exclusive of interest, divided by 5 years. The monetary value of the fringe
benefit shall be the entire value of the benefit.
4. If the er shoulders a portion of the amount of the purchase price of a motor
vehicle, the ownership of which is placed in the name of the ee, the value of the
benefit shall be the amount shouldered by the er. The monetary value of the
fringe benefit shall be the entire value of the benefit.
5. If the er owns and maintains a fleet of motor vehicles for the use of the business
and the ees, the value of the benefit shall be the acquisition cost of all the
motor vehicles not normally used for sales, freight, delivery service and other
non personal use divided by 5 years. The monetary value of the fringe benefit
shall be 50% of the value of benefit.
6. If the er leases and maintains a fleet of motor vehicles for the use of the
business and the ees, the value of the benefit shall be the amount of rental
payments for motor vehicles not normally used for sales, freight, delivery
services and other non-personal use. The monetary value of the fringe benefit
shall be 50% of the value of benefit.
7. The use of aircraft owned and maintained by the er shall be treated as business
use and not subject to fringe benefit
8. The use of yacht whether owned or maintained or leased by the er shall be
treated as taxable fringe benefit. The value of the benefit shall be measured
based on the depreciation of the yacht at an estimated useful lifetime of 20
years.

Household Expenses
 Such as salaries of help, personal driver, or other similar personal expenses shall
be treated as taxable fringe benefit.
Interest on Loan at Less Than Market Value
 If the er lends money to his ee free of interest or at a rate lower than 12%, such
interest foregone by the er or the difference of the interest assumed by the ee
and the rate of 12% shall be treated as taxable fringe benefit
 12% applies to installment payments or loans with interest rate lower than 12%
starting Jan. 1, 1998
Membership Fees, Dues, and Other Expenses Borne by the ER for his manager or
Supervisor in Social and Athletic Clubs of Other Similar Organizations
 Shall be treated as taxable fringe benefits in full.
 Assignment – not subject to income tax.
Expenses for Foreign Travel
1. Reasonable business expenses which are paid for by the er for the purpose of
attending business meetings or conventions shall not be treated as taxable
fringe benefits. Inland travel expenses amounting to an average of US$300 or
less er day, shall not be subject to a FBT. The cost of economy or business class
airplane ticket shall not be subject to FBT. However 30% of the cost of first class
airplane ticket shall be subject to a FBT.
2. No documentary evidence showing that the travel is for business meetings, the
entire cost of the ticket, including cost of hotel accommodations and other
expenses incidental thereto shall be treated as taxable fringe benefits.
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3. Traveling expenses which are paid by the er for the travel of the family
members of the ee shall be treated a taxable fringe benefits of the ee.
Holiday and Vacation Expenses
 Taxable fringe benefits
Educational assistance to the ee or his dependents
a. GR. taxable fringe benefit. However, a scholarship grant to the ee by the er shall
not be treated as taxable fringe benefit if the education or study involved is
directly connected with the er’s trade, business or profession, and there is a
written contract between them that the ee is under obligation to remain in the
employ of the er for the period of time that they have mutually agreed.
b. Extended to the ee’s dependents – taxable fringe benefits, unless the assistance
is provided thru a competitive scheme under the scholarship program of the
company.
Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows
 GR. taxable fringe benefit. XPN
1. Contributions of the er for the benefit of the ee, pursuant to the SS, GSIS or
similar contributions
2. The cost of premiums borne by the er for the group of his ees

STOCK OPTION
 Any income or gain derived from stock option plans granted to managerial and
supervisory ees which qualify as fringe benefits is subject to FBT.
 The additional compensation or the taxable fringe benefit, as the case may be,
is the difference of the book value/fair market value of the shares, whichever is
higher, at the time of exercise of the stock option and the price fixed on the
grant date.
 The option has value only if, at the time of the exercise, the stock is worth more
than the price fixed on the grant date.
 If the income or gain is derived from the exercise of stock option is derived by
the rank-and-file ees, the same is considered as additional compensation
subject to income tax.
 FBT shall not be imposed on the ff fringe benefits:
1. Those authorized and exempted from income tax under this code or under
any special law
2. Contributions of the er for the benefit of the ee to retirement, insurance and
hospitalization benefit plans
3. Benefits given to the rank and file
4. De minimis benefits
5. If the grant of fringe benefits to the ee is required by the nature of, or
necessary to the trade, business or profession of the er
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6. If the grant of the fringe benefit is for the convenience of the er.
 If the fringe benefit is exempted from the FBT, the same may still form part of
the ee’s gross compensation income.
 As a general rule, the amount of taxable fringe benefit and the FBT shall
constitute allowable deductions from gross income of the er. However, if the
basis of computation of the FBT is the depreciation value, the zonal value or the
fair market value, only the actual fringe benefits tax paid shall constitute a
deductible expense for the er.
 If the zonal value or fair market value of the property is greater than its cost
subject to depreciation, the excess amount shall be allowed as a deduction from
the er’s gross income as fringe benefit expense.
 The test of supervisory or managerial status depends on whether a person
possesses authority to act in the interest of his er and whether such authority is
not merely routinary or clerical in nature, but requires the use of independent
judgment.
 Elements of managerial ee
1. His primary duty consists of performance of work directly related to
management policies
2. He customarily and regularly exercises discretion and independent judgment
in the performance of his function
3. He regularly and firectly assist in the management of the establishment
4. He does not devote 20% of his time to work other than those above
prescribed.
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ALLOWABLE DEDUCTIONS
 Means the items enumerated in Section 34, including special deductions
allowed to insurance companies under Section 37; Provided, that in case of an
individual and a corporation entitled to claim the Optional Standard Deduction,
under Section 34 (L), in lieu of the deductions enumerated under Section 34(A)
to (J), the term allowable deductions shall mean the aforesaid OSD.
 In case of individuals, deduction of premium payments on health and/or
hospitalization insurance may be allowed, if applicable.
1. Taxpayers earning compensation income arising from personal services
rendered under the er-ee relationship (except for the deduction on premium
payments on HHI)
2. Nonresident alien individuals not engage in trade or business within the
Philippines
3. Alien individual employed by RHQs or ROHQs of Multinational Companies
4. Alien individuals employed by OBUs
5. Alien individuals employed by petroleum service contractors and subcontractors

6. International carriers
Taxpayers allowed to claim the allowable deductions

1. Individual resident and nonresident citizens 7. OBUs

2. Individual resident aliens 8. Branches of foreign corporations on the profits remitted to their head offices

9. RHQs
3. Nonresident alien individual engaged in trade or business within the Philippines

4. GPP and partners thereof 10. ROHQs

11. Nonresident foreign corporations

5. Domestic corporations, including proprietary educational institutions and
hospitals; and GOCC, agencies or instrumentalities

6. Resident foreign corporations

Taxpayers not allowed to claim the allowable deductions

 Income taxes of these taxpayers are subject to final withholding taxes based on
the gross income except for RHQs which is exempt from income tax
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Deductions and exemptions allowed to taxpayers must prove by convincing evidence that he is entitled to the deductions
claimed.
Type of Taxpayer Allowable Deduction

Individuals earning pure 1. Personal and

compensation income Additional General rules for the deductibility of certain transactions from gross income
(except nonresident exemptions;
aliens not engaged in 1. Deductions must be paid or incurred in connection with the taxpayer’s trade,
trade or business in the 2. Premium business or exercise of profession
Philippines) payments on HHI,
if applicable 2. Deductions must be paid or incurred during the taxable year

3. Deductions must be supported by adequate receipts or invoices

Individuals deriving 1. Personal and
income from trade or additional 4. Deductible expenses must have been subjected to withholding tax
business, or exercise of exemptions
profession
2. Premium
payments on HHI, Return of capital which may be deducted from the gross sales or gross revenue
if applicable
 Income tax is levied only on income, hence, the amount representing return of
3. Itemized capital should be deducted from proceeds from sales and should not be subject
deductions or OSD to income tax.

Corporations (except Itemized deductions or  Return of capital are in the form of coast of sales or cost of service paid or
nonresident foreign OSD incurred by the taxpayer in the conduct of his business or exercise of profession.
corporation)
 Cost of goods purchased for resale, with proper adjustment for opening and
closing inventories, are deducted from gross sales in computing gross income

Deductions from Gross income, how construed
 Since a deduction for income tax purposes partakes of the nature of a tax
exemption, then it must also be strictly construed against the taxpayer, who
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 In sale of goods representing inventory, the amount received by the seller
consists of return of capital and gain from sale of goods or properties. Return of
capital is not subject to income tax.
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 Real estate dealers and dealers in securities are ordinarily not allowed to Business expenses that may be deducted from gross income
compute the amount representing return of capital thru cost of sales. Rather,
they are required to deduct the total cost specifically identifiable to the real  Include the ordinary and necessary expenditures directly connected with or
property or shares of stock sold and exchanged. pertaining to the taxpayer’s trade or business, should be deducted from the
gross income in the year incurred.
 In the sale of services, the portion of the cost of services representing the return
of capital is not subject to income tax.  The cost of goods purchased for resale, with proper adjustment for opening and
closing inventories, is deducted from gross sales in computing the gross income.
* Incentives to lawyers – a lawyer or GPPs rendering free legal services shall be entitled
to an allowable deduction from the gross income, the amount that could have been  Among the items included in the business expenses are:
collected for the actual free legal services rendered or up to 10% of the gross income 1. Salaries, wages, compensation for services rendered; pensions,
derived from the actual performance of the legal profession, whichever is lower; compensation for injuries; commissions
Provided, that the actual free legal services herein contemplated shall be exclusive of
the minimum 60-hour mandatory legal aid services rendered to indigent litigants. 2. Benefits of ees, including de minimis benefits and the grossed-up monetary
value of fringe benefits subject to FBT

3. Traveling expenses while away from home solely in the pursuit of a trade or
Business expense vis-à-vis capital expense business
 Business expense – expenditures related to the conduct of the business of the 4. Rentals for the use of business property
taxpayer and deductible in the year incurred
5. Entertainment, amusement and recreation expenses
 Capital expenses – expenditures that improve or add to the value of the
property or equipment of the business. They are not immediately deductible 6. Incidental repairs
but may be deducted overtime in the form of allowance for depreciation.
7. Cost of materials and supplies

8. Advertising expense and other selling expenses

9. Professional services

10. Insurance premiums against fire, storm, theft, accident or other similar
losses in the case of a business
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11. Equipment used in the trade or business 10. Other necessary expenses incurred in the practice of profession

12. Organizational and operating expenses

13. Management expenses Requisites for the deductibility of business and professional expenses

14. Training expenses 1. Expenses must be ordinary and necessary

15. Other necessary expenses incurred in carrying on the business 2. Must be aid or incurred during the taxable year

3. Must be paid or incurred in carrying on the trade or business, or the exercise of

Professional Expenses
 A professional may claim as deduction from gross income the following:
1. The cost of supplies used by him in the practice of his profession
2. Expenses aid in the operation and repair of transportation equipment used
in making professional calls
profession by the taxpayer, or attributable to the development, management or
operation of the trade, business or profession
4. Amount must be reasonable
5. Must be substantiated by sales invoice or official receipts, records or other
pertinent documents showing the amount of expenses and the direct
connection to the business

3. Dues to professional societies 6. If subject to withholding tax, the same should be properly withheld and
remitted to the BIR
4. Subscriptions to professional journals
7. Must be legitimately paid
5. Rent paid for office rooms

6. Fuel, light, water, telephone expenses used in offices

Meaning of ordinary and necessary expenses
7. Salaries or office assistants
 Ordinary – not lavish, extravagant or excessive under the circumstances
8. Amounts currently expended for books, furniture and professional
instruments and equipment, the useful life of which is short  A business expense is ordinary when it connotes payment which is normal in
relation to the business of the taxpayer and the surrounding circumstances. It
9. Training expenses does not require that the payments be habitual or normal in the sense that the
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same taxpayer will have to make them often; the payment may be unique on
non-recurring to the particular taxpayer.
 Necessary – where the expenditure is appropriate and helpful in the
development of the taxpayer’s business. – day to day expense
 Whether an ordinary and necessary expense is deductible expense must be
determined from the nature of expenditure itself, which in turn depends on the
extent and permanency of the work accomplished by the expenditure.
Meaning of paid or incurred during the taxable year
 The deduction shall be taken for the taxable year in which paid or accrued or
paid or incurred depending upon the accounting method in which taxable
income is computed.
 Under the accrual method of accounting, expenses not claimed as deduction in
the current year when they are incurred cannot be claimed as deduction from
income from the succeeding year.
 The amount of liability does not have to be determined exactly; it must be
determined with reasonable accuracy, which implies something less than exact
or completely accurate amount.
 The propriety of an accrual must be judged by the facts that a taxpayer knew, or
could reasonably be expected to have known, at the closing of its books for the
taxable year.
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SALARIES AND OTHER FORMS OF COMPENSATION FOR PERSONAL SERVICES
ACTUALLY RENDERED
 Must be reasonable allowance for salaries or other compensation for personal
services actually rendered.
 Must be payments purely for service
 This test and its practical application may be further stated and illustrated as
follows
1. Any amount in the form of compensation, but not in fact as the purchase
price of service, is not deductible.
2. The form or method of fixing compensation is not decisive as to
deductibility. If contingent compensation is paid pursuant to a free bargain
between the er and the individual made before the services are rendered,
not influenced by any consideration on the part of the er other than that of
securing on fair and advantageous terms the service of the individual, it
should be allowed as a deduction even though in the actual working out of
the contract may prove to be greater than the amount which would
ordinarily be paid.
3. In any event the allowance for compensation paid may not exceed what is
reasonable under the circumstances. It is generally just to assume that
reasonable and true compensation is only such amount as would be paid for
like services by like enterprises in like circumstances. The circumstances to
be taken into consideration are those existing at the date when the contract
of services was made.

Treatment of excessive compensation
 In case of excessive payments by corporations, if such payments correspond or
bear a close relationship to stockholdings, and are found to be distribution of
earnings or profits, the excessive payments will be treated as dividends
 If such payments constitute payments for property, they should be treated by
the payer as a capital expenditure and by the recipient as part of the purchase
price.
Bonuses to ees
 A bonus is an amount granted and paid ex gratia to the ees, it is an amount
granted and paid to an ee for his industry and loyalty which contributed to the
success of the er’s business and made possible the realization of profits.
 It is not demandable and enforceable obligation, unless made a part of the
wage or salary, or is embodied in a CBA
 Constitute allowable deductions from gross income when such payments are
made in good faith and as additional compensation for the services rendered to
ees, provided such payments, when added to the stipulated salaries, do not
exceed a reasonable compensation for the services rendered.
 Donations made to ees and others which do not have in them the element of
compensation or are in excess of reasonable compensation for services, are not
deductible from gross income.
 Reasonable amount only is deductible.
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 Giving an extra bonus at the time when the company has declared a net
operating loss is not a payment in good faith and not normal to the business,
hence unreasonable and would not qualify as ordinary and necessary expense.
Pensions; Compensation for injuries
 Proper deductions as ordinary and necessary expenses
 Such deductions are limited to the amount not compensated for by insurance
companies.
FRINGE BENEFITS EXPENSE
 The company can deduct the amount of the grossed-u monetary value of the
fringe benefit given to the managers or supervisors as fringe benefit expense
provided that the said fringe benefits had been subjected to FWT on the fringe
benefits.
TRAVELLING/TRANSPORTATION EXPENSES
 If the trip is undertaken for other than business purposes, the transportation
expenses are personal expenses, and the meals and lodging are living expenses,
and therefore not deductible.
 If the trip is solely on business, the reasonable and necessary travelling
expenses, including transportation expenses, meals and lodging, become
business expenses instead of personal expenses.
a. If an individual, whose business requires him to travel, receives a salary as
full compensation for his services without reimbursement for travelling
expenses, or is employed on a commission basis with no expense allowance,

his travelling expenses, including the entire amount expended for meals and
lodging, are deductible from gross income.
b. If an individual receives as salary and is also repaid his actual travelling
expenses, he shall include in the gross income, the amount so repaid and
may deduct such expenses.
c. If the individual receives a salary and also an allowance for meals and
lodging, the amount of the allowance should be included in gross income
and the cost of such meals and lodging may be deducted therefrom.
 A payment for the use of a sample room in a hotel for the display of foods is a
business expense. Only such expenses as are reasonable and necessary in the
conduct of the business and directly attributable to it may be deducted. He
must attach to his return a statement showing:
1. The nature of the business in which he is engaged
2. The number of days away from home during the taxable year on account of
business
3. The total amount of expenses incident to meals and lodging while absent
from home in the pursuit of business during the taxable year
4. The total amount of other expenses incident to travel and claimed as a
deduction
 Claims for deductions referred to herein must be substantiated by records
showing in detail the amount and nature of the expenses incurred.
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Proof of deductibility for travel expenses when claimed by passengers, as well as
freight charges incurred on transport of cargoes by airline companies
 For purposes of validating the deductions claimed, the passenger coupon of the
plane ticket/airway bill which reflects the CAB rate shall not be used as the basis
for the claim of expenses.
 The amount of expenses to be claimed shall be the actual cost incurred for the
purchase of the plane ticket/airway bill which is the net amount of the ticket
fare/airway bill after deducting the corresponding fare/freight adjustments.
 In case of plane tickets, if said tickets are purchased from travel agents, travel
expenses as claimed by the passengers shall be validated on the basis of the
sales invoice/official receipt issued by the travel agent representing the actual
cost of the ticket and the reasonable margin added by the travel agent as
payment for the services.
Essential Requisites of traveling/transportation expense
1. Expense must be reasonable and necessary
2. It must be paid or incurred while away from home
 While away from home means away from the location of the ee’s official
place of employment regardless of where the family residence is
maintained, like business trips
3. It must be paid or incurred in the conduct of trade or business or exercise of
profession

RENTAL EXPENSE
Rental and/or payments for use or possession of property
 Requisites
1. Rental must be ordinary and necessary
2. It must have been paid or incurred during the taxable year
 On the accrual basis, rent is deductible as expense when liability is
incurred during the period of use. On cash basis, rent is deductible when
incurred and paid. An advance payment is not deductible expense of the
lessee until the period is used, although the lessor may be required to
report the amount when received.
3. It must be paid or incurred in carrying trade or business of the taxpayer or
practice of profession.
4. It must be supported by official receipts, records or other pertinent papers
5. It is required as a condition for the continued use or possession of the
property being leased
6. The taxpayer has not taken or is not taking title to the property or has no
equity other than that of a lessee, user, or possessor
7. Rentals should be subject to the expanded withholding tax of 5% of the
rental charge, net of vat, if any.
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Expenses under lease agreements
 Where a leasehold is acquired for business purposes for a specified sum, the
purchaser may take as a deduction in his return an aliquot part of such sum
each year, based on the number of years the lease has to run.
 Taxes paid by a tenant to or for a landlord for business property are additional
rent and constitute a deductible item to the tenant and taxable income to the
landlord, the amount of the tax deductible by the latter.
 The cost borne by a lessee in erecting buildings or making permanent
improvement on ground of which he is a lessee is held to be a capital
investment and not deductible as a business expense. In order to return to such
taxpayer his investment of capital, an annual deduction may be made from
gross income of an amount equal to the cost of such improvements divided by
the number of years remaining of the term of lease, and such deduction shall be
in lieu of a deduction for depreciation if the remainder of the term of lease is
greater than the probable life of the building erected, or of the improvement
made, and this deduction shall take the form of an allowance for depreciation.
ENTERTAINMENT, AMUSEMENT AND REPRESENTATION EXPENSES
 Representation expenses – refer to the expenses incurred by a taxpayer in
connection with the conduct of his trade, business or exercise of a profession, in
entertaining, providing amusement and recreation to, or meeting with, a
guest/s at a dining place, place of amusement, country club, theater, concert,
play, sporting event, and similar events or places.

 Shall not refer to fixed representation allowances that are subject to
withholding tax on wages pursuant to an er-ee relationship
 Entertainment facilities – shall refer to:
1. A yacht, vacation home or condominium; and
2. A similar item of real or personal property used by the taxpayer primarily for
the entertainment, amusement, or recreation of guests or ees.
 To be considered entertainment facility, the aforementioned must
be owned or form part of the taxpayer’s trade, business or
profession, or rented by such taxpayer, for which the taxpayer claims
a depreciation or rental expense.
 A yacht shall be considered an entertainment facility if its use is in
fact not restricted to specified officers or ees or positions in such a
manner as to make the same a fringe benefit for purposes of
imposing the FBT.
 The term guests mean persons or entities with which the taxpayer
has direct business relations. It does not include ees, officers,
partners, directors, stockholders, or trustees of the taxpayer.
 In the case particularly of a country, golf, sports club, or any other similar club
where the ee or officer of the taxpayer is the registered member and the
expenses thereto are paid for by the taxpayer, there shall be a presumption
that such expenses are fringe benefits unless the taxpayer can prove that these
are actually representation expenses. For purposes of proving that said expense
is representation, the taxpayer should maintain receipts and adequate records
that indicate the:
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1. Amount of expense
2. Date and place of expense
3. Purpose of expense
4. Professional or business relationship of expense
5. Name of person or company entertained with contact details
Requisites of deductibility of entertainment, amusement and recreation expenses
1. It must be paid or incurred during the taxable year
2. The amount must be reasonable
3. It must be:
a. Directly connected to the development, management and operation of the
trade, business or profession of the taxpayer; or
b. Directly related to or in furtherance of the conduct of his or its trade,
business or exercise of a profession
4. It must not contrary to law, morals, good customs, public policy or public order
5. It must not have been paid, directly or indirectly, to an official or ee of the
national government, or any local government unit, or of any GOCC, or of a
foreign government, or to a private individual, or corporation, or GPP, or a
similar entity, if it constitutes a bribe, kickback, or other similar payment

6. It must not exceed the ceiling of .50% of net sales for sellers of goods or
properties or 1% of net revenues for sellers of services
7. It must be duly substantiated by adequate proof
8. The appropriate amount of withholding tax, if applicable, should have been
withheld therefrom and paid to by the BIR.
Ceiling on entertainment, amusement, and recreation expense
 There shall be allowed a deduction from gross income for entertainment,
amusement and recreation expense in an amount equivalent to the actual
entertainment, amusement and recreation expense paid or incurred within the
taxable year by the taxpayer, but in no case shall such deduction exceed .50% of
net sales for taxpayers engaged in sale or goods or properties; or 1% of net
revenue if taxpayer is engaged in sale of services, including exercise of
profession and use or lease of properties.
 If the taxpayer is deriving income from both sale of goods/properties and
services, the allowable entertainment, amusement and recreation expense shall
in all cases be determined based on an apportionment formula taking into
consideration the percentage of the net sales/net revenue to the total net
sales/net revenue, but which in no case shall exceed the maximum percentage
ceiling.
 Apportionment formula: net sales/net revenue over total net sales and net
revenue time actual expense
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 Notwithstanding the ceiling imposed on such expense, the claimed expenses
shall be subject to verification and audit for purposes of determining its
deductibility as well as compliance with the substantiation requirements.
 It after the verification, a taxpayer is found to have shifted the amount of the
entertainment, amusement and recreation expense to any other expense in
order to avoid being subjected to the ceiling, the amount shifted shall be
disallows in its totality, without prejudice to such penalties under the tax code.
Excluded from the entertainment, amusement, and recreation expenses
1. Expenses which are treated as compensation or fringe benefits for services
rendered under an er-ee relationship
2. Expenses for charitable or fund raising events
3. Expenses for bona fide business meeting of stockholders, partners or directors
4. Expenses for attending or sponsoring an ee to a business league or professional
organization meeting
5. Expenses for events organized for promotion, marketing and advertising
including concerts, conferences, seminars, workshops, conventions, and other
similar events; and
6. Other expenses of a similar nature
 Not exhaustive

Reporting requirements
 The taxpayer is required to use in its financial statements and income tax return
the account title entertainment, amusement and recreation expense, or in the
alternative, to disclose in the notes to financial statements the amount
corresponding thereto when recording expenses paid or incurred in the nature
of the expense.
 Such expense should be reported in the taxpayer’s income tax return as a
separate expense item.
MINOR OR ORDINARY REPAIRS AND MAINTENANCE
Incidental, minor or ordinary repairs and maintenance
 The cost of incidental repairs which neither materially add to the value of the
property nor appreciably prolong its life, but keep it in an ordinarily efficient
operating condition may be deducted as expenses, provided the plant and
property account is not increased by the amount of such expenditure.
 MAJOR OR EXTRAORDINARY REPAIRS – Repairs in the nature of replacement, to
the extent that they arrest deterioration and appreciably prolong the life of the
property or increase its value are capital expenditures and should be
charged/debited against the depreciation reserves if such account is kept.
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COSTS OF MATERIALS AND SUPPLIES
 Taxpayers carrying materials and supplies on hand should include in expenses
the charges for materials and supplies only to the amount that they are actually
consumed and used in operation during the year for which the return is made,
provided that the cost of such has not been deducted in determining the net
income for any previous year.
 If a taxpayer carries incidental materials and supplies on hand and for which no
record of consumption is kept or of which physical inventories at the beginning
and end of the year are not taken, it will be permissible for the taxpayer to
include in his expenses and deduct from gross income the total cost of such
supplies and materials as were purchased during the year for which the return is
made, provided the taxable income is clearly reflected by this method.
 If the materials and supplies are used directly or indirectly in the production of
the product, the related cost shall form part of the cost of the product and will
be deductible as such when the products are sold.
ADVERTISING AND OTHER SELLING EXPENSES
 A taxpayer is entitled to deduct the necessary expenses aid in carrying on his
business from his gross income from whatever sources.
 Advertising includes the use of spoken or written word in printed matter,
movies, radio and television acquaint the public with the taxpayer’s
merchandise or services.
 Two kinds of advertising

1. To stimulate the current sales of merchandise or use of services
2. Designed to stimulate the future sale of merchandize or use of services
 If the expenditures are for the first kind, then except as to the question of the
reasonableness of amount, there is no doubt that such expenditures are
deductible as business expenses.
 If the expenditures are for the second kind, then normally there should be
spread out over a reasonable period of time.
 Advertising expense duly covered by a VAT invoice is a legitimate business
expense.
PROFESSIONAL SERVICES
 Hiring the services of professionals shall be considered deductible expense
subject to the condition that the same shall be subject to the EWT, except only
if the professional is a member/partner of a GPP.
TRAINING EXPENSE
 Incurred during the taxable year for training ees of the office shall be considered
as ordinary and necessary deductible expense.
MANAGEMENT EXPENSES
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OTHER NECESSARY BUSINESS EXPENSES
CAPITAL EXPENDITURES
 Non-deductible during the taxable year but can be amortized
1. Equipment needed in trade or business
2. Organizational and pre-operating expenses
 Organizational and pre-operating expenses of a corporation are
considered capital expenditures and are therefore, not deductible in the
year they are paid or incurred
 But taxpayers who incur these expenses and subsequently enter the
trade and business to which the expenditures relate can elect to
amortize these expenditures over a period of not less than 60 months. –
Does not apply to a situation where an existing corporation incurs such
for the purpose of expanding its business in a new line of trade, venture
or activity.
 Organizational expenses are amortized across the life of the firm. Where
no such life exists or is determined, the amortization period is 5 years.
Under the Investment Incentives Act, such expenses are amortized by a
registered enterprise for a period of not more than 10 years.

Substantiation requirement
 No expenses shall be allowed as deduction from gross income unless the
taxpayer shall substantiate with sufficient evidence, such as official receipts or
other adequate records:
1. The amount of the expense being deducted
2. The direct connection or relation of the expense being deducted to the
development, management, operation and/or conduct of the trade,
business or profession of the taxpayer.
Bribery or kickback not allowed as deduction
 To a government official in order to facilitate the processing of a transaction
from a government office
 However, on the part of the subject approving official, who received the bribe,
the said amount would constitute as a taxable income because all income from
legal or illegal sources whatsoever are taxable.
Insurance premium on the life of a government official not a deductible expense by a
private firm-payor
 Because it is not an ordinary and necessary business expense
 Paying premiums for the insurance of a person not connected with the company
is not normal, usual or customary.
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 It is also an illegal compensation made to a government ee.
 If the company is made the beneficiary, whether directly or indirectly, the
premium is not allowed as deduction from gross income.
Political campaign expenses and contributions to a candidate in an election not
allowed as deductible from gross income
 The contributor is not allowed to deduct his contributions because the said
expense is not directly attributable to the development, management,
operation and/or conduct of a trade, business or profession.
 If candidate is an incumbent government official or ee, it may even be
considered as a bribe or kickback.
EXPENSES ALLOWABLE TO PRIVATE EDUCTIONAL INSTITUTIONS
 In addition to the expenses allowable as deductions, a private educational
institution, may at its option, elect either:
1. To deduct expenditures otherwise considered as capital outlays of
depreciable assets incurred during the taxable year for the expansion of
school facilities, or
2. To deduct allowance for depreciation.

Interest Expense – refer to payment for the use or forbearance or detention of money,
regardless of the name it is called or denominated. It includes the amount paid for the
borrower’s use of money during the term of the loan, as well as for his detention of
money after the due date of its payment.
Rules on the deductibility of interest expense
Requisites for deductibility of interest expense
1. There must be an indebtedness
2. There should be an interest expense paid or incurred upon such indebtedness
during the taxable year
3. The indebtedness must be that of the taxpayer
4. The indebtedness must be connected with the taxpayer’s trade, business or
exercise of profession
5. The interest must be stipulated in writing
6. The interest must be legally due
7. The interest payment arrangement must not be between related taxpayers
8. The interest must not incurred to finance petroleum operations
9. In case of interest incurred to acquire property used in trade, business or
exercise of profession, the same was not treated as a capital expenditure
10. That the allowable deduction for interest expense shall be reduced to 33% of
the interest income subjected to the final tax
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11. The interest is not expressly disallowed by law to be deducted from gross
income of the taxpayer
 G.R. The amount of interest expense paid or incurred within a taxable year on
indebtedness in connection with the taxpayer’s trade, business or exercise of
profession shall be allowed as deduction from the taxpayer’s gross income
 Limitation. The amount of interest paid or incurred by a taxpayer in connection
with his trade, business or exercise of a profession from an existing shall be
reduced by an amount equal to 33% of the interest income earned which had
been subjected to the final tax.
 This limitation shall apply regardless of WON a tax arbitrage scheme was
entered into by the taxpayer or regardless of the date when the interest bearing
loan and the date when the interest bearing loan and the date when the
investment was made for as long as, during the taxable year, there is interest
expense incurred on one side and an interest income earned on the other side,
which income had been subjected to final withholding tax.
 Tax Arbitrage Scheme – a method of borrowing without entering into a
debtor/creditor relationship, often to resolve financing and exchange control
problems. In tax cases, back-to-back loan is used to take advantage of the lower
rate of tax on interest income and a higher rate of tax on interest expense
deduction.
 Interest on unpaid taxes. Shall be fully deductible from gross income and shall
not be diminished by the percentage of interest income earned which had been
subjected to FWT.

 A self-employed individual is allowed to deduct from his gross income the entire
Deductible interest expense
1. Interest on taxes, such as those paid for tax deficiency or tax delinquency,
provided that the tax is a deductible tax.
 Fines, penalties and surcharges on unpaid taxes are not deductible.
 On the other hand, even if the interest expense is paid in advance but the
 The interest on unpaid business tax is not subject to 33%.
2. Interest paid on the mortgage upon real property of which the corporation is
the equitable owner.
3. Interest payments made between related taxpayers. No interest expense shall
3. Interest on deposits paid by authorized banks of the BSP to depositors provided
that the tax on such interest had been withheld.
No interest expense shall be allowed as deduction from gross income in any of the
following cases:
1. Interest paid in advance thru discount or otherwise within the taxable year, an
individual taxpayer reporting income on the cash basis incurs an indebtedness
 Such interest shall be allowed as a deduction only in the year the indebtedness
is paid.
2. In the case of interest periodically amortized, if the indebtedness is payable in
periodic amortization, the amount of interest which corresponds to the amount
of the principal amortized or paid during the year shall be allowed as deduction
in such taxable year.
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amount of interest expense actually paid during the taxable year. However, if
the interest expense is paid in advance and the accounting method used is the
cash-basis accounting method, such interest expense paid in advance shall not
be allowed as deduction. However, it shall only be allowed as deduction in the
year when he has fully paid his liability.
indebtedness is payable in periodic amortization, the amount of interest
expense which corresponds to the amount of the principal amortized or paid
during the respective years.
be allowed as deductions if both the taxpayer and the person to whom the
payment has been made or is to be made are persons:
1. Between members of the family. (includes only his brothers and sisters,
spouse, ancestors, and lineal descendants
2. Between an individual and a corporation more that 50% in value of the
outstanding stock of which is owned, directly and indirectly, by or for such
individual
3. Between two corporations more than 50% in value of the outstanding stock
of each of which is owned, directly or indirectly, by or for the same
individual
4. Between the grantor and a fiduciary of any trust
5. Between the fiduciary of a trust and the fiduciary of another trust if the
same person is a grantor with respect to each trust

6. Between a fiduciary of a trust and a beneficiary of such trust.
4. Interest on indebtedness incurred to finance petroleum operations. No
interest expense shall be allowed as deductions if the indebtedness on which
the interest expense is paid is incurred to finance petroleum exploration in the
Philippines.
Other cases of non-deductible interest expense
1. Interest imposed on taxpayer as penalty for failure to pay donor’s tax on time
not deductible from gross income.
 Reason: not one that can be considered as having been incurred in connection
with the taxpayer’s trade, business or exercise of a profession. To allow the
deductibility of such interest would be to diminish the punitive and deterrent
effects of the imposition, and thus diminishing the importance of prompt
payment of taxes.
2. Deterred dividends on the preferred shares of stock cannot be claimed as
interests deductible from the gross income for income tax purposes
 Reason: preferred shares shall be considered capital regardless of the condition
under which such shares are issued. Dividends paid thereon are not considered
interest.
 So-called interest on preferred stock, which is in reality a dividend thereon,
cannot be deducted in computing tax on income.
 Interest on indebtedness incurred or continued to purchase bonds and other
securities, the interest upon which is exempt from tax, is also not deductible.
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3. Interest on Capital. Which does not represent a charged rising under an
interest-bearing obligation is not allowable deduction.
At the option of the taxpayer, the interest expense on a capital expenditure incurred
to acquire property used in trade, business or exercise of a profession may be
allowed as:
1. Outright deduction – a deduction in full in the year when incurred
2. Treated as a capital expenditure – for which the taxpayer may claim only as a
deduction the periodic amortization/depreciation of such expenditure.
 The taxpayer is not entitled to both the deduction from gross income and the
adjusted basis for determining gain or loss and the allowable depreciation
charge.
TAXES
 Means taxes proper and no deductions should be allowed for amounts
representing interest, surcharge, or penalties incident to delinquency.
 Postage is not a tax deductible from gross income but it may be deducted as
business expense.
 Taxes are deductible as such only by the person upon whom it is imposed.
 The taxes deductible are those levied for the general public welfare by the
proper taxing authorities at a like rate against all property in the territory over
which such authorities have jurisdiction.

 No deductions should be allowed for amounts representing interest, surcharge,
or penalties incident to delinquency in the payment of taxes.
Requisite for the deductibility of taxes
1. Taxes must be aid or incurred in connection with the taxpayer’s trade or
business or exercise of profession
2. Tax must be imposed by law directly on the taxpayers
3. Taxes must be paid or incurred during the taxable year
4. Taxes must be those allowed and not disallowed to be deducted from gross
income
5. Said taxes must be duly substantiated by official receipts
Taxes deductible from gross income
1. Indirect taxes payable to the BIR
2. Taxes payable to the Bureau of Customs
3. Local taxes payable to the LGU
4. Automobile registration fees for vehicles being used in business or practice of
profession are considered as taxes
5. Any other taxes of every name or nature aid directly to the Government of the
Philippines or to any political subdivision thereof.
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 When assessments are made for the purpose of maintenance or repair of local
benefits, the taxpayer may deduct assessments paid as an excuse incurred in
business, if the payment of such assessments is necessary to the conduct of his
business.
Non-deductible taxes
1. Philippine income Tax, except fringe benefit tax
2. Foreign income taxes imposed by authority of any foreign country, except when
a resident citizen, domestic corporation or estate signifies in his/its return
his/its desire to have the benefits of crediting against his taxes payable in the
Philippines the taxes he/it paid in foreign countries
3. Estate tax
4. Donor’s tax
5. Tax on sale, barter, exchange of shares of stock listed and traded thru the local
stock exchange or thru initial public offering
6. Taxes assessed against local benefits of a kind tending to increase the value of
the property assessed
7. Taxes not connected with the trade, business or exercise of profession of the
taxpayer
8. Energy tax on electric power consumption
9. FWTaxes on passive income, the same being in the nature of income tax.

Tax treatment of special assessment; when a tax is considered assessed against local
benefits tending to increase the value of the property assessed
 So called taxes, more properly special assessments, paid for local benefits, such
as street, sidewalk and other like improvements, imposed because of and
measured by some benefit inuring directly to the property against which the
assessment is levied, do not constitute an allowable deduction from gross
income.
 A tax is considered assessed against local benefits when the property subject to
the tax is limited to the property benefited.
 Not deductible even though an incidental benefit may inure to the public
welfare.
 What is deductible are those levied for the general public welfare by the proper
taxing authorities at a like rate against all property in the territory over which
such authorities have jurisdiction.
 When assessments are made for the purpose of maintenance or repair of local
benefits, the taxpayer may deduct assessments paid as an expense incurred in
business, if the payment of such assessments is necessary to the conduct of his
business.
 When the assessments are made for the purpose of constructing local benefits,
the payments by the taxpayer are in the nature of capital expenditures and are
not deductible.
 When assessments are made for the purpose of construction and maintenance
or repairs, the burden is on the taxpayer to show the allocation of the amounts
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assessed to the different purposes. If the allocation cannot be made, none of
the amounts so paid is deductible.
Tax benefit Rule
 GR. Recovery of amounts deducted in prior years would result to income.
 Where the deduction did not result in tax benefit, the subsequent recovery is
not taxable income.
 Applicable also to taxes previously deducted from gross income but which were
subsequently refunded or credited.
 The taxpayer is also required to report as taxable income the subsequent tax
refund or tax credit granted to the extent of the tax benefit the taxpayer
enjoyed when such taxes were previously claimed as deduction from income.
 Taxes paid which are not allowed as deduction from gross income are not
taxable even when refunded.
Limitations on deductions
 Nonresident alien individuals engaged in trade or business in the Philippines and
resident foreign corporations shall only be allowed to deduct taxes from gross
income if and to the extent that they are connected with their income from
sources within the Philippines.
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Persons entitled to credit against income tax payable in the Philippines for the taxes Taxable income from foreign country X Phil. Income
paid in foreign countries.
Taxable income from all sources tax payable
 If the taxpayer signifies in his return his desire to have benefits of crediting
against his taxes payable in the Philippines the taxes paid in foreign countries, (within and without the Phil)
he must demonstrate that he is entitled to tax credit, and the tax imposed shall 2. Worldwide limit. Applicable only when the taxpayer derives income from more
be credited with: than one foreign country. In order to determine the tax credit that may be
1. Citizen and domestic corporation, the amount of income taxes paid or incurred allowed, determine first the lower between the worldwide limit and the total
during the taxable year to any foreign country foreign income taxes paid. Then compare the result with the per country limit,
then the lower amount is the allowed tax credit.
2. Partnerships and estates. In case of a person who is a member of a G or a
beneficiary of an estate or trust, his proportionate share of such taxes of the GP TI from all foreign countries X Phil. Income tax
or the estate or trust paid or incurred during the taxable year to a foreign Taxable income from all sources payable
country, if his distributive share of the income of such partnership or trust is
reported for taxation. (within and without the Phil)

 XPN. An alien individual, resident or not, and a foreign corporation shall not be
allowed to credit against the taxes paid in the Philippines the taxes paid in
foreign countries because they are subject to Philippine income tax only on
income derived from sources within the Philippines.
Limitations on credit
 Tax credit refers to the taxpayer’s right to deduct from income tax payable in
the Philippines the foreign income tax he has paid subject to the following
limitations:
Adjustments on payment of incurred taxes
 In case credit has been given for taxes accrued, or a proportionate share
thereof, and the amount that is actually paid on account of such taxes, or a
proportionate share thereof, is not the same as the amount of such credit, or in
case any tax payment credited is refunded in whole or in art, the taxpayer shall
immediately notify the CIR.
 The CIR shall re-determine the amount paid for the year or years which such
incurred credit was granted.

1. Per country limit. The amount of credit allowed is the lower between per country  The amount of tax due to such redetermination shall be paid by the taxpayer
limit and the foreign income tax paid. upon notice and demand by the CIR.
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 If there was overpaid, it shall be credited or refunded to the taxpayer. 3. All other information necessary for the verification and computation of such
credits.
 In case of such a tax incurred but not paid, the CIR as a condition precedent to
the allowance of this credit may require the taxpayer to give a bond with
sureties satisfactory to and to be approved by the CIR, conditioned upon the
payment by the taxpayer of any amount of tax found due upon any such re- Information regarding taxes that should be included in the Notes to Financial
determination. Statements

Where credits for taxes may be taken
 The credit for taxes of the foreign country may ordinarily be taken either in the
return for the year in which the taxes accrued or in which the taxes were paid,
dependent upon whether the accounts of the taxpayer are kept and his return
filed upon the accrual basis or upon the cash receipts and disbursement basis.
 The taxpayer, at his option and irrespective of the method of accounting
employed in keeping his books, is allowed to take such credit for taxes as may
be allowable in the return for the year in which the taxes of the foreign country
accrued.
1. The amount of Vat output tax declared during the year and the account title and
amount/s upon which the same is based. If there are zero-rated sales/receipts
and/or exempt sales/receipts, a statement to that effect and the legal basis
therefor;
2. The amount of VAT input taxes claimed and broken down into:
a. Beginning of the year
b. Current year’s domestic purchases/payments for:
i. Goods for resale/manufacture or further processing
ii. Goods other than for resale or manufacture

 An election made must be followed in returns for all subsequent years, and no iii. Capital goods subject to amortization
portion of any such taxes will be allowed as a deduction from gross income.
iv. Capital goods not subject to amortization

v. Services lodges under cost of goods sold

Proof of credits
vi. Services lodged under other accounts
1. The total amount of income derived from sources within the Philippines
c. Claims for tax credit/refund and other adjustments
2. The amount of income derived from each country, the tax paid or incurred to
d. Balance at the end of the year
which is claimed as a credit
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3. The landed cost of imports and the amount of customs duties and tariff fees LOSSES
paid or accrued thereon
 those allowed from deductions are those actually sustained during the taxable
4. The amount of excise tax/es classified per major product category, paid on: year and not compensated for by insurance or other forms of indemnity.

a. Locally produced excisable items

b. Imported excisable items Types of Losses

5. Documentary stamp tax on loan instruments, shares of stock and other
transactions subject thereto
6. All other taxes, local or national, including real estate taxes, license and permit
fees, lodged under the Taxes and Licenses account both under the cost of sales
and operating expense accounts
7. The amount of withholding taxes categorized into
a. Tax on compensation and benefits
b. Credible withholding taxes
c. FWT Casualty Losses
8. Periods covered and amounts of deficiency tax assessments, whether protested
or not
9. Tax cases, and amounts involved, under preliminary investigation, litigation
and/or prosecution in courts or bodies outside the BIR.
1. Casualty losses
2. Net operating loss carry over
3. Capital losses and securities becoming worthless
4. Special losses
a. Losses from wash sales of stocks or securities
b. Wagering losses
c. Abandonment losses.
 Refers to the complete or partial destruction of property resulting from an
identifiable event of sudden, unexpected, or unusual nature, such as those
arising from fire, storm, shipwreck, or other casualty, or theft or robbery.
 The basis of the loss in the case of total destruction is the net book value
immediately preceding the casualty to be reduced by the amount of insurance
or compensation received.

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 In the case of partial destruction, the basis of the loss in the replacement cost to
restore the property to its normal operating condition, but in no case shall the
deductible loss more than the net book value of the property as a whole,
immediately before casualty.
 The excess over the net book value immediately before the casualty should be
capitalized, subject to depreciation over the remaining useful life of the
property.
Value of the casualty loss deductible
Requisites for deductibility of casualty losses
1. The taxpayer is engaged in trade or business.
2. Properties that shall be reported as casualty losses must have been reported as
part of the taxpayer’s assets in the taxpayer’s accounting records and financial
statements in the year immediately preceding the occurrence of the loss, with
the costs of acquisition clearly established and recorded.
3. The recovery of casualty losses thru insurance claims shall be governed by RR
12-77. The amount of loss that shall be compensated by insurance coverage
should not be claimed as a deductible loss. If the insurance proceeds exceed the
net book value of the damages, such excess shall be subject to the regular
income tax, but not to the VAT, since the indemnifications not an actual sale of
goods by the insured company to the insurance company.
4. The following guidelines shall also be observed:
a. The deduction of assets as capital losses must be properly recorded in
accounting reports, with the adjustment of the applicable accounts.
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b. The restoration of the damaged property, or the acquisition of new property
to replace it must be properly recorded and recognized as either a repair
expense of a capitalized asset.
5. It must be evidenced by a declaration of loss filed within 45 days with the BIR
from the date of the casualty or robbery, theft or embezzlement.
 Deductible casualty loss shall be the difference between the value of property
immediately preceding casualty and its value immediately thereafter, but shall
not exceed the amount equal to the cost of other adjusted basis of property, or
depreciated cost in the case of property used in business and reduced by any
insurance or other compensation received.
 The book value of assets destroyed less any proceeds from insurance and other
compensation shall also be deductible loss.
 When the insurance proceeds are greater than book value of assets destroyed,
then that will be a taxable gain.
 Casualty losses with claim for reimbursement (with reasonable prospect of
recovery until it is ascertained with reasonable certainty is a question of fact
which may be determined upon an examination of all facts and circumstances.
 The difference between the value of the property immediately preceding
casualty and its value immediately thereafter shall be deductible.

Net Operating Loss carry-over
 Net Operating Loss – means the excess of allowable deduction over gross
income of the business in a taxable year.
 The net operating losses which have not been previously offset as deduction
from gross income shall be carried over as a deduction from gross income for
the next 3 consecutive taxable years immediately following the year of such
loss.
Requisites for the availment of NOLCO
1. The taxpayer was not exempt from income tax in the year the loss was incurred.
2. There has been no substantial change in the ownership of the business or
enterprise wherein at least 75% of the nominal value of outstanding issued
shares is held by or on behalf of the same persons if the business is in the name
of the corporation; or at least 75% of the paid up capital of the corporation is
held by or on behalf of the same persons
3. The net operating losses which have not been previously offset as deduction
from gross income shall be carried over as a deduction from gross income for
the next 3 consecutive taxable years immediately following the year of such
loss.
4. Except, however, in the case of mines other than oil and gas wells, where a net
operating loss incurred in any of the first 10 years of operation may be carried
over as a deduction from gross income for the next 5 years immediately
following the year of such loss.
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General Principles and Policies
 In general, NOLCO shall be allowed as a deduction from the gross income of the
same taxpayer who sustained and accumulated the net operating losses
regardless of the change in its ownership.
 Unless otherwise provided in the regulations, NOLCO of the taxpayer shall not
be transferred or assigned to another person, whether directly or indirectly,
such as, but not limited to, the transfer or assignment thereof thru a merger,
consolidation or any form of business combination of such taxpayer with
another person.
 NOLCO shall also be allowed if there has been no substantial change in the
ownership of the business or enterprise in that not less than 75% in nominal
value of the outstanding issued shares or not less than 75% of the paid up
capital of the corporation, if the business is in the name of the corporation, is
held by or on behalf of the same persons.
Taxpayers entitled to deduct NOLCO from gross income
1. Any individual, including estates and trusts, engaged in trade or business or in
the exercise of his profession; and
2. Domestic and resident foreign corporations subject to the normal income tax or
preferential rates under the Code on their taxable income.
Taxpayers not entitled to deduct NOLCO from gross income
1. OBU and FCDU, duly authorized as such by the BSP;

2. Any enterprise registered with the BOI with respect to its BOI-registered activity
enjoying the ITH incentive.
3. An enterprise registered with the PEZA
4. An enterprise registered under RA 7227
5. Foreign corporations engaged in international shipping or air carriage business
in the Philippines
6. Any person, natural or juridical, enjoying exemption from income tax.
Entitlement to NOLCO
 Domestic corporations subject to the normal income tax rate are liable to the
2% MCIT, if applicable, computed based on gross income, whenever the amount
of the MCIT is greater than the normal income tax due. Thus, such corporation
cannot enjoy the benefit of NOLCO for as long as it is subject to MCIT in any
taxable year.
Capital Losses
 Losses from sales or exchanges of capital assets.
 Following are requirements in order that capital losses may be allowed as
deduction:
1. Capital losses from sales or exchanges of capital assets are deductible only to
the extent of the capital gains from such sales or exchanges of capital assets of
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both corporations and individuals, except banks and trusts companies. If the
dealings of the taxpayer in capital assets during the year result in a net capital
loss, such loss cannot be deducted from his ordinary income, inasmuch as
capital losses are allowable only to the extent of capital gains.
2. “Securities considered as worthless” refers to shares of stock when offered for
sale or requested for share redemption, no amount can be realized by the
owner of the share. Securities becoming worthless, which are capital assets,
shall be considered as a loss from the sale or exchange of capital assets on the
last day of such taxable year.
 Worthless securities, which are ordinary assets, are not allowed as
deduction from gross income because the loss is not realized.
 Losses due to voluntary removal or demolition of old buildings, the
scrapping of old machinery, equipment, etc., incident to renewals and
replacements will be deductible from gross income.
 The term wash sale of stocks or securities is a sale or other disposition of
stock or securities where the taxpayer has acquired or has entered into a
contract or option to acquire substantially identical stocks or securities
within a 61-day period, beginning 30 days before the sale and ending 30
days after the sale.
 Losses from wash sale are not deductible from gross income, except if it
is a loss incurred by a dealer in securities in the ordinary course of
business.
 Requisites of wash sales:

1. The sale or other disposition of stock resulted to a loss
2. There was an acquisition or contract or option for acquisition of stock or
securities within 30 days before the sale or 30 days after the sale; and
3. The stock or securities sold were substantially the same.
 Losses from wagering transactions shall be allowed only to individuals to the
extent of the wagering gains or winnings from such transaction.
 A wager is made when the outcome depends upon chance.
 Cases when no loss can be recognized:
1. Loss on the sale of real property considered as capital asset;
2. Loss sustained by the transfer of property by gift
3. Loss sustained by the transfer of property by death
4. Losses sustained in illegal transactions
5. Losses claimed as deduction from the gross estate for estate tax purposes can
no longer be claimed as deduction from gross income for income tax purposes
6. Losses in transactions between related taxpayers
7. In the case of merger, consolidation, or control of securities, where no gains are
recognized
8. Losses in exchanges not solely in king.
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BAD DEBTS
 Refer to those debts resulting from the worthlessness or uncollectibility, in whole or
in part, of amounts due the taxpayer by others, arising from money lent or from
uncollectible amounts of income from goods sold or services rendered actually
ascertained to be worthless and charged off within the taxable year.
Requisites for deductibility of bad debts
1. There must be an existing indebtedness fur to the taxpayer which must be valid
and legally demandable
2. The same must be connected with the taxpayer’s trade, business or practice of
profession
3. The same must not be sustained in a transaction entered into between parties
enumerated under Section 36(b) of the Tax Code
4. The same must be actually charged off in the books of accounts of the taxpayer
as of the end of the taxable year
5. The same must be actually ascertained to be worthless and uncollectible as of
the end of the taxable year and even in the future.
Meaning of the phrase “actually ascertained to be worthless”
 A debt is not worthless simply because it is doubtful value or difficult to collect.
 Worthless is determined upon the exercise of sound business judgment.
 Depends upon the particular facts and the circumstances of the case.
 A taxpayer may not postpone a bad debt deduction on the basis of a mere hope of
ultimate collection or because of a continuance of attempts to collect notes which
have long become overdue, and where there is no showing that the surrounding
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circumstances differ from those relating to other notes which were charged off in a Tax Benefit Rule or the Equitable Doctrine of Tax Benefit in case of recovery of bad
prior year. debts
 A reasonable possibility of recovery will permit the account to be carried along
 The recovery of bad debts previously allowed as deduction in the preceding year/s
notwithstanding that the probabilities are that the debt may not be collected at all.
shall be included as part of the taxpayer’s gross income in the year of such recovery
 Good faith does not require that the taxpayer be an incorrigible optimist but on the
to the extent of the income tax benefit of said deduction. Reason: considered as
other hand, he may not be unduly pessimistic.
mere return of capital.
Meaning of the phrase “actually charged off from the taxpayer’s books of accounts”
Rules in allowing bad debts as deduction from gross income
 The amount of money lent by the taxpayer, in the course of his business, trade or
 Where all the surrounding circumstances indicate that a debt is worthless, and the
profession, to his debtor had been recorded in his books of account as a receivable
debt is charged off on the books of the taxpayer within the year, the same may be
has actually become worthless as of the end of the taxable year, that the said
allowed as a deduction in computing taxable income.
receivable has been cancelled and written-off from the said taxpayer’s books of
 Before a taxpayer may charge off and deduct a debt, he must ascertain and be able
account.
to demonstrate, with reasonable degree of certainty, the uncollectibility of the
 A mere recording in the taxpayer’s books of account of estimated uncollectible
debt.
accounts does not constitute a write-off of the said receivable, hence, shall not be a
 If a taxpayer computes his income upon the basis of valuing his notes or accounts
valid basis for its deduction as a bad debt expense.
receivable at fair market value when received, which may be less than their face
When there is a reasonable degree of certainty value, the amount deductible for bad debts in any case is limited to such original
valuation.
 Before a taxpayer may charge off and deduct a debt, he must ascertain and be able
to demonstrate with reasonable degree of certainty the uncollectibility of the bad Other factors to determine whether a bad debt is already worthless
debts.
1. The debtor has been adjudged bankrupt or insolvent
 In no case may a receivable from an insurance or surety company be written-off
2. The debtor has no property nor visible income
from the taxpayer’s books and claimed as bad debts deduction unless such
3. The collateral shares have already become worthless
company has been declared closed due to insolvency or for any such similar reason
4. There are many debtors with small amounts of debts and further action on the
by the Insurance Commissioner.
accounts would entail expenses exceeding the amounts sought to be collected.
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Reserves for bad debts are not allowed as deduction from gross income
 Bad debts must be charged off during the taxable year to be allowed as deduction
to gross income.
Advances cannot be claimed as deduction from gross income
 Deductions for income tax purposes partake of the nature of tax exemptions and
are strictly construed against the taxpayer, who must prove by convincing evidence
that he is entitled to the deduction claimed.
 There is a need to substantiate the assertion that the advances were subsisting
debts that could be deducted from the gross income.
When worthless securities are deductible from gross income as bad debts
 Worthless securities which are ordinary assets are not allowed as deduction from
gross income because loss is not realized.
 However, if these worthless securities are capital assets, and charged off within the
taxable year, the owner is considered to have incurred a capital loss from the sale
or exchange of capital assets, as of the last day of the taxable year and, therefore,
deductible to the extent of the capital gains.
 This rule is not true in the case of banks or trust companies incorporated under the
laws of the Philippines.
DEPRECIATION
 A reasonable allowance for the exhaustion, wear and tear, and obsolescence of
property used in the trade or business may be deducted from gross income.
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 Depreciation excludes any idea of a mere reduction in market value resulting from
wear and tear or obsolescence.
 The proper allowance for such depreciation of any property used in the trade or
business for such depreciation of any property used in the trade or business is that
amount which should be set aside for the taxable year in accordance with a
reasonable consistent plan whereby the aggregate of the amount so set aside, plus
the salvage value, will, at the end of the useful life of the property in business, equal
the basis of the property.
 In case of property held by one person for life with remainder to another person,
the deduction shall be computed as if the life tenant were the absolute owner of
the property and shall be allowed to the life tenant.
 In the case of property held in trust, the allowable deduction shall be apportioned
between he income beneficiaries and the trustees in accordance with the pertinent
provisions of the instrument creating the trust, or in the absence of such provisions,
on the basis of the trust income allowable to each.
When obsolescence may be allowed to be deducted from gross income, in addition to
depreciation
 With respect to physical property the whole or any portion of which is clearly
shown by the taxpayer as being affected by economic conditions that will result in
its being abandoned at a future date prior to the end of its normal useful life, so
that depreciation deductions alone are insufficient to return the cost at the end of
its economic term of usefulness, a reasonable deduction for obsolescence, in
addition to depreciation, may be allowed.

 No deductions for obsolescence will be permitted merely because, in the opinion of
a taxpayer, the property may become obsolete at some later date.
Depreciable property
 The necessity for a depreciation allowance arises from the fact that certain property
used in the business gradually approaches a point where its usefulness is
exhausted.
 This does not apply to inventories of to stock in trade, nor to land apart from the
improvements or physical development added to it.
 It does not apply to bodies of minerals which try the process of removal suffer
depletion.
Requisites for deductibility of allowance for depreciation
1. It must be sustained by the person who owns or who has a capital investment in
the property
2. It must be reasonable in that the amount of depreciation must be in accordance
with the depreciation method being adopted by the company
3. The property being depreciated is being used in the trade or business
4. The allowance for depreciation must be charged off during the taxable year
5. The property must have a limited useful life
6. The allowance for depreciation should not exceed the cost of the property
7. The schedule of the allowance must be attached to the return.
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Depreciation expense on vehicles, and other expenses incurred thereon
 It cannot be presumed that the purchase of a vehicle is a purchase of a property
used in business.
 Guidelines:
1. No deduction from gross income for depreciation shall be allowed unless the
taxpayer substantiates the purchase with sufficient evidence, which must
contain the following:
a. Specific motor vehicle identification number
b. Total price
c. The direct connection or relation of the vehicle to the development,
management, operation and/or conduct of the trade or business or
profession of the taxpayer
2. Only one vehicle for land transport is allowed for the use of an official or ee, the
value of which should not exceed 2.4M.
3. No depreciation shall be allowed for yachts, helicopters, airplanes and/or
aircrafts, and land vehicle which exceed the above threshold amount, unless the
taxpayer’s main line of business is transport operations or lease of
transportation equipment and the vehicles purchased are used in the said
operations.
4. All maintenance expenses on account of non-depreciable vehicles for taxation
purposes are disallowed in its entirety.
5. All maintenance expenses incurred on non-depreciable vehicles are likewise
disallowed for taxation purposes.

How to charge off depreciation
 A depreciation allowance, in order to constitute an allowable deduction from gross
income must be charged off.
 The particular manner in which is shall be charged off is not material, except that
the amount measuring a reasonable allowance for depreciation must be either
deducted directly from the book value of the assets or preferably credited to a
depreciation reserve account, which must be reflected in the annual balance sheet.
Statement to be attached to return
 There should be attached a statement showing the item, unit, or group of
depreciable property, the cost price, the rate of charge, amount previously
deducted, and the amount claimed in the return.
 These data must agree with those appearing the in the books of the taxpayer.
No depreciation may be allowed on the appraisal increase of fixed assets
 The income tax does not allow depreciation of an asset beyond its acquisition cost.
 Reason: deductions from the gross income are privileges, not matters of right.
 The idea of profit on the investment made has never been the underlying reason for
the allowance of a deduction for depreciation.
Methods of computing allowance for depreciation
 The proper allowance for depreciation of any property used in trade or business
refers to the reasonable allowance for the exhaustion, wear and tear, including
reasonable allowance for obsolescence of said property
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 Methods
1. Straight-line method – to the effect that the rate and the base are constant.
Cost of property – salvage value = A for D
Useful life of the property
2. Declining-balance method – the fixed percentage of diminishing book value
method is to the effect that the rate of yearly depreciation remains the same but
the base upon which the rate is applied diminishes year to year.
Cost – Depreciation X rate = A for D
Estimated useful life
3. Sum of the years digit method – the capital sum to be replaced should be
charged off over the useful life of the property.
Nth period X Cost – Salvage value = A for D
Sum of all the years digits
4. Any other method which may be prescribed by the SOF upon recommendation
of the CIR.
 Method adopted must be reasonable.
 The reasonableness of any claim for depreciation shall be determined upon the
condition known to exist at the end of the period for which the return is made.
 If it develops that the useful life will be longer or shorter, the portion of the cost or
other basis of the property not already provided for thru depreciation allowances
should spread over the remaining useful life of the property as re-estimated in the
light of the subsequent facts.

Agreement as to the useful life on which the depreciation rate is based
 Taxpayer and the CIR, binding.
 The responsibility of establishing the existence of such facts and circumstances shall
rest upon the party initiating modification.
Capital sum recoverable thru depreciation allowances
 The capital sum to be replaced by depreciation allowances is the cost or other basis
of the property in respect of which the allowance is made.
 To this amount should be added from time to time the cost of improvements,
additions, and betterment and from it should be deducted from time to time the
amount of any definite loss or damage sustained by the property thru casualty, as
distinguished from the gradual exhaustion of its utility which is the basis of the
depreciation allowance.
 Where the lessee of the real property erects improvements, and income has been
returned by the lessor as a result thereof, the caital sum to be replaced by
depreciation allowance is the same as though no such improvement was made.
 No depreciation deduction will be allowed in case of property which has been
amortized to its scrap value and is no longer in use.
Depreciation of properties used in petroleum operations
 An allowance for depreciation in respect of all properties related to production of
petroleum initially placed in service in a taxable year shall be allowed under the
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straight-line or declining-balance method of depreciation at the option of the service
contractor.
 If the service contractor initially elects the declining-balance method, it may at any
subsequent date, shift to the straight-line method.
 The useful life of properties used shall be 10 years or such shorter life as may be
permitted by the CIR.
 Properties not used directly shall be depreciated under the straight-line method on
the basis of an estimated useful life of 5 years.
Depreciation of properties used in mining operations
 Shall be computed as follows
1. At the normal rate of depreciation if the expected life is 10 years or less
2. Depreciated over any number of years between 5 years and the expected life if
the latter is more than 10 years, and the depreciation thereon allowed as
deduction from taxable income
Depreciation deductible by nonresident aliens engaged in trade or business in the
Philippines
 a reasonable allowance for the deterioration of property arising out of its use or
employment or its non-use in the business, trade or profession shall be permitted
only when such property is located in the Philippines.

DEPLETION
 Refers to the exhaustion of natural resources owing to production or severance.
 The allowance for depletion is based on the theory that the extraction of minerals
gradually exhausts the capital investment in the mineral deposit.
 In computing taxable income, there shall be allowed as deduction, in the case of
mines, a reasonable allowance for depletion thereof not to exceed the market value
in the mine of the product thereof which has been mined and sold during the year
for which the return is made.
 In determining the amount, three factors are essential:
1. The basis of the property
2. The estimated total recoverable units in the property
3. The number of units discovered during the taxable year.
 Minerals – all naturally occurring inorganic substances in solid, liquid or any
intermediate state including coal.
 Mining or to mine – to extract, remove, utilize minerals and includes operations
necessary for that purpose.
Who may avail of the cost of depletion
 Annual depletion deductions are allowed only in mining entities which own an
economic interest in mineral deposits.
 Economic interest is possessed in every case in which the taxpayer has acquired by
investment any interest in mineral, in place and secures, by any form of legal
relationship, such as, but not limited to, operating agreement and service contract
agreement, income from the extraction of mineral, to which it must look for a return
of capital.
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Basis of Cost of Depletion
 The adjusted cost of basis of the mining property being mined
 The adjusted cost basis shall be the accumulated exploration and development
expenses incurred on the mining properties minus accumulated cost depletion that
should have been deducted as of the same date of same property.
 Exploration expenditures – expenditures paid or incurred for the purpose of
ascertaining the existence, location, extent, quality of any deposit for ore or other
mineral, and paid or incurred before the beginning of the development stage of
mine or deposit of a particular mining property.
 Development expenditures – include all capital expenditures paid or incurred during
the development stage of the mine or other natural deposit.
Limitation of cost depletion
 The basis for cost depletion mineral deposits does not include:
1. Amounts recoverable thru depreciation, thru deferred expenses thru deductions
other than depletion
2. The residual value of improvements at the end of operation.
 Such basis does include exploration and development expenses incurred on mining
properties or area other than those presently being mined. These expenses shall be
treated as deferred expenses.
 The annual allowable cost depletion shall not exceed the market value as used for
purposes of imposing the mining ad valorem taxes in the mine of the product
thereof which has been mined and sold during the year for which the return and
computation are made.

 The allowable cost depletion deduction shall be limited only to the extent of the
capital invested in the particular mining property.
 Capital invested in the particular mining shall include the accumulated exploration
and development expenditures and expenditures incurred on the ongoing mine
exploration and development on the same mining are which –
1. Increases the value of the mine
2. Decreases the cost of production of mineral units
3. Restores property to its previous condition or in making good the exhaustion
thereof for which an allowance is or has been made.
 No further deduction for cost depletion shall be allowed when the sum of the cost
depletion equals the cost of adjusted basis of the property plus allowable capital
additions.
 Actual commercial production – shall mean the stage of mining operation attained
by a mine in which mineral or mineral products of marketable grade and quantity
have been produced and sold to local and/or foreign markets.
Manner of computation of cost depletion
 Computed by dividing the adjusted cost basis by the number of units of minerals
remaining as of the taxable year and by multiplying the depletion unit so determined
by the number of units of minerals sold within the taxable year.
 Number of units of minerals remaining as of the taxable year is the number of units
of minerals remaining at the end of the period to be recovered from the property
plus the number of units sold within the taxable year.
 The number of units sold within the taxable year is
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1. In case of taxpayer reporting income on the cash basis, include units for which
payments were received within the taxable year although extracted or sold prior
to the period and exclude units sold but not paid for in the taxable year.
2. In case of taxpayer reporting income on the accrual method, include all units
extracted and sold during the period, whether paid for or not, but does not
include units with respect to depletion deductions which are allowed or
allowable prior to the taxable year.
 In the case of natural gas or oil wells, the taxpayer may computed the cost depletion
in respect of such property for the taxable year by multiplying the adjusted cost
basis of the property by a fraction, the numerator of which is equal to the number of
cubic feet or barrels of oil recovered during the year and the denominator of which
is equal to the expected recoverable number of cubic feet of gas or barrels of oil at
the end of the taxable year plus the number of cubic feet of gas or barrels of oil
recovered during the year.
Determination of mineral content of deposits remaining as of the taxable year
 The mineral contents remaining as of the taxable year pertains to the estimated
mineral products reasonably known or on good evidence believed to have existed in
place as of the end of the taxable year, the estimate of determination of which was
made according to the method current in the industry and in the light of the most
accurate and reliable information obtainable.
 The estimated mineral products remaining as of the taxable year shall include both
quantity and grade:
1. The positive ores and mineral deposits, which include ores and minerals blocked
out and developed or assured in the usual conventional meaning.

 Positive ore shall mean the full tonnage computed with good mining practice
from dimensions revealed in outcrops, branches, underground workings and
drill holes and for which the grade is computed from results of detailed
sampling.
2. The probable or prospective ores and mineral deposits, which include ores and
minerals that are believed to exist on the basis of good evidence although not
actually known to occur on the basis of existing development. Such probable or
prospective ores or minerals may be estimated:
a. As to quantity, only in case they are extensions of known deposits or are new
bodies or masses whose existence is indicated by geological surveys or other
evidence to a high degree of probability
b. As to grade, only in accordance with the best indications available as to
richness.
 Probable or prospective ore shall mean the ore for which tonnage and grade are
computed partly from specific measurement, samples and partly from projection for
a reasonable distance on geologic evidence.
Records to be kept
 Every taxpayer claiming and making a deduction for depletion of mineral property
shall keep a separate account for each and every area in his books of accounts in
which shall be accurately recorded the cost or other basis of such property and
thereafter to be debited by any and all capital additions.
 In addition, the taxpayer must assemble, segregate and have readily available at his
principal place of business, all supporting data which were used in compiling the
summary statement required to be attached to the income tax return to be filed.
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Basis of depreciation of improvements
 There shall be allowed as a deduction a reasonable allowance for depreciation of
improvements including, but not limited to, mining and milling equipment.
Aggregation or combination of separate properties
 In the case of mining companies with several mining properties, it may aggregate
into one operating unit, several mining properties for purposes of determining the
adjusted cost basis recoverable thru depletion subject to the following conditions:
1. All contiguous areas included in a single concession grant or in separate
concession grants may be constituted as a single operating unit
2. Operating mineral interests which are geographically widespread may not be
treated as parts of the same operating unit
3. Undeveloped operating mineral unit may be aggregated only with those interests
with which it will be operated as a unit when it reaches the production stage.
Intangible costs in petroleum operations.
 Refers to any cost incurred in petroleum operations which in itself has no salvage
value and which is incidental to and necessary for the drilling of wells and
preparation of wells for the production of petroleum.
 Any intangible exploration, drilling and development expenses allowed as a
deduction in computing taxable income during the year shall not be taken into
consideration in computing the adjusted cost basis for the purpose of computing
allowable cost depletion.

Election to deduct exploration and development expenditures
 In computing taxable income from mining operations, the taxpayer may, at his
option, deduct exploration and development expenditures accumulated as cost of
adjusted basis for cost depletion as of date of prospecting, as well as exploration and
development expenditures paid or incurred during the taxable year: Provided, That
the total amount of deductible for exploration and development expenditures shall
not exceed 25% of the taxable income from mining operations computed without
the benefit of any tax incentives under existing laws.
 The actual exploration and development expenditures minus 25% of the taxable
income from mining shall be carried forward to the succeeding years until fully
deducted.
 This election by the taxpayer is irrevocable and shall be binding in succeeding
taxable years.
Net income from mining operations
 Mean the gross income from operations less allowable deductions which are
necessary or related to mining operations.
Depletion of oil and gas wells and mines deductible by a nonresident alien individual
or foreign corporation
 Shall be authorized only in respect to oil and gas wells or mines located within the
Philippines.
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CHARITABLE AND OTHER CONTRIBUTIONS
 Requisites
1. The contribution must have been actually made to entities specified by law
2. The contribution must have been made within the taxable year
3. It must be evidenced by adequate receipts and records
4. For contributions other than money, the amount shall be based on the
acquisition cost of the property not the fair market value at the time of the
contribution
5. For contributions subject to statutory limitations, the same must not exceed 10%
in the case of individuals engaged in business or profession or 5% in case of
corporations of the said taxpayer’s taxable income before deducting the
charitable contributions.
Contributions subject to statutory limits
 The following donations or contributions are subject to limitations of not exceeding
10% (in case of individuals) or to 5% (in case of corporations) based on the
taxpayer’s gross income derived from trade, business or practice of profession
computed without first deducting the contributions:
1. Contributions for non-priority activities or gifts actually paid or made within the
taxable year to, or for the use of the Government of the Philippines or any of its
agencies or any political subdivision thereof exclusively for public purposes, or
2. Donations, contributions or gifts actually paid or made within the taxable year to
accredited non-profit corporations organized and operated exclusively for
religious, charitable, scientific, youth and sports development, cultural or
educational purposes or for the rehabilitation of veterans, or to social welfare

institutions, or to non-government organizations, no part of the net income of
which inures to the benefit of any private stock holder or individual shall be
allowed limited deductibility in an amount not in excess of 10% for an individual
donor, and 5% for a corporate donor, of the donor’s taxable income derived
from trade, business or practice of profession as computed without the benefit
of this deduction.
 The amount deductible is the actual contribution or the statutory limit computed,
whichever is lower.
Contributions/donations deductible in Full
1. Donations to the Government
 Including fully-owned government corporations, exclusively to finance, to
provide for, or to be used in undertaking priority in education, health, youth and
sports development, human settlements, science and culture, and in economic
development according to a national Priority Plan determined by the NEDA in
consultation with appropriate government agencies, including its regional
development councils and private philanthropic persons and institutions.
2. Donations to certain foreign institutions or international organizations
 The subject donations must be fully deductible in pursuance of or in compliance
with agreements, treaties, or commitments entered into by the Government of
the Philippines and the foreign institutions or international organizations or in
pursuance of special laws.
3. Donations to accredited non-stock, non-profit corporations/NGOs
1. Organized and operated exclusively for scientific, research, educational,
character-building and youth and sports development, health, social
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welfare, cultural or charitable purposes, or combination thereof, no part of
the taxable income of which inures to the benefit of any private individual
2. Which, not later than 15th day of the third month after the close of the
accredited NGO’s taxable year in which contributions are received, makes
utilization directly for the active conduct of the activities constituting the
purpose or function for which it is organized and operated
3. The level of administrative expense of which shall, on an annual basis and in
no case to exceed 30% of the total expenses
4. The assets of which, in the event of dissolution, would be distributed to
another NGO organized for similar purpose or purposes, or to the state for
public purpose, or to another NGO to be used in such manner as in the
judgment of a court shall best accomplish the general purpose for which the
dissolved organization was organized
5. Only to the extent of the acquisition cost (not the fair market value) of the
property, if the contribution is other than money, shall be allowed full
deductibility
 Donations and gifts made in favor of accredited non-stock, non-profit
corporations/NGOs shall be exempted from the donor’s tax; Provided, however,
That not more than 30% of the said donations and gifts for the taxable year shall be
used by such accredited non-stock, non-profit corporations/NGOs institutions
qualified done-institution for administration purposes.
Utilization requirements
 Amounts set aside for specific project must have the prior approval of the
Commissioner in writing
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 Amounts set aside shall be evidenced by book entries and documents showing Date and place of filing
evidence of deposits or investments, including investment of the funds so set aside,
 By the donors – at the time of filing their income tax returns.
or other documents that the Commissioner may require.
 By the accredited NGO – not later than 15th day of the 4th month after the close of
Accreditation of non-stock, non-profit corporations/NGOs by the accrediting Entity its taxable year in order to maintain its status as an accredited NGO.
 File in the RDO where the place of business of the donor or donee is located.
 The accrediting entity shall examine, evaluate and accredit non-stock, non-profit
corporations and NGOs as a prerequisite for their registration with the BIR as Contributions to a candidate in an election not allowed as deduction from gross
qualified-donee institutions. income of a taxpayer.
 Newly-organized and existing non-stock, non-profit corporations and NGOs shall
 Because the said expense is not directly attributable to, the development,
apply with the Accrediting Entity for accreditation and submit to a process of
management, operation and/or conduct of a trade, business or profession.
examination and evaluation.
 The accrediting Entity shall evaluate and accredit NGOs by using a set of major Monitoring and verification of the annual information return
criteria.
 May be examined by the BIR annually for purposes of ascertaining compliance with
Certificate of donations the conditions where which they have been granted tax exemptions or tax
incentives, and their tax liability, if any.
 All credited NGOs are required to issue a certificate of donation in such form as
prescribed by the BIR, on every donation or gift they receive.
RESEARCH AND DEVELOPMENT
Notice of donations
 Research is original and planned investigation undertaken by the taxpayer with the
 The donor, on the hand, should give a notice for every donation worth over P1M
prospect of gaining new scientific or technical knowledge and understanding, while
to the RDO where his lace of business is located within 30 days after the receipt of
development is the application of research findings or other knowledge to a plan
the Certificate of Donation attaching to the said notice the copy of the Certificate
or design for the production of new or substantially improved materials, devices,
of Donation issued to him by the accredited NGO.
products, processes, systems or services before the start of commercial production
or use.

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Requisites
1. Research or development expenditures were paid or incurred in connection
with the taxpayer’s trade, business or practice of profession
2. The same had been paid or incurred during the taxable year as ordinary and
necessary expenses
3. The same had not been charged to the capital account
Amortization of certain research and development expenditures
 The following research and development expenditures may be treated as deferred
expenses:
1. The same had been paid or incurred by the taxpayer in connection with his
trade, business or practice of profession
2. The same was not treated as an ordinary and necessary expense
3. The same was chargeable to capital account but not chargeable to property of a
character which is subject to depreciation or depletion
4. The deduction is ratably distributed over a period of not less than 60 months
beginning with the month in which the taxpayer first realized the benefits from
such expenditures.
Limitations on deduction
1. The expenditure shall not apply to the acquisition or improvement of land or for
the improvement of property to be used in connection with research and
development of a character which is subject to depreciation and depletion
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2. For any expenditure paid or incurred for the purpose of ascertaining the
existence, location, extent, or quality of any deposit of ore or other mineral,
including oil or gas.
PENSION TRUSTS
 A trust established or maintained by the er to provide for the payment of
reasonable pensions to its ees.
Pension trust contributions
 A deduction applicable only to the er on account of its contribution to a private
pension plan for the benefit of its ees.
 This deduction is purely business in character.
Normal Cost
 Refers to the contributions during the taxable year into the pension plan to cover
the pension liability accruing during the taxable year.
 Allowed as an ordinary and necessary business expense.
Past service cost
 Refers to the amount in excess of the above contribution (covering pension liability
pertaining to old ees which accrued during the years previous to the establishment
of the pension trust).
 It represents 1/10th of the reasonable amount paid by the er to the trust during the
taxable year to cover in whole or in part the pension liability applicable to the

years prior to the taxable year, or so paid to place the trust in a sound financial
basis.
 Allowed as a deduction if:
1. Such amount has not yet been allowed as a deduction
2. Said amounts had been apportioned in equal parts over a period of 10
consecutive years beginning with the year in which the payment is made.
Requisites for deductibility of Past service cost
1. The er must have established a pension or retirement plan to provide for the
payment of reasonable pensions to his ees;
2. The pension plan is reasonable and actually sound;
3. It must be funded by the er
4. The amount contributed must no longer be subject to the control and
disposition of the er;
5. The payment has not yet been allowed as a deduction;
6. The deduction is apportioned in equal parts over a period of 10 consecutive
years beginning with the year in which the transfer of payment is made; and
7. The er shall be allowed to deduct from gross income reasonable amounts paid
to such trust, in accordance with the pension plan
OPTIONAL STANDARD DEDUCTION
 Who may avail, in lieu of the itemized deduction
1. Individuals and taxable estates and trusts, except individuals earning pure
income and non resident aliens
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2. Corporations, except nonresident foreign corporations.
Requisites for individuals who want to avail of the OSD
1. The individual is a citizen or a resident alien
2. The taxpayer’s income is not pure compensation income
3. The individual signifies in his return filed for the first quarter his intention to
elect OSD as deduction, otherwise, he is considered as having availed of the
itemized deductions
4. The election to avail OSD is irrevocable for the year in which made; however, he
can change to itemized deductions in succeeding years if he opts to
5. The OSD allowed shall be a maximum of 40% of gross sales or gross receipts
during the taxable year.
Determination of the amount of OSD for individuals
 The OSD allowed to individual taxpayers shall be a maximum 40% of the gross sales
or gross receipts during the taxable year.
 If the individual is on the accrual basis of accounting for his income and deductions,
the OSD shall be based on the gross sales during the taxable year.
 If the individual employs the cash basis of accounting for his income and
deductions, the OSD shall be based on his gross receipts during the taxable year.
 For other individuals allowed by law to report their income and deductions under a
different method of accounting other than cash and accrual method of accounting,
the gross sales or gross receipts shall be determined in accordance with said
acceptable method of accounting.

Requisites for corporations who want to avail of the OSD
1. The corporation is a domestic or a resident foreign corporation.
2. The corporation signifies in his return filed for the first quarter his intention to
elect OSD as deduction, otherwise, it is considered as having availed of the
itemized deductions.
3. The election to avail OSD is irrevocable for the year in which it is made;
however, it can change to itemized deductions in succeeding years if it opts to.
4. The OSD allowed shall be a maximum of 40% of gross income during the taxable
year.
Determination of the amount of OSD for corporations
 The OSD allowed shall be in an amount not exceeding 40% of their gross income.
 Gross income – the gross sales less sales returns, discounts and allowances and cost
of goods sold.
 Passive income – not included.
Determination of the OSD for GPPs and Partners of GPPs
 Like corporations.
 The net income determined by either claiming the itemized deduction or OSD from
the GPP’s income is the distributable net income from which the share of each
partner is to be determined.
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Claim of the partners of GPP of their deductions from their share in the taxable
income of the GPP
 Rules
1. If the GPP availed of the itemized deduction in computing its net income, the
partners may still claim itemized deductions; Provided, That in claiming itemized
deductions, the partner is precluded from claiming the same expenses already
claimed by the GPP.
 Is the GPP claimed itemized deductions, the partners comprising it can only
claim itemized deductions which are in the nature of ordinary and necessary
expenses for the practice of profession which were not claimed by the GPP in
computing its net income or distributable net income during the year.
 The OSD is in lieu of the items of deductions claimed by the GPP and the items
deduction claimed by the partners.
2. If the GPP avails of OSD in computing its net income, the partners comprising it
can no longer claim further deduction from their share in the said net income.
PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCE
 This represents an amount of premium on health and/or hospitalization insurance
paid by an individual taxpayer for himself and/or for the members of his family
during the taxable year.
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Requisites for deductibility of premium payments on HHI from gross income Persons qualified to claim basic personal exemptions

1. Hospitalization insurance must actually have been taken by the individual for 1. The claimant must be a citizen or a resident alien.
himself and/or for the members of his family. 2. Nonresident aliens engaged in trade or business only by way of reciprocity but
2. The individual availing either earns pure compensation or earning business not to additional exemptions.
income or engaged in the practice of profession. 3. The individual claiming basic personal exemption must be earning income for
3. The gross income of the family of the individual does not exceed P250,000 for the taxable year.
the taxable year. 4. The amount allowed for each individual who earns income is P50,000,
4. The amount of the premium deductible does not exceed P2,400 per family or regardless of whether the individual is single or married.
P200 per month 5. In the case of married individuals, where only one of the spouses is deriving
5. In case of married individuals, only the spouse claiming additional exemption gross income, only such spouse shall be allowed the personal exemption.
shall be entitled to this deduction.
Amount of additional exemption of individuals
Who may avail
 Each legitimate, illegitimate and legally adopted child, not exceeding 4, is entitled
1. Individual taxpayers earning purely compensation income during the year to an additional exemption of P25,000, if apart from being a minor (21) and not
2. Individual taxpayers engaged in business or in the practice of profession gainfully employed, they are unmarried, living with and dependent upon the parent
whether availing of itemized or OSD during the taxable income. for their chief support.

PERSONAL EXEMPTIONS Persons qualified to claim additional exemptions.

 An arbitrary amount allowed for personal living, or family expenses of an individual 1. The claimant may be married or unmarried for as long as he has a qualified
taxpayer. dependent child.
 Allowed only to citizens of the Philippines and to resident aliens and non resident 2. The claimant must be a citizen or a resident alien.
aliens in certain cases. 3. In case of married individuals, the proper claimant is the husband, except when
 P50,000 there is an express waiver by the husband in favor of his wife.
4. The wife automatically claims the additional exemptions in the ff instances:
a. The husband has no income or unemployed
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b. The husband is a nonresident citizen working abroad
c. In case she is legally separated and she has the custody of the qualified child
or children.
Individual benefactor of senior citizen not allowed to claim additional exemption
 Regardless of WON an individual is a benefactor of a senior citizen, he shall only be
entitled to a personal exemption of P50,000.
 The senior citizen does not fall within the meaning of the term dependent under
the Tax code that would entitle the benefactor to claim the additional personal
exemption.
Right to claim withholding exemptions
 An employee receiving compensation shall be entitled to withholding exemptions.
Meaning of the term dependent for purposes of additional exemption
1. Legitimate, illegitimate, legally adopted or foster child of the taxpayer
2. Chiefly dependent for support upon and living with the taxpayer
3. Such dependent is not more than 21 years of age
4. Such dependent is unmarried and not gainfully employed
5. Except if such dependent, regardless of age, is incapable of self-support because
of mental or physical defect.
Employer should ascertain WON a child being claimed is a qualified dependent.
 If the ee should have additional dependents during the taxable year, he may claim
the corresponding additional exemption, in full for such year.
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Status-at-the-end-of-the-year rule.
 Whatever is the individual taxpayer’s status at the end of the calendar year may be
used for determining his basic personal and additional exemptions.
 For purposes of filing the income tax return in a particular year, the taxpayer, who
changed his civil status during the year can still use his old civil status, or he may opt
to use his new status in his income tax return.
Limit of the basic personal exemption allowed to a nonresident alien individual
engaged in trade or business in the Philippines.
 Entitled only to personal exemption, but not to additional exemption, in an amount
equal to the exemptions allowed by the income tax law in the country which he is a
citizen or allowed to citizens of the Philippines who are also nonresidents in that
country, but not to exceed personal exemption of P50,000.
 The exemption allowed to nonresident aliens is a reciprocal one; that is, it is only
allowed if the country of said nonresident aliens allowed similar exemptions to
Filipinos who are considered as non-residents of such country but deriving income
from sources therein.
 If the nonresident alien individual is not engaged in trade or business in the
Philippines, he will not be allowed to claim any personal exemption because his
income tax is subject to the final withholding tax of 25% based on the gross income.

ITEMS AND EXPENSES WHICH ARE NON-DEDUCTIBLE FROM THE GROSS INCOME.
 G.R. In computing the taxable income, no deduction shall in any case be allowed in
respect to:
1. Personal, living or family expenses
2. Amount paid out for new buildings or permanent improvements, or betterments
made to increase the value of any property or estate; except in the case of
intangible drilling and development costs incurred in petroleum operations.
3. Amount expended in restoring property or in making food the exhaustion
thereof for which an allowance of depreciation or depletion is or has been made
4. Premiums paid on life insurance policy covering the life of any officer or ee, or of
any person financially interested in any trade or business carried on by the
taxpayer, individual or corporate, when the taxpayer is directly or indirectly a
beneficiary under such policy
5. Interest expense and bad debts from sales of property between related parties.
6. Losses from sales or exchanges of property between related parties.
Personal, living, and family expenses which are not deductible from gross income.
 They are deemed covered by personal and additional exemption.
Losses which are not deductible from the gross income.
 Designed to avoid sham or pretended sales or exchanges designed to create losses
so as to enable the taxpayer to deduct the same from gross income and
consequently fall under a lower bracket.
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Rationale for the prohibition from deductibility of capital losses from ordinary gains
 Designed to forestall the shifting of deductions from an area subject to lower taxes
to an area subject to a higher tax, thereby unnecessarily resulting in leakage of tax
revenues.
WHAT CONSTITUTEES AS GROSS INCOME FOR INSURANCE COMPANIES
 Consists of their income from all sources within the taxable year, except as
otherwise provided by the statute.
Deductions allowed to insurance companies
 They are entitled to same deductions as other corporations, and also to the
deductions of the net addition required by law to be made within the taxable year
on policy and annuity contracts.
Gross income of mutual insurance companies.
 Consists of their total revenue from the operation of the business and of their
income from all other sources within the taxable year, except as otherwise provided
by the statute.
 Mutual insurance companies, other than mutual life and mutual marine insurance
companies, which require their members to make premium deposits to provide for
losses and expenses, are allowed to deduct from gross income the aggregate
amount of premium deposits returned to their policyholders or retained for the
payment of losses, expenses, and reinsurance reserves.

 Mutual marine companies should include in gross income the gross premiums
collected and received by them less amounts paid for reinsurance. They may deduct
from gross income amounts repaid to policyholders on account of premiums
previously paid by them together with the interest actually paid upon such amounts
between the date of ascertainment and the date of payment thereof.
WASH SALES OF STOCKS AND SECURITIES
 A sale or other disposition of stocks or securities where it appears that within a
period beginning 30 days before the date of such sale or disposition and ending 30
days after such date, the taxpayer has acquired or has entered into a contract or
option to acquire, substantially identical stock or securities.
 Not deductible loss.
 XPN: may be deductible in the following case:
1. If the claim is made by a dealer in stock and securities; and
2. With respect to a transaction made in the ordinary course of the business of
such dealer in stock or securities.
Purposes of wash sales of stock or securities
 To prevent taxpayers from selling stock or securities to establish a loss deduction
and then immediately repurchasing the same or substantially the same securities.
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Rules on losses from wash sales of stock and securities
 Where more than one loss is claimed to have been sustained within the taxable
year from the sale or other disposition of stock and securities, the provisions of this
section shall be applied to the losses in the order in which the stock or securities
the disposition of which resulted in the respective losses were disposed of
(beginning with the earliest disposition). If the order of disposition of stock or
securities disposed of at a loss on the same day cannot be determined, the stock or
securities will be considered to have been disposed of in the order in which they
were originally acquired.
Basis of stock or securities acquired in wash sales
 In the sale or other disposition of stocks or securities, the acquisition of which
resulted in the non-deductibility of the loss from the sale or other disposition of
substantially identical stock or securities, the basis shall be the basis of the
substantially identical stock or securities so sold or disposed of, increased or
decreased, as the case may be by the difference, if any, between the rice at which
the stock or securities was acquired and the price at which such substantially
identical stock or securities were sold or otherwise disposed of.
CAPITAL ASSETS VIS-À-VIS ORDINARY ASSETS
 Capital asset – all properties not being used for trade or business.
 Ordinary asset – all properties that are being used primarily or for sale in the
ordinary course of trade or business. (those included in the inventory, primarily for
sale, subject to the allowance for depreciation)
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 In the case of a taxpayer not engaged in the real estate business, real properties, properties which are
whether land, building, or other improvements, which are used or being used or considered as capital
have been previously used in the trade or business of the taxpayer shall be assets) over the capital
losses from such sale or
considered as ordinary assets.
exchanges should be
 Properties classified as ordinary asset for being used in business by a taxpayer included in the gross
engaged in business other an real estate business are automatically converted into income.
capital asset upon showing of proof that the same have not been used in business
for more than 2 years prior to the consummation of the taxable transactions
involving said properties. Actual gain distinguished from presumed gain.

Capital gains distinguished from ordinary gains.
Capital Gains
Sources of capital gains
are sales or exchanges of
capital assets.
Capital gains are
generally profits from
sale of assets not stock in
trade.
Basis of capital gains tax
is on the presumed gain.
Excess of gains from sales
or exchanges of other
capital assets (i.e., other
than capital gains from
sales or exchanges of
shares of stock and real
 Actual gain – the gain actually or constructively derived from the sale of
assets/properties treated as ordinary assets in excess of the cost to the taxpayer.
Ordinary Gains  Presumed gain – the capital gain presumed to have been realized from the sale,
Sources of ordinary gains exchange or disposition of real property located in the Philippines, classified as
are sales or exchanges of capital asset, including pacto de retro sales and other forms of conditional sales, by
ordinary assets.
individuals, including estates and trusts, regardless of whether he suffers a loss than
Ordinary gains generally
come from assets a gain, the basis of which is the zonal value of the property or the gross selling price,
constituting stock in whichever is higher.
trade.
Basis of the ordinary tax Net capital gain distinguished from net capital loss.
is on the actual gain.
 Net capital gains – the excess of the gains from sales or exchanges of capital assets
All sales or exchanges of
ordinary assets should be over the losses from such sales or exchanges. It is added to the ordinary gain.
included in the gross  Net capital loss – the excess of the losses from sales or exchanges of other capital
income. assets over the capital gains from such sales or exchanges. It is not deductible from
the ordinary gain.

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Long term capital gain distinguished from short term capital gain; Percentages taken Rationale for the rule prohibiting the deduction of capital losses from ordinary gains.
into account; Holding Period rule
 To insure that only costs or expenses incurred in earning the income shall be
 In computing net capital gain, net capital loss, and net taxable income in the case of deductible for income tax purposes consonant with the requirement of the law that
individual taxpayers, the ff percentages of capital gains or loss shall be recognized only necessary expenses are allowed as deductions from gross income.
and taken into account upon the sale or exchange of a capital asset depending on  This is also the reason why all non-business connected expenses, like personal,
the actual holding period. living and family expenses, are not allowed as deduction from gross income.
 Short-term capital gain – 100% of the capital gains or loss is taken into account, if
Net capital loss carry over (NCLCO) vis-à-vis net operating loss carry over (NOLCO).
the capital asset has been held for not more than 12 months
 Long-term capital gain – 50% of the capital gains or loss is taken into account, if the NCLCO NOLCO
capital asset has been held for more than 12 months. Can be availed of only by Available to both
individual taxpayer. individuals and corporate
Capital loss limitation rule applicable to both corporations and individuals. taxpayers.
Covers only one year May be deducted from
 G.R. Capital losses from sales or exchanges of capital assets are allowed only to the
period. the gross income for the
extent of the gains from such sales or exchanges. next three consecutive
 The net capital loss is not deductible in arriving at the taxable net income inasmuch years.
as capital losses are allowed only to the extent of capital gains. A capital asset An ordinary asset
 XPN. In a bank or trust incorporated under the laws of the Philippines, a substantial transaction. transaction.
part of whose business is the receipt of deposits, sells any bond, debenture, not or Directly governed by the Directly governed by the
Tax Code only. Tax Code and by the
certificate or other evidences of indebtedness issued by any corporation, including
Investment Incentives
the government, with interest coupons or in registered form, any loss resulting Act.
from such sale shall not be subject to the limitation, and shall not be included in
determining the applicability of such limitation to other losses.

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Retirement bonds  The capital gain or loss shall be subject to the regular income tax.

 For income tax purposes, amounts received by the holder upon the retirement of Short sales
bonds, debentures, notes or certificates or other evidences of indebtedness issued y
 Refer to any sale of a security which the seller does not own or any sale which is
any corporation with interest coupons or in registered form, shall be considered as
consummated by the delivery of a security borrowed by, or for the account of the
amounts received in exchange thereof.
sellers.
Taxation of shares redeemed for cancellation or retirement.  A person shall be deemed to own a security if:
1. He or his agent has title to it
 When preferred shares are redeemed at a time when the issuing corporation is still
2. He has purchased or has entered into an unconditional contract, binding on both
in its going concern and is not contemplating in dissolving or liquidating its assets
parties thereto, to purchase it and has not yet received it
and liabilities, capital gain or capital loss upon redemption shall be recognized on the
3. He owns a security convertible into or exchangeable for it and has tendered such
basis of the difference between the amount/value received at the time of
security for conversion or exchange
redemption and the cost of the preferred shares.
4. He has an option to purchase or acquire it and has exercised such option
 The capital gain or loss derived shall be subject to the regular rates.
5. He has rights or warrants to subscribe to it and has exercised such rights or
 This section does not cover the situation where a corporation voluntarily buys back
warrants provided however that a person shall be deemed to own securities only
its own shares, in which it becomes treasury shares. Stock transaction tax applies, if
to the extent he has a net long position in such securities.
listed and traded in the local stock exchange. Otherwise, it is subject to 5% or 10%
net capital gains tax. When short sale is deemed consummated.

Taxation of surrender of shares by the investor upon dissolution of the corporation  For income tax purposes, a short sale is not deemed to be consummated until the
and liquidation of assets and liabilities of said corporation. delivery of property to cover the short sale.

 Upon surrender by the investor of the shares in exchange for cash and property
distributed by the issuing corporation upon its dissolution and liquidation of all
assets and liabilities, the investor shall recognize either capital gain or loss upon such
surrender of shares computed by comparing the cash and fair market value of
property received against the cost of the investment in shares.
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DETERMINATION OF GAIN OR LOSS IN EXCHANGE OF PROPERTY  The property received as boot refers to the money received and other property
received in excess of the stock or securities received by the transferor on a tax-
 The amount of income derived or loss sustained from an exchange of property is
free exchange.
the difference between eh market value at the time of the exchange of the
property received in exchange of and the original cost, or other basis, of the Recognition of gain or loss in exchange of property
property exchanged.
 GR. the entire amount of the gain or loss on the sale or exchange of properties
Basis for determining gain or loss from sale or disposition of property should be recognized.
 XPN. If in pursuance to a plan merger or consolidation:
1. If the property is acquired by purchase – basis is the cost of the property
1. A corporation exchanges property solely for stocks in a corporation
acquired on or after March 1, 1913
2. A shareholder exchanges stock in a corporation for the stock of another
2. If the property is acquired by inheritance – basis is the fair market price or value
corporation
as of the moment of death of the decedent
3. A security holder of a corporation exchanges his securities in such corporation
3. If the property is acquired by donation – basis is the cost in the hands of the
solely for stock or securities in another corporation
donor or the last previous owner who did not acquire it by donation. If the
4. The transfer is made by a person, acting alone or together with others, not
basis, however, is greater than the fair market value of the property at the time
exceeding four persons
of donation, then, for purposes of determining loss, the basis shall be such fair
5. As a result of the exchange, the transferor, alone or together with others, not
market value.
exceeding four, gains control of the transferee.
4. If the property is acquired for less than an adequate consideration in money or
money’s worth – basis shall be the amount paid by the transferee for the
property
5. If the property was acquired thru previous tax-free exchange, the basis of stock
or securities received by the transferor is the same as the basis of the property,
stock or securities exchanged or transferred. Basis of the property transferred in
the hands of the transferee – same as it would be in the hands of the transferor.

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The following are the tax consequences of a tax-free exchange of property for shares
of stock of a controlled corporation:
1. Income tax – The transferor shall not recognize any gain or loss on the transfer
of the property to the transferee. The transferor will not be subject to capital
gains tax, income tax, or to creditable withholding tax on the transfer of such
property to the transferee. Neither may the transferor recognize a loss, if any,
incurred in the transfer.
 Control – means ownership of stocks in a corporation possessing at least 51% of
the total voting power of all classes of stocks entitled to vote.
 The assumption of liabilities or the transfer of property that is subject to a
liability does not affect the non-recognition of gain or loss, since the total
amount of such liabilities does not exceed the basis of the property transferred.
If the amount of the liabilities assumed plus the amount of the liabilities to
which the property is subject exceed the total amount of the adjusted basis of
the property transferred pursuant to such exchange, then such excess shall be
considered as a gain from the sale or exchange of a capital asset or of property
which is not a capital asset, as the case may be.
 The transferee is not subject to income tax on its receipts of the property as
contribution to its capital, even if the value of such property exceeds the par
value or stated value of the shares issued to the transferor.
2. Donor’s tax – the transferor is not subject to donor’s tax, regardless whether
the value of the property transferred exceeds the par/stated value of the
transferee shares issued to the transferor, there being no intent to donate on
the part of the transferor.
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3. Value-Added Tax – the VAT shall not apply to goods or properties which are
originally intended for sale or for use in the course of business.
 XPN. The exchange of goods or properties including the real estate properties
used in business or held for sale or for lease by the transferor, for shares of
stocks, whether resulting in corporate control or not, is subject to VAT.
4. Documentary Stamp Tax – in the case of tax-free exchange of properties for
shares or shares for shares, said exchange shall be exempt.
INVENTORIES
 Two tests for which inventory must conform
1. It must conform as nearly as possible to the best accounting method in the
trade or business; and
2. It must clearly reflect the income.
 Inventory rules cannot be uniform but must give effect to trade customs which
come within the scope of the best accounting practice in the particular trade or
business.
 In order to clearly reflect income, the inventory practice should be consistent from
year to year.
 Inventories should be recorded in a legible manner, properly computed and
summarized, and should be preserved as a part of the accounting record of the
taxpayer.
 Inventory losses which are allowable as tax deduction are:
1. Losses from the sale of excess or obsolete raw materials
2. Losses from production of initial batches of new products
3. Production losses from reprocessing of stocks returned for reconditioning.

 Inventory valuation method adopted by the taxpayer should be applied from year
to year.
Rationale behind the power of the State to tax persons, properties and business
within its jurisdiction.
 Based on the theory that the tax laws of a state can have no extraterritorial
operation.
 Violation of the constitutional provision that no person shall be deprived of his
property without due process of law.
Classification of income as to sources
1. Within the Philippines
2. Without the Philippines
3. Partly within and partly without the Philippines
Gross income from sources within the Philippines
1. Interest income – interest on bonds or notes or other interest-bearing
obligations of residents, corporate or otherwise.
2. Dividends
a. From domestic corporation
b. From a foreign corporation unless less than 50% of its gross income for the
3-year period ending with the close of its taxable year preceding the
declaration of such dividends, or for such part of such period as it has been
in existence was derived from sources within the Philippines; but only in an
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amount which bears the same ratio to such dividends as the gross income
from all sources.
 In the case of dividends derived from a foreign corporation, the same is subject
to the 50% rule, i.e., if the 3-year period preceding the declaration of such
dividend, the ratio of such corporation’s Philippines gross income to the world
gross income is
i. Less than 50% - then the income is considered derived entirely without
ii. If 50% or more – then the income is considered derived within.
3. Services – includes compensation for labor or personal services performed within
the Philippines regardless of the residence of the payor, of the place in which the
contract for service was made, or of the place of payment.
4. Rentals and royalties – the income arising from the rental of property whether
tangible or intangible, located within the Philippines, or from the use of property,
whether tangible or intangible, located within the Philippines.
5. Sale of real property – those located in the Philippines
6. Sale of personal property – in the country where the personal property is sold. The
country in which sold means the place where the property is marketed. This section
does not apply to income from the sale of property produced by the taxpayer
within and sold without the Philippines or produced by the taxpayer without and
sold within the Philippines.
7. Sale of shares of stock of domestic corporation – within the Philippines, regardless
of where the said shares are sold. The transfer by a nonresident alien or a foreign
corporation to anyone of any share of stock issued by a domestic corporation sold
thru a foreign stock exchange shall still be subject to Philippine income tax and shall
not be affected or made in its book unless:

a. The transferor has filed with the Commissioner a bond conditioned upon the
future payment by him of any income tax that may be due on the gains derived
from such transfer, or
b. The Commissioner certified that the taxes, if any, due on the gain realized from
such sale or transfer have been paid.
GROSS INCOME FROM SOURCES WITHOUT THE PHIL
1. Interests other than those derived from sources within the Philippines
2. Dividends other than those derived from sources within the Philippines
3. Compensation for labor or personal services performed without the Philippines
4. Rentals or royalties from property located without the Philippines or from any
interest in such property including rentals or royalties for the use or for the
privilege of using without the Philippines, patents, copyrights, secret processes
and formulas, goodwill, trademarks, trade brands, franchises and other like
properties;
5. Gains, profits and income from the sale of real property located without the
Philippines.
INCOME FROM SOURCES PARTLY WITHIN AND PARTLY WITHOUT THE PHILIPPINES
 The taxable income may first be computed by deducting the expenses, losses or
other deductions apportioned or allocated thereto and a ratable part of any
expense, loss or other deduction which cannot be definitely be allocated to some
items or classes of gross income; and the portion of such taxable income
attributable to sources within the Philippines may be determined by the processes
and formulas of general apportionment prescribed by the SOF.
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 Gains, profits and income from the sale of personal property produced by the
taxpayer within and sold without the Philippines, or produced by the taxpayer
without and sold within the Philippines, shall be treated as derived partly from
sources without the Philippines.
 Gains, profits and income derived from the purchase of personal property within
and its sale without the Philippines, or from the purchase of personal property
without and its sale within the Philippines shall be treated as derived entirely from
sources within the country in which sold.
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING
Accounting Periods
 Taxable year or taxable accounting period – the calendar year or the fiscal year
ending during such calendar year, upon the basis of which the taxable income
under Title II of the Tax Code is computed.
Different taxable accounting periods
 G.R. the accounting period of a taxpayer is a period of 12 months:
1. Calendar accounting year - taxable period adopted by individuals or
corporations using the calendar year, which is a period of 12 months starting
from Jan. 1 to Dec. 31.
 If the taxpayer had no annual accounting period, or does not keep books, or if
the taxpayer is an individual, the taxable income shall be computed on the basis
of the calendar year.
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2. Fiscal accounting period – taxable period adopted by corporations using the Essentials of a standard accounting method in order to truly reflect a taxpayer’s
fiscal year, which is a period of 12 months ending on the last day of any month taxable income
other than December.
 In all cases in which the production, purchase, or sale of merchandise of any kind is
 In no instance shall individual taxpayers be authorized to establish a fiscal year
an income-producing factor, inventories of the merchandise on hand should be
as basis for filing their returns and computing their income.
taken at the beginning and end of the year and used in computing the taxable
 But a taxpayer may have a taxable period of less than 12 months.
income of the year.
3. Short accounting period – adopted by a taxpayer in the case of a return made
 Expenditures made during the year should be properly classified as between capital
for a fractional part of a year or which is a period of less than 12 months.
and income
 Occurs when a taxpayer, with the approval of the Commissioner, changes the
 In any case in which the cost of capital assets is being recovered thru deductions for
basis of computing taxable income. It may also occur when a taxpayer dies, or is
wear and tear, depletion or obsolescence, any expenditure (other than ordinary
newly organized, or a corporation is dissolved at any time during the year after
repairs) made to restore the property or prolong its useful life should be added to
the beginning of the calendar year or fiscal year.
the property account or charged against the appropriate reserve and not to current
Accounting Methods expenses.

 Comprise of a set of rules for determining when and how to report income and Different accounting methods under the Tax Code
deductions.
1. Cash Accounting Method – all items of income actually received during the year
 The accounting method for tax purposes must be one generally employed in
shall be accounted for in such taxable year and the corresponding expenses
keeping the taxpayer’s books, provided that the method clearly reflects the income.
actually paid shall also be claimed as deductions during the year.
 In case of conflict between the Tax Code and that of the generally accepted
2. Accrual accounting method – income, gains and profits are included in the gross
accounting principles, the provisions of the Tax Code and its IRR shall prevail.
income when earned regardless of whether or not actually received, and the
 If the taxpayer does not regularly employ a method of accounting which clearly
expenses are allowed as deductions from the gross income when actually
reflects his income, the computation shall be made in such manner as in the
incurred, although not yet paid. This is allowed because expenses not being
opinion of the Commissioner clearly reflects it.
claimed as deductions by a taxpayer in the current year when they are incurred
cannot be claimed as deduction from income for the succeeding year.

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3. Installment payment basis method – a method considered appropriate when
collections extends over relatively long periods of time and there is a strong
possibility that full collection will not be made. As customers make installment
payments, the seller recognizes the gross profit on sale in proportion to the cash
collected. In order that payments may be considered as on installment payment
basis, the initial payments in the year of sale should not exceed 25% of the gross
selling price.
4. Deferred payment basis method – a method being applied by real estate dealers
in their sale of real properties, which, although the mode of payment being
employed is on the installment basis, the said sale shall be considered as on a
cash basis when the initial payments in the year of sale of the real properties
exceed 25% of the gross selling price.
5. Percentage-of-completion-basis method – a method applicable in the case of a
building, installation or construction contract covering a period in excess of one
year whereby gross income derived from such contract may be reported upon
the basis of percentage of completion or progress of work.
Period in which items of gross income included
 In case of death of a taxpayer, gains, profits, and income are to be included in the
gross income for the taxable year in which they are received by the taxpayer, unless
they are included as of a different period in accordance with the approved method
of accounting followed by him.
 If the taxpayer is keeping books of accounts on the cash basis, income earned is
taxable in the year of actual receipt.
 If his books of accounts and records are kept on the accrual basis, income is taxable
in the year it is earned, irrespective of the year in which it is actually received.
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Meaning of the terms paid and incurred and paid or accrued
 The terms will be construed according to the method of accounting upon the basis
of which the taxable income is computed by the taxpayer.
 In case of the death of a taxpayer, there shall be allowed as deduction for the
taxable period in which falls the date of his death, amounts accrued up to the date
of his death if not otherwise properly allowable in respect of such period or a prior
period.
All-events-test
 The accrual of income and expense is permitted when the all-events-test has been
met.
 The all-events-tests requires
1. Fixing of a right to income or liability to pay
2. The availability of the reasonable accurate determination of such income or
liability.
 The test does not demand that the amount of 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 basis of accrual system of accounting is that obligations incurred in the normal
course of business will be discharged in due course; that the deductions have been
paid or accrued, or paid and accrues, in order to be accruable in the taxable year, a
valid obligation upon which the profit or loss, in case of deduction, is to be
determined must have existed in the year in which the obligation became binding
and enforceable.

Change of accounting period
 A taxpayer who changes the method of accounting employed in keeping his books
shall, before computing his income upon such new method for purposes of
taxation, secure the consent of the Commissioner.
 Application for permission to change the method of accounting employed and the
basis upon which return is made shall be filed within 90 days after the beginning of
the taxable year to be covered by the return.
 An individual cannot change his accounting period from calendar year to fiscal year
because he is only allowed to use the calendar year.
 A corporation, including a duly registered GPP, who desires to change its accounting
shall at any time not less than 60 days prior to the beginning of the proposed new
accounting period submit a written application to the Commissioner.
 The certification approving the adoption of a new accounting period must be
released within 30 working days from the date of receipt of the complete
documentary requirements.
Final or adjusted returns for a period of less than 12 months
 GR. No return can be made for a period of more than 12 months
 A separate return for a fractional part of a year is required whenever there is a
change, with the approval of the Commissioner, on the basis of computing taxable
income from one taxable year to another.
Accounting for long-term contracts
 Percentage-of-completion basis
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Installment basis
 The income of a dealer in a personal property on the installment plan may be
ascertained by taking as income that proportion of the total payments received in
the taxable year from installment sales which the total or gross profit realize or to
be realized on the total installment sales made during each year bears to the total
contract price of all such sales made during that respective year.
 The income from a casual sale or casual disposition of personal property (other than
property of a kind which should be properly be included in inventory) may be
reported on the installment basis only if the sales price exceeds P1,000 and the
initial payments do not exceed 25% of the selling price.
 The term initial payment does not include the amounts received by the vendor in
the year of sale from the disposition to a third person of notes given by the vendee
as part of the purchase price which are due and payable in subsequent years.
RETURNS AND PAYMENT OF TAX
 The following individuals are required to file income tax return
1. Filipino citizen residing in the Philippines
2. Filipino citizen residing outside the Philippines on his income from sources
within the Philippines
3. Alien residing in the Philippines on income derived in the Philippines
4. Nonresident alien engaged in trade or business or in the exercise of a profession
in the Philippines
5. A citizen of the Philippines and any alien individual engaged in business or
practice of profession within the Philippines, regardless of the amount of gross
income
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6. An individual earning purely compensation income but who is currently Income tax returns of individuals for the preceding taxable year shall be filed in
employed by two or more employers at any time during the taxable year. duplicate by the ff persons:

Individuals not required to file income tax return 1. A resident citizen – on his income for all sources
2. A nonresident citizen – on his income derived from sources within the
1. An individual whose gross income does not exceed his total personal and
Philippines
additional exemptions as dependents
3. A resident alien – on his income from all sources within the Philippines
2. An individual with respect to pure compensation income derived from sources
4. A nonresident alien engaged in trade or business in the Philippines – on his
within the Philippines, the income tax on which has been correctly withheld.
income derived from sources within the Philippines.
3. An individual whose sole income has been subjected to final withholding tax
4. A minimum wage earner or an individual exempt from income tax In case of individuals subject to capital gains tax:
5. Senior citizens who are considered as minimum wage earners
1. From the sale or exchange of shares of stock not traded thru a local stock
Taxation of marginal Income Earners exchange, the return should be filed within 30 days after each transaction and
final consolidated return on or before April 15 of each taxable year covering all
 Marginal income earners – refer to individuals not otherwise deriving compensation
stock transactions of the preceding year
as an ee under an er-ee relationship but who are self-employed and deriving gross
2. From the sale or disposition of real property, the return should be filed within
sales/receipts not exceeding P100,000 during any 12 month period. The activities of
30 days following each sale or other disposition.
such are considered principally for subsistence or livelihood.
 They are exempt from VAT and any percentage tax. Return of Husband and Wife
 They are not required to pay any registration although they are required to register
 Those who do not derive income purely from compensation, shall file a return for
as taxpayers for being a possible income tax and withholding tax filers.
the taxable year to include the income of both spouses, but where it is
 They are required to file the annual income tax return reflecting income from
impracticable for the spouses to file one return, each spouse may file a separate
whatever source.
return of income but the returns so filed shall be consolidated by the Bureau for the
 Any individual not required to file an income tax return may nevertheless be
purposes of verification for the taxable year.
required to file an information return.

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Returns of minors and persons with disability.  A corporation which has received a charter but has never perfected its organization,
and which has transacted no business and had no income from any source, may
 If he is unable to make his own return, the return may be made by the ff:
upon presentation of the facts to the Commissioner be relieved from the necessity
1. His duly authorized agent or representative
of making a return so long as it remains in an unorganized condition.
2. By the guardian
 A domestic corporation is required to file income tax returns 4 times for income
3. Other person charge with the care of his person, property, the principal and his
earned during a single taxable year. Reason: to endure the timeliness of collection
representative or guardian assuming the responsibility of making the return and
to meet the budgetary needs of the government; to ease the burden on the
incurring penalties for erroneous, false or fraudulent returns
taxpayer by providing it with an installment payment scheme, rather than requiring
4. In the case of income of unmarried minors derived from property received form
payment of the tax on a lump-sum basis after the end of the year.
living parent, said income shall be included in the return of the parents, except:
 GR. stockholders cannot be held liable for the unpaid taxes of a dissolved
a. When the donor’s tax has been paid on such property;
corporation. XPN. If it appears that the corporate assets have been passed into their
b. When the transfer of such property is exempt from donor’s tax.
hands.
The fact that an individual’s named is signed to a file return shall be prima facie
Reasons for the grant of extension to file returns
evidence for all purposes that the return was actually signed.
 The Commissioner may grant, in meritorious cases
Return of individuals with concurrent employers
1. Destruction of books of accounts and other records of the taxpayer thru fire,
 At any time during the taxable year shall file an income tax return regardless of flood or typhoon and the said books and other records are in the process of
whether she is an MWE or regardless of whether her personal and additional reconstruction;
exemption does not exceed his total wages. 2. Epidemic, pestilence or other calamities prevailing in specific sectors of the
country where the taxpayer resides or where the principal business is being
CORPORATION RETURNS conducted. Sickness or illness of the accountant, bookkeeper or the manager or
 Every corporation subject to tax, except foreign corporations not engaged in trade proprietor of the business shall not be considered a reasonable cause.
or business in the Philippines, shall render, in duplicate, a true and accurate
quarterly income tax return and final or adjustment return.

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Returns of receivers, trustees in bankruptcy or assignees
 Must make returns of income for such corporations, partnerships or associations
covering each year or part of the year during which they are in control.
Returns of GPPs
 Are not subject to income tax, but are required to file returns of their income for
the purpose of furnishing information as to the share in the gains or profits which
each partner shall include in his individual return.
 They are required to render a return of their earnings, profits and income, setting
forth the items of gross income and the deductions allowable, and the names and
addresses, TIN and shares of each of the partners who would be entitled to the net
earnings, profits, and income, is distributed.
PAYMENT AND ASSESSMENT OF INCOME TAX FOR INDIVIDUALS AND CORPORATIONS
 The total amount of income shall be paid at the time the return is filed, such tax to
be paid by the person subject thereto.
 Installment payment of income tax allowed only to individuals.
 Interest on income tax is not punitive in nature but compensatory; it is a
compensation to the State for the delay in the payment of the tax.
WITHHOLDING TAX-AT-SOURCE
 Withholding tax is a method of collecting in advance income tax and business tax of
certain taxpayers who are liable to pay income tax or business tax in the Philippines.
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 In the operation of the withholding tax system, the payee is the taxpayer, the
person on whom the tax is imposed, while the payor, a separate entity, acts no
more than an agent of the government for the collection of the tax in order to
ensure its payment.
 If the payor who is duty bound to withhold the tax fails to withhold and to remit the
said tax to the government, the said expenses of the payor shall generally be
disallowed as deduction from the gross income.
3-Fold purpose of the withholding tax system
1. To provide the taxpayer with a convenient way of paying his tax liability
2. To ensure the collection of tax
3. To improve the government’s cashflow
 The withholding agent is liable only insofar as he failed to perform his duty to
withhold the tax and remit the same to the government.
Who are constituted as withholding agent
 A withholding agent is any person or entity who is required to deduct and remit the
taxes withheld to the government.
1. In general, any juridical person, whether engaged or not in trade or business;
2. An individual, with respect to payments made in connection with his trade or
business.
 Insofar as taxable sales, exchanges or transfers of real property are concerned, the
buyers, WON engaged in trade or business, are constituted as withholding agents.

 The tax withheld is considered a part of the consideration agreed upon between the
seller and the buyer resulting, therefore, to a net take to the seller of only the
difference between the agreed consideration/selling price and the tax withheld.
3. All government offices, including GOCCs, as well as well provincial, city and
municipal governments and barangays.
4. All individuals, juridical persons and political parties, with respect to their
income payments made as campaign expenditures and/or purchase of goods
and services intended as campaign contributions.
Duties and obligations of the withholding agent
1. To register as a withholding agent within 10 days after acquiring such status
with the RDO having jurisdiction where his business is located.
2. To deduct and withhold taxes.
3. To remit the tax withheld
4. To file annual information return
5. To issue withholding tax certificates to recipient of income payments subject to
the withholding.
Income which may be subjected to the withholding tax at source
 Only fixed or determinable annual or periodical income is subject to withholding.
 The statute subjects interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, and emoluments, including royalties, to
withholding tax at source.
 Income is fixed when it is to be paid in amounts definitely pre-determined.
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 It is determinable whenever there is a basis of calculation by which the amount to
be paid may be ascertained.
Time of withholding
 When the income payment is paid or payable or accrued or the income payment is
accrued or recorded as an expense or asset, whichever is earlier.
Kinds of withholding tax-at-source
1. Withholding of final tax on certain incomes
2. Withholding of creditable tax at source
3. Withholding tax on interest from tax-free covenant bonds.
Concept of 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 tax due from the payee on the said income.
 In case of the payor’s failure to withhold the tax or incase of underwithholding, the
deficiency tax shall be collected from the payor.
 The payee is not required to file an income tax return for the particular income.
 The finality of the withholding tax is limited only to the payee’s income tax liability
on the particular income, it does not extend to the payee’s other tax liability on
income.

Rationale for the withholding of final tax on income payment to nonresident aliens
not engaged in trade or business in the Philippines
 Subject to final withholding tax
 At 25%
 Designed to enable the government to collect the proper and correct tax on
incomes derived from the Philippines by aliens outside the taxing jurisdiction.
Government as withholding agent
 Before making any money payment to private individuals, corporations,
partnerships and/or associations on account of each purchase of goods and services
shall deduct final withholding tax due on the gross money payments thereof.
Concept of creditable withholding tax system
 Taxes withheld on certain income payments are intended to equal or at least
approximate the tax due of the payee on said income.
 The income recipient is still required to file an income tax return.
Kinds of creditable withholding tax system
1. Expanded withholding tax
2. Withholding tax on compensation or wages
3. Withholding tax on interest from tax-free covenant bonds
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Expanded Withholding Tax
 A kind of creditable withholding tax, which is prescribed to be withheld both by the
government and private payors from the different items of income payments to
sellers/suppliers residing in the Philippines on their sale of goods and service, which
is creditable against the income tax due of the said payees/sellers/suppliers for the
taxable year quarter/year.
Conditions in order that income payment may be subjected to EWT
1. The income payment must be paid or payable by a taxpayer who is residing in
the Philippines
2. The recipient of the income who is liable to income tax must also be residing or
has business in the Philippines
3. The income is fixed or determinable at the time of payment
4. The income is one listed under the consolidated withholding tax regulations
A nonresident foreign corporation not doing business in the Philippines retained by a
domestic corporation to do the advertising of its product abroad paid thru outward
remittances is not subject to EWT.
 The fees paid by a domestic corporation to a nonresident foreign corporation are
not subject to EWT since they are not subject to the Philippine income tax.
 Expanded withholding taxes are only imposed on income payments to persons
residing in the Philippines.

When the obligation of withholding agent to deduct and withhold the tax arise
 At the time an income payment is paid or payable, or when the income payment
has accrued or recorded as an expense or asset, whichever is applicable, in the
payor’s books and which comes first.
 The term payable refers to the date the obligation becomes due, demandable or
legally enforced.
Persons exempted from being subjected to the EWT
1. National government agencies and its instrumentalities, including provincial,
city, municipal governments and barangays except GOCCs
2. Persons enjoying exemption of income taxes pursuant to the provisions of any
law, general or special.
Withholding tax on compensation or wages
 Also a form of creditable withholding tax which is withheld from individuals
receiving compensation income.
 No withholding of tax shall be required where the income received by an ee does
not exceed the statutory minimum wage.
Withholding tax on interest of tax-free covenant bonds
 Withholding is required of a tax of 30% in the case of interest upon bonds,
obligations or securities issued by domestic or resident foreign corporations,
containing a so-called tax-free covenant clause, payable either to citizens or aliens,
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where the owner of such interest income does not file with the withholding agent a
signed notice claiming the benefit of personal exemption.
 Subject to the exception just mentioned, withholding taxes take place in all cases of
payments of interest upon tax-free covenant bonds or other securities regardless of
the place where such bonds or securities are issued or marketed and the interest
thereupon paid.
 Not required in the case of a citizen or resident alien individual files with the
withholding agent when presenting interest coupons for payment, not later the
Feb. 1 following the taxable year, an ownership and exemption certificate on the
requisite form claiming a personal exemption or credits for dependents.
RETURNS AND PAYMENT OF TAXES WITHHELD AT SOURCE
 Income upon which any creditable tax is required to be withheld at source shall be
included in the return of its recipient.
 The excess of the withheld tax over the tax due on his return shall be refunded to
him subject to the authority of the Commissioner to refund taxes.
 The taxes withheld by the withholding agents shall be maintained in separate
accounts and should not be commingled with any other funds of the withholding
agent. They shall be considered as a trust fund held for government until they are
remitted.
 Every person who is required to withhold the tax from the compensation of an ee is
liable for the payment of such tax to the BIR. Such liability stays even if the ee
subsequently pays the tax.
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 Any income payment which is otherwise deductible shall be allowed as deduction But the income of the ees’ trust is exempt from income tax
from the payor’s gross income only if it is shown that the income tax required to be
 The income of the ees’ trust which forms part of a pension, stock bonus or profit-
withheld has been paid to the Bureau.
sharing plan of an er for the benefit of some or all of his ees shall be exempt from
TAX ON PROFITS COLLECTIBLE FROM THE OWNER income tax if the following conditions are met:
1. The contributions are made to the trust by such er, or ees, or both;
 Income tax not otherwise collectible from taxpayers chargeable to his duly
2. Such contributions are made for the purpose of distributing to such ees the
authorized representative.
earnings and principal of the fund accumulated by the trust in accordance with
ESTATES AND TRUSTS the plan;
3. Under the trust instrument, it is impossible, (in the taxable year and at any time
Income of estates and trusts which are subject to income tax thereafter prior to the satisfaction of all liabilities with respect to ees under the
trust) for any part of the corpus or income to be used for, or diverted to,
 The income tax imposable upon individuals shall apply to the income of estates or
purposes other than for the exclusive benefit of his ees; and
of any kind of property held in trust, including:
4. The same is duly registered as such with the BIR.
1. Income accumulated in trust
 Purpose: to encourage the formation of private plan outside SSS.
a. For the benefit of unborn or unascertained persons or persons with
 Tax exemption is likewise enjoyed by the income of the pension trust. Otherwise,
contingent interest: and
taxation of those earnings would result in a diminution of accumulated income and
b. Income accumulated or held for future distribution under the terms of the
reduce whatever the trust beneficiaries would receive out of the trust fund.
will or trust.
2. Income which is to be distributed currently be the fiduciary to the beneficiaries  The income of the trust funds shall be exempt from payment of final withholding
3. Income collected by a guardian of an infant which is to be held or distributed as tax.
the court may direct
4. Income received by the estates of deceased persons during the period of
administration or settlement of the estate
5. Income which, in the discretion of the fiduciary, may be either distributed tot eh
beneficiaries or accumulated.

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Instances when ees’ trusts may be taxed.
1. Mere resolution setting aside every month a reserve fun to pay pensions for all
the present and future ees, without evidence that the pension plan is actuarially
sound.
2. Any amount actually distributed tot eh ee or distributee of an ees’ trust shall be
taxable to the ee in the year in which so distributed to the extent that it exceeds
the amount contributed by such ee or distributee.
 A foundation existing for the purpose of holding title to, and administering, the tax
exempt Ees’ Trust Fund established for the benefit of the ees, has the personality to
claim tax refunds due to the Ees’ Trust Fund.
Other trusts which are exempt from income tax.
1. Revocable trust. The trust itself is exempt but the trustor/grantor is subject to
the payment of the income tax of the trust.
2. Trust, the income of which, in whole or in part, may be held or distributed for
the benefit of the grantor. If part of the income of the trust is to be held or
distributed for the benefit of the grantor, the same should be included in the
grantor’s return.
The following income taxes are payable when a person who owns property dies:
1. Income tax of the decedent when he was still alive, to cover the period
beginning January up to the time of his death;
2. Estate income if the estate is under administration or judicial settlement.
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When income of estates and trusts taxable to fiduciaries.
 Fiduciary is a term which applies to all persons or corporations that occupy
positions of peculiar confidence towards others such as trustees, executors, or
administrators; and a fiduciary, for income tax purposes, is any person or
corporation which holds in trust an estate of another person/s.
 GR. the income tax of estate or trust shall be computed upon the taxable income of
the estate or trust and shall be paid by the fiduciary.
 Where under the terms of a will or deed, the trustee may, in his discretion,
distribute the income or accumulate it, the income is taxed to the trustee,
irrespective of the exercise of his discretion. The imposition of the tax is not
affected by the fact that an ultimate beneficiary may be a person exempt from tax.
 The income of a trust which is to be accumulated or held for future distribution
must be returned by and will be taxed to the trustee.
When income of estate and trust taxable to beneficiaries.
1. A trust, the income of which is to be distributed annually or regularly
2. An estate of a decedent the statement of which is not the object of judicial
testamentary or intestate proceedings; and
3. Properties held under a co-ownership or tenancy in common, the income is
taxable directly to the beneficiary.
Rules in the consolidation of income of two or more trusts.
1. There are two or more trusts which derive income
2. The creator of the trust in each instance is the same person, and the beneficiary
in each instance is the same.

3. The income of the said trust should be consolidated.
4. Where the creator of the trust in each instance is the same person and the
beneficiary in each instance is the same, the tax due on the consolidated
income will be collected from the trustees in proportion to the taxable income
of the respective trusts.
5. When the creator of the trust in each instance is the same person and the
trustee in each instance is the same but the beneficiaries are different, the
trustee should make a separate return for each of the trusts in his hands.
6. When a trustee holds trust created by different persons for the benefit of the
same beneficiary, he should also make a return for each trust separately.
7. Where a trustor/grantor created two or more trusts in favor of the same
beneficiary appointing two or more trustees, the trustees should each make a
separate return for each trust. However, the Commissioner will consolidate the
taxable incomes, allowing only one absolute exemption of P20,000.
8. The income tax computed on the consolidated taxable income shall be allocated
between several trusts in proportion to their respective taxable income.
Computation of taxable income of estates or trusts.
G.R. The taxable income of the estate or trust shall be computed in the same manner
and on the same basis as in the case of an individual
XPN.
1. Allowable deductions:
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a. The amount of the income of the estate or trust for the taxable year which is
to be distributed currently by the fiduciary to the beneficiaries shall be
allowed as deduction in computing the taxable income of the estate or trust
b. The amount of the income collected by a guardian and infant which is to be
held or distributed as the court may direct shall also be allowed as
deduction in computing the taxable income.
c. However, the said amounts so allowed as a deduction shall be included in
computing the taxable income of the beneficiaries, whether or not
distributed to them.
2. Additional allowable deductions
a. There shall be allowed an additional deduction in computing the taxable
income of the estate or trust the amount of the income of the estate or
trust for its taxable year, which is properly paid or credited during such year
to any legatee, heir or beneficiary. This applies in cases of:
i. Income received by estates of deceased persons during the period of
administration or settlement of the estate; and
ii. Income which, in the discretion of the fiduciary, may either be
distributed to the beneficiary or accumulated.
b. However, the amount so allowed as a deduction shall be included in
computing the taxable income of the legatee, heir or beneficiary.
3. No deductions allowed. In the case of trust administered in a foreign country:
a. The deductions mentioned in Subsections A and B of Section 61 shall not be
allowed.
b. The amount of any income included in the return of said trust shall not be
included in computing the income of the beneficiaries.

c. The income of the trust, undiminished by any amount distributed to the
beneficiaries shall be taxed to the trustee.
4. Personal exemption allowed. – P20,000
Casasola believes that the personal exemption of estates and trusts should be
P50,000 since they are taxed like an individual.
The term period of administration and settlement of the estate is the period required
by the executor or administrator to perform the ordinary duties pertaining to
administration, in particular, the collection of assets and the payment of debts and
legacies.
Tax consequences during the period of administration and settlement of the estate.
1. Estates during the period of administration have but one beneficiary and that
beneficiary is the estate.
2. No taxable income is realized from the passage of property to the executor or
administrator on the death of the decedent, even though it may have
appreciated in value since the decedent acquired it.
3. In the event of delivery of property in kind to a legatee or distributee, no
income is realized.
4. Where, however, prior to the settlement of the estate, the executor or
administrator sells the property of the decedent’s estate for more than the
appraised value placed upon it at the death of the decedent, the excess is
income, taxable to the estate.
5. Where the property is sold after the settlement of the estate by the devisee,
legatee or heir at a price greater than the appraised value placed upon it at the
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time he inherited the property from the decedent, he is taxable individually on
the profit derived.
6. An allowance paid a widow or heir out of the corpus of the estate is not
deductible from gross income.
Effects of distribution to heirs of the income of the estate.
 Distribution to the heirs during the taxable year of the income of the estate is
deductible from the taxable income of the estate since the distributed income shall
form part of the respective heir’s taxable income.
 Where no such distribution to the heirs is made during the taxable year when the
income is earned, and such income is subjected to income tax payment by the
estate, the subsequent distribution thereof is no longer taxable on the part of the
recipient.
Effects of termination of judicial settlement where the heirs still do not divide the
property.
 If the heirs contribute to the estate money, property or industry with intention to
divide the profits between or among them, an unregistered partnership is formed
and the estate becomes liable for the payment of corporate income tax.
 If the heirs, without contributing money, property or industry to improve the
estate, simply divide the fruits thereof between or among themselves, a co-
ownership is created and individual income tax is imposed on the income received
by each of the heirs, payable in their separate and individual capacity.

Exemption allowed to estates and trusts.
 Each beneficiary is entitled to but one personal exemption, no matter how many
trusts he may receive income.
 No additional exemption is allowed to the income of estates and trusts.
Revocable Trust
 A trust where the title can revert back to the grantor anytime.
 It is not taxable itself as separate entity because the income forms part of the
income of the grantor.
 Paid by the grantor
Requisites of a revocable trust
1. The power to revert in the grantor title to any part of the corpus of the trust is
vested in the grantor at any time either alone or in conjunction with any person
not having a substantial adverse interest in the disposition of such part of the
corpus or the income therefrom; or
2. The power to revert in the grantor title to any part of the corpus of the trust is
vested in the grantor at any time in any person not having a substantial adverse
interest in the disposition of such part of the corpus or the income therefrom;
3. The income of such part of the trust shall be included in computing the taxable
income of the grantor, and thus the grantor/trustor shall be the one subject to
the income tax.
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Irrevocable Trust
 A trust irrevocable both as to corpus and to income.
 Requisites:
1. The trust itself, through the trustee or fiduciary, is liable for the payment of the
income tax
2. It is taxed exactly in the same way as estates under judicial settlement and its
status as an individual is that of the trustor.
3. The distribution of the trust income during the taxable year to the beneficiaries
is deductible from the taxable income of the trust.
When estate and trust may be taxable as a separate entity
 The estate of the decedent is taxable as a separate entity when it is already subject
to a judicial proceeding.
 A trust is taxable as a separate entity if the trust is irrevocable and the grantor has
no more control over the corpus of the trust. If there is a condition that provides
that a portion does not convert the irrevocable trust to a revocable trust, but that
portion is a taxable income of the grantor.
Requisites when income shall be considered for the benefit of the grantor
1. Any part of the income of a trust is, or in the discretion of the grantor or of any
person not having a substantial adverse interest in the distribution of such part
of the income may be held or accumulated for future distribution to the
grantor;

2. Any apart of the income of a trust may, or in the discretion of the grantor or of
any person not having a substantial adverse interest in the disposition of such
part of the income, be distributed to the grantor; or
3. Such part of the income of the trust shall be included in computing the taxable
income of the grantor/trustor.
 The term in the discretion of the grantor means in the discretion of the grantor,
either alone or in conjunction with any person not having a substantial adverse in
the disposition of the part of the income in question.
Fiduciary Returns
 In order that a fiduciary relationship may exist, it is necessary that a legal trust be
created.
 Fiduciaries are required to make returns of income of the trust when the gross
income of the person, trust or estate for whom or which they act amounts of
P20,000 or more and will be subject to all the provisions of law which apply to
individuals.
Income tax return by receiver
 A receiver who stands in the place of an individual or corporation must render a
return of income and pay the tax for his trust, but a receiver of only part of the
property of an individual or corporation need not.
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Fiduciaries to be indemnified against claims for taxes paid.
 Fiduciaries are indemnified against the claims or demands of every beneficiary for
all payments of taxes which they shall be required to make and they shall have
credit for such payments in any accounting they make as such fiduciaries.
WITHHOLDING ON WAGES
Compensation Income
 Means all remuneration for services performed by an ee for his er under an er-ee
relationship, unless specifically excluded by the Code.
 The name by which the remuneration for services is designated is immaterial.
Remunerations not considered as compensation income
1. Remuneration paid for agricultural labor.
G.R. Remuneration for services which constitute agricultural labor and paid
entirely in products of the farm where the labor is performed is not subject to
withholding tax.
XPN. Subject to withholding tax
a. Services performed in connection with forestry, lumbering or landscaping,
because the term agricultural labor does not include the same.
b. Remuneration paid entirely in products of the farm where the labor is
performed be an ee of any person in connection with any of the following
activities is excepted as remuneration for agricultural labor:
i. The cultivation of soil;

ii. The raising, shearing, feeding, caring for, training, or management of
livestock, bees, poultry, or wildlife; or
iii. The raising or harvesting of any other agricultural or horticultural
commodity.
c. The remuneration paid entirely in products of the farm where the labor is
performed for the following services in the employ of the owner or tenant
or other operator of one or more farms is not considered remuneration,
provided the major part of such services is performed on a farm.
i. Services performed in connection with the operation, management,
conservation, improvement, or maintenance of any such farms or its tools
or equipment; or
ii. Services performed in salvaging timber, or clearing land brush and other
debris left by a hurricane.
d. Remuneration paid entirely in products of the farm where labor is
performed by an ee in the employ of any person In connection with any of
the following operations is not considered as remuneration without regard
to the place where such services are performed;
i. The making of copra, stripping of abaca, etc.;
ii. The hatching of poultry;
iii. The raising of fish;
iv. The operation or maintenance of ditches, canals, reservoirs, or
waterways used exclusively for supplying or storing water for farming
purposes; and
v. The production or harvesting of crude gum from a living tree or the
processing of such crude gum into gum spirits or turpentine and gum
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resin, provided such processing is carried on by the original producer of
such crude gum.
e. Remuneration paid entirely in products of the farm where labor is
performed by an ee in the employ of a farmer or a farmer’s cooperative,
organization or group in the handling, planting, drying, pacing, packaging,
processing, freezing, grading, storing or delivering to storage or to market or
to carrier for transportation to market, of any agricultural or horticultural
commodity produced by such farmer or farmer-members of such
organization or group.
2. Remuneration for domestic services. Not subject to withholding.
3. Remuneration for casual labor not in the course of an er’s trade or business.
4. Compensation for services by a citizen or resident of the Philippines for a
foreign government or an international organization.
Payroll period
 The period of services for which a payment of compensation is ordinarily made to
an ee by his er.
Employee
 An individual performing services under an er-ee relationship.
Employer
 Any person for whom an individual performs or performed any service, of whatever
nature, under an er-ee relationship.

Withholding tax on compensation income
 A method of collecting the income tax at source upon receipt of the income.
 The er is constituted as the withholding agent.
 No withholding of tax shall be required on the SMW, including holiday pay, night
shift differential and hazard pay of MWEs in the private/public sectors.
 The tax withheld by the ers from the compensation income of the ees is considered
as the tax aid by the recipient of the income.
 The tax deducted and withheld at source on compensation income shall neither be
allowed as a deduction from the er’s gross income or from the recipient’s gross
compensation income.
 The creditable tax withheld at source, however. Is allowable as a credit against the
tax imposed by the NIRC to the recipient of the income.
 Any excess of the tax withheld at source, over the tax ascertained to be due on the
income tax return shall be refunded or automatically credited, at the taxpayer’s
option, to the recipient of the income.
 Any excess of the tax which was withheld on compensation over the tax due from
the taxpayer shall be returned not later than July 15 of the following year.
 Refunds made after such time shall earn interest at the rate of 6% per annum,
starting after the lapse of the 3 month period up to the date when the refund is
made.
 The withholding exemptions to which an ee is entitled depends upon his status and
the number of dependents qualified for additional exemptions.
 Individual taxpayers regardless of status are entitled to P50K personal exemption.
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 An individual, whether single or married, shall be allowed an additional exemption
of P25K for each qualified dependent child, provided that the total number of
dependents for which additional exemptions may be claimed shall not exceed 4
dependents.
 Taxpayer who died during the taxable year may still claim personal and additional
exemption for himself and his dependents.
 If the spouse or any of the dependents dies or if any of such dependents marries,
becomes 21 years old or becomes gainfully employed during the taxable year, the
taxpayer may still claim the same exemptions as if such happened at the close of
such year.
 Where both husband and wife are each recipients of compensation either from the
same or different ers, taxes to be withheld on the ff basis:
a. The husband shall be deemed the proper claimant of the additional exemption
in respect to any dependent children, unless he explicitly waives his right in
favor of his wife in the application for registration or in the withholding
exemption certificate.
b. In general, taxes shall be withheld from the wages of the wife in accordance
with the schedule for a married person without any qualified dependent.
 Compensation for services rendered in the Philippines paid to nonresident aliens
engaged in trade or business shall also be subject to withholding tax on
compensation just like a resident alien.
 There shall also be imposed a final withholding tax of 15% on the salaries, annuities,
compensation, remuneration and other emoluments, such as honoraria and
allowances paid to its alien ees occupying managerial and technical positions and
Filipino ees occupying similar positions by ROHQs, OBUs and Petroleum Service
contractors and sub-contractors.

 The following are liabilities of the er for the tax:
1. In general, the er shall be responsible for the withholding and remittance of the
correct amount of tax required by deducting and withholding from the
compensation income of his ees.
2. The er, who required to collect, account for and remit any tax imposed by the
NIRC, who willfully fail to collect such tax, or account for and remit such tax or
willfully assist in any manner to evade any payment thereof, shall in addition to
other penalties, to a penalty equal to the amount of the tax not collected nor
accounted for or remitted.
3. Any er/withholding agent who fails or refuses to refund excess withholding tax
not later than Jan 25 of the succeeding year shall, in addition to any penalties,
be liable to the total amount of refund which was not refunded to the ee
resulting from any excess of the amount withheld over the tax actually due on
their return.
 The following are the violations that may be committed by the er/withholding
agent relative to withholding taxes on compensation and its year-end adjustment:
1. Non-withholding of tax
2. Under withholding
3. Non-remittance
4. Underremittance
5. Late remittance
6. Failure to refund excess taxes withheld to its ees.
 Liabilities of the ee for the tax. Where an ee fails or refuses to file an application of
refistration or certificate to update of exemption and the er’s and ee’s information,
together with the attachments, or willfully supplies false or inaccurate information
thereunder after due written notice by the er, the tax otherwise to be withheld by
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the er shall be collected from him including penalties or additions to the tax from
the due date of remittance until the date of payment.
 Where the ee, after due written notice form the er, willfully fails or refuses to file
the application for registration, or the certificate of update of exemption and the
er’s and ee’s information, whichever is applicable, or willfully supplies false and
inaccurate information, the excess taxes withheld by the er shall not be refunded to
the ee but shall be forfeited in favor of the government.
 Persons having control of the payment of wages or salaries are authorized to
deduct and withhold upon such wages or salaries the withholding tax due thereon.
In this case, the garnishees are the persons owning debts due to the er or in
possession or control of credits to which the er are entitled. Accordingly, they are
authorized to deduct and withhold the income tax due from the backwages,
allowances and benefits to be paid to ees, and are respectively liable for such
deductions.
 In order to ensure the collection of the appropriate withholding taxes on wages,
garnishees of a judgment award in a labor dispute are constituted as withholding
agents with the duty of deducting the corresponding withholding tax on wages due
thereon in an amount equivalent to 5% of the portion of the judgment award
representing the taxable backwages, allowances and benefits.
 Failure of the withholding agent of compensation income to remit withholding
taxes is tantamount to non-payment of taxes by payee.
 Substituted filing is when the er’s annual return may be considered as the
substitute ITR of the ee inasmuch as the information provided in his income tax
return would exactly be the same information contained in the er’s annual return.
 Under substituted filing, an individual taxpayer although required under the law to
file his income tax return, will no longer have to personally file his own income tax

return but instead the er’s annual information return filed with be considered as
the substitute ITR of the ee inasmuch as the information in the er’s return is exactly
the same information contained in the ee’s return.
 Non-filing is applicable to certain types of individual taxpayers who are not required
under the law to file an income tax return.
 The ee who is qualified for substituted filing of income tax return shall no longer be
required to file income tax return.
 Persons qualified for substituted filing of income tax returns
1. The ee who receives purely compensation income during the taxable year
2. The ee who receives the income only form one er in the Philippines during the
taxable year
3. The amount of tax due from the ee at the end of the year equals the amount of
tax withheld by the er.
4. The ee’s spouse also complies with all 3 conditions stated above.
5. The er files an annual information return
6. The er issues BIR Form No. 2316 to each ee.
 Persons not qualified for substituted filing of the ITR
1. Individuals deriving compensation income from two or more ers concurrently or
successively at anytime during the taxable year.
2. Ees deriving compensation income, regardless of the amount, whether from a
single or several ers, during the calendar year, the income tax of which has not
been withheld correctly resulting to collectible or refundable return.
3. Individuals deriving other non-business, non-profession-related income in
addition to compensation income not otherwise subject to a final tax.
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4. Individuals receiving purely compensation income from a single er, although the
income tax of which has been correctly withheld, but whose spouse falls under
paragraphs a, b and c above.
5. Nonresident aliens engaed in trade or business in the Philippines deriving purely
compensation income, or compensation income and other non-business, non-
profession related income.
 Constructive receipt of Compensation Theory. Compensation is constructively paid
when it is credited to the account of or set apart for an ee so that it may be drawn
upon by him at any time although not then actually reduced to possession.
ESTATE AND DONOR’S TAXES
TRANSFER TAXES
 Transfer taxes are the taxes imposed upon the gratuitous disposition of
property, whether real or personal, tangible or intangible.
 They are not property taxes because their imposition does not rest upon
general ownership but rather considered as privilege tax imposed on the
act of passing ownership of property.
Kinds of Transfer Taxes
1. Estate tax – a tax imposed upon the privilege of individuals to transfer
property occasioned by death (donation mortis causa)
2. Donor’s tax – a tax imposed upon the privilege of individuals and corporate
donors to transfer property during lifetime (donation inter vivos)

Characteristics of Donation Mortis Causa
1. It conveys no title or ownership to the transferee before the death of the
transferor; or, what amounts to the same thing that the transferor should
retain the ownership (full or naked) and control of the property while alive
2. That before his death, the transfer should be revocable by the transferor at
will, ad nutum; but revocability may be provided for indirectly by means of a
reserved power in the donor to dispose of the properties conveyed; and
3. Tat the transfer should be void if the transferor should survive the
transferee.
Basic Principles of Estate Taxation
 Estate tax laws rest in their essence upon the principle that death of an
individual is the generating source from which the taxing power takes its
being, and that it is the power to transmit or the transmission from the dead
to the living on which the tax is more immediately based.
Estate Tax
 A tax levied, assessed, collected and paid upon the transfer of the net
estate of every decedent, whether resident or nonresident of the
Philippines, based on the value of such net estate, by including the value at
the time of his death of all property.
 In case of a nonresident decedent who at the time of his death was not a
citizen of the Philippines, only that part of the estate which is situated in the
Philippines shall be included in his taxable estate.
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Nature of Estate Tax
 It has made the duty of the probate court to make the amount of the
inheritance tax a part of the final decree of distribution of the estate.
 It is not against the property of the decedent, nor is it a claim against the
estate of as such, but it is against the interest or property right which the
heir, legatee, devisee, etc., has in the property formerly held by the
decedent.
 Proceeding in rem – one taken directly against the property, and has for its
object the disposition of the property, without reference to the title of
individual claimants. It constitutes constructive notice to the whole world.
 The enforcement and collection of estate tax is executive in character.
 It is a tax laid neither on the property nor on transferor or the transferee. It
is an excise tax or privilege tax and its object is to tax the shifting of
economic benefits and enjoyment of property from the dead to the living.
Purpose or Object for Levying the Estate Tax
 It is a more effective agent for bringing about a more equitable distribution
of wealth.
 It applies to the entire net estate, including the property otherwise exempt.
 It is the most appropriate and effective method for taxing the privilege
which the decedent enjoys of controlling the disposition at death of property
accumulated during lifetime.
 It is the only method of collecting the share which is properly due to the
State as a partner in the accumulation of property which was made
possible on account of the protection given by the State.
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The law that governs 10M And 1.215M 20% 10M

 Estate taxation is governed by the statute in force at the time of death of over
the decedent.
 The estate tax accrues as of the death of the decedent and the accrual of GROSS ESTATE
the tax is distinct from the obligation to pay the same.  Consists of the totality of the value of all property of the decedent at the
 The right of the State to tax the privilege to transmit the estate vests time of his death, whether real or personal, tangible or intangible, wherever
instantly upon death. situated.
 These are the properties which the decedent owned, existing and can
Time and Transfer of Properties dispose to the extent of the interest therein at the time of his death,
 The properties and rights are transferred to the successors at the time of including revocable transfers and transfers for insufficient consideration.
death. But the ROD shall not transfer the title to the properties without the
Certificate Authorizing Registration issued by the RDO evidencing the Classification of Decedents
payment of the estate tax. 1. Citizen and resident alien – gross estate shall include all his property, real
or personal, tangible or intangible, wherever situated at the time of his
Rates of Estate Tax death.
 The entire value of the net estate is divided into brackets and each rate is 2. Nonresident alien – gross estate includes only that part of the entire gross
imposed on the corresponding bracket. estate which is situated in the Philippines, provided that intangible personal
property, its inclusion in the gross estate is subject to the rule on
If the net estate is: reciprocity.
Over But not The tax Plus Of the
over shall excess Residence for purposes of estate taxation
be over  Synonymous with domicile.
200k exempt  Refers to the permanent home, the place to which whenever absent, for
200k 550k 0 5% 200k business or pleasure, one intends to return, and depends on facts and
500k 2M 15k 8% 500k circumstances, in the sense that disclose intent.
2M 5M 135k 11% 2M  It is not the actual place of residence.
5M 10M 465k 15% 5M
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Meaning of date-of-death valuation rule
 The properties comprising the gross estate shall be valued based on their
fair net value as of the time of death.
 If the property is a real property, the fair market value shall be the fair
market value as determined by the Commissioner of the fair market value
as shown in the schedule of values fixed by the provincial and city
assessors, whichever is higher.
 If shares of stocks, the fair market value shall depend on whether the
shares are listed or unlisted in the stock exchanges. Unlisted common
shares are values based on their book value which unlisted preferred
shares are values at par value. In determining the book value of common
shares, appraisal surplus shall not be considered as well as the value
assigned to preferred shares, if there are any.
 If shares are listed in the stock exchanges, the fair market value shall be
the arithmetic mean between the highest and lowest quotation at a date
nearest the date of death, if none is available on the date of death itself.
 To determine the value of the right to usufruct, use or habitation, as well as
that of annuity, there shall be taken into account the probable life of the
beneficiary in accordance with the latest basic standard mortality table.
 Personal properties shall be valued at their fair market value at the time of
death.
Composition of the Gross Estate of a Decedent
1. Decedent’s interest
2. Transfers in contemplation of death
3. Revocable transfers
4. Property passing under general power of appointment
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5. Proceeds of life insurance
6. Prior interests
7. Transfer for insufficient consideration
8. Dividends declared by a corporation before death of stockholder although
paid after death, if the decedent was still living on the record date
9. Partnership profits even if paid after the death of partner
10. Right of usufruct if transferable to the heirs
Decedent’s Interest
 The decedent must have had an interest in property at the time of his death
in order that such property interest may be taxable or includible in his gross
estate.
 Where he had, before his death, relinquished ownership over any interest
in property, he could not be deemed to have transmitted any interest in
such property upon his death.
Transfer in contemplation of death
 Refers to transfer, by trust or otherwise, of properties or interest therein
made by the decedent during his lifetime in contemplation of or intended to
take effect in possession or enjoyment at or after death, or of which he has
at any time made a transfer, by trust or otherwise, under which he has
retained for his life or for any period which does not in fact end before his
death the following:
a. The possession or enjoyment thereof;
b. The receipt of the income or the fruits notwithstanding the transfer; or

c. The right either alone or in conjunction with any person, to designate
person who shall possess or enjoy the said property or income
therefrom.
Meaning of the term in contemplation of death
 Means that the thought of the death is the impelling cause of the transfer,
and while the belief of death may afford convincing evidence, the statute is
not to be limited and its purpose thwarted by a rule of construction which in
place of contemplation of death makes the final criterion to be an
apprehension that death is near at hand.
 Does not constitute any transfer made by a dying person but rather to the
retention of some type of control over the property transferred. In effect,
there is no full transfer of all interest during the lifetime of the decedent.
When donation inter vivos given by the decedent during his lifetime to his
heirs be considered transfer in contemplation of death.
 Inter vivos gifts made by a decedent to his children within a very short time
before he died due to his incurable sickness.
 When the decedent, during his lifetime, makes his will within a short time,
or simultaneously with, the giving or gifts.
 When the donor makes inter vivos gifts, especially when he knows that his
sickness can no longer be cured, his purpose for donating his properties to
his heirs is to avoid the payment of the estate tax.
 Subject properties donated during his lifetime shall form part of his gross
estate which shall be subject to the estate tax, not the donor’s tax.
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Meaning of transfer with retention or reservation of certain rights.
 Involves cases where the owner transfers his property during life but still
retains economic benefits.
 By reason of the restriction, the transferee is incapable of freely enjoying or
disposing of the property until the transferor’s death.
Revocable transfer
 Included in the gross estate because of the tremendous power and control
which the transferor can exercise over the property since at anytime, he
can always revoke the transfer, hence, there was really no genuine
transfer of the property made by the transferor.
 It consists of transfers made by the decedent to the extent of any interest
he had therein, of which he has at any time made by trust or otherwise,
where the enjoyment thereof was subject at the date of his death to any
change through the exercise of a power by:
a. The decedent alone
b. The decedent in conjunction with any other person to alter, amend,
revoke or terminate. The power to alter, amend or revoke must be
retained by the donor-decedent on the date of his death in order that the
gift may be considered revocable.
c. Where any such power is relinquished in contemplation of the
decedent’s death.
 Refer to transfers where the transferor has reserved the right to alter,
amend or revoke such transfer, regardless of whether or not the power
should be exercised by him alone or in conjunction with some else.

Property passing under general power of appointment.
 Form part of the gross estate if exercised by the decedent
a. By will
b. By deed executed in contemplation of, or intended to take effect in
possession or enjoyment at, or after his death; or
c. By deed under which he has retained for his life or any period not
ascertainable without reference to his death or for any period which
does not in fact end before his death
i. The possession or enjoyment of, or the right to the income from, the
property, or
ii. The right, either alone or in conjunction with any person, to
designate the persons who shall possess or enjoy the property or
the income therefrom.
 The property passing under a general power of appointment comes from
the donor and the done-decedent. The power to dispose of property at
death by the exercise of a power of appointment is the equivalent of
ownership. It is a potential source of wealth to the appointee and the
disposition of wealth affected by its exercise or relinquishment at death is
one from of the enjoyment of wealth.
Meaning of the term power of appointment.
 A power of appointment is a right to designate by will or deed the person or
persons who are to receive certain property from the estate of a prior
decedent.
 Such power is held by one who has enjoyed a life income from the
property.
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 It is possible for one person to have a life income and another person to
have the right to designate who shall receive the property after death of the
life tenant.
 Considered general power when it gives to the donee the power to appoint
any person he pleases, including himself, his spouse, his estate, executor
or administrator, and his creditor, thus having a full dominion over the
property as though he owned it.
 It is special when the done can appoint only among a restricted or
designated class of persons other than himself.
Proceeds of life insurance.
 The amount includible in the gross estate would be to the extent of the
amount receivable by the estate of the deceased, his executor, or
administrator, under policies taken out by decedent upon his own life,
irrespective of whether or not the insured retained the power of revocation,
or to the extent of the amount receivable by any beneficiary designated in
the policy of insurance, except when it is expressly stipulated that the
designation of the beneficiary is irrevocable.
Prior Interests
 Transfers in contemplation of death, revocable transfer and property
passing under general power of appointment shall apply to the transfers,
trusts, estates, interests, rights, powers and relinquishment of powers, as
severally enumerated and described, whether made, created, arising,
existing, exercised or relinquished before or after the effectivity of this
Code.

Transfers for insufficient consideration.
 Refers to the transfer that is bona fide sale of property for an adequate and
full consideration in money and money’s worth.
 If it is not a bona fide sale, the excess of the fair market value at the time of
death over the value of the consideration received by the decedent shall
form part of his gross income.
 If the inter vivos transfer is proven fictitious or simulated, the total value of
the property at the time of death should be included in the gross estate.
 This transfer falls under any of the ff:
a. Transfer in contemplation of death
b. Revocable transfer
c. Transfer of property passing under a general power of appointment.
Items which are not part of the gross estate.
1. Capital of surviving spouse – refers to the exclusive property of the
surviving spouse and shall not, for estate tax purposes, be deemed as part
of his/her gross estate:
a. That which is brought to the marriage as his or her own
b. That which each acquires during the marriage by lucrative title;
c. That which is acquired by right of redemption or by exchange with other
property belonging to only one of the spouses;
d. That which is purchased with exclusive money of the surviving spouse;
e. The sums collected by installments during the marriage from credit
payable in certain number of years are considered of the souse whom
the credit belongs;
f. The right of an annuity, whether perpetual or for life, and the right of
usufruct, belonging to one of the spouses, form part of his or her
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separate property, but its fruits, pensions and interests, due during the
marriage belong to the partnership.
2. Amounts received as compensation for personal injuries and damages
which led to the death of a decedent.
 Considering that the said amount is not yet a property of the
decedent at the time of his death, it cannot be said that the same
shall be subject to the estate tax, hence, not taxable.
Meaning of the term net estate of the deceased person.
 Determined by deducting from the gross estate the exemption under
Section 84 and the allowable deductions under Section 86 of the Tax Code.
It is that portion of the gross estate which is the one being subjected to the
estate tax after considering all the exemptions and deductions.
Distinction between gross estate and net estate.
 Gross estate refers to all properties and interest in properties of the
decedent at the time of his death, while the term net estate refers to the
value of the estate after all the deductions have been made against the
gross estate; but will be subject to the graduated tax rates.
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COMPUTATION OF THE NET ESTATE OF A DECEDENT WHO IS A CITIZEN III. Net share of the surviving spouse in the conjugal partnership or
OR A RESIDENT ALIEN community property.

Deductions from the gross estate. ORDINARY DEDUCTIONS

 The value of the net estate shall be determined by deducting from the value 1. Funeral Expenses
of the gross estate the following items of deductions:  Actual funeral expenses, whether paid or unpaid, up to the time of
interment, or an amount equal to 5% of the gross estate, whichever is
I. Ordinary Deductions lower, but in no case to exceed 200k. – those which are actually incurred in
1. Expenses, losses, indebtedness, and taxes – such amounts for: connection with the interment or burial of the deceased. Must be duly
a. Actual funeral expenses or 5% of the gross estate, whichever is supported by receipts or invoices or other evidence
lower, but in no case to exceed P200,000  They include:
b. Judicial expenses of the testamentary or intestate proceedings a. the mourning apparel of the surviving spouse and unmarried minor
c. Claims against the estate children of the deceased bought and used on the occasion of the burial;
d. Claims of the deceased against insolvent persons b. expenses of the deceased’s wake, including food and drinks;
e. Unpaid mortgages or any indebtedness in respect to property c. publication charges for death notices;
f. Taxes d. telecommunications expenses incurred in informing relatives of the
g. Casualty losses deceased;
2. Property previously taxed e. cost of burial plot, tombstones, monument or mausoleum but not their
3. Transfers for public use. upkeep.
f. Interment and/or cremation fees and charges
II. Special deductions g. All other expenses
1. Family home
2. Standard deduction Not deductible funeral expenses.
3. Medical expenses 1. Expenses incurred after interment
4. Amount received by heirs under RA 4917 2. Any portion of the funeral or burial expenses borne or defrayed by relatives
and friends of the deceased.
3. Any amount of funeral expenses in excess of the 200k threshold.

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Cost of dinner to commemorate the first death anniversary of the
deceased is not an allowable funeral expenses.
 Does not fall under the meaning of the funeral expenses.
2. Judicial expenses of the testamentary or intestate proceedings.
 These expenses are incurred during the settlement of the estate but not
beyond the last day prescribed by law, or the extension thereof, for the
filing date of the estate return.
 Includes:
a. Fees of executor or administrator
b. Attorney’s fees
c. Court fees
d. Accountant’s fees
e. Appraiser’s fees
f. Clerk hire````
g. Cost of preserving and distributing the estate
h. Cost of storing or maintaining property of the estate
i. Brokerage fees for selling property of the estate
j. Commissions for selling or disposing of the estate, and the like.
 Should be supported by a sworn statement of account issued and signed
by the creditor.
 Includes expenses incurred in extrajudicial proceedings. But only
administration expenses.
 Fees to litigate case among the heirs are not deductible.
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Administration Expenses.
 Those which are necessary for the management of the estate, for
protecting it against destruction or deterioration, and for the production of
fruits.
 Limited to such expenses as are actually and necessarily incurred in the
administration of a decedent’s estate.
 The expenses must be essential to the proper settlement of the estate.
Notarial fee paid for the extrajudicial settlement.
 Should be allowed as deduction.
 There is no requirement for formal administration. It is sufficient that the
expense be a necessary contribution toward the settlement of the case.
 Attorney’s fee to be deductible must be essential to the collection of assets,
payment of debts or the distribution of property to the persons entitled to it.
Attorney’s fees in guardianship proceedings.
 Must be essential to the collection of assets, payment of debts or the
distribution of the property tot eh persons entitled to it.
 Attorney’s fees and guardian’s fees incurred in a trustee’s accounting of a
taxable inter vivos trust attributable to the usual issues involved in such an
accounting was held to be proper deductions because these are expenses
incurred in terminating an inter vivos trust that was includible in the
decedent’s estate.
Substantiation requirements in case the settlement is made through the
court in a testate or intestate proceeding.
 Pertinent documents evidencing claims against the estate are necessary.

Claims against the estate.
 The word claims is generally construed to mean debts or demands of a
pecuniary nature which could have been enforced against the deceased in
his lifetime and could have been reduced to simple money judgments. It
may arise out of contract, tort or by operation of law.
Requisites for the deductibility of claims against the estate.
1. The liability represents a personal obligation of the deceased existing at the
time of his death except unpaid obligation incurred incident to his death.
2. The liability was contracted in good faith and for adequate and full
consideration in money or money’s worth.
3. The claim must be a debt or claim which is valid in law and enforceable in
courts
4. The indebtedness must not have condoned by the creditor or the action to
collect from the decedent must not have prescribed.
Substantiation requirements in case of simple loan (including advances).
 The ff requirements or documents must be complied with or submitted:
1. The debt instrument must be duly notarized at the time the
indebtedness was incurred
2. Duly notarized certification from the creditor as to the unpaid balance of
the debt, including interest as of the time of death.
 If the creditor is a corporation, the sworn certification must be signed
by the President, VP or other principal officer of the corporation.
 If partnership, must be signed by any general partners.
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 If a bank or other financing institution, the branch manager which
monitors and manages the loan.
 If individual, he should sign.
 In any of all these cases, the one who should certify must not be a
relative of the borrower within the 4th civil degree of consanguinity or
affinity.
 If the one who certifies is a relative, a copy of the promissory note or
other evidence of the indebtedness must be filed with the RDO
within 15 days.
3. Proof of financial capacity of the creditor to lend the amount at the time
the loan was granted, as well as its latest audited balance sheet with a
detailed schedule of its receivable showing the unpaid balance of the
debtor-decedent.
 If the debtor is no longer required to file income tax returns, a duly
notarized declaration of the creditor of his capacity to lend at the
time when the loan was granted.
 If the creditor is nonresident, the executor or administrator or any of
the legal heirs must submit a duly notarized declaration by the
creditor of his capacity to lend at the time when the loan was
granted, authenticated or certified to as such by the tax authority of
the country here the nonresident creditor is a resident.
4. A statement under oath executed by the administrator or executor of the
estate reflecting the disposition of the proceeds of the loan if said loan
was contracted within 3 years prior to the death of the decedent.

Substantiation requirements in case the unpaid obligation arose from
purchase of goods or services.
1. Pertinent documents evidencing the purchase of goods or services.
2. Duly notarized certification from the creditor as to the unpaid balance of the
debt, including interest as of the time of death.
3. Certified true copy of the latest audited balance sheet of the creditor with a
detailed schedule of its receivable showing the unpaid balance of the
decedent-debtor. A certified true copy of the updated latest subsidiary
ledger/records of the debt of the debtor-decedent should likewise be
submitted.
Substantiation requirements where the settlement of the estate is made
through the court.
 Pertinent documents filed with the court evidencing the claims against the
estate, and the court order approving the said claims, if already issued.
Whether actual claims of creditors can be fully allowed as deductions from
the gross estate despite the fact that the said claims were reduced or
condoned through compromise agreements entered into by the estate with
its creditors.
 Where a lien claimed against the estate was certain and enforceable on the
date of the decedent’s death, the fact that the claimant subsequently
settled for lesser amount did not preclude the estate from deducting the
entire amount of the claim for estate tax purposes. This pronouncement
essentially confirm the general principle that post-death developments are
not material in determining the amount of the deduction.
 Date-of-death valuation rule. Reasons:
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1. There is no law, nor any legislative intent in tax laws, which disregards
the date-of-death valuation principle, and particularly provides that post-
death developments must be considered in determining the net value of
the estate.
2. Such construction finds relevance and consistency with the Rules on
Special Proceedings where the term claims required to be presented
against a decedent’s estate is generally construed to mean debts or
demands of a pecuniary nature which could have been enforced during
his lifetime.
 Therefore, the claims existing at the time of death are significant to, and
should be made the basis of, the determination of allowable deductions,
and that post-death development should not be considered.
Requisites for the deductibility of claims of the deceased against insolvent
persons.
1. The value of the claims against insolvent persons had been included as
part of the gross estate
2. It must be shown that the debtors are incapable of paying their
indebtedness.
Requisites for the deductibility of unpaid mortgages or indebtedness.
1. Unpaid mortgages upon, or any indebtedness in respect to, property where
the value of the decedent’s interest therein, undiminished by such
mortgage or indebtedness, should be included in the value of the gross
estate.
2. The deduction allowed, unpaid mortgages or any indebtedness shall, when
founded upon a promise or agreement, be limited to the extent that they

were contracted bona fide and for an adequate and full consideration in
money or money’s worth.
3. In case the unpaid mortgage payable is being claimed by the estate,
verification must be made as to who was the beneficiary of the loan
proceeds.
 If the loan is found to be merely an accommodation loan where the loan
proceeds went to another person, the value of the unpaid loan must be
included in the receivable of the estate.
 If there is a legal impediment to recognize the same as receivable, said
unpaid obligation/mortgage payable shall not be allowed as a deduction
from the gross estate.
4. In all instances, the mortgaged property, to the extent of the decedent’s
interest therein, should always be a part of the gross taxable estate.
Requisites for the deductibility of losses from the gross estate.
1. Losses must be incurred during the settlement of the estate
2. Losses arose from fires, storms, shipwreck, or other casualties, or from
robbery, theft or embezzlement
3. Said losses are not compensated for by insurance or otherwise
4. Losses claimed must not have been claimed as deduction from gross
income for income tax purposes
5. Such losses were incurred not later than the last day for the payment of the
estate tax – 6 months from the date of death.
Requisites for the deductibility of taxes from the gross estate.
1. Said taxes must have accrued as of the time of death of the decedent
2. Said taxes were unpaid as of the time of death
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3. There taxes will not include:
a. Income tax upon income received after death
b. Property taxes not accrued before his death
c. The estate tax due from the transmission of his estate.
Property previously taxed (Vanishing Deduction)
 Vanishing deduction refers to the diminishing deductibility allowed from the
gross estate of the decedent on the property left behind by the decedent
which he had acquired previously by inheritance or donation.
 Vanishing deduction is deducted only from the exclusive properties of the
decedent which form part of his gross estate.
Rationale for the allowance of the Vanishing Deduction.
 A property can only be allowed a vanishing deduction if it had been
subjected to the estate tax or donor’s tax within 5 years prior to the death of
the present decedent.
 The said property has already been subjected to a transfer tax (either
donor’s tax or estate tax) and now that the recipient is dead, the same
property will again be subjected to tax, this time, estate tax.
 In order to mitigate the harshness of successive taxation of the same
property occasioned by death occurring within a short period of time, the
law allows a vanishing deduction to be claimed on the said property.
 An estate tax is considered to have been paid in the previous estate if a
return was filed even if there was no tax due in that return.

Requisites for the deductibility from gross estate of property previously
taxed.
1. The property involved must have been transferred by a prior decedent
either thru estate donation, or which can be identified as having been
acquired in exchange for property so received.
2. The present decedent must have died within 5 years from the receipt of the
property from a prior decedent or donor
3. The property can be identified as the one received from the prior decedent
or donor, or as the property acquired in exchange for the original property
so received
4. The property must have formed part of the gross estate of a prior decedent,
or the total amount of the gifts of the donor
5. Donor’s tax on the gift or the estate tax on the inheritance must have been
already paid
6. Said property must be situated in the Philippines and now forms part of the
gross estate of the present decedent
7. The amount of the deduction is the full value of the property being taxed if
the present decedent died within one year from the death of the prior
decedent, and that the amount deductible diminishes yearly and is finally
lost after the 5th year from the death of the prior decedent
8. The vanishing deduction on the property must not have been claimed by
the previous estate involving the same property.
Amounts that may be deducted from the gross estate of a decedent insofar
as the property previously taxed is concerned.
1. 100% of the value, if received within one year prior to the death of the
decedent
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2. 80% of the value, if received more than one year but not more than 2 years
prior to the death of the decedent
3. 60% of the value, if received more than 2 years but not more than 3 years
prior to the death of the decedent
4. 40% of the value, if received more than 3 years but not more than 4 years
prior to the death of the decedent
5. 20% of the value, if received more than 4 years but not more than 5 years
prior to the death of the decedent
 Where the deduction was allowed of any mortgage or other lien in
determining the donor’s tax, or the estate tax of the prior decedent, which
was paid in whole or in part prior to decedent’s death, then the deduction
allowable shall be reduced by the amount so paid.
 Where the property referred to consists of two or more items, the aggregate
value of such items shall be used for the purpose of computing the
deduction.
Requisites for the deductibility of transfers for public use.
1. The disposition is in the last will and testament
2. Disposition should take effect after death
3. In favor of the government of the Philippines or any of its subdivisions
4. Exclusively for public use
5. The value of the property given is included n the gross estate.

SPECIAL DEDUCTIONS
Family Home
 The place where the family actually resides.
 CC: a family home has to be constituted judicially or extra judicially.
 FC: there is no need to constitute it as a family home, as it is deemed
constituted thereunder.
 Exempt from execution, forced sale or attachment
 Refers to the dwelling house, including the land on which it is situated,
where the husband and wife, or a head of the family, and the members of
their family reside, as certified to by the Barangay Captain of the locality
 It is deemed constituted on the house and lot from the time it is actually
occupied as a family residence and is considered as such for as long as
any of its beneficiaries actually resides therein.
 The family home is generally characterized by permanency, has an
intention to return.
 The family home must be part of the properties of the absolute community
or of the conjugal partnership, or of the exclusive properties of either
spouse depending upon the classification of the property and the property
relations prevailing on the properties of the husband and the wife.
 It may also be constituted by an unmarried individual on his or her own
property.
 For purposes of deduction, a person may constitute only one family home.
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What constitutes the family home which is deductible from the gross
estate.
 An amount equivalent to the current fair market value of the decedent’s
family home shall be deducted from the gross estate.
 If the said current fair market value exceeds P1M, the excess shall be
subjected to estate tax.
 The family home must have been the decedent’s family home as certified
by the barangay captain of the locality.
Conditions for the allowance of family home as deduction from gross
estate.
1. It must be the actual residential home of the decedent and his family at the
time of his death, as certified by the Barangay Captain of the locality where
the family home is situated;
2. Total value of the family home must be included as part of the gross estate
of the decedent;
3. Allowable deduction must be in an amount equivalent to the current fair
market value of the family home as declared or included in the gross
estate, or the extent of the decedent’s interest, whichever is lower, but not
exceeding P1M.
Standard deduction.
 Standard deduction, which is a deduction in the amount of P1M, shall be
allowed as an additional deduction without need of substantiation. Full
amount shall be deducted for the benefit of the decedent.

Medical expenses; Requisites of deductibility of medical expenses from
the gross estate of the decedent.
1. The medical expenses were incurred within one year prior to the death of
the decedent;
2. The expenses are duly substantiated with official receipts, invoices,
statements of account duly certified by the hospital, and such other
documents in support thereof;
3. The total amount thereof, whether paid or unpaid, does not exceed P500k.
Amount received by heirs under RA 4917.
 Any amount received by the heirs from the decedent’s employer as a
consequence of the death of the decedent-employee shall be allowed as
deduction from gross estate, provided that such amount is included in the
gross estate of the decedent.
NET SHARE OF THE SURVIVING SPOUSE IN THE CONJUGAL
COMMUNITY PROPERTY
Net share of the surviving spouse in the conjugal property.
 After deducting the allowable deductions appertaining to the conjugal or
community properties included in the gross estate, the share of the
surviving spouse must be removed to ensure that only the decedent’s
interest in the estate is taxed.
Note: if decedent is a nonresident alien, no deduction shall be allowed unless
the executor, administrator or any of the heirs, includes in the return the value at
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the time of decedent’s death of that part of the gross estate not situated in the
Philippines.
Rules on situs of taxation with respect to the imposition of the estate tax
on property left behind by a nonresident decedent.
1. If the nonresident decedent is a Filipino citizen at the time of his death, the
value of the gross estate shall be determined by including the value, at the
time of his death, all the property, real or personal, tangible or intangible,
wherever situated to the extent of the interest therein of the decedent at the
time of his death.
2. In case of a nonresident decedent who at the time of his death was not a
citizen of the Philippines, only that part of the entire gross estate which is
situated in the Philippines to the extent of the interest therein of the
decedent at the time of his death shall be included in his taxable estate.
 With respect to intangible personal property, only those located in the
Philippines shall be taxable, unless exempted on the basis of the ff:
a. The foreign country where the resident alien was a citizen at the time
of his death did not impose estate tax in respect of intangible personal
property of citizens of the Philippines not residing in that foreign
country; or
b. If the laws of the foreign country of which the decedent was a citizen
and resident at the time of his death allows similar exemption from
estate taxes of every character or description in respect of intangible
personal property owned by citizen of the Philippines not residing in
that foreign country.

Tax credit for estate taxes paid in foreign country of a citizen or resident
alien.
 To minimize the onerous effect of taxing the same property twice, tax credit
against Philippine estate tax is allowed for estate taxes paid to foreign
countries.
 Only the estate of a decedent who was a citizen or a resident of the
Philippines at the time of his death can claim tax credit for any estate tax
paid to a foreign country.
Amount allowable as tax credit.
 The general rule is the estate tax imposed by the Philippines shall be
credited with the amounts of any estate tax imposed by the authority of a
foreign country.
Limitation on credit.
 Per country basis. The amount of the credit in respect to the tax paid to any
country shall not exceed the same proportion of the tax against which such
credit is taken, which the decedent’s net estate situated within such country
taxable under the NIRC bears to his entire net estate.
 Overall basis. The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which the
decedent’s net estate situated outside the Philippines taxable under the
NIRC bears to his entire net estate.
Exemptions of certain acquisitions and transmissions.
 Exempt from estate tax:
1. The merger of usufruct in the owner of the naked title;
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2. The transmission or delivery of the inheritance or legacy by the fiduciary
heir or legatee to the fideicommisary;
3. The transmission from the first heir, legatee or done in favor of another
beneficiary, in accordance with the desire of the predecessor;
4. All bequests, devises, legacies or transfers to social welfare, cultural and
charitable institutions, no part of the net income of which inures to the
benefit of any individual
 Not more than 30% of the said bequests, devises, legacies or transfers
shall be used by such institutions for administration purposes.
Purposes of the exemption from the estate tax of the abovementioned
acquisitions and transmissions.
 The estate tax is predicated upon the transmission of property from the
decedent to his heirs or legatees. In these cases, there is only one
transmission of property, i.e., the transmission from the testator to the
ultimate heir thru the fiduciary.
Fideicommissary substitution.
 An obligation is clearly imposed upon a first heir to preserve and transmit to
another the whole or part of the estate bequeathed to him, upon his death
or upon the happening of a particular event.
Net estate of not exceeding P200k exempt from estate tax.
 After deducting all the allowable deductions from the gross estate, the net
estate of the deceased not exceeding P200K shall be exempt from estate
tax.

Exclusions from the gross estate.
1. Proceeds of:
a. Life insurance policy taken out by the decedent upon his own life when
the beneficiary is other than the estate, executor or administrator; and
the designation of the beneficiary is irrevocable;
b. Group life insurance policy taken out by a company for its employees;
c. Life insurance policies issued by the GSIS to government officials or
employees, as they are exempt by law from taxes of all kinds;
2. Death benefits received from the SSS, accruing by reason of death;
3. Amounts received from the Philippine and US governments from the
damages suffered during WWII
4. Benefits received by beneficiaries residing in the Philippines under the
laws administered by the US Veterans Administration
5. Properties held in trust by the decedent
6. Transfers by way of bona fide sales
7. Capital or exclusive property of the surviving spouse is not deemed part
of the gross estate of the decedent spouse
8. Share of the surviving spouse in the conjugal property.
Valuation of the properties compromising the gross estate.
 The properties comprising the gross estate be valued based on their fair
market value as of the time of death.
 If the property is a real property, the fair market value shall be the fair
market value as determined by the Commissioner or the fair market value
fixed by the provincial or city assessor, whichever is higher.
 Unlisted common shares are valued based on their book value.
 Unlisted preferred shares are valued at par value.
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 For shares listed in the stock exchanges, fair market value shall be the
arithmetic mean between the highest and the lowest quotation at a date
nearest the date of death, if none is available on the date of death itself.
 To determine the value of the right of usufruct, use or habitation, as well as
annuity, there shall be taken into account the probable life of the
beneficiary in accordance with the latest basic standard mortality table.
Requirements for the filing of a notice of death of the decedent.
1. Whenever there are properties left by the decedent which are registered or
registrable subject to estate tax
2. If the same are exempt from estate tax, the gross value of the estate
exceeds P20K
3. The executor, administrator or any of the legal heirs, as the case may be,
shall file a written notice of death
4. The notice of death shall be filed within 2 months after the decedent’s
death, or within a like period after qualifying as such executor or
administrator
5. A notice of death to be filed with the RDO having jurisdiction over the place
of residence of the deceased.
Requirements before the heirs file an estate tax return when the decedent
has registered or registrable properties.
 In cases where a registered taxpayer dies, the administrator or executor
shall register the estate of the decedent and a new TIN shall be supplied.
 In the case of a nonresident decedent, the executor or administrator of the
estate shall register the estate with the RDO where he is registered,
provided, that in case such executor or administrator is not registered,

registration of the estate shall be made with and the TIN supplied by the
RDO having jurisdiction over his legal residence.
When and in what cases must an estate tax return be filed.
 Required
1. In all cases of transfers subject to the estate tax;
2. Where though exempt from tax, the gross value of the estate exceeds
P200k;
3. Regardless of the gross value of the estate, where the said estate
consists of registered or registrable property, such as real property,
motor vehicle, shares of stock or other similar property for which a
clearance from the BIR is required as a condition precedent for the
transfer of ownership thereof in the name of the transferee.
Contents of the estate tax return.
1. The value of the gross estate of the decedent at the time of his death, or in
case of a nonresident, not a citizen of the Philippines, of that part of his
gross estate situated in the Philippines;
2. The deductions allowed from gross estate in determining the net taxable
estate;
3. Such part of such information as may at the time be ascertainable and such
supplemental data as may be necessary to establish the correct taxes;
4. For estate returns showing a gross value exceeding P2M, there must be a
statement duly certified by a CPA containing the ff:
a. Itemized assets of the decedent with their corresponding gross value at
the time of his death, or in the case of a nonresident, not a resident of
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the Philippines, of that part of his gross estate situated in the
Philippines;
b. Itemized deductions from gross estate allowed
c. The amount of tax due, whether paid or still due and outstanding.
When the Commissioner may file a return for the estate of a deceased
person; Effect of filing.
 In case the executor, administrator, or any heir fails to file a return within 6
months from the date of death of the decedent or makes, willfully or
otherwise, a false or fraudulent return, the CIR shall make the return from
his own knowledge and from such information as he can obtain thru third
party information.
 Any return made by the CIR shall be prima facie good and sufficient for all
legal purposes.
Time of filing of estate tax returns.
 Within 6 months from the decedent’s death.
 In case of judicial settlement of the estate, the court approving the project
of partition shall furnish the CIR with a certified copy thereof and its order
within 30 days after promulgation of such order.
Extension of time to file estate tax returns.
 The CIR have authority to grant, in meritorious cases, a reasonable
extension, not exceeding 30 days
 File application for extension with the RDO where the estate is required to
secure its TIN and file the tax returns

Place of filing of the estate tax returns and payment of tax.
1. An authorized agent bank;
2. RDO;
3. Collection Office;
4. Duly authorized treasurer of the city or municipality in which the decedent
was domiciled at the time of his death
5. If there be no legal residence in the Philippines, with the office of the
Commissioner.
 The Commissioner has the power to allow a different venue/place in the filing
of tax returns.
Time and place of payment of estate tax.
 Within 6 months from the decedent’s death at the same time that the estate
tax return is filed in an Authorized Agent Bank having jurisdiction over the
decedent.
Requirements for the request extension to file the estate tax return and
pay the estate tax.
1. A request for extension to file the estate tax should be filed before the
expiration of the original period to pay which is within 6 months from death
of the decedent
2. The application for extension of time to file the return and extension of time
to pay estate tax shall be filed with the RDO
3. There must be a finding that the payment on the due date of the estate tax
would impose undue hardship upon the estate or any of the heirs; and
4. The extension must be for a period not exceeding 5 years if the estate is
settled judicially or 2 years if settled extra judicially.
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Effect of granting an extension of time for the payment of the estate tax.
1. The amount in respect of which the extension is granted shall be paid on or
before the date of the expiration of the period of the extension;
2. The running if the period of the Statute of Limitations on the making of
assessment shall be suspended within the period of such granted request
for extension;
3. The Commissioner may require to furnish a bond in an amount not
exceeding double the amount of the tax
4. Any amount paid after the statutory due date for the payment of the tax, but
within the extension period, shall be subject to interest but not to surcharge.
When the extension to file the estate tax return and pay the tax may not be
granted by the Commissioner.
 By reason of negligence, intentional disregard of rules and regulations, or
fraud on the part of the taxpayer.
Persons liable to pay the estate tax before the delivery of the distributive
share to any of the heir or beneficiary.
1. The executor or administrator. If there are two or more executors or
administrators, all of them are severally liable for the payment of the tax.
 The estate tax clearance issued by the Commissioner or the RDO, will
serve as the authority to distribute the remaining/distributable
properties/share in the inheritance to the heir or beneficiary.
2. The heir or beneficiary has subsidiary liability for the payment of that
portion of the estate which his distributive share bears to the value of the
total net estate.

 The extent of his liability shall be the extent of his share in the
inheritance.
Who is considered as executor or administrator for estate taxation
purposes.
 Means the executor or administrator of the decedent, or if there is no
executor or administrator appointed, qualified, and acting within the
Philippines, then any person in actual or constructive possession of any
property of the decedent.
Obligations of an administrator.
 The administration bond is for the benefit of the creditors and the heirs, as
it compels the administrator to perform the trust reposed in and discharge
the obligations incumbent upon him:
1. To administer the estate and pay the debts
2. To perform all judicial orders
3. To account within one year and at any other time when required by the
probate court; and
4. To make an inventory within 3 months from the date of death of the
decedent.
 More specifically, the bond is conditioned on the faithful execution of the
administration
1. Make and return a true inventory of the goods, chattels, rights, credits,
and estate of the deceased which come to his possession or
knowledge;
2. Truly account for such as received by him when required by the court;
and
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3. Deliver the same to the person appointed as executor or regular
administrator, or to such other person as may be authorized to receive
by them.
Payment of the estate tax by installment.
 In case the available cash of the estate is not sufficient to pay its total
estate tax liability, the estate may be allowed to pay the tax by installment
and a clearance shall be released only with respect to the property
corresponding/computed tax on which it has been paid.
 The computation of the estate tax shall always be on the cumulative
amount of the net taxable estate.
 If the payment of the tax after the due date is approved by the CIR, the
imposable penalty thereon shall only be the interest.
Extent of liability of the executor or administrator.
 His liability is personal.
 Even if the properties of the estate have been distributed to the heirs, the
executor or administrator can still be held liable for the unpaid tax.
When executor or administrator may be discharged from personal liability.
 If the executor or administrator makes a written application to the CIR for
determination of the amount of the estate tax and discharge from personal
liability therefor, the Commissioner, as soon as possible, and in any event
within 1 year after the making of such application, or, if the application is
made before the return is filed, then within one year after the return is filed,
but not after the expiration of the prescribed for the assessment of the tax,
shall notify the executor or administrator of the amount of tax.

 Upon payment, the executor or administrator, shall be discharged from
personal liability for any deficiency in the tax thereafter found to be due and
shall be entitled to a receipt or writing showing such discharge.
Remedies of the government when the estate has already been distributed
to the heirs without the payment of the estate tax.
1. Sue all heirs and collect from each of them the amount of tax proportionate
to the inheritance received;
2. By virtue of tax lien, sue only one heir (executor or administrator) and
subject the property received from the estate to the payment of the estate
tax.
Remedy of the heir who paid the estate tax.
 Reimburse from the others
BIR can collect the estate tax deficiencies by the summary remedy of levy
upon and sale of real properties of the decedent without first securing the
authority of the court.
 Because the collection of tax is executive in character.
 The probate court is forbidden to authorize the executor or administrator to
deliver any distributive share to any party interested in the estate, unless a
certification from the CIR that the estate tax has been paid is shown.
 Payment of estate tax is condition precedent for the distribution of the
properties of the decedent and the collection of estate taxes is executive in
nature for which the court is devoid of any jurisdiction.
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Nature of the process of estate tax collection.
 It is not against the property of decedent, nor is it a claim against the estate
as such, but it is against the interest or property right which the heir,
legatee, devisee has in the property formerly held by the decedent.
 Proceeding in rem.
 Executive in nature.
 Such taxes were exempted from the application of the statute of non-
claims, and this is justified by the necessity of government. Funding,
immortalized in the maxim that taxes are the lifeblood of the government.
 The court may direct the payment of such taxes upon motion showing that
the taxes have been assessed against the estate.
 It allows the enforcement of tax obligations against the heirs of the
decedent, even after distribution of the estate’s properties.
DOJ is not the proper party to determine the amount of taxes due upon the
estate, but the BIR.
 The BIR’s determinations and assessments are presumed correct and
made in good faith.
Duties of certain officers and debtors.
1. The ROD shall not register in the Registry of Property any document
transferring real property or real rights therein or any chattel mortgage, by
way of gifts inter vivos or mortis causa, legacy or inheritance, unless a
certification from the Commissioner that the estate tax actually due thereon
had been paid is shown.

2. They shall immediately notify the Commissioner, Regional Director, RDO or
RCO or Treasurer of the city of municipality where their offices are located,
of the nonpayment of the tax discovered by them.
3. Any lawyer, notary public, or any government officer who, by reason of his
official duties, intervenes in the preparation and acknowledgment of
documents regarding partition or disposal of donation inter vivos or mortis
causa, legacy or inheritance, shall have the duty of furnishing the CIR, RD,
RDO or RCO of the place where he may have his principal office, with
copies of such documents and any information whatsoever which may
facilitate the collection of the tax.
4. Neither shall a debtor of the deceased pay his debts to the heirs, legatee,
executor or administrator of his creditor, unless the certification of the CIR
that the estate tax had been paid is shown.
5. But the debtor may pay the executor or administrator without said
certification if the credit is included in the inventory of the estate of the
deceased.
Effects of nonpayment of estate tax.
1. Shares, bonds or obligations cannot be transferred in the names of the new
owners in the books of the corporation, partnership, business, or industry,
unless evidence of payment of tax is shown.
2. If a bank has knowledge of the death of a person, who maintained a bank
deposit account alone, or jointly with another, it shall not allow any
withdrawal from the said deposit account, unless the CIR has certified that
the estate taxes imposed thereon had been paid.
3. A bank with knowledge of the death of a person who maintained a deposit
account with such bank shall allow withdrawals therefrom only if
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mandatory requirement of a certification from the CIR that the taxes due
thereon have been paid count be resented by an heir. Absent such
certification, a bank is not authorized to withhold the release of deposits of
a decedent. However, the CIR may authorize the withdrawal of an amount
not exceeding P20K without the said certification of payment of estate tax.
4. The executor or administrator is prohibited from delivering the distributive
share of any heir or beneficiary unless the tax has been paid.
5. RODs cannot register transfers of real property or real rights therein or any
chattel mortgage.
Banks cannot refuse to disclose the amount of bank deposits of the
decedent.
 The CIR has the authority to inquire into bank deposit accounts of a
decedent to determine his gross estate notwithstanding the provisions of
the Bank Secrecy law.
 The fact the deposit is a joint account will not preclude the CIR from
inquiring thereon because the law mandates that if a bank has knowledge
of the death of a person, who maintained a bank deposit account alone, or
jointly with another, it shall not allow any withdrawal therefrom.
DONOR’S TAX
 A tax levied, assessed, collected and paid upon the transfer by any person
(whether individual or corporation), resident or nonresident, of the property
by gift.
 It is a tax on the privilege of transmitting one’s property or property rights to
another or others without adequate and full valuable consideration.

 The subject of the donor’s tax is the gift or donation which is an act of
liberality whereby a person disposes gratuitously of a thing or right in favor
of another who accepts it.
Imposition of donor’s tax.
 Imposed on donations inter vivos or those made between living persons to
take effect during the lifetime of the donor.
 The donor’s tax supplements the estate tax by preventing the avoidance of
the latter through the device of donating the property during the lifetime of
the deceased.
Classification of donors.
 The law imposes the donor’s tax only on the donor.
1. Citizens (whether resident or nonresident) and resident aliens – with
respect to properties located within and without the Philippines
2. Nonresident aliens – within the Philippines, including intangible personal
property with a situs in the Philippines, unless exempted on the basis of
reciprocity.
Nature of Donor’s Tax.
 Not a property tax, but is a tax imposed on the transfer of property by way
of gift inter vivos.
 It is an excise tax imposed on the exercise of the donor’s right during life to
transfer property to others in the form of gift.
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Purposes/Objectives of donor’s tax.
1. To forestall the eventuality of property owners attempting to avoid the
payment of the estate tax by transferring their property to another during
their lifetime so that such estates may pass to the objects of their bounty
unimpaired.
2. Whatever loss the Government may sustain as a consequence of the
transfer will be compensated by the earlier payment of the donor’s tax and
by the acceleration of the redistribution of wealth.
3. To prevent the avoidance of income tax through the device of splitting the
income of the property among all the donees, who are members of the
family or of many trusts, with the donor thereby escaping the effect of the
progressive rates of income tax.
Law that governs the imposition of donor’s tax.
 The donor’s tax shall not apply unless and until there is a completed gift.
 The transfer of property gift is perfected from the moment the donor knows
of the acceptance by the done; it is completed by the delivery, either
actually or constructively, of the donated property to the donee.
 The law in force at the time of perfection/completion of the donation shall
govern the imposition of the donor’s tax.
Meaning of the term donation.
 An act of liberality whereby a person, called the donor, disposes
gratuitously of a thing or right in favor of another, who is called the donee,
who accepts it.
 There is also a donation when a person gives to another a thing or right on
account of the latter’s merits or of the services rendered by him to the

donor provided they do not constitute a demandable debt or when the gift
imposes upon the donee a burden which is less than the value of the thing
given.
 Tax Code: there is donation which is subject to donor’s tax when a person,
whether resident or nonresident, transfers a property by gift, whether the
transfer is in trust or otherwise, whether the gift is direct or indirect, or
whether the property is real or personal, tangible or intangible.
Requisites of valid donation.
1. The donor must have the capacity to donate;
2. The donor must have the intent to donate his property to the donee;
3. The donee accepts the donation;
4. The donation must be in writing and fully executed; and
5. There must be actual or constructive delivery of the gift to the donee or to
someone else for him.
3 requisites for the validity of donation of real property.
1. It must be made in a public instrument document specifying therein the
property donated;
2. It must be accepted during the lifetime of the donor, which acceptance may
be made either in the same Deed of Donation or in a separate public
instrument;
3. If the acceptance is made in a separate instrument, the donor must be
notified in an authentic form, and the same must be noted in both
instruments.
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When gift is considered as perfected and completed.
1. The transfer of property by gift is perfected from the moment the donor
knows of the acceptance by the donee
2. It is completed by delivery, either actually or constructively, of the donated
property to the donee.
 A gift that is incomplete because of reserved powers, becomes complete
when either:
1. The donor renounces the power; or
2. His right to exercise the reserved power ceases because of the
happening of some event or contingency or the fulfillment of some
condition, other than because of the donor’s death.
Tax base and rates of donor’s tax.
 Donor’s tax shall be computed on the basis of the total net gifts made
during the calendar year.
 If the donee is a relative (brother or sister), spouse, ancestor, and lineal
descendant, or a relative by consanguinity in the collateral line within the 4th
civil degree, then the tax for each calendar year shall be computed on the
basis of the total net gifts made during the calendar year with donor’s tax
rate staring with 2% and a maximum of 15%, the first P100K being exempt
from donor’s tax.
 If the donee is a stranger, there is only one rate and that is 30% on the net
gifts.

Determination of the net gifts subject to donor’s tax.
 Net gift is the net economic from the transfer that accrues to the donee.
 If a mortgaged property is transferred as a gift, but imposing upon the
donee the obligation to pay the mortgage liability, then the net gift is
measured by deducting from the fait market value of the property the
amount of mortgage assumed.
 In ascertaining the rates applicable to the net gifts for any year, all the gifts
made previously during the same calendar year must be considered.
Computation involves 3 operations.
1. A computation of the tax at graduated rates on all gifts made including
those made previously in the same year;
2. A computation of the tax at the graduated rates on the gifts made
previously in the same year; and
3. The subtraction of the result of the second computation from that of the
first.
Computation of donor’s tax.
 The computation of the donor’s tax is on a cumulative basis over a period
of one calendar year.
 Husband and wife are considered as separate and distinct taxpayers for
purposes of donor’s tax.
 If what was donated is a conjugal or community property and only the
husband signed the deed of donation, there in only one donor, without
prejudice to the right of the wife to question the validity of the donation
without her consent.
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How to reduce donor’s tax on donation to relatives.
 In order to reduce the donor’s tax on donation to relatives, the donation can
be splitted.
 Giving a one-time donation would mean that it will be subject to a higher
tax bracket under the graduated tax structure thereby necessitating the
payment of donor’s tax.
 If splitted, it may relieve the donor from paying the tax because the first
P100K is exempted.
Waiver or renunciation by the surviving spouse of his/her share in the
conjugal partnership or absolute community after the dissolution of the
marriage in favor of the heirs is subject to donor’s tax.
Waiver or renunciation by an heir of his/her share in the hereditary estate
is not subject to donor’s tax.
 Unless specifically and categorically done in favor of identified heir/s to the
exclusion or disadvantage of the other co-heirs in the hereditary estate.
Treatment of donation made by the husband alone our of the conjugal
partnership property.
 Treated as made by the husband alone, unless the wife expressly joins in
making the gift.
 If the gift is made jointly, it would be taxable to both, that is, one-half would
be taxable to the husband and the other half to the wife.

Effect on the creditor of condonation/remission of debt of the debtor.
 The condonation of a debt of a corporation has the effect of a donation
made on the part of the creditor. The amount of the debt cancelled is a gift
from the creditor to the debtor but need not be included in the latter’s gross
income.
 The creditor merely desires to benefit the debtor.
 The amount of the debt is considered as a gift from the creditor to the
debtor and need not be included in the latter’s gross income.
 The creditor shall be subject to 30% donor’s tax – stranger.
Contributions to a candidate for an elective post and to the political party
of the candidate not subject to donor’s tax; conditions for exemption.
 Exempted provided the recipient candidates and political parties had
complied with the requirement for filing of returns of contributions with the
COMELEC.
 Political contributions made prior to RA 7166 were subjected to donor’s tax,
since the same were made prior to the exempting legislation.
Meaning of the term adequate consideration.
 Means money of equal value or some goods or services capable of being
evaluated in money.
 Where consideration is fictitious, the entire value of the property transferred
is taxable.
Transfers which may be constituted as donation.
1. Sale, barter or exchange of property for less than adequate or full
consideration in money or money’s worth;
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The element of donative intent is conclusively presumed in transfers
of property for less than an adequate or full consideration in money
or money’s worth, thus subject to donor’s tax.
2. Condonation or remission of debt
Sale of ordinary assets for less than adequate and full consideration.
 Then the amount by which the fair market value of the property at the time
of the execution 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.
 In case of capital assets, the difference in the supposed taxable value
cannot legally be subjected to donor’s tax because the sale here is a
capital asset and not for an insufficient consideration. A deemed gift subject
to tax arises only if a tax is avoided as a result of selling a property at a
price lower than its fair market value.
 In a sale of capital asset subject to the capital gains tax, the tax is always
based on the gross selling price or fair market value, whichever is higher,
and therefore, there is no instance where the seller can avoid any tax by
selling his capital assets below its fair market value.
Transfers not considered as donation.
1. Transfers in contemplation of death, or intended to take effect in
possession or enjoyment at or after death; or
2. Other transfers mortis cause, as such transfers are subject to the estate
tax.

When donation propter nuptias (dowries) exempt from donor’s tax.
1. The gifts must be made on account of marriage before its celebration or
within one year thereafter;
2. The donor/s must be the parent/s of the donee who is/are resident/s of the
Philippines;
3. The donee must be a legitimate, recognized natural, or legally adopted
child;
4. The amount of the donation is to the extent of the first P10,000.
 In case of donation of real property. A father is considered to be making 2
donations: first to his son who is a relative, and second, in favor of his son’s
wife who is a stranger. The taxable gift to the son is computed by deducting
from the gross gift the dowry exclusion of P10K. The net gift is subject to the
graduated tax rates of 2% to 15%. The taxable gift to his son’s wife is ¼ of
the fair market value of the property subject to the 30% rate on donation to
strangers.
 The mother is subject to the donor’s tax in exactly the same manner as the
father.
Gifts made by a resident citizen or alien to or for the use of the National
Government or any entity created by any of its agencies which is not
conducted for profit, or to any political subdivision of the said Government
are exempt from donor’s tax.
Donation of a parcel of land to the Government made by a Philippine
corporation to be used as a relocation site for the less fortunate exempt
from donor’s tax.
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 Because it qualifies as a gift to or for the use of any political subdivision of
the National Government.
 It may be considered as an undertaking for human settlements, hence the
value of the land may be deductible in full from the gross income of the
donor if in accordance to a national Priority Plan determined by the NEDA.
If the utilization is not in accordance to a NPP determined by NEDA, then
the domestic corporation may deduct the value of the land donated only to
the extent of 5% of its taxable income derived from trade or business as
computed without the benefit of the donation.
Requirements for exemption from donor’s tax of donations to qualified-
donee institutions (NGOs).
1. The donation must be made in favor or a qualified-donee institutions duly
accredited by the Philippine Council for NGO Certification, INC. which must
be an educational, charitable, religious, cultural or social welfare or
research institution;
2. The donor must be engaged in business or engaged in the practice of
profession;
3. The donor shall give a notice of donation on every donation worth at least
P50,000 to the RDO which has jurisdiction over his place of business within
30 days after receipt of the qualified-donee institution’s duly issued
Certificate of Donation.
4. The certificate of donation shall be attached to the said Notice of Donation,
stating that not more than 30% of the said donation/gifts for the taxable
year shall be used by such accredited non-stock, non-profit
corporation/NGO institution (qualified-donee institution) for administration
purposes.

Donations to parish church exempt from donor’s tax.
 Religious organization, exempt provided that not more than 30% of the said
gifts shall be used by such donee for administration purposes.
Conditions in order that donations to nonstock nonprofit educational
institution may be exempt from the donor’s tax.
1. Not more than 30% of said gifts shall be used by such donee for
administration purposes
2. The educational institution is incorporated as a nonstock nonprofit entity,
declaring no dividends, governed by trustees who receive no
compensation, and devoting all its income, whether students’ fees or gifts,
donations, subsidies or other forms of philanthropy, to the accomplishment
of the purposes enumerated in its Articles of Incorporation.
3. The donation must be used actually, directly and exclusively for educational
purposes only.
4. The donee, being a nonstick nonprofit educational institution, is a qualified
entity to receive an exempt donation subject to the conditions prescribed by
law.
Donation to an alumni association not exempt from donor’s tax unless.
 Not exempt because it is not an educational or research institution.
 If it can be proven that it is an accredited nonstick nonprofit charitable
association paying no dividends, governed by trustees who receive no
compensation and devoting all its income to the accomplishment and
promotion of the purposes enumerated in its articles of incorporation, such
as charitable, religious, cultural or social welfare purposes, and not more
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than 30% of the gift should be used for administration purposes by the
donee, then the donation may qualify for exemption.
Gifts that are exempt from donor’s tax which are extendible to both
residents and nonresident aliens of the Philippines.
1. Gifts made to or for the use of the National Government or any entity
created by any of its agencies which is not conducted for profit, or to any
political subdivision of the said government
2. Gifts in favor or an educational and/or charitable, religious, cultural or social
welfare corporation, institution, foundation, or trust or philanthropic
organization or research institution or organization, provided, however, that
not more than 30% of said gifts shall be used by such donee for
administration purposes.
Donations of a foreign corporation of its own shares of stock to a resident
employee in the Philippines is not subject to donor’s tax.
 Foreign corporations effecting donation in the Philippines is subject to
donor’s tax only if the property donated is located in the Philippines.
 If 85% of the business of the foreign corporation is located in the
Philippines, or the shares donated have acquired business situs in the
Philippines, the donation may be taxed in the Philippines subject to the rule
on reciprocity.

Donor’s tax paid to a foreign country may be credited against Philippine
donor’s tax.
 The tax credit for donor’s tax pain in a foreign country may be claimed only
be a citizen and a resident alien at the time of the donation.
 GR. The donor’s tax imposed by the Philippines upon a donor who was a
citizen or a resident of the Philippines at the time of donation shall be
credited with the amount of any donor’s tax of any character and
description imposed by the authority of a foreign country.
Limitation on Credit.
1. Per Country Basis. The amount of the credit with respect to the tax paid to
any country shall not exceed the same proportion of the tax against which
such credit is taken, which the gifts situated within such country taxable
under NIRC bears to his entire net gifts;
2. Overall basis. The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which the donor’s
net gifts situated outside the Philippines taxable under the BIRC bears to
his entire net gifts.
Valuation of gifts made in property for purposes of computing donor’s tax.
 If the gift is in the form of real property, the value of the real property should
be the higher of 2 values as of the time of donation which are:
1. The fair market value as determined by the CIR; or
2. The fair market value as shown in the schedule of values fixed by the
Provincial and City Assessors.
 In case of improvements, the basis is the fair market value as
appearing in the latest tax declaration at the time of donation.
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 If the gist is in the form of property other than real property, then the
amount of the gift s hall be the fair market value thereof at the time of the
gift.
Person liable for the donor’s tax.
 Personal liability of the donor.
 The question as to who shall ay any given tax and what shall be the basis
thereof are determined by law, the operation of which cannot be affected
by the provisions of a contract to which the Government is not a party.
Requirements for the filing and payment of donor’s tax.
 Accomplish under oath a donor’s tax return in duplicate:
1. Each gift made during the calendar year which is to be included in
computing net gifts;
2. The deductions claimed and allowable
3. Any previous net gifts made during the same calendar year
4. The name of the donee
5. Relationship of the donor to the donee
6. Such further information as the Commissioner may require.
Time and place of filing and payment of donor’s tax.
 File within 30 days after the date the gift is made or completed and the tax
due thereon shall be paid at the same time that the return is filed.
 File with the AAB, RDO or RCO or duly authorized Treasurer of the city or
municipality where the donor was domiciled at the same time of the
transfer, or if there be no legal residence in the Philippines, with the Office
of the Commissioner.
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 If made by nonresident alien, file with the Philippine embassy or Consulate 5. Shares or rights in any partnership, business or industry established in
in the country where he is domiciled at the time of the transfer, or directly the Philippines.
with the Office of Commissioner(RDO).
Properties Citizens Nonresident
Situs of Intangible personal properties. and aliens
 GR. The domicile or residence of the owner. resident
 XPN. aliens
1. When it is inconsistent with the express provisions of the law; or 1. Real / /
2. Justice does not demand that it should be, as where the property has property
in fact a situs elsewhere. within
2. Real / X
Intangible properties which are considered by law as situated in the property
Philippines. without
 GR. The intangible properties of a nonresident alien at the time of his death 3. Tangible / /
or donation, as the case may be, transferred outside the Philippines shall personal
not be considered as art of his gross estate or gross gift, hence, not subject within
to estate or donor’s tax. 4. Tangible / X
 XPN. Considered by law as situated in the Philippines: personal
1. Franchise which must be exercised in the Philippines; without
2. Shares, obligations or bonds issued by any corporation or sociedad 5. Intangible / / except
anonima organized or constituted in the Philippines in accordance with personal when
its laws; within exempted on
3. Shares, obligations or bonds issued by any foreign corporation 85% of the basis of
the business is located in the Philippines; reciprocity
4. Shares, obligations or bonds issued by any foreign corporation of such 6. Intangible / X
shares, obligations, or bonds have acquired a business situs in the personal
Philippines; and without

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When does reciprocity rule apply.
 Applies if the foreign country of which the nonresident alien decedent was a
citizen and resident at the time of his death:
1. Did not impose a transfer tax of any character, in respect of intangible
personal property of Filipino citizens not residing in that foreign country;
or
2. Allows similar exemption from transfer tax of every character or
description in respect of intangible personal property owned by Filipino
citizens not residing in that foreign country.
 There must be a total reciprocity, meaning both countries must exempt
nonresidents from transfer taxes in respect of intangible personal property.
Whether or not the reciprocity rule requires the foreign country to possess
international personality.
 Reciprocity in exemption does not require the foreign country to possess
international personality in traditional sense, i.e. compliance with the
requisites of statehood.
Donation of shares of stock in a foreign company by a nonresident alien to
his son residing in the Philippines not subject to donor’s tax.
 Because the donor is a nonresident alien and the personal property
donated is a property not situated in the Philippines.
 The rule on reciprocity applies only if the property is an intangible personal
property located in the Philippines.
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Meaning of deficiency tax.
1. The amount by which the donor’s tax exceeds the amount shown as the tax
by the donor upon his return; but the amount shown on the return shall first
be increased by the amount previously assessed as deficiency, and
decreased by the amounts previously abated, refunded or otherwise repaid
in respect of such tax; or
2. If no amount is shown as the tax by the donor, then the amount by which
the donor’s tax exceeds the amounts previously assessed as a deficiency,
but such amount previously assessed, or collected without assessment,
shall first be decreased by the amount previously abated, refunded or
otherwise paid in respect of such tax.
VALUE-ADDED TAX
Persons liable to VAT.
 Any person who, in the course of his trade or business, sells, barters,
exchanges, or leases goods or properties, or renders services, and any
persons who imports goods.
When taxpayers should register as VAT taxpayers.
 Any person who, in the course of trade or business, sells, barters,
exchanges goods or properties, or engages in the sale of services subject
to VAT shall register with the RDO and ay an annual registration fee of
P500 for every separate or distinct establishment or place of business
before the state of the business or every year thereafter on or before the
31st day of January.

 If a person maintains a head or main office and branches in different
places, the registration fee shall be paid to any accredited bank in the
Revenue District where the head office or branch is registered provided
that in areas where there are no accredited banks, the same shall be paid
to the RDO, collection agent, or duly authorized treasurer of the
municipality where each place of business or branch is situated.
 Each VAT-registered person shall be assigned only one TIN.
Mandatory VAT registration.
1. His gross sales or receipts for the past 12 months, other than those that are
exempt, have exceeded P1,919,500; or
2. There are reasonable grounds to believe that those that are exempt will
exceed P1,919,500.
 If a person fails to register, he shall be liable to pay the output tax as if he
were a VAT-registered person, but without the benefit of input tax credits
for the period in which he was not properly registered.
 Franchise grantees of radio and television broadcasting, whose gross
annual receipt for the preceding taxable year exceeded P10M, shall
register within 30 days from the end of the taxable year.
Optional VAT registration.
1. Any person who is exempt from VAT.
2. Any person who is VAT-registered but enters into transactions which are
exempt from VAT may opt that the VAT apply to his transactions which
would have been exempt
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3. Franchise grantees of radio and/or television broadcasting whose annual
gross receipts of the preceding year does not exceed 10M. If it chooses to
register, it shall be irrevocable.
 Any person who elects to register under 1 and 2 shall not be allowed to
cancel his registration for the next 3 years.
 May register not later than 10 days before the beginning of the taxable
quarter.
 Once registered, the taxpayer shall be liable to output tax and be entitled to
input tax credit beginning on the first day of the month following
registration.
Registration of Non-VAT or VAT-exempt taxpayer.
 Register, on or before the commencement of his business, or whenever he
transfers to another revenue district, register with the RDO concerned
within 10 days from the commencement of business or transfer.
 The fee shall be paid in any AAB, absence, RDO, RCO or authorized
municipal treasurer.
 Required to register as Non-VAT
1. VAT exempt persons who did not opt to register as VAT taxpayers;
2. Individuals engaged in business where the gross sales or receipts do
not exceed P100K during the 12-month period, but will not pay
registration fee.
3. Non-stock, non-profit organizations and associations engaged in trade
or business whose gross sales or receipts do not exceed P1,919,500
for any 12-month period or in an amount as adjusted thereafter every 3
years;

4. Cooperatives other than electric cooperatives, but not required to pay
the registration fee.
5. Radio and TV broadcasting whose gross annual receipts do not exceed
P10M and which do not opt to be VAT registered
6. PEZA and other ecozone registered enterprises enjoying the
preferential tax rate or 5% in lieu of all taxes;
7. SBMA and other Freeport zone-registered enterprises enjoying the
preferential tax rate of 5% in lieu of all taxes.
Application for registration.
 File with the RDO where the principal place of business, branch, storage
place or premises is located before commencement of the business or
production or qualification as a withholding agent.
 In the case of storage places, the application shall be filed within 30 days
from the date the aforesaid premises have been used for storage.
 The Commissioner may deny or revoke any application for registration.
Certificate of registration.
 Issued by the BIR office after compliance with the requirements for
registration.
Posting of registration Certificate.
 Post at a conspicuous place in his principal place of business and at each
branch in such a way that it is clearly and easily visible to the public.
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Nature and characteristics of the VAT.
1. It is a broad-based tax on consumption of goods, properties or services in
the Philippines. There is vat on every stage of the taxable sales of goods,
properties or services either 0 to 12% tax rates. It is imposed on each sale,
barter, exchange or lease of goods or business as they pass along the
production and distribution chain and levied on every importation of goods,
whether or not in the course of trade or business.
2. It is an indirect tax that may be shifted or passed on by the seller to the
buyer, transferee or lessee of the goods, properties or services. The seller
is the one statutorily liable for the payment of the tax but the amount of the
tax may be shifted or passed on the buyer, transferee or lessee of the
goods, properties or services. In the case of importation, the importer is the
one liable for the VAT.
3. VAT is collected through the tax credit method. An entity can credit or
subtract from the VAT charged on its sales or outputs the VAT paid on its
purchases, inputs and imports.
 If at the end of a taxable quarter, the output taxes charged by a VAT
registered 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 the input taxes exceed the output taxes, the excess shall be carried
over to the succeeding quarter/s.
 Should the input taxes result from zero-rated or effectively zero-rated
transactions, any excess over the output taxes shall instead be refunded to
the taxpayer.
4. VAT is not a cascading tax. If at the end of a taxable quarter, the seller
charges output taxes equal to the input taxes that his suppliers passed on

to him, no payment is required of him. It is when his output taxes exceed
his input taxes that he has to pay the excess. If the input taxes exceed the
output taxes, the excess payment shall be carried over to the succeeding
quarter/s. Should the input taxes result from zero-rated or effectively zero-
rated transactions or when the taxpayer would be cancelling his VAT-
registration, any excess input taxes over the output taxes may instead be
refunded to the taxpayer. In other words, the tax does not cascade
because what had been subjected to VAT before is not thereafter further
subjected to VAT. Hence, there is no tax pyramiding.
5. VAT is not a tax on tax. VAT on toll way operations cannot be deemed a
tax on tax due to the nature of VAT as an indirect tax. In indirect taxation,
the seller who is liable for the VAT may shift or pass on the amount of VAT
it paid on goods, properties or services to the buyer. In such a case, what is
transferred is not the seller’s liability but merely the burden of the VAT.
 VAT on toll way operations is not really a tax on the toll way user,
but on the toll way operator. The seller of services, who in this case
is the toll way operator, is the person liable for VAT.
 For this reason, VAT on toll way operations cannot be a tax on tax
even if toll fees were deemed as a user’s tax. VAT is assessed
against the toll way operator’s gross receipts and not necessarily on
the toll fees. The shifted VAT burden simply becomes part of the toll
fees that one has to pay in order to use the toll ways.
6. VAT is a transparent form of sales tax because the law requires that the tax
be shown as a separate item in the VAT sales invoice or VAT official
receipt.
7. VAT adheres to the cross border doctrine/ destination doctrine. Cross
Border Doctrine, no VAT shall be imposed to form part of the cost of goods
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for consumption outside of the territorial border of the taxing authority.
Actual export of goods and services from the Philippines to a foreign
country must be free of VAT; while those destined for use or consumption
within the Philippines shall be imposed with 12% VAT.
 Destination principle, goods and services are taxed only in the country
where these are consumed.
 Based on the cross border doctrine, PEZA-registered enterprises are
VAT-exempt and no VAT can be passed on to them. They are tax
exempt, not because of the imposition of the 5% preferential tax rate on
gross income but rather because of Ecozones are foreign territory.
Impact and incidence of VAT.
 The impact of VAT is on the seller because it is the one who is statutorily
liable for the payment of the tax, but in case of importation, the importer is
the one liable for the VAT.
 The incidence of the tax is on the final consumer where the tax comes to
rest. The amount of VAT may be shifted of passed on to the buyer.
Meaning of the term in the course of trade or business.
 Means the regular conduct or pursuit of a commercial or economic activity,
including transactions incidental thereto, by any person regardless of
whether or not the person engaged therein is a non-stock, non-profit private
organization or government entity.
 Nonresident persons who perform services in the Philippines are deemed
to be making sales in the course of trade or business, even if the
performance of services is not regular.

Incidental transactions also subject to VAT.
 A transaction will be characterized as having been entered into by a person
in the course of trade or business if it is:
1. Regularly conducted; and
2. Undertaken in pursuit of a commercial or economic activity.
 Incidental to the pursuit of a commercial or economic activity are
considered as entered into in the course of trade or business. Incidental
means something else as primary; something necessary, appertaining
thereto, or depending upon another, which is termed the principal.
 An isolated transaction is not necessarily disqualified from being made
incidentally in the course of trade or business.
 Once activity has been identified as a business, any supply made while
carrying it on is likely to be made in the course or furtherance of business.
No distinction is made between capital and revenue items.
 A supply in the course or furtherance of business includes:
1. The disposition of the assets and liabilities of a business;
2. The disposition of a business as going concern; and
3. Anything done in connection with the termination or intended
termination of a business.
Even a non-stock non-profit organization or a government entity engaged
in the sale of goods or services may be subject to VAT.
 VAT is a tax on transactions, imposed at every stage of the distribution
process on the sale, barter, exchange of goods or property, and on the
performance of services, even in the absence of profit attributable thereto.
 It is immaterial whether the primary purpose of a corporation indicates that
it receives payments for services rendered to its affiliated on a
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reimbursement-on-cost basis only, without realizing profit, for purposes of
determining liability for VAT on services rendered.
 As long as the entity provides for a fee, remuneration or consideration, then
the service rendered is subject to VAT.
Recreational clubs organized and operated exclusively for pleasure,
recreation, and other non-profit purposes subject to VAT.
 The gross receipts of recreational clubs, including but not limited to
membership fees, assessment dues, rental income, and service fees are
subject to VAT.
Sale of service by a nonresident foreign corporation in the Philippines to
one who is doing business in the Philippines subject to VAT.
 When the provider nonresident foreign corporation and recipient of services
are both doing business in the Philippines, subject to regular VAT.
Subsidy subject to VAT.
 The court does not agree that the same subsidy which had been subjected
to income tax should be subject to VAT. The said subsidy termed by the
CIR as reimbursement was not even exclusively earmarked for Sony’s
advertising expense for it was but an assistance or aid in view of Sony’s
dire or adverse economic conditions, and was only equivalent to the latter’s
advertising expenses.
 VAT may be imposed or exacted when there is a sale, barter or exchange
of goods or properties before any VAT may be levied.
 SIS just gave assistance to Sony in the amount equivalent to the latter’s
advertising expense but never received any goods, properties or service
from Sony.

 CIR vs. Sony Philippines, Inc.
VAT on sale of goods or properties.
 VAT is imposed and collected on every sale, barter or exchange, or
transactions deemed sale of taxable goods or properties at the rate of 12%
of the gross selling price or gross value in money of the goods or properties
sold, bartered, or exchanged, or deemed sold in the Philippines.
Sale of goods or properties which are subject to 12% VAT.
 Requisites:
1. The seller must be VAT-registered, or even if not, he/it is a VAT
registrable person and his/its gross annual sales exceeds P1,919,500;
2. The goods or properties sold may either be tangible or intangible
objects which are capable of pecuniary estimation;
3. The sale must be actual or constructive sale or a transaction deemed
sale;
4. The sale must be undertaken in the course of trade or business;
5. The sale must be done in the Philippines;
6. The sale must be for use or consumption in the Philippines;
7. The sale must not be considered as a zero-rated sale; and
8. The sale must not be exempt from VAT under the Tax Code, special
law or international agreement.
Meaning of the term goods or properties.
 Refer to all tangible and intangible objects which are capable of pecuniary
estimation and shall include, among others:
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1. Real properties held primarily for sale to customers or held for lease in
the ordinary course of trade or business;
2. The right or privilege to use patent, copyright, design or model, plan,
secret formula or process, goodwill, trademark, trade brand or other like
property or right;
3. The right or the privilege to use any industrial, commercial or scientific
equipment;
4. The right or privilege to use motion picture films, films, tapes and discs;
and
5. Television, radio, satellite transmission and cable television time.
Statutory definition of the term goods or properties in relation to the real
properties held primarily for sale to customers or held for lease in the
ordinary course of business for VAT purposes.
 Real properties held primarily for sale to customers or held for lease in the
ordinary course of trade or business.
 Goods refer to the product which the VAT-registered person offers for sale
to the public.
 With respect to real estate dealers, it is the real properties themselves
which constitute their goods.
 RA 7716 clarifies that it is the real properties held primarily for sale to
customers or held for lease in the ordinary course of trade or business that
are subject to the VAT, and not when the real estate transactions are
engaged in by persons who do not sell or lease properties in the ordinary
course of trade or business.

Sale of real properties, when subject to VAT.
1. Sale of real properties held primarily for sale to customers or held for lease
in the ordinary course of trade or business of the seller.
2. Sale of residential lot with gross selling price exceeding P1,919,500 and
residential house and lot or other residential dwelling with gross selling
price exceeding P3,919,200 whether the instrument of sale is nominated as
a deed of absolute sale, deed of conditional sale or otherwise.
 Includes sale, transfer or disposal within 12-month period of two or more
adjacent residential lots, house and lots or other residential dwellings in
favor of one buyer from the same seller, for the purpose of utilizing the lots,
house and lots or other residential dwelling as one residential area wherein
the aggregate value of the adjacent properties exceeds P1,919,500 for
residential lots and P3,919,200 for residential house and lots or other
residential dwellings.
 Does not include the sale of parking lot which may or may not include in the
sale of condominium units – subject to VAT regardless of the amount.
3. Installment of real properties, as follows:
a. Installment sale of residential house and lot or other residential
dwellings with gross selling price exceeding P1M where the instrument
of sale was executed prior to November 1, 2005, shall be subject to
10% output VAT.
b. The seller shall be subject to output VAT on the installment payments
received, including the interests and penalties for late payment. The
buyer of the property can claim the input tax in the same period as the
seller recognized the output tax.
 12% starting February 1, 2006.
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c. In the case of sale of real properties on a deferred basis not on the
installment plan, the transaction shall be treated as cash sale which
makes the entire selling price taxable in the month of sale. Output tax
shall be recognized by the seller and input tax shall accrue to the buyer
at the time of the execution of the instrument of sale. Payment
subsequent to initial payments shall no longer be subjected to output
VAT.
4. Pre-selling of real estate properties by real estate dealers shall be subject
to VAT.
5. Transmission of property to a trustee shall not be subject to VAT if the
property is to be merely held in trust for the trustor and/or beneficiary.
However, if the property transferred is one for sale, lease or use in the
ordinary course of trade or business and the transfer constitutes a
completed gift, the transfer is subject to VAT as a deemed sale transaction.
 The transfer is a completed gift if the transferor divests himself
absolutely of control over the property.
Meaning of the term Gross Selling Price.
 Means the total amount of money or its equivalent which the purchaser
pays or is obligated to pay to the seller in consideration of the sale, barter,
or exchange of the goods or properties, excluding VAT.
 The excise tax, if any, on such goods or properties shall form part of the
gross selling price.

What constitutes gross selling price in the case of sale, barter or exchange
of real property for VAT purposes.
 Shall mean the consideration stated in the sales document or the fair
market value, whichever is higher.
 If the VAT is not billed separately in the document of sale, the selling price
or the consideration stated therein shall be deemed to be inclusive of VAT.
 The term fair market value shall mean whichever is higher of:
1. The fair market value as determined by the Commissioner (zonal
value); or
2. The fair market value as in schedule of values of the Provincial and City
Assessors.
 If the gross selling rice is based on the zonal value or market value of the
property, the zonal or market value shall be deemed exclusive of VAT.
 If the sale of real property is on installment plan where the zonal value/fair
market value is higher than the consideration/selling rice, exclusive of the
VAT, the VAT shall be based on the ratio of actual collection of the
consideration, exclusive of the VAT, against the agreed consideration,
exclusive of the VAT appearing in the Contract to Sell/Contract of Sale
applied to the zonal value/fair market value of the property at the time of
the execution of the Contract to Sell/Contract of Sale applied to the zonal
value/fair market value of the property at the time of the execution of the
Contract.
 The input vat that can be availed by the buyer shall be the separately-billed
output VAT in the sales document issued by the seller.
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Zero-rated sales of goods or properties.
 A zero-rated of goods or properties is a taxable transaction for VAT
purposes, but shall not result in any output tax.
 The input tax shall be available as tax credit or refund.
Distinction between automatically zero-rated sale and effectively zero-
rated transactions.
 Although both are taxable and similar in effect, they differ as to source.
 Automatically zero-rated transactions refer to the actual export sale of
goods and supply of services. The tax rate is set at zero. When applied to
the tax base, such rate obviously results in no tax chargeable against the
purchaser.
 Effectively zero-rated transactions refer to the local sale of goods or supply
of services to persons or entities who were granted indirect tax exemption.
Requirements for the effective zero-rating of sale transactions.
 The taxpayer has to be VAT-registered and must comply with invoicing
requirements.
 The taxpayer’s failure to comply with invoicing requirements will result in
the disallowance of his claim or refund. Nonetheless, this treatment is
without prejudice to the right of the taxpayer to charge the input taxes to the
appropriate expense account or asset account subject to depreciation,
whichever is applicable.

Purpose of effective zero-rating.
 Zero-rating is not intended as a benefit to the person legally liable to pay the
tax, but to relieve certain exempt entities from the burden of indirect tax so as
to encourage the development of particular industries.
 Effective zero-rating was intended to relieve the exempt entity from being
burdened with the indirect tax which is or which will be shifted to it had there
been no exemption.
Intention of the Legislature in granting tax relief such as automatic zero-
rating or effective zero-rating on the sales of certain VAT registered
enterprise.
 The legislative grant of tax relief constitutes a sovereign commitment of
Government to taxpayers that the latter can avail themselves of certain tax
reliefs and incentives in the course of their business activities here.
 Such a commitment is particularly to foreign investors who have been
enticed to invest heavily in our country’s infrastructure, and who have done
so on the firm assurance that certain tax reliefs and incentives can be availed
of in order to enable them to achieve their projected returns on these very
long-term and heavily funded investment.
What are considered zero-rated export sales of goods or properties under
the Tax Code.
1. The sale and actual shipment of goods from the Philippines to a foreign
country, irrespective of any shipping arrangement that may be agreed
upon which may influence or determine the transfer of ownership of
goods so exported, paid for in acceptable foreign currency or its
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equivalent in goods or services, and accounted for in accordance with the
rules and regulations of the BSP;
2. The sale of raw materials or packaging materials to a nonresident buyer
delivery to a resident local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of the
said buyer’s goods, paid for in acceptable foreign currency, and
accounted for in accordance with the rules and regulations of the BSP;
3. The sale of raw materials or packaging materials to an export-oriented
enterprise whose export sales exceed 70% of total annual production.
Any enterprise whose export sales exceed 70% of the total annual
production of the preceding taxable year shall be considered an export-
oriented enterprise.
4. Sale of gold to BSP;
5. Transactions considered export sales under EO 226, Omnibus
Investments Code of 1987, and other special laws; and
6. The sale of goods, supplies, equipment and fuel to persons engaged in
international shipping or international air transport operation; Provided,
that the same is limited to goods, supplies, equipment and fuel pertaining
to or attributable to the transport of goods and passengers from a port in
the Philippines directly to a foreign port, or vice versa, without docking or
stopping at any port in the Philippines unless the docking or stopping ay
any other port in the Philippines is for the purpose of unloading
passengers and/or cargoes that originated from abroad, or to load
passengers and/or cargoes bound abroad; Provided, further, That if any
portion of such fuel, goods or supplies is used for the purposes other than
that mentioned, such portion of fuels, goods or supplies shall be subject
to 12% output VAT effective February 1, 2006.

Meaning of the term export sales.
 Export sales or sales outside the Philippines are subject to VAT at 0% rate if
made by a VAT-registered person.
 When applied to the tax base, the 0% 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 tax credit certificate to the VAT previously charged by suppliers.
Rationale for the zero-rating of export sale of goods.
 Zero-rated transactions generally refer to the export sale of goods. The tax
rate in this case is set at zero.
 When applied to the tax base or the selling price of the goods sold, such zero
rate results in no tax chargeable against the purchaser, foreign buyer or
customer.
 Although the seller in such transaction charges no output tax, said seller can
claim a refund of the VAT that his suppliers charged him.
 The seller thus enjoys automatic zero-rating, which allows him to recover the
input taxes he paid relating to the export sales, making him internationally
competitive.
 A sale by a VAT-registered taxpayer of goods taxed at 0% shall not result in
any output VAT, while the input VAT on its purchases of goods or services
related to such zero-rated sale shall be available as tax credit or refund.
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When a taxpayer is deemed to be engaged in the sale and actual shipment
of goods in the Philippines to a foreign country.
 The taxpayer is considered engaged in export sales (a zero-rated
transaction) if made by a VAT-registered entity.
When payments are considered made in acceptable foreign currency or its
equivalent in goods or services, and accounted for in accordance with the
rules and regulations of the BSP.
 The certification of inward remittances attests to the fact of payment.
Local sales of raw materials to export-oriented enterprises.
 Sale of raw materials to export-oriented BOI-registered enterprises whose
export sales, under rules and regulations of the BOI, exceed 70% of total
annual production, shall be subject to zero-rate under the following
conditions:
1. The seller shall file an application for zero-rating for each and every
separable year. The application should be accompanied with a favorable
recommendation from the BOI;
2. The raw materials sold are to be used exclusively by the buyer in the
manufacture, processing or repacking of his own registered export
product;
3. The words “zero-rated rates” shall be prominently indicated in the sales
invoice.
Sales of gold to BSP considered as export sales.

 The BIR interpreted Section 106 of the NIRC in relation to Section 2 of EO
581 which prescribed that gold sold to the BSP shall be considered export
and therefore shall be subject to the export and premium duties.
 The BIR also considered section 169 of the Central Bank Circular No. 960
which states that all sales of gold to the Central Bank are considered
constructive exports.
 It is only the sale of gold, not silver or other metallic minerals which is
considered export sale.
Duties and obligations of the taxpayer when buying gold.
 Sales of metallic minerals to persons and entities is subject to 12% VAT if the
value thereof exceeds the threshold set by the NIRC and existing issuances.
Meaning of the term considered export under EO 226 and other special
laws.
 The following sales are considered as export sales under EO 226
1. Actual exports :
a. Considered export sales shall mean the Philippine port FOB value,
determined from invoices, bills of lading, inward letters of credit,
landing certificates, and other commercial documents, of export
products exported directly by a registered export producer;
 FOB stands for free on board, wherein the seller shall deliver and
load the goods at seller’s point at his expense or free of charge to
the buyer but the duty to pay the freight charges from seller’s point
of view to the point of destination is on the buyer.
b. The net selling price of export products sold by a registered export
producer to another export producer, provided that sales of export
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products to another producer shall only be deemed export sales when
actually exported by the latter. For purposes of VAT zero-rating, such
producer must be registered with the BOI and is required to actually
export more than 70% of its total annual production.
c. The net selling price of export products sold by a registered export
producer to an export trader, Provided, That the sales of export
products to an export trader shall only be deemed export sales when
actually exported by the latter, as evidenced by landing certificated or
similar commercial documents. The export sales of registered export
traders shall include commission income.
2. Constructive exports:
a. Sales to bonded manufacturing warehouses of export-oriented
manufacturers;
b. Sales to export processing zones pursuant to RA Nos. 7916, as
amended, 7903, 7922 and other similar export processing zones.
Sales to processing zones are subject to special tax treatment.
Merchandise purchased by a registered zone enterprise from the
customs territory and subsequently brought into the zone, shall be
considered as export sales.
c. Sales to enterprises duly registered and accredited with the SMBA
pursuant to RA 7227;
d. Sales to registered export traders operating bonded trading
warehouses supplying raw materials in the manufacture of export
products;
e. Sales to diplomatic missions and other agencies and/or
instrumentalities granted tax immunities, of locally manufactured,

assembled or repacked products whether paid for in foreign currency
or not.
 Exportation of goods on consignment shall not be deemed export sales until
the export products consigned are in fact sold by the consignee.
 Sales of goods or properties made by a VAT-registered supplier to a BOI-
registered manufacturer/producer whose products are 100% exported are
considered export sales. As certification to this effect must be issued by the
BOI which shall be good for one year unless subsequently re-issued by the
BOI.
Foreign currency denominated sale of goods.
 Means the sale to a nonresident of goods, except automobiles and non-
essential goods (jewelry, perfume, yachts), assembled or manufactured in
the Philippines for delivery to a resident in the Philippines, paid for in
acceptable foreign currency and accounted for in accordance with the rules
and regulations of the BSP.
 Sales of locally manufactured or assembled goods for household and
personal use paid for in convertible foreign currency and accounted in
accordance with the rules and regulations of the BSP shall also be
considered export sales.
Sales to persons or entities deemed tax-exempt under special law or
international agreement.
 Ex. ADB, IRRI – effectively subject to VAT at zero-rate.
 There should be a special law or an international agreement which declared
that the buyer is exempt from VAT. Burden of proof: buyer.
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 Rationale for the exemption: CIR vs. John Gotamco & Sons, Inc. The
manifest intention of the agreement is to exempt the contractor so that no
contractor’s tax may be shifted to the contractee.
Tax treatment of sales made by a VAT-registered supplier from the
Customs Territory to PEZA-registered enterprise under the old rule and
under the new rule.
 If the buyer is a PEZA-registered enterprise which is subject to 5% special
tax regime, in lieu of all taxes, except property tax, pursuant to RA 7916, as
amended:
a. Sale of goods – shall be treated as indirect export, hence, considered
subject to 0% VAT.
b. Sale of service – shall be treated subject to 0% VAT under the cross
border doctrine.
 If buyer is a PEZA registered enterprise which is not embraced by the 5%
special tax regime, hence, subject to taxes under the NIRC:
a. Sale of goods – treated as indirect export, hence, considered subject to
0% VAT.
b. Sale of service – treated as subject to 0% VAT under the cross border
doctrine.
 No output VAT may be passed on to an ecozone enterprise since it is a vat-
exempt entity.

Zero-rating of sale by a supplier from the Customs Territory to a PEZA-
registered enterprise was only clearly established on October 15, 1999,
upon the issuance of RMC 74-99.
 CIR vs. Toshiba Information Equipment (Phils.)
 Prior to October 15, 1999, whether a PEZA-registered enterprise was exempt
or subject to VAT depended upon the type of fiscal incentives availed of by
the said enterprise. 2 types of fiscal incentives:
1. The 5% preferential tax rate on it gross income; and
2. The income tax holiday.
Transactions-deemed sale.
1. Transfer, use or consumption not in the course of business of goods or
properties originally intended for sale or for use in the course of business.
Transfers of goods or properties not in the course of business can take
place when VAT-registered person withdraws goods from his business for
his personal use;
2. Distribution or transfer to:
a. Shareholder or investors share in the profits of VAT-registered person.
 Property dividends which constitute stocks in trade or properties
primarily held for sale or lease declared out of retained earnings on
or after January 1, 1996 and distributed by the company to its
shareholders shall be subject to VAT based on the zonal value or
fair market value at the time of distribution, whichever is applicable.
b. Creditors in payment of debt or obligation.
3. Consignment of goods if actual sale is not made within 60 days following
the date such goods were consigned.
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4. Retirement from or cessation of business with respect to all goods on
hand, whether capital goods, stock-in-trade, supplies or materials as of
the date of such retirement or cessation, whether or not the business is
continued by the new owner or successor. Also deemed sale:
a. Change of ownership of business. There is a change of ownership of
the business when a single proprietorship incorporates; or the
proprietor of a single proprietorship sells his entire business.
b. Dissolution of a partnership and creation of a new partnership which
takes over the business.
Sale of NPC during the testing period which is similar to a mere cost
recovery scheme considered as falling within the contemplation of the
term transaction deemed sale.
 Not a commercial sale.
 The imposition of VAT does not limit the term sale to commercial sales,
rather it extends the term to transactions that are deemed sale.
 PAL vs. CIR. When the term sale is made to include certain transactions for
the purpose of imposing a tax, these same transactions should be included in
the term sale when considering the availability of an exemption or tax benefit
from the same revenue measures. The fact that it was not transferred thru a
commercial sale or in the normal course of business does not deflect from
the fact that such transaction is deemed as a sale under the law.
Change or cessation of status as VAT-registered.
 Subject to VAT. The VAT shall apply to goods or properties originally
intended for sale or use in business, and capital goods which are existing as
of the occurrence of the following:

1. Change of business activity from VAT taxable status to exempt;
2. Approval of a request for cancellation of registration due to reversion to
exempt status;
3. Approval of a request for cancellation of registration due to a desire to
revert exempt status after the lapse of 3 consecutive years from the time
of registration by a person who voluntarily registered despite being
exempt;
4. Approval of a request for cancellation of registration of one who
commenced business with the expectation of gross sales or receipts
exceeding P1,919,500 but who failed to exceed this amount during the
first 12 months.
 Not subject to VAT. Those goods or properties which are originally intended
for sale or for use in the course of business existing as of the occurrence of
the following:
1. Change of control of a corporation by the acquisition of the controlling
interest of such corporation by another stockholder or group stockholders.
However, the exchange of goods or properties including the real estate
properties used in business or held for sale or for lease by the transferor,
for shares of stocks, whether resulting in corporate control or not, is
subject to VAT.
2. Change in the trade or corporate name of the business; and
3. Merger or consolidation of corporations. The unused input tax of the
dissolved corporation, as of the date of merger or consolidation, shall be
absorbed by the surviving or new corporation.
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Allowable deductions from Gross Selling Price.
1. Discounts determined and granted at the time of sale, which are
expressly indicated in the invoice, the amount thereof forms part of the
gross sales duly recorded in the books of accounts.
2. Sales returns and allowance for which a proper credit or refund as made
during the month or quarter to the buyer for sales previously recorded as
taxable sales.
Authority of the CIR to determine the appropriate tax base in the case of
transaction deemed sale.
 If the transaction is deemed sale, barter or exchange, or where the gross
selling price is unreasonably lower than the actual market value.
 The gross selling rice is unreasonably lower than the actual market value if it
is lower by more than 30% of the actual market value of the same goods of
the same quality or quantity sold in immediate locality on or nearest the date
of sales.
 If one of the parties is the government, the output VAT on the transaction
shall be based on the actual selling price.
 For transactions deemed sale, the output tax shall be based on the market
value of the goods deemed sold as of the time of the occurrence of the
transaction.
 In the case of retirement or cessation of business, the tax base shall be the
acquisition cost or the current maker price of the goods or properties,
whichever is lower.
 Where the gross selling price is unreasonably lower than the fair market
value, the actual market value shall the tax base.

VALUE-ADDED TAX ON IMPORTATION OF GOODS.
 Importation begins when the carrying vessels or aircraft enters in the
jurisdiction of the Philippines with the intention to unlade therein.
 Importation is deemed terminated upon payment of duties, taxes and other
charges due upon the articles or secured to be paid, at a port of entry and
the legal permit for withdrawal shall have been granted, or in case said
articles are free of duties, taxes and other charges, until they have legally left
eh jurisdiction.
General Rule on the imposition of VAT on importation of goods.
 VAT is imposed on goods brought into the Philippines, whether for use in
business or not.
 Shall be based on the total value used by the BOC in determining tariff, and
other charges, such as postage, commission, and similar charges, prior to
the release of the goods from customs custody.
 In case the valuation used by the BOC in computing customs duties is based
on the volume or quantity of the imported goods, the landed cost shall be the
basis for computing VAT.
 Landed cost consists of the invoice amount, custom duties, freight, insurance
and other charges.
 If the goods imported are subject to excise tax, the excise tax shall form part
of the tax base.
 Same rule applies to technical importation of goods sold by a person located
in a Special Economic Zone to a customer located in a customs territory.
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Applicability and payment of VAT on importation.
 The VAT on importation shall be paid by the importer prior to the release of
such goods from customs custody.
When customs duties and VAT on imported goods paid; Bases of the tax;
and Venue for payment of VAT.
 If the motor vehicles are sold to the customs territory, the duties and taxes
must be paid first before they are physically brought out of the SBFZ
because that will be considered as technical importation.
 The tax base for the customs duties is the transaction value while the tax
base for VAT purposes is the value used in computing custom duties plus
custom duties, excise taxes, and other charges incident to importation.
 These customs duties and taxes on importation must be paid first by the
buyer to the Bureau of Customs before an ATRIG will be issued to the BIR.
 An importer refers to any person who brings goods into the Philippines WON
made in the course of trade or business.
Concessionaires of PAGCOR, such as the Philippine Casino Operators
Corporation, not exempt from the payment of VAT on importation.
 Commissioner of Customs vs. CTA. Not exempt on importations of auto
parts, elevators, escalators, and other heavy equipment even if PAGCOR is
an exempt entity.
Sale, transfer or exchange of imported goods by tax-exempt persons.
 If goods are subsequently sold, transferred or exchanged in the Philippines
to non-exempt persons or entities, the latter shall be considered the
importers thereof and shall be liable for VAT due on such importation.

 The tax due on such importation shall constitute a lien on the goods, superior
to all charges or liens, irrespective of the possessor of said goods.
Subsequent sale of car by an alien employee of ADB which was imported
tax-free is subject to VAT when sold to non-exempt person.
 The Tax Code provides that in the case of tax-free importation of goods into
the Philippines by persons, entities or agencies exempt from tax where such
goods are subsequently sold, transferred or exchanged in the Philippines to
non-exempt persons or entities, the purchasers, transferees or recipients
shall be considered the importer thereof, who shall be liable for any internal
revenue tax on such importation and the tax due on such importation shall
constitute a lien on the goods superior to all charges or liens on goods,
irrespective of the possessor thereof.
VAT-exempt importations.
 No VAT. They are specifically exempt under the TAX Code.
Importations of motor vehicles to the SBFZ not subject to customs duties
and VAT.
 Subic Bay Freeport Zone
 Seagate Technology, Inc. vs. CIR. Exempt because the SBFZ is considered
as a foreign territory, hence all motor vehicles imported by a duly registered
enterprise engaged in the importation and sale of motor vehicles in the
SMBA and while still within the secured perimeter of SMBA is not subject to
Philippine taxes.
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Tax treatment of all petroleum and petroleum products imported and its
subsequent exportation or sales to Freeport and economic zone locators
or other persons/entities; Refund of taxes paid; ATRIG and other
administrative requirements.
 The VAT and excise taxes which are due on all petroleum and petroleum
products that are imported and/or brought directly from abroad to the
Philippines, including Freeport and economic zones, shall be paid by the
importer thereof to the BOC.
 The subsequent exportation or sale/delivery to registered enterprises
enjoying tax privileges within the Freeport and Ecozones, as well as the sale
of said goods to persons engaged in international shipping or international air
transport operations, shall be subject to 0% VAT.
 With respect to the VAT paid by the importer on account of the 0% VAT
transactions/entities and the excise taxes paid on account of sales to
international carriers of Philippine or foreign registry for use or consumption
outside the Philippines or exempt entities or agencies covered by tax
treaties, conventions and international agreements for their use or
consumption, as well as entities which are by law exempt from indirect taxes,
the importer may file a claim for fund or refund with the BOC, subject to the
favorable endorsement of the BIR.
 No claim for refund shall be granted unless it is properly shown to the
satisfaction of the BIR that said petroleum or petroleum products have been
sold to a duly registered locator and have been utilized in the registered
activity/operator of the locator, or that such have been sold and have been
used for international shipping or air transport operations, or that the entities
to which the said goods were sold are statutorily zero-rated for VAT, and/or
exempt from excise taxes.

 If the said freeport/ecozone registered enterprise shall subsequently
sell/introduce the petroleum or petroleum products, or part of the volume
thereof, into the customs territory, except sales of fuel for use in international
operations or another Freeport/ecozone registered enterprise not enjoying
tax privileges, no refund for excise taxes shall be granted to the importer for
the product sold.
 The possessor shall present sufficient evidence that the excise tax thereon
have been paid, otherwise, the excise taxes due on said goods shall be
collected from him.
 In case of sale or introduction by a Freeport/ecozone registered enterprise
into the customs territory or to a Freeport/ecozone registered enterprise not
enjoying 0% VAT rate, the seller shall be liable for 12% VAT. In this instance,
no refund for VAT shall be allowed the importer or an assessment for VAT
shall be issued to said importer, if the refund has already been granted, and
another assessment for VAT shall be made against the seller.
 For every importation, the importer shall secure from the prescribed ATRIG
form the BIR’s excise Tax Regulatory Board, and pay the VAT and excise tax
before the release of the products. In case of subsequent sale to customs
territory by a Freeport/ecozone-registered enterprise, the importer shall
secure the necessary withdrawal certificate.
 For excise tax purposes, all importers of petroleum and petroleum products
shall secure a permit to operate with the BIR’s ETRD.
VAT ON THE SALES OF SERVICES AND USE OR LEASE OF PROPERTIES
 Subject to VAT, equivalent to 12% of the gross receipts (excluding VAT).
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Sale of services which are subject to 12% VAT.
 Requisites:
1. The seller must be a VAT-registered, or even if not, he/it is a VAT-
registerable person and his/its gross annual receipts exceeds to
P1,919,500;
2. The sale must be performed in the course of trade or business;
3. The sale of services must be for a valuable consideration actually or
constructively received;
4. The sale must have been done and for use or consumption in the
Philippines;
5. The sale must not be considered as a zero-rated sale;
6. The sale must not be exempt from VAT under the tax Code, special law
or international agreement;
7. In the case of lease of properties, the property being leased should be
located in the Philippines irrespective of the place where the contract of
lease or licensing agreement was executed.
Meaning of gross receipts.
 Refer to the total amount of money or its equivalent representing the contract
price, compensation, service fee, rental or royalty, including the amount
charged for materials supplied with the services and deposits applied as
payment for services rendered and advance payments actually or
constructively received during the taxable period for the services performed
or to be performed for another person, excluding VAT, except those amounts
earmarked for payment to unrelated third party or received as reimbursement
for advance payment on behalf of another which do not redound to the
benefit of the payor.

When constructive receipt occurs.
 It occurs when the money consideration or its equivalent is placed at the
control of the person who rendered the service without restrictions by the
payor.
 Examples:
1. Deposit in banks which are made available to the seller of services
without restrictions;
2. Issuance by the debtor of a notice to offset the debt or obligation and
acceptance thereof by the seller as payment for services rendered; and
3. Transfer of the amount retained by the payor to the account of the
contractor.
Meaning of sale or exchange of services.
 Means the performance of all kinds of services in the Philippines for others
for fee, remuneration or consideration, whether in kind or in cash, including
those performed or rendered by the following:
1. Construction and service contractors;
2. Stock, real estate, commercial, customs and immigration brokers;
3. Lessors of property, whether personal or real;
4. Persons engaged in warehousing services;
5. Lessors or distributors of cinematographic films;
6. Persons engaged in milling processing, manufacturing or repacking
goods for others;
7. Proprietors, operators, or keepers of hotels, motels, rest houses, pension
houses, inns, resorts, theaters, and movie houses;
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8. Proprietors or operators of restaurants, refreshment parlors, cafes and
other eating places, including clubs and caterers;
9. Dealers in securities;
10. Lending investors;
11. 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;
12. 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
place in the Philippines;
13. Sales of electricity by generation, transmission, and/or distribution
companies;
14. Franchise grantees of electric utilities, telephone and telegraph, radio
and/or 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 10M and franchise
grantees of gas and water utilities;
15. Non-life insurance companies (except their crop insurance), including
surety, fidelity, indemnity and bonding companies; and
16. Similar services regardless of whether or not the performance thereof
calls for the exercise or use of the physical or mental faculties.
 The phrase sale or exchange of services shall likewise include:
1. The lease or the use of or the right or privilege to use any copyright,
patent, design or model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or right;

2. The lease or the use of, or the right to use any industrial, commercial or
scientific equipment;
3. The supply of scientific, technical, industrial or commercial knowledge or
information;
4. The supply of any assistance that is ancillary and subsidiary to and is
furnished as a means of enabling the application or enjoyment of any
such property;
5. The supply of services by a nonresident person or his employee in
connection with the use of property or rights belonging to, or the
installation or operation of any brand, machinery or other apparatus
purchased from such nonresident person;
6. The supply of technical advice, assistance or services rendered in
connection with technical management or administration of any scientific,
industrial or commercial undertaking, venture, project or scheme.
7. The lease of motion picture films, films, tapes and discs; and
8. The lease or use of, or the right to use radio, television, satellite
transmission and cable television time.
Special VAT rules on Selected services.
Services of contractors; salaries of security guards form part of the gross
receipts of the security agency; rationale behind the imposition.
 The reason is the salaries of the security guards are actually the liability of
the agency and that guards are considered their employees.
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Tax treatment of payments for media advertising placements.
 Advertising agencies, media suppliers and advertisers comprise the tripartite
institutional structure of the advertising industry.
 Clients/advisers make income payments for media advertisement contracts
directly to the advertising agency or directly to the media supply for the total
cost of the media advertisement, inclusive of creative and media services,
advertising commission or service fees and VAT.
 In contracts for media advertisements, the media supplier shall bill the client
for the total cost of production and media placement. The client/advertiser
shall pay the media supplier directly for the amount billed by it.
1. On the income payment by client/advertiser to the media supplier. The
media supplier shall bill the client/advertiser for the total amount of media
placement. Upon payment, client/advertiser shall withhold 2% EWT on
the entire invoice amount. Client/advertiser shall likewise issue certificate
of CWT in the name of the supplier.
2. On the gross receipts of the media supplier. Upon the receipt of the
income payment from the advertiser, the media supplier shall issue VAT
invoice/official receipt to client/advertiser and shall report the entire
amount as business income for income tax purposes.
 Commission/service fee of advertising agency relative to the media
advertisement and placement contracted.
1. On the payment of commission/service fee by the media supplier to the
advertising agency. The advertising agency shall bill the media supplier
for its commission/service fee. Upon payment by the media supplier to
the advertising agency, it shall withhold 2% from the commission/service
fee of the advertising agency. It shall likewise issue certificate of CTW in
the name of the advertising agency.

2. On the receipt of commission/service fee by the advertising agency. The
advertising agency shall issue its VAT invoice/official receipt to the media
supplier for amount of commission/service fee received. The amount of
VAT shall be reported based on the commission/service fee of the
advertising agency.
Services rendered by brokers.
 Subject to VAT.
 A broker is one who is engaged for others on a commission, to negotiate
contract relative to a property the custody of which he has no concern.
 The duty assumed by a broker is to bring the minds of the buyer and the
seller to an agreement for a sale and the price and terms on which it is to be
made.
Lessors of properties, whether personal or real.
 Subject to VAT, regardless of the place where the contract of lease or
licensing agreement was executed if the property leased or used is located in
the Philippines.
Treatment of advance payment in a lease contract.
 The advance payment of the lessee may be:
1. A loan to the lessor from the lessee;
2. An option in money for the property;
3. A security deposit to insure the faithful performance of certain obligations
of the lessee to the lessor; or
4. Pre-paid rental.
 1, 2 and 3, advance payment is not subject to VAT.
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 A security deposit that is applied to rental shall be subject to VAT at the time
of its application.
 If #4, such payment is taxable to the lessor in the month when received,
irrespective of the accounting method employed by the lessor.
VAT on rental and/or royalties payable to nonresident foreign corporations
or owners.
 For the sale of services and use or lease of properties in the Philippines shall
be based on the contract price agreed upon by the licensor and the licensee.
 The licensee shall be responsible for the payment of VAT on such rentals
and/or royalties in behalf of the nonresident corporation or owner.
Payments for software transactions subject to VAT.
 Payments for computer software transactions subject to 12% VAT:
1. Royalty payments for the use of a copyright over a software;
2. Payments made to resellers/distributors/retailers who are engaged in the
trade or business of distributing or selling software; and
3. Payments for services rendered in the Philippines in connection with
software purchased.
 The payor in control of the VAT shall be responsible for payment of the
withholding of the VAT on such fees on behalf of the nonresident payee, by
filing a separate VAT return for and on behalf of such payee.
 The filed return and proof of payment thereof shall serve as sufficient basis
for the claim of input tax to be applied against the output tax that may be due
the payor.
 The payor is also required to issue the certificate of Final Tax withheld at
source at quadruplicate upon the request of the payee, the first three copies

thereof to be given to the payee and the 4 th coy be retained to the payor as
its file copy.
Warehousing subject to VAT.
 Means rendering personal services of a warehouseman such as:
1. Engaging in the business of receiving or storing goods of others for
compensation or profit;
2. Receiving goods and merchandise to be stored in his warehouse for hire;
or
3. Keeping and storing goods for others, as a business and for use.
Lessors or distributors of cinematographic films; But Legislature never
intended to include cinema/theater operators or proprietors in the
coverage of the VAT.
 Has always been considered a form of entertainment subject to amusement
tax.
 Only lessors or distributors of cinematographic films are included in the
coverage of VAT.
 None pertain to cinema/theater operators or proprietors. This reveal the
intent of the legislative not to impose VAT on persons already covered by the
amusement tax.
 This holds true even under the LGC of 1991 precisely because the VAT laws
was intended to replace the percentage tax on certain services. The mere
fact that they are taxed by local government unit and not by the national
government is immaterial.
 The transfer of the power to tax did not intend to treat cinema/theater houses
as a separate class.
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 Amusement tax – 10%
Persons engaged in milling, processing, manufacturing or repacking
goods for others subject to VAT.
 A miller, who is engaged in milling for others (except palay into rice, corn into
corn grits, and sugarcane into raw sugar), is subject to VAT on sale of
services.
 If he is paid in cash, VAT shall be based on his gross receipts for the month
or quarter.
 If otherwise, VAT shall be based on the actual market value of his shares of
the milled product (except rice, corn grits and raw sugar) shall be subject to
VAT.
Hotels and similar establishments.
 Proprietors, operators or keepers, motels, rest houses, pension houses, inns,
resorts and similar establishments are subject to VAT.
Restaurants and similar establishments.
 Proprietors or operators of restaurants, refreshment parlors, cafes and other
eating places, including clubs and caterers, and similar establishments shall
be subject to VAT.
Dealers in securities and lending investors.
 Subject to VAT on the basis of their gross receipts.
 For dealer in securities, the term gross receipts shall mean gross selling
price less cost of the securities sold.

Whether a lending investor is the same as a lending company.
 Lending investor – one who makes a practice of lending money for
themselves or others at interest.
 A bank depositor is not a lending investor because the opening and maintain
a deposit in a bank cannot be considered as a business.
 A lending company shall refer to a corporation engaged in granting loans
from its own capital funds or from funds sourced from not more than 19
persons. Synonymous with lending inverstors.
 Not deemed to include banking institutions, investment houses, savings, loan
associations, financing companies, pawnshops, insurance companies,
cooperatives and other credit institutions already regulated by law.
Pawnshops not considered as lending investors.
 Reason: not enumerated as one of those engaged in sale or exchange of
services in section 108
 The nature of business of pawnshop does not fall under service.
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 shall be subject to VAT.
 All receipts from service, hire or operating lease of transportation equipment
not subject to percentage tax on domestic common carriers and keepers of
garage shall be subjected to VAT.
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Transport of passengers of domestic common carriers by land not subject
to VAT.
 Common carriers by land with respect to their gross receipts from the
transport of passengers including operators of taxicabs, utility cars for rent or
hire driven by the lessees and tourist buses used for the transport of
passengers shall be subject to the percentage tax, but not to VAT.
 Common carriers by land engaged in the transport of cargo shall be subject
to VAT.
But transport of passengers of domestic common carriers by air and sea
subject to VAT.
 12% VAT on their gross receipts from their transport of passengers, goods or
cargoes from one place in the Philippines to another place in the Philippines.
 Foreign international carriers shall be subject to 3% international carriers tax.
 Domestic carriers with international flight shall be subject to 0% VAT.
Tax implications of integrating the domestic passenger service charge
(DPSC) at the point of sale of airline tickets.
 The DPSC shall be collected from passengers at the time they purchase
airline tickets from airline companies or general sales agents/travel agents.
 In turn, the companies shall receive service fees from MIAA as compensation
for collecting the DPSC on behalf of MIAA.
 The tax implications of the integration of the DPSC:
1. Collection of DPSC from passengers. It will be included in the OR to be
issued by the airline to the passenger. The share of the airport authority is
the DPSC should be shown in the airline company’s OR as art of receipts
subject to VAT while the ASF should be reflected as VAT exempt. The
VAT component of the DPSC should be included in the total VAT.

2. Payment of D PSC by airline company to airport authority. The airport
authority shall issue an OR to the airline. The OR shall indicate the full
amount of the DPSC. The DPSC shall not form part of the gross receipts
of the airport authority for purposes of computing creditable withholding
taxes.
3. Payment of service Fees by airport authority to airline company.
Governed by the rules on government money payments and be subjected
to withholding VAT and the rate of 5% and EWT of 2% of gross
payments.
 The entries to record payment/receipt of DSC and entries to take up the
receipt/payment of service fees may be consolidated if the actual remittance
of DSPC by the airline company to the airport authority is net of the service
fees.
Taxes imposable eon domestic airline companies.
VAT on sale of electricity.
 Sale of electricity by generation, transmission and distribution companies
shall be subject to 12% VAT on their gross receipts, Provided, that sale of
power or fuel generated through renewable sources of energy such as, but
not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy,
and other emerging energy sources using technologies such as fuel cells and
hydrogen shall be subjected to 0% VAT.
Meaning of gross receipts on sale of electricity.
 Refer to:
1. Total amount charged by generation companies for the sale of electricity
and related ancillary services; and/or
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2. Total amount charged by transmission companies for transmission of
electricity and related ancillary services; and/or
3. Total amount charged by distribution companies and electric cooperatives
for distribution and supply of electricity and related electric service.
 The universal charge passed on and collected by distribution companies and
electric cooperatives shall be excluded from the computation of the Gross
Receipts.
Tax treatment of the generation and other power related charges, including
the VAT thereon, which are pass through charges of the Distribution
Companies and Electric Cooperatives.
 The generation companies, aggregators, market operators, retail electricity
suppliers, and other suppliers of electricity shall bill the distribution
companies and electric cooperatives for the sale and transmission of
electricity and ancillary services including the VAT thereon, if applicable.
 The VAT shall be remitted by the distribution companies and electric
cooperatives to the generation companies, aggregators, market operators,
retail electricity suppliers and other suppliers of electricity together with the
payment for generation and transmission services.
 All collections by generation companies, aggregators, market operators,
retail electricity suppliers and other suppliers of electricity from distribution
companies and electric cooperatives shall be deemed included in the VAT.
 The amount collected by the distribution companies and electric cooperatives
from the end-user for such charges, including the VAT thereon, shall not form
part of the gross receipts of the distribution companies and electric
cooperatives.

 The distribution companies and electric cooperatives shall not claim an input
tax on such pass-through charges.
 The amount collected from the end-user as payment for the generation and
other VATable charges including the VAT thereon shall form part of the gross
receipts and output VAT of the generation company or transmission
company, accordingly.
 If the distribution company or the transmission cooperatives pay in advance
the generation fee to the generation company, the amount paid shall be
inclusive of the corresponding VAT. The amount advanced may be offset
against the amount collected from the end-user.
Tax Consequences of power sector assets and liabilities management
corporation (PSALM) transactions.
 On the sale of the NPC generation Assets and other real properties in view of
the privatization:
1. No income and withholding taxes are due from the sale of the NPC
generation assets and other real properties to winning bidders;
2. The sale of PSALM to NPC generation assets and other real properties to
winning bidders is subject to VAT;
3. The sale of PSALM to NPC generation assets and real properties is
subject to DST;
4. The rental income of PSALM from the NPC generation assets and other
real properties prior to its sale to winning bidders is subject to income tax
and VAT.
 On the operation of generation facilities:
1. Income tax and withholding tax
 PSALM is not one of the exempt GOCCs under the law.
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 The operation of PSALM of the NC assets transferred to it is not its
principal purpose but not only incidental to its mandate to privatize the
generating plants of the NPC in order to avoid a massive interruption
in the supply of electricity. In this regard, any income derived
therefrom is subject income tax.
2. VAT
 Since the sale of the electricity and sale of service by PSALM are
deemed made in the course of its business, the same is subject to
VAT.
 However, sale of power generated though renewable sources of
energy is subject to VAT at 0%.
3. Miscellaneous activities.
 Such as performance bonds, interest income from persons other than
the winning bidders, and from other activities not related with its
mandate are subject to all applicable taxes under the TAX Code.
Services of franchise grantees subject to VAT; Services which are not
subject to VAT.
1. Services of franchise grantees of telephone and telegraph, radio and/or
television broadcasting, toll road operations and all other franchise
grantees, except gas and water utilities, shall be subject to the 12% VAT,
in lieu of franchise tax.
2. However, franchise grantees of radio and/or television broadcasting
whose annual gross receipts of the receding year do not exceed P10M
shall not be subject to VAT, but to the 3% franchise tax, subject to
optional registration. If the option is exercised, said option is irrevocable.

3. Franchise grantees of gas and water utilities shall be subject to 2%
franchise tax on their gross receipts derived from the business covered by
the law granting the franchise.
4. Gross receipts of all other franchises, regardless of how their franchises
may have been granted, shall be subject to 12% VAT.
5. Franchise grantees of telephone and telegraph shall be subject to VAT on
their gross receipts derived from their telephone, telegraph, telewriter
exchange, wireless and other communication equipment services.
6. Amounts received by Telephone and telegraph companies for overseas
dispatch, message or conversation originating from the Philippines are
subject to percentage tax, but exempt from VAT.
PAGCOR is still exempt from VAT despite the enactment of RA 9337;
Provision subjecting PAGCOR to VAT under RR-16-2005 is invalid for
being contrary to RA 9337.
 Nowhere in RA 9337 is it provided that PAGCOR can be subjected to VAT.
RA 9337 is clear only as to the removal of PAGCOR’s exemption from the
payment of corporate income tax.
 PAGCOR is exempt from VAT because PACGOR’s charter, PD 1869, is a
special law that grants it exemption from taxes.
VAT exemption of PAGCOR extends to Acesite.
 CIR vs. Acesite. Acesite was the owner and operator of the Holiday Inn
Manila Pavilion Hotel. It leased a portion of the hotel’s premises to PAGCOR.
While it was proper not to pay the VAT charged by Acesite, the latter is not
liable for payment of it as it is exempt in this particular transaction by
operation of law to pay the indirect tax.
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VAT replaced the national franchise tax, but did not prohibit nor abolish
the imposition of local franchise tax by cities or municipalities.
 The power of tax by LGUs emanates from Section 5, Article X of the
Constitution which empowers them to create their own sources of revenues
and to levy taxes, fees and charges subject to such guidelines and limitations
as to the Congress may provide. VAT inures to the benefit of the national
government, while a local franchise tax is a revenue of the LGU.
Meaning of “In Lieu of All Taxes” clause in a legislative franchise.
 The in lieu of all taxes clause in a legislative franchise should categorically
state that the exemption applies both to local and national taxes; otherwise
the exemption claimed should be strictly construed against the taxpayer and
liberally in favor of the taxing authority.
Non-life insurance companies subject to VAT.
 Non-life insurance companies, except their crop insurances, including surety,
fidelity, indemnity and bonding companies are subject to VAT.
 They are not liable to payment of premium tax.
Tax base of VAT on non-life insurance companies.
 The gross receipts – the total premiums collected, whether paid in money,
notes, credits or any substitute for money.
 The gross receipts does not include:
1. Premiums refunded within 6 months after payment on account of rejection
of risk or returned for other reason to the person insured;
2. Premiums on reinsurance of a company that has already paid the tax;

3. Premiums on account of any reinsurance, if the risk insured against
covers property located outside the Philippines;
4. DST and local taxes passed on by the insurance company to the insured;
and
5. VAT passed on to the insured.
 Premiums received from a health and accident insurance contract
underwritten by the non-life insurance companies, inasmuch as the same
partakes the nature of a life insurance policy, is subject to the premium tax.
Non-life reinsurance premiums not subject to VAT.
 Non-life insurance premiums are subject to VAT whereas non-life
reinsurance premiums are not subject to VAT, the latter being already
subjected to VAT upon receipt of the insurance premiums.
 Insurance or reinsurance commissions, whether life or non-life, are subject to
VAT.
Basis of VAT in the case of pre-need companies.
 Pre-need companies are corporations registered with the SEC and
authorized/licensed to sell or offer for sale re-need plans, whether single plan
or multi-plan.
 They are engaged in business as seller of services providing services to plan
holders by managing the funds provided by them and making payments at
the time of need or maturity of the contract.
 As service providers, the compensation for their services is the premium or
payment received from the plan holder.
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Zero-rated sale of services.
 In general, a zero-rated sale of service by a VAT-registered person is a
taxable transaction for VAT purposes, but shall not result in 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.
Meaning of the term “Effectively Zero-rated sale of services”.
 Refer to the local sale of services by a VAT registered person to a person or
entity who was granted indirect tax exemption under special laws or
international agreement.
Essential conditions for the zero-rating of sale of services.
1. The processing, manufacturing or repacking goods must be performed in the
Philippines;
2. The recipient of said services is another person doing business outside the
Philippines;
3. The goods which were processed, manufactured or repacked are
subsequently exported; and
4. The services rendered are aid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP.
Distinction between VAT-exempt transaction and VAT-exempt party/entity.
 The object of exemption from the VAT may either be the transaction itself or
any of the parties to the transaction.
 An exemption transaction 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. Such transaction is not subject to VAT, but the seller is not
allowed to any tax refund or tax credit for any input taxes paid.
 An exempt party is a person or entity granted VAT exemption under the Tax
Code, a Special Law or an international agreement. Such party is not subject
to VAT, nut may be allowed a tax refund or credit for input taxes paid.
VAT-exempt Transactions.
 The term VAT-exempt transactions refers to the sale of goods or properties
and/or services and the use or lease of properties that is not such to VAT
(output tax) and the seller is not allowed any tax credit of VAT (input tax) on
purchases.
 The person making the exempt sale of goods, properties or services shall not
bill any output to his customers because the said transaction is not subject to
VAT.
Agricultural and marine food products in their original state exempt from
VAT.
When senior citizen may be subject to VAT.
 If he is self-employed or engaged in business or practice of profession, and
his gross annual sales and/or receipts exceeds P1,919,500 or such amount
to which he may be adjusted pursuant to the Tax Code, his gross
sales/receipts derived from such business or practice of profession shall be
subject to VAT.
 Otherwise, he shall be subject to the percentage tax.
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VAT-exempt transactions of cooperatives.
1. Sales by agricultural cooperatives duly registered and in good standing with
the CDA
a. To their members;
b. Sale of their produce, whether in its original state or processed form to
non-members;
 Exempted from VAT if the producer of the agricultural products
sold is the cooperative itself.
 If the cooperative is not the producer, only the sales to its
members shall be exempt.
c. 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.
 The sale or importation of agricultural products in their original
state is exempt from VAT irrespective of the seller and buyer
thereof.
2. Gross receipts from lending activities by credit or multi-purpose cooperatives
duly registered and in good standing with the CDA.
3. Sales and non-agricultural, non-electric and non-credit cooperatives duly
registered with and in good standing with the CDA; Provided, That the share
capital contribution of each member does not exceed P15K 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.

 A cooperative is not exempt from the VAT passed on to it by it VAT-
registered supplier. The VAT passed on to it by the said seller is not a tax on
the part of the cooperative but just part of the cost of the goods that it buys
from its suppliers.
Export sales which are exempt from VAT.
 Export sales of non-VAT registered taxpayers are exempt from VAT.
 Export sales of VAT registered taxpayers are considered zero-rated.
Real property transactions which are exempt from VAT.
1. Sale of real properties primarily held for sale to customers or held for lease in
the ordinary course of trade or business.
 However, if such are used in the trade or business of the seller, the
sale thereof shall be subject to VAT being a transaction incidental
tot eh taxpayer’s main business.
2. Sale of real properties utilized for low-cost housing as defined by RA 7279,
Urban Development and Housing Act of 1992, and other related laws, such
as RA 7835 (Comprehensive and Integrated Shelter Financing Act of 1994)
and RA 8763 (Home Guaranty Corporation Act of 2000.
3. Sale of real properties utilized for socialized housing wherein the price ceiling
per unit is P400,000 or as may be from time to time be determined by the
HUDCC or the NEDA and other related laws.
4. Sale of residential lot valued at P1,919,500 and below, or house and lot and
other residential dwellings valued at P3,919,200 and below.
5. If two or more adjacent residential lots, house and lots or other residential
dwellings are sold or disposed in favor of one buyer, from the same seller,
for the purpose of utilizing the lots, house and lots or other residential
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dwellings as one residential area, the sale shall be exempt from VAT only if
the aggregate value of the said properties do not exceed P1,919,500 for
residential lots, and P3,919,200 for residential house and lots or other
residential dwellings.
 Does not include the sale of parking lot which may or may not be
included in the sale of condominium units.
6. Lease of residential units with a monthly rental per unit not exceeding
P12,800 regardless of the amount of aggregate rentals received by the
lessor during the year.
7. Lease of residential units where the monthly rental per unit exceeds P12,800
but the aggregate of such rentals of the lessor during the year do not exceed
P1,919,500.
 Exempt from VAT but subject to 3% percentage tax.
8. In a case where a lessor has several residential units for lease, some are
leased out for a monthly rental per unit of not exceeding P12,800 while
others are leased out for more than P12,800 per unit, his tax liability will be:
a. The gross receipts of rentals not exceeding P12,800 per month per unit
shall be exempt from VAT regardless of the aggregate annual gross
receipts;
b. The gross receipts from rentals exceeding P12,800 per month per unit
shall be subject to VAT if the aggregate annual gross receipts from said
units only exceeds P1,919,500.
 Otherwise, the gross receipts shall be subjected to 3% percentage
tax.
9. Transfer of real property to a trustee if the property is to be held merely in
trust for the trustor.

10. Advance payment of the lessee in a lease contracts, when the same is
actually a loan tot eh lessor from the lessee;
11. Security deposits for lease arrangements to insure the faithful performance of
certain obligations of the lessee to the lessor.
Sale, importation, printing, or publication of books, newspapers,
magazines, reviews or bulletins.
 Conditions for exemption:
1. A newspaper, magazine, review or bulletin must be:
a. Printed or published at regular intervals;
b. Available for subscription and sale at fixed price; and
c. Are not principally devoted to the publication of paid advertisement.
2. The terms book, newspaper, magazine, review and bulletin shall refer to
printed materials in hard copies.
Transport of passengers by international carriers.
 International air carriers and international shipping carriers doing business in
the Philippines which are subject to the 3% percentage tax on their quarterly
gross receipts.
Sale or importation of vessels and aircrafts, including engine, equipment
and spare parts for domestic or international transport operations.
1. The exemption from Vat on the importation and local purchase of passenger
and/or cargo vessels shall be limited to those of 150 tons and above,
including engine and spare parts of the said vessels; Provided, That the
vessels be imported shall comply with the age limit requirement, at the time
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of acquisition counted from the date of the vessel’s original commissioning,
as follows:
a. For passenger and/or cargo vessels, the age limit is 15 years old;
b. For tankers, the age limit is 10 years;
c. For high-speed passenger craft, the gage limit is 5 years.
 Exemption shall be subject to the provisions of Section 4 of RA 9295,
The Domestic Shipping Development Act of 2004.
2. Importation of life-saving equipment, safety and rescue equipment and
communication and navigational safety equipment, steel plates and other
metal plates including marine-grade aluminum plates, used for shipping
transport operations.
 Exemption shall be subject to RA9295, The Domestic Shipping
Development Act of 2004.
3. Importation of capital equipment, machinery, spare parts, life-saving and
navigational equipment, steel plates and other metal plates including marine-
grade aluminum plates to be used in the construction, repair, renovation or
alteration of any merchant marine vessel operated or to be operated in the
domestic trade.
 Exemption shall be subject to RA9295, The Domestic Shipping
Development Act of 2004.
4. Importation of fuel, goods and supplies by persons engaged in international
shipping or air transport operations.
 Provided such 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, or vice versa, without docking or stopping at
any other port in the Philippines unless the docking or stopping at any
other Philippine port is for the purpose of unloading passengers and/or

cargoes that originated from abroad, or to load passengers and/or
cargoes bound for abroad.
 If any portion of such is used for purposes other than that mentioned,
such portion shall be subject to 12% VAT.
Ho to determine the VAT threshold of P1,919,500 in the case of husband
and wife for purposes of the VAT exemption.
 The husband and the wife shall be considered as separate taxpayers.
 The aggregation rule for each taxpayer shall apply.
 If the husband, aside from the practice of 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.
 The VAT-exempt sales shall not be included.
 If the revenue aggregates to exceeding P1,919,500 in one year, then he will
be subject to VAT. Otherwise, he will be subject to 3% percentage tax.
How a VAT-registered taxpayer may elect that its VAT-exempt transactions
be subject to VAT; Effect when election is made.
 A VAT-registered person may elect that its VAT exempt transactions shall
not apply to his sales of goods or properties or services.
 Once the election to be covered by the VAT is made, the previously exempt
sale shall be subject to VAT and the same shall be irrevocable for 3 years
counted from the quarter when the election was made, except for the
franchise grantees of radio and TV broadcasting whose annual gross
receipts for the preceding year do not exceed P10M, wherein in case of
exercise of such option, the said option becomes perpetually irrevocable.
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Input Tax.
 Means the VAT due on or paid by a VAT-registered person on importation of
goods, properties or services, including lease or use of properties, in the
course of trade or business.
 It includes the transitional input tax and the presumptive input tax.
 It includes input taxes which are 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.
Sources of credible input taxes.
 Any input tax on the ff transactions evidenced by a VAT invoice or official
receipt issued by a VAT-registered person shall be creditable against the
output tax:
1. Purchase or importation of goods;
a. For sale;
b. For conversation into or intended to form part of a finished product for
sale, including packaging materials;
c. For use as supplies in the course of business;
d. For use as raw materials supplied in the sale of services; or
e. For use in trade or business for which deduction for depreciation or
amortization is allowed under the Tax Code;
2. Purchase of real properties for which a VAT has actually been paid;
3. Purchase of services in which a VAT has actually been paid;
4. Transactions deemed sale;
5. Transitional input tax;
6. Presumptive input tax;

7. Transitional input tax credits allowed.
Persons who can avail of the input tax credit.
 The input tax credit on importation of goods or local purchases of goods,
properties or services by a VAT-registered person shall be creditable:
1. To the importer upon payment of VAT prior to the release of goods from
customs custody, provided that claim for input taxes on capital goods
shall be subject to certain conditions as provided for by law;
2. To the purchaser of the domestic foods or properties upon consummation
of the sale, also subject to the conditions provided above;
3. To the purchaser of services or the lessee or licensee upon payment of
the compensation, rental, royalty or fee.
Claim for input tax on depreciable capital goods.
 Where a VAT-registered person purchases or imports capital goods, which
are depreciable assets for income tax purposes, the aggregate acquisition
cost of which (exclusive of VAT) in a calendar month exceeds P1M,
regardless of the acquisition cost of each capital goods, shall be claimed as
credit against output tax in the ff manner:
a. If the estimated useful life of a capital good is 5 years or more. The input
tax shall be spread evenly over a period of 60 months and the claim for
input tax credit will commence in the calendar month when the capital
goods are acquired. The total input taxes on purchases or importation of
this type of capital goods shall be divided by 60 and the quotient will be
the amount to be claimed monthly.
b. If the estimated useful life of a capital food is less than 5 years. The input
tax shall be spread evenly on a monthly basis by dividing the input tax by
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the actual number of months comprising the estimated useful life of the
capital goods. The claim for input tax credit shall commence in the
calendar month that the capital goods were acquired.
 Where the aggregate acquisition cost (exclusive of VAT) of the existing or
finished depreciable capital goods purchased or imported during any
calendar month does not exceed P1M, the total input taxes will be allowable
as credit against output tax in the month of acquisition.
What are considered as capital goods.
 Capital goods or properties refer to goods or properties with estimated useful
life greater than one year and which are treated as depreciable assets, used
directly or indirectly in the production or sale of taxable goods or services.
 For domestic goods and services to be considered as capital goods or
properties, 3 requisites must concur:
1. Useful life of goods or properties must exceed 1 year;
2. Said goods or properties are treated as depreciable assets;
3. Foods or properties must be used directly or indirectly in the production or
sale of taxable goods and services.
Illustration of how to amortize input taxes on capital goods.
 The aggregate acquisition cost of a depreciable asset in any calendar month
refers to the total price, excluding the VAT, agreed upon for one or more
assets acquired and not on the payments actually made during the calendar
month. Thus, an asset acquired on installment for an acquisition cost of more
than P1M, excluding the VAT, will be subject to amortization of input tax
despite the fact that the monthly payments/installments may not exceed
P1M.

Purchases recorded under inventory accounts, instead of depreciable
accounts, cannot be considered as capital goods.
 The goods or services must be recorded and treated as depreciable assets.
 A general ledger is a record or a business entity’s accounts which make up
its financial statements. Information contained in a general ledger is gathered
from source documents such as account vouchers, purchase orders and
sales invoices. In case of variance between the source document and the
general ledger, the former is preferred.
 The purchasers are not qualified as capital goods if they are held as
inventory items and not charged to any depreciable asset account.
Disallowance of input taxes on purchase of non-depreciable vehicles.
 GR. It cannot be presumed that the purchase of a vehicle is a purchase of a
property used in business.
 Guidelines to determine whether depreciation expense can be claimed or not
on account of vehicles capitalized by tax payer, or in claiming other expenses
and input taxes on account of said vehicle:
1. No deduction from gross income for depreciation shall be allowed unless
substantiated with sufficient evidence, such as official receipts or other
adequate records containing:
a. Specific motor vehicle identification number, chassis number, or other
registrable identification numbers of the vehicles;
b. The total rice of the specific vehicle subject to depreciation; and
c. The direct connection or relation of the vehicle to the development,
management, operation, and/or conduct of the trade or business or
profession of the taxpayer.
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2. Only one vehicle for and transportation is allowed for the use of an official
or employee, the value of which should not exceed P2,400,000;
3. No depreciation shall be allowed to yachts, helicopters, airplanes and/or
crafts and land vehicles which exceed the above threshold amount,
unless the taxpayer’s main line business is transport operations or lease
of transportation equipment and the vehicles purchased are used in said
operations;
4. All maintenance expenses on account of non-depreciable vehicles for
taxation purposes are disallowed in its entirety;
5. The input taxes on the purchase of non-depreciable vehicles and all input
taxes on maintenance expenses incurred thereon are likewise disallowed
for taxation purposes.
How to claim input tax in the case of construction in progress.
 Construction in progress is considered for purposes of claiming input tax, as
a purchase of service, the value of which shall be determined based on the
progress billings.
 Until such time the construction has been completed, it will not qualify as
capital goods, in which case, input tax credit on such transaction can be
recognized in the month the payment was made; Provided, That an official
receipt of payment has been issued based on the progress billing.
 In case of contract of sale of services where only the labor will be supplied by
the contractor and the materials will be purchased by the contractee from
other suppliers, input tax credit on the labor contracted shall still be
recognized on the month the payment was made based on a progress
billings while input tax on the purchase of materials shall be recognized at
the time the materials were purchased.

 Once the input tax has already been claimed while the construction is still in
progress, no additional input tax can be claimed upon completion of the
asset when it has been reclassified as a depreciable capital asset and
depreciated.
Apportionment of input tax on mixed transaction.
 A VAT-registered person who is also engaged in transactions not subject to
VAT shall be allowed to recognize input tax on credit on transactions subject
to VAT as follows:
1. All the input taxes that can be directly attributed to transactions subject to
VAT may be recognized for input tax credit; Provided, That input taxes
that can be directly attributable to VAT taxable sales of goods and
services to the Government or any of it political subdivisions,
instrumentalities or agencies, including GOCCs shall not be credited
against output taxes arising from sales to non-Government entities.
 Claims for VAT refund or Tax Credit Certificate with the BIR, BOI and
one-stop-shop and Duty Drawback Venter of the DOF should be
deducted from the allowable input tax that are attributable to zero-
rated sales.
2. If any input tax cannot be directly attributed to either a VAT taxable or
VAT exempt transaction, the input tax shall be prorated to the VAT
taxable and VAT-exempt transactions and only the ratable portion
pertaining to the transactions subject to VAT may be recognized for input
tax credit.
 The input attributable to VAT-exempt sales shall not be allowed as credit
against the output tax but should be treated as part of cost or expense.
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 For persons engaged in both zero-rated sales and non-zero rated sales, the
aggregate input taxes shall be allocated ratably between the zero-rated sale
and the non-zero rated sale.
VAT payable (excess output tax) or excess input tax.
 If at the end of any taxable quarter, the output tax exceeds the input tax, the
excess shall be paid by the VAT-registered person.
 If the input tax inclusive of the input tax carried over from the previous
quarter exceeds the output tax, the excess input tax shall be carried over to
the succeeding quarter or quarters; Provided, however, That any input tax
attributable to zero-rated sales by a VAT-registered person may at his option
be refunded or applied for a tax credit certificate which may be used in the
payment of internal revenue taxes, subject to the limitations as may be
provided for by the law, as well as, other implementing rules.
Determination of the output tax and VAT payable and computation of VAT
payable or excess tax credits.
 In a sale of goods or properties, the output tax is computed by multiplying the
gross selling rice by the regular rate of VAT.
 For sellers of services, the output tax is computed by multiplying the gross
receipts by the regular rate of VAT.
 If the amount of VAT is erroneously billed in the invoice, the total invoice
amount shall be presumed to be comprised of the gross selling price/gross
receipts plus the correct amount of VAT. Hence, the output tax shall be
computed by multiplying the total invoice amount by a fraction using the rate
of VAT as numerator and 100% plus rate of VAT as denominator.
Accordingly, the input tax that can be claimed by the buyer shall be the

corrected amount of VAT computed in accordance with the formula herein
prescribed.
 There shall be allowed as a deduction from the output tax the amount of
input tax deductible to arrive at VAT payable on the monthly VAT declaration
and the quarterly VAT returns.
Determination of input tax creditable during a taxable month or quarter.
 Add all creditable input taxes arising from the transactions during the month
or quarter plus any amount of input tax carried-over from the preceding
month or quarter, reduced by the amount of claim for VAT refund or tax credit
certificate and other adjustments.
 Once proved that the taxpayer used the purchased capital goods in both VAT
taxable and non-VAT taxable business, the proportional allocation of tax
credits stated in the law necessarily applies.
 In VAT-exempt sales, the taxpayer/seller shall not bill any output tax on his
sales to his customers and, corollary, is not allowed any credit or refund in
the input taxes he paid on his purchases.
Substantiation of input tax credits for purposes of claiming creditable
input taxes.
 For the importation of goods – import entry or other equivalent document
showing actual payment of VAT on the imported goods.
 For the domestic purchase of goods and properties – Invoice
 For the purchase of real property – public instrument of the deed together
with VAT invoice issued by the seller.
 For the purchase of services – official receipt.
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 Transitional input tax shall be supported by an inventory of goods as shown
in a detailed list to be submitted to the BIR.
 Input tax on deemed sale transactions shall be substantiated with invoice.
 Input taxes from payments made to nonresidents shall be supported by a
copy of the Monthly Remittance Return of VAT Withheld filed by the resident
payor in behalf of the nonresident evidencing the remittance of VAT due
which was withheld by the payor.
 Advance VAT on sugar shall be supported by the Payment Order showing
payment of the advance VAT.
Taxpayer cannot claim input taxes without any supporting VAT invoice or
official receipt.
 It is the only means by which the CTA may ascertain and verify the truth of
the refund claim.
How to determine the validity of taxpayer’s claim of unutilized input VAT.
 Invoice would suffice.
 Sales invoice are recognized commercial documents to facilitate trade or
credit transactions. They are proofs that a business transaction has been
concluded, hence, should not be considered bereft of probative value.
Transitional input tax credits on beginning inventories.
 Taxpayers who became VAT-registered persons upon exceeding the
minimum turnover of P1,919,500 in any 12-month period, or who voluntarily
register as VAT taxpayer even if their turnover does not exceed P1,919,500
(except franchise grantees for radio and television broadcasting whose

threshold is P10M) shall be entitled to a transitional input tax on the inventory
on hand as of the effectivity of their VAT registration on the following:
1. Goods purchased for resale in their present condition;
2. Materials purchased for further processing, but which have not yet
undergone processing;
3. Goods which have been manufactured by the taxpayer;
4. Goods in process for sale; or
5. Goods and supplies for use in the course of the taxpayer’s trade or
business as a VAT-registered person.
 The transitional input tax shall be 2% of the value of the beginning inventory
on hand or actual VAT paid on such goods, materials and supplies,
whichever is higher, which amount shall be creditable against the output tax
of VAT-registered person.
 The value allowed for income tax purposes on inventories shall be the basis
for the computation of the 2% transitional input tax, excluding the goods that
are exempt from VAT.
Meaning of the term transitional in the term transitional input taxes.
 There is hardly any constricted definition of transitional that will limit its
possible meaning to the shift from sales tax regime to the VAT regime.
 It could also allude to the transition one undergoes from not being a VAT-
registered person to becoming a VAT-registered person.
 It could also occur when one decides to start business.
 Transitional input tax credits become available either to a person who
becomes liable to VAT or any person who elects to be VAT-registered.
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Who may claim 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 4% of the gross value in money of their
purchases of primary agricultural products which are used as inputs to their
production.
 The term processing shall mean pasteurization, canning and activities which
through physical or chemical process alter the exterior texture or form or
inner substance of a product in such manner as to prepare it for special use
to which it could not have been put in its original form or condition.
Distinguish presumptive input tax from the transitional input tax credit.
 As with the transitional input tax credit, the presumptive input tax credit is
creditable against the output VAT.
 EO 273. Presumptive input tax credit is one of the transitory measures in the
shift from sales taxes to VAT.
 Presumptive input tax is highly limited in application as it may be claimed
only by persons or firms engaged in the processing of sardines, mackerel
and mild and in manufacturing refined sugar and cooking oil; and public
works contractors.
Tax Refund, How construed.
 Tax refunds, in relation to the VAT, are in nature of exemptions.
 Taxes are the lifeblood of the nation. Therefore, statutes that allow
exemptions are construed strictly against the grantee and liberally in favor of
the government.

Rationale for the refund of taxes.
 A taxpayer is entitled to a refund either by authority of a statute expressly
granting such right, privilege, or incentive in his favor, or under the principle
of solution indebiti requiring the return of taxes erroneously or illegally
collected.
 The monetary amounts which are currently in the hands of the government
must rightfully be returned to the taxpayer.
Invoice-based method of determining tax refund.
 We adopt the tax credit method.
 Under the present method that relies on invoices, an entity can credit against
or subtract from the VAT charged on it sales or outputs the VAT paid on its
purchases, inputs and imports.
 Should the input taxes result from zero-rated or effectively zero-rated
transactions, any excess over the output taxes shall instead be refunded to
the taxpayer or be issued a tax credit certificate which can be used to pay
VAT and other internal revenue taxes.
Proper party to claim VAT refund.
 Ecozone registered enterprise in not the proper party for VAT refund passed
on to it by its supplier of raw materials whose sale is a zero-rated sale.
Rather, the proper party is the supplier. The buyer is not the taxpayer in so
far as the passed-on tax is concerned and therefore, it cannot claim for a
refund of a tax merely shifted to it.
 For indirect taxes like VAT, the proper party to question or seek a refund of
the tax is the statutory taxpayer/seller or the payor, not the end consumer.
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 Only taxpayers are allowed to claim for refund.
Instances when a taxpayer may claim for refund or Tax Credit of excess
input taxes.
1. Zero-rated and effectively zero-rated sales of goods, properties or services.
 The input tax may be subject of the claim shall exclude the portion of
input tax that has been applied against the output tax. The application
should be filed within 2 years after the close of the taxable quarter
when such sales were made.
 The payments must have been made in acceptable foreign currency
duly accounted for in accordance with the BSP rules and regulations.
 Only the proportionate share of input taxes allocated to zero-rated or
effectively zero-rated sales can be claimed for refund or issuance of a
tax credit certificate.
 In the case of a person engaged in the transport of passenger and
cargo by air or sea vessels from the Philippines to a foreign country,
the input taxes shall be allocated ratably between the zero-rated sales
to non-zero-rated sales.
2. Cancellation of VAT registration.
 Due to retirement from or cessation of business, or due to changes in
or cessation of status may, within 2 years from the date of
cancellation, apply for the issuance of a tax credit certificate for any
unused input tax which he may use in payment of his other internal
revenue taxes; Provided, That he will be entitled to a refund if he has
no internal revenue liabilities against which the tax credit certificate
may be utilized.

Criteria governing claims for VAT refund of unutilized input taxes
attributable to zero-rated or effectively zero-rated sales.
1. The one applying for refund must be the seller, who must be VAT-registered;
2. The taxpayer is engaged in sales which are zero-rated or effectively zero-
rated;
3. The input taxes are due or paid;
4. The input taxes are not transitional input taxes;
5. The input taxes have not been applied against output taxes during and in the
succeeding quarters;
6. The input taxes claimed are attributable to zero-rated or effectively zero-rated
sales;
7. For zero-rated sales, the acceptable foreign currency exchange proceeds
have been duly accounted for in accordance with BSP rules and regulations;
8. Where there are both zero-rated or effectively zero-rated sales and taxable
or exempt sales, and the input taxes cannot be directly or entirely attributable
to any of these sales, the input taxes shall be proportionately allocated on the
basis of sales volume;
9. The claim is filed within 2 years after the close of the taxable quarter when
such sales were made; and
10. The ff documents, among other, must be presented:
a. Sales invoice or receipts with the words zero-rated imprinted on it;
b. Purchase invoices or receipts from another VAT-registered taxpayer;
c. Evidence of actual receipt of goods;
d. BOI statement showing the amount and description of sale of goods, etc.;
e. Original or attested copies of the invoice or receipt on capital equipment
locally purchases; and
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f. Photocopy of import entry document and confirmation receipt on imported
capital equipment.
VAT registration indispensable to VAT refund; Not application for effective
zero rating.
 Other than the general registration of a taxpayer the VAT status of which is
aptly determined, no provision under out VAT law requires an additional
application to made for such taxpayer’s transactions to be considered
effectively zero-rated.
 The application may be denied.
 A VAT-registered status, as well as compliance with the invoicing
requirements, is sufficient for the effective zero rating of the transactions of a
taxpayer.
Taxpayer’s failure to indicate on its invoices the “BIR Authority to Print”
not a ground for the denial of claim for refund.
 It is not one of the items required on the invoices or receipts. Required to be
reflected on the invoice:
1. Name, tin and address of the seller;
2. Date of transaction
3. Quantity, unit cost and description of merchandise or nature of service;
4. Name, tin, business style, if any, and address of the VAT-registered
purchaser, customer or client;
5. The word zero-rated imprinted on the invoice covering zero-rated sales;
and
6. The invoice value or consideration.

For purposes of VAT refund, taxpayer should prove that its sales invoices
state on its face that its sale are zero-rated.
 Panasonic vs. CIR. The appearance of the word zero-rated on the face of the
invoices covering zero-rated sales prevents buyers from falsely claiming
input VAT from their purchases when no VAT is actually paid. Absent such
word, the government may be refunding taxes it did not collect.
Rationale for the rule.
 Zero-rated transactions generally refer to the export sale of goods and
services. The tax rate in this case is set at zero. When applied to the tax
base or the selling price of goods or services sold, such zero rate results in
no tax chargeable against the foreign buyer or customer. But, although the
seller in such transactions charges no output tax, he can claim a refund of
the VAT that his suppliers charged him. the seller thus enjoys automatic zero
rating which allows him to recover the input taxes he paid relating to the
export sales, making him internationally competitive.
But in another case, the failure of the taxpayer to indicate its zero-rated
sales in its VAT returns and in its official receipts is not sufficient reason
to deny its claim for tax credit or refund when there are other documents
from which the court can determine the veracity of the taxpayer’s claim.
 Only a preponderance of evidence is needed to grant a claim for tax refund
based one excess payment.
 Southern Philippines Power Corp. vs. CIR
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Whether input taxes derived when the project was still under construction
and when no commercial sale has yet been made may be refunded.
 The NIRC does not limit the term “sale” in the imposition of VAT to
commercial sales alone, rather it extends to the term transactions that the
deemed sale.
 The transaction is deemed as a sale.
Sales invoices are recognized in the commercial world as valid between
the parties and serve as memorials of their business transactions.
 Such documents have probative value.
Cancellation of VAT registration.
A. He makes written application and can demonstrate to the CIR satisfaction
that his gross sales or receipts for the following 12 months, other than
those that are exempt, will not exceed P1,919,500; or
B. He has ceased to carry on his trade or business, and does not expect to
recommence any trade or business within the next 12 months.
 Other instances:
1. A change of ownership, in the case of a single proprietorship;
2. Dissolution of a partnership or corporation;
3. Merger or consolidation with respect to the dissolved corporation(s);
4. A person who has registered prior to planned business commencement,
but failed to actually start his business.
 Instances when the taxpayer will update his registration:
1. A person’s business has become exempt;
2. A change in the nature of the business itself from sale of taxable goods
and/or services to exempt sales and/or services;

3. A person whose transactions are exempt from VAT who voluntarily
registered under VAT system, who after the lapse of 3 years after his
registration, applies for cancellation of his registration as such; and
4. A VAT-registered person whose gross sales or receipts for the 3
consecutive years did not exceed P1,919,500.
Period when a VAT-registered taxpayer apply for issuance of tax credit
when the VAT registration has been cancelled.
 Within 2 years from the date of cancellation.
ADMINISTRATIVE CLAIM FOR VAT REFUND/TAX CREDIT CERTIFICATE
How to file and administrative claim for refund of excess input taxes with
the CIR.
 File an administrative claim with the CIR or his duly authorized representative
for the issuance of a tax credit certificate or refund of creditable input tax due
or paid attributable to such sales to the extent that such input tax has not
been applied against output tax refund within 2 years after the close of the
taxable quarter when the sales were made; and
 In case of full or partial denial of the claim for tax refund or tax credit, or the
failure on the part of the CIR to act on the application within 120 days from
the date of submission of complete documents in support of the application
filed, the taxpayer affected may, within 30 days from the receipt of the
decision denying the claim or after the expiration of the 120-day period,
appeal the decision or the unacted claim with the CTA and to the SC, if
necessary
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Where to file the administrative claim for VAT refund.
 Appropriate BIR office (Large taxpayers Service or RDO) having jurisdiction
over the principal place of business of the taxpayer.
 Direct exporters may file their claim with the One Stop Shop Center of the
DOF.
 The filing of the claim with one office shall preclude the filing of the same with
another.
Requirements for application for administrative claims for VAT refund or
Tax Credit Certificate.
 Sufficient evidence that the sale were actually made and resulted in
refundable or creditable input VAT in the amount being claimed.
Whether or not the excess creditable input VAT can be considered as
erroneous payment that could be claimed as a refund that could be
claimed as a refund under Section 229.
 Section 112 is the pertinent provision for the refund/credit of input VAT. Thus,
the 2 year period should be reckoned from the close of the taxable quarter
when the sales were made.
Reckoning of the 2-year prescriptive period for purposes of the
administrative claim for refund of input tax in the case of zero-rated or
effectively zero-rated sales.
 Unutilized input VAT payments not otherwise used for any internal revenue
tax due to the taxpayer must be claimed within 2 years reckoned from the
close of the taxable quarter when the relevant sales were made pertaining to
the input VAT regardless of whether said tax was paid or not.

 Prescriptive period commences from the close of the taxable quarter when
the sales were made and not from the time the input VAT was paid nor from
the time the official receipt was issued.
Reckoning of the 2-year prescriptive period for purposes of claiming tax
refund under Sections 204 (c) and 229 not applicable to claim of VAT
refund.
 The said provisions are inapplicable for the purpose of application for
refund/credit of input taxes in cases of zero-rated or effectively zero-rated
sales.
 The two-year period should be reckoned from the date of payment of the tax
or penalty.
 Both provisions apply only to instances of erroneous payment or illegal
collection of internal revenue taxes.
 Atlas Consolidated vs. CIR. The very same reasons concerning the two-year
prescriptive period for claims for refund of illegally or erroneously collected
income tax may also apply to the petitions involving the same prescriptive
period for claims for refund/credit of input VAT on zero-rated sales.
Administrative Code of 1987 governs computation of the legal periods.
 As between the Civil Code, which provides that a year is equivalent to 365
days, and the Administrative Code of 1987, which states that a year is
composed of 12 calendar months, it is the latter that must prevail following
the legal maxim, Lex posteriori derogate priori.
Meaning of the phrase “within 2 years apply for the issuance of a tax credit
certificate or refund.
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 A taxpayer has to wait for the decision of the CIR or the lapse of the 120-day
period before he could file his judicial claim with the CTA because non-
observance of the 120-day period id fatal to the filing of a judicial claim.
 It means application for refund/credit filed with the CIR and not appeals made
to the CTA.
Requirement in order that the application for VAT refund or tax credit may
be approved.
 The VAT-registered taxpayer must be able to establish that it does not have
refundable or creditable input VAT, and the same has not been applied
against its output VAT liabilities – information which are supposed to be
reflected in the taxpayer’s VAT returns.
 Thus, an application for refund/credit must be accompanied by copies of the
taxpayer’s VAT return/s for the taxable quarter/s concerned.
Franchise grantees cannot claim refund of the franchise tax they paid prior
to the implementation of the VAT on franchise grantees.
 CIR vs. Phil. Global Communications. To grant refund of franchise tax it paid
prior to the effectivity and implementation of the VAT would create a vacuum
and thereby deprive the government from collecting either the VAT or the
franchise tax.

JUDICIAL CLAIM FOR VAT REFUND/CREDIT
Requirements for the grant of judicial claim for VAT refund or credit.
 No refund of input VAT shall be allowed unless the VAT-registered taxpayer
filed an application for refund with the CIR within the two-year prescriptive
period.
Rules governing the presentation of voluminous documents and/or long
accounts.
 CTA Circular No. 1-95, as amended.
 Compania Maritima vs. Allied Free Workers Union.
1. The party who desires to introduce as evidence such voluminous
documents must, after motion and approval by the court, present:
a. A summary containing, among others, a chronological listing of the
numbers, dates and amounts covered by the invoices or receipts and
the amount/s of tax paid; and
b. A certification of an independent CPA attesting to the correctness of
the contents of the summary after making an examination, evaluation
and audit of the voluminous receipt and invoices. The name of the
accountant should be named in the motion so that he may be
commissioned by the court.
Certification of an independent CPA not sufficient to prove the correctness
of the Summary of Suppliers’ Invoices or Receipts for purposes of the
claim for VAT refund.
 There is nothing in the CTA Circular No. 1-95, as amended by CTA Circular
No. 10-97, which either expressly or impliedly suggests that summaries and
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schedules of input VAT payments, even if certified by an independent CPA,
suffice the evidence of input VAT payments.
 The circular, in the interest of speedy administration of justice, was
promulgated to avoid the time-consuming procedure of presenting,
identifying and marking of documents before the Court. It does not relieve the
taxpayer of its imperative task of pre-marking photocopies of sales receipts
and invoices and submitting the same to the court after the independent CPA
shall have examined and compared them with the originals.
 Without presenting these pre-marked documents as evidence, the court
cannot verify the authenticity and veracity of the independent auditor’s
conclusions.
Summaries and schedules of input VAT payments not sufficient proofs for
the grant of judicial claims for VAT refund.
 For a judicial claim for refund to prosper, the taxpayer must not only prove
that it is a VAT-registered entity and that it filed its claims within the
prescriptive period. It must substantiate the input VAT paid by purchase or
official receipts.
Input taxes not formally offered as evidence cannot be the source of a tax
refund.
 Where the pertinent invoices or receipts purportedly evidencing the VAT paid
by the taxpayer were not submitted, the courts a quo evidently could not
determine the veracity of the input VAT such taxpayer has paid.
Taxpayer has the burden of proof in proving his claim in actions involving
claims for refund of taxes assessed and collected.

 He should be able to present the following documents:
1. Sales invoices or receipts;
2. Purchase invoices or receipts;
3. Evidence of actual receipt of goods;
4. BOI statement showing the amount and description of sale of goods, etc.;
5. Original or attested copies of invoice receipt on capital equipment locally
purchased; and
6. Photocopy of import entry document and confirmation receipt on imported
capital equipment.
When the SC may re-examine the facts and evidence offered by the parties
in case of claim for refund or credit or creditable input taxes.
 Where the judgment is premised on a misapprehension of facts, or when the
appellate court failed to notice certain relevant facts which if considered
would justify a different conclusion.
CHAPTER II – COMPLIANCE REQUIREMENTS
Invoicing requirement for VAT-registered taxpayers, in General.
 A VAT-registered person shall issue:
1. A VAT invoice for every sale, barter or exchange of goods or properties;
and
2. A VAT official receipt for every lease of goods or properties, and for every
sale, barter, exchange of services.
 Only VAT-registered persons are required to print their TIN followed by the
word VAT in their invoice or official receipts. Said documents shall be
considered as a VAT invoice or VAT official receipts. All purchases covered
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by invoices/receipts other than VAT invoice/VAT official receipts shall not
give rise to any input tax.
 Should be prepared at least in duplicate.
Distinction between an invoice and a receipt.
 A VAT invoice is necessary for every sale, barter or exchange of goods or
properties, while a VAT official receipt properly pertains to every lease of
goods or properties, and for every sale, barter or exchange of services.
Information contained in VAT invoice or VAT official receipt.
1. A statement that the seller is a VAT-registered person, followed by his TIN;
2. The total amount which the purchaser pays or is obligated to pay to the seller
with the indication that such amount includes the VAT; Provided, That:
a. The amount of tax shall be shown as a separate item in the invoice or
receipt;
b. If the sale is exempt from VAT, the term VAT-exempt sale shall be written
or printed prominently on the invoice or receipt;
c. If the sale is subject to 0% VAT, the term zero-rated sale shall be written
or printed prominently on the invoice or receipt;
d. If the sale involves goods, properties or services some of which are
subject to and some of which are VAT-zero-rated or VAT-exempt, the
invoice or receipt shall clearly indicate the breakdown of the sale price
between its taxable, exempt and zero-rated components, and the
calculation of the VAT on each portion of the sale shall be shown on the
invoice or receipt. The seller has the option to issue separate invoices or
receipts for the taxable, exempt and zero-rated components of the sale.

3. In case of sales in the amount of P1,000 or more where the sale or transfer is
made to a VAT-registered person, the name, business style, if any, address
and TIN of the purchaser, customer or client, shall be indicated in addition to
the information required in 1 and 2.
Invoicing and recording requirements for “Deemed Sale Transactions”.
 A memorandum entry in the subsidiary sales journal to record withdrawal of
goods for personal use is required.
 The total amount of deemed sale shall be included in the return to be filed for
the month or quarter.
 The invoice need not enumerate the specific items appearing in the
inventory, but is must show the total amount.
Accounting requirements for VAT-registered taxpayers.
 All persons subject to VAT shall, in addition to the regular accounting records
required, maintain a subsidiary sales journal and subsidiary purchase journal
on which every sale or purchase on any given day is recorded.
 The subsidiary journal shall contain such information as may be required by
the CIR.
 A subsidiary record in ledger form shall be maintained for the acquisition,
purchase or importation of depreciable assets or capital goods which shall
contain, among others, information on the total input tax thereon as well as
the monthly input tax claimed in VAT declaration or return.
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Issuance of a VAT sales invoice or VAT official receipt by a non-VAT
person.
 If a person who is not VAT-registered issues an invoice or receipt showing
his TIN, followed by the word VAT, the erroneous issuance shall result in:
1. The non-VAT person shall be liable to:
a. Percentage taxes applicable to his transactions;
b. VAT due on the transactions, without the benefit of any input tax
credit; and
c. A 50% surcharge.
2. Vat shall be recognized as an input tax credit to the purchaser.
Issuance of a VAT invoice or VAT official receipt on an exempt transaction
by a VAT-registered person.
 But fails to display prominently on the invoice or receipt the words “VAT-
exempt sale”, the transaction shall become taxable and the issuer shall be
liable to pay VAT thereon. The purchaser shall be entitled to claim an input
tax credit on his purchase.
Rules on the filing of VAT returns, in general.
 Every person liable to pay VAT shall file a quarterly return of the amount of
his quarterly gross sales or receipts within 25 days following the close of
taxable quarter.
 The term taxable quarter shall mean the quarter that is synchronized to the
income tax quarter of the taxpayer.
 Amounts reflected in the monthly VAT declarations for the first 2 months of
the quarter shall still be included in the quarterly VAT return which reflects
the cumulative figures for the taxable quarter.

 Payments in the monthly VAT declarations shall, however, be credited in the
quarterly VAT return to arrive at the net VAT payable or excess input
tax/over-payment as of the end of the quarter.
Rules on the filing of VAT returns under the EFPS.
 For purposes of filing returns under the Electronic Filing and Payment
System, the taxpayers classified under certain specific business industries
shall be required file a monthly VAT declaration on staggered basis.
 The return for withholding of VAT shall be filed on or before the 10th day of
the following month, which is likewise the due date for the payment of this
type of withholding tax.
 The electronic return shall be filed on or before 10pm.
Transactions which allow the advance payment of VAT.
1. Transport of naturally grown and planted timber products;
2. Sale of refined sugar;
3. Sale of flour;
4. Sale of jewelry, gold and other metallic minerals to nonresident alien
individuals not engaged in trade or business within the Philippines or to
nonresident foreign corporations.
When a short period VAT return required to be filed.
 Any person who retires from business or whose VAT registration has been
cancelled shall file a final quarterly return and pay the tax due thereon within
25 days from the end of the month when the business ceases to operate or
when the VAT registration has been officially cancelled.
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Final adjustment return at the end of the taxable year not required in the
filing and payment of VAT; VAT computed and paid on a purely quarterly
basis.
 VAT is computed and paid on a purely quarterly basis without need for a final
adjustment at the end of the taxable year.
Withholding of Final VAT on Government money payments and on sale of
services rendered to nonresidents.
 On sales to the government
 Shall, before making payment on account of each purchase of goods
and/or of services taxes at 12% VAT, deduct and withhold a final VAT
due at the rate of 5% of the gross payment thereof.
 The 5% final VAT withholding rate shall represent the net VAT payable of
the seller.
 The remaining 7% effectively accounts for the standard input VAT for
sales of goods or services to government, in lieu of the actual input VAT
directly attributable or ratably apportioned to such sales.
 Should the actual input VAT attributable to sale for government exceeds
7% of gross payments, the excess may form part of the sellers’ expense
or cost.
 If actual input VAT attributable to sale to government is less than 7% of
gross payment, the difference must be closed to expense or cost.
 On sale of services rendered by nonresidents.
 The Government as well as private corporations, individuals, estates and
trusts shall withhold 12 % VAT with respect to the ff payments:
1. Lease or use of properties or property rights owned by nonresidents;
and

2. Other services rendered in the Philippines by nonresidents.
 VAT withheld and aid for the nonresident recipient, which VAT is passed
on to the resident withholding agent by the nonresident recipient of the
income, may be claimed as input tax by said VAT-registered withholding
agent upon filing his VAT Return, subject to the rule on allocation of input
tax among taxable sales, zero-rated sales and exempt sales.
 If the resident withholding agent is a non-VAT taxpayer, said passed on
VAT by the nonresident recipient of the income shall form part of the cost
of purchased services, which may be treated either as asset or expense,
whichever is applicable, of the resident withholding agent.
 VAT withheld shall be remitted within 10 days following the end of the
month the withholding was made.
Withholding of the VAT in software transactions for nonresident payees.
 The payor in control of the payment of VAT in the software transactions shall
be responsible for the withholding of VAT on such fees on behalf of the non-
resident payee, by filing a VAT return for and on behalf of the such payee.
Issuance of Certificate of VAT withheld at Source.
 A copy of which should be issued to the payee.
Penalty clause
1. Payors reported by the payees for not having issued the COTWAT shall be
subject to mandatory audit on their withholding tax liabilities and to other
appropriate sanctions under the TAX Code and applicable regulations.
2. Penalties in case of failure to submit quarterly summary list of sales and
purchases.
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 Pay P1000 for each failure
 The aggregate amount to be imposed for all such failures during a taxable
year shall not exceed P25K.
3. Willful failure to keep any record and to supply the correct and accurate
information shall be subject to criminal penalty.
Persons required to submit summary list of sales or Purchases
1. Persons required to submit summary list of sales. All persons liable for VAT.
2. Persons required to submit summary list of purchasers. All persons liable for
VAT.
When and where to file the Summary Lists of Sales/Prurchasers.
 Submit in diskette from to the RDO or LTDO or LTAD having jurisdiction over
the taxpayer, on or before the 25th day of the month following the close of the
taxable quarter.
 Taxpayers under the jurisdiction of the LTS, and those enrolled under the
EFPS, shall thru electronic filing facility submit to the RDO/LTDO/LTAD on or
before the 30th say of the month following the close of the taxable quarter.
Information that must be contained in the Quarterly Summary List of Sales.
 Must contain the monthly total sales generated from regular
buyers/customers, regardless of the amount of sale per buyer/customer, as
well as from casual buyers/customers with individual sales amounting to
P100,000 or more.
 Regular buyers/customers – those who are engaged in business or exercise
of profession and those with whom the taxpayer has transacted at least 6
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transactions regardless of amount per transaction either in the previous year OTHER PERCENTAGE TAXES
or current year.
 Casual buyers/customers – those who are engaged in business or profession
Persons liable to other percentage taxes.
but did not qualify as regular buyers or customers.
 Refers specifically to business taxes covered by Title V payable by any
Oplan Kandado person or entity whose sale of goods or services is not covered by the VAT
system and classified as follows:
 An initiative involving the strengthening of the Bureau’s imposition of
1. Sale of goods or services of persons who are exempt from VAT and who
prescribed administrative sanctions for non-compliance with such essential
is not a VAT-registered person and whose gross annual sales or receipts
requirements as: the issuance of receipts, filing of returns, declaration of
do not exceed P1,919,500.
taxable transactions, taxpayer registration, and paying the correct amount of
2. Other kinds of business subject to the other percentage taxes under Title
taxes as mandated by the norms or standards of their particular industry or
V, regardless of whether or not the gross annual receipts exceed
line of business.
P1,919,500:
a. Domestic carriers by land and keepers of garages;
Instances where the Commissioner may exercise to suspend the
b. International carriers;
operations of the business.
c. Franchise grantees;
 Of a period not less than 5 days of the ff violations:
d. Overseas dispatch, message or conversation originating from the
1. Failure to issue receipts and invoices;
Philippines;
2. Failure to file VAT return;
e. Banks and non-bank financial intermediaries;
3. Understatement of taxable sales or receipts by 30% or more of his correct
f. Other non-bank financial intermediaries;
taxable sales or receipt for the taxable quarter;
g. Life insurance companies;
4. Failure to register.
h. Agents of foreign insurance companies;
i. Proprietors of amusement places;
Penalties that may be imposed to a taxpayer in case of violation of VAT.
j. Winnings;
 Interest on unpaid amount of tax, civil penalties, and criminal penalties.
k. Sale, barter or exchange of shares of stock listed and traded thru the
local exchange or thru initial public offerings.

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Nature of other percentage taxes.
 Essentially a tax on transaction and not on the articles sold, bartered or
exchanged.
 They are indirect taxes which can be passed on to the buyer.
Meaning of the term business.
 Since the term business is being used without qualification in the Tax Code,
it should therefore be construed in its plain and ordinary meaning, restricted
to activities for profit or livelihood.
Whether a single transaction, or a few isolated transactions would
constitute doing business.
 If it is with intent of carrying on a business.
Whether sales consummated outside the Philippines is subject to the
other percentage taxes.
 Beyond the taxing power of the Philippine Government.
Whether the successor is liable for the tax from the date of transfer in case
of death or transfer of ownership of a doing business.
 Where a person engaged in taxable business dies and the same business is
continued by the person/s interested in his estate, no additional payment is
required for the residue of the term for which the tax was paid.
 It is, however, required that the successor within 30 days from the death of
the decedent, submit to the BIR or the regional or provincial revenue office
inventories of goods or stocks has at the time of such death.
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 The same rule applies in the case of transfer of ownership or change of
name of the business establishment.
Common carriers, defined; Only transport of passenger of common
carriers by land subject to percentage tax.
 Common carriers – refer to persons, corporations, firms or associations
engaged in the business of carrying or transporting passengers or goods or
both, by land, water, or air, for compensation, offering their services to the
public and shall include transportation contractors.
 Only the gross receipts of common carriers by land from the transport of
passengers, including operators of taxicabs, utility cars for rent or hire driven
by the lessees, and tourist buses used for the transport of passengers shall
be subject to the percentage tax.
 All receipts from service, hire, or operating lease of transportation equipment
not subject to the percentage tax on domestic common carriers and keepers
of the garages shall be subject to VAT.
 Domestic common carriers by sea and air are subject to VAT from their
transport of passengers, goods or cargoes from one place in the Philippines
to another place in the Philippines.
Meaning of the term gross receipts for purposes of international common
carrier’s tax.
 For purposes of determining the international common carrier’s tax liability,
gross receipts shall be the same as the tax base for calculating gross
Philippine Billings Tax.

International carriers of foreign registry, defined.
 International carriers referred to herein which are subject to the 3%
international carriers tax are those international carriers of foreign registry as
distinguished from international carriers of Philippine registry which are
subject to VAT on their domestic transport of both passengers and cargo, but
zero-rated on their transport of passengers and cargo from the Philippine
port to a foreign port.
Taxes imposed on an off-line air carrier having branch office or a sales
agent in the Philippines
 An offline airline having a branch office or a sales agent in the Philippines
which sells passage documents for compensation or commission to cover
off-line flights of its principal or head office, or for other airlines covering
flights originating from Philippine ports or off-line flights, is not considered
engaged in business as an international air carrier in the Philippines and is,
therefore, not subject to the Gross Philippine Billings Tax nor the 3%
common carrier’s tax.
 This is without prejudice to classifying such taxpayer under a different
category.
Nature of legislative franchise; whether or not a legislative franchise
grantee may be subject to both the national and local franchise taxes at
the same time.
 A legislative franchise partakes of the nature of a contract entered into
between the sovereign power and private citizens.
 Franchise is the law of the parties and they are bound by the terms thereof.
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 Aside from the national franchise tax, the franchisee is still liable to pay the
local franchise tax, unless it is expressly and unequivocally exempted from
the payment thereof under its legislative franchise.
 The in lieu of all taxes clause in a legislative franchise should categorically
state that the exemption applies to both local and national taxes; otherwise
the exemption claimed should be strictly construed against the taxpayer and
liberally in favor of the taxing authority.
Taxes imposed on services rendered by franchise grantees.
1. Services of franchise grantees of telephone or telegraph, radio and/or
television broadcasting, toll road operations and all other franchise grantees,
except gas and water utilities, shall be subject to VAT, in lieu of franchise tax.
 Franchise grantees of radio and/or television broadcasting whose annual
gross receipts of the preceding year do not exceed P10M shall not be
subject to VAT, but to the 3% franchise tax.
2. Franchise grantees of gas and water utilities shall be subject to 2% franchise
tax on their gross receipts derived from the business.
3. Gross receipts of all other franchisees, not covered by Section 119,
regardless of how their franchise may have been granted, shall be subject to
the 12% VAT.
4. Franchise grantees of telephone and telegraph shall be subject to VAT on
their gross receipts.
 Amounts received for overseas dispatch, message, or conversation
originating from the Philippines are subject to percentage tax.
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Local water districts now exempt from corporate income tax but subject to 3. International organizations;
franchise tax. 4. News services
 RA 10026 exempts them from corporate income tax.
What would constitute the gross receipts of banks and non-bank financial
Electric utility no longer subject to franchise tax. intermediaries performing quasi-banking functions.
 But subject to VAT on their generation, transmission and distribution of  Gross receipts of banks and non-bank financial intermediaries performing
electricity. quasi-banking functions shall refer to the compensation for all financial and
non-financial services, or combination thereof, performed by financial
Effect of repeal of franchise tax on certain franchise grantees prior to the institutions within the Philippines, which include:
effectivity of RA 9337 (R-VAT Law) 1. Financial intermediation service fee;
 The franchise grantee has to pay the franchise tax under its legislative 2. Financial leasing income;
franchise until the new law takes effect. 3. Rentals on properties, real or personal;
 CIR vs. Phil. Global Commission. To grant refund of franchise tax it paid prior 4. Royalties;
to the effectivity and implementation of the VAT would create a vacuum and 5. Commissions;
thereby deprive the government from collecting either the VAT or the 6. Trust fees;
franchise tax. 7. Estate planning fees;
Taxes on overseas communication 8. Service fees;
 Amounts received from overseas dispatch, message or conversation 9. Other charges or fees received as compensation for services;
originating from the Philippines are subject to the percentage tax, hence, 10. Net trading gains;
exempt from VAT. 11. Net foreign gains;
 Franchise grantees of telephone and telegraph shall be subject to VAT on 12. Gain on sale or redemption investments;
their gross receipts derived from their telephone, telegraph, telewriter 13. Net gain from the sale of properties acquired thru foreclosure lodged
exchange, wireless and other communication equipment services. under the account Real and Other Properties Owned and Acquired
(ROPOA) or under any other appropriate account.
Exemption from overseas communication. 14. All other receipts of gross income specified in Section 32(A) not otherwise
1. Government; enumerated above.
2. Diplomatic services (embassy and consular offices of a foreign government);
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 In determining gross receipts, any amount withheld by the payor of the
income as taxes shall from part thereof under the doctrine of constructive
receipt of income.
 Banks or banking institutions – refer to those entities defined in Section 3 of
the General Banking Law of 2000.
 Non-bank financial intermediaries – refer to persons or entities whose
principal functions include the lending, investing or placement of funds or
evidences of indebtedness or equity deposited with them, acquired by them
or otherwise coursed through them, either for their own account or for the
account of others.
 Quasi-banking activities – refer to the borrowing of funds from 20 or more
personal or corporate lenders at any one time, through the issuance,
endorsement or acceptance of debt instruments of any kind other than
deposits for the borrower’s own account or through the issuance of
certificates of assignment or similar instruments, with recourse, or of
repurchase agreements for purposes of relending or purchasing receivables
and other similar obligations.
 Financial institution – refer to banks, non-bank financial intermediaries,
including finance companies. Does not include insurance companies.
 Financial leasing – refer to the mode of extending credit through non-
cancellable lease contract under which the lessor purchases or acquires, at
the instance of the lessee, machinery, equipment, motor vehicles,
appliances, business and office machines, and other movable or immovable
property in consideration of the periodical payment of the lessee at a fixed
amount of money.
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Imposition of gross receipts tax (GRT) on banks and non-bank financial
intermediaries performing quasi-banking functions.
 There shall be collected a tax on gross receipts derived from sources within
the Philippines by all banks and non-bank financial intermediaries in
accordance with the following schedule:
1. On interest, commissions and discounts from lending activities as well as
income from financial leasing, on the basis of remaining maturities of
instruments from which such receipts are derived:
o Maturity period is 5 years or less (5%)
o Maturity period is more than 5 years (1%)
o On dividends and equity shares and net income subsidiaries (0%)
o On royalties, rentals of property, real or personal, profits, from
exchange and all other items treated as gross income (7%)
o On net trading within the taxable year on foreign currency, debt
securities, derivatives, and other similar financial instruments (7%)
 In computing the net trading gain, the figure to be reported in the monthly
percentage tax return (GRT) shall be the cumulative total of the net trading
gain/loss since the first month of the applicable taxable year less the figure
already reflected in the previous month.
 In the case of financial leasing, the taxable gross receipts shall consist of the
interest income only whereas in the case of transactions under operating
lease agreements, the gross receipts is the gross rental.
 Whether the lease transaction is finance lease or operating lease shall be
determined by the contents of the document evidencing the lease agreement
or, in short, the substance of the agreement rather than the form used to
evidence such agreement between the lessor and the lessee.

 If the maturity period is shortened thru pre-termination, then the maturity
period shall be reckoned to end as of the date of pre-termination for
purposes of classifying the transaction and the application of the correct tax
rate.
 The generally accepted accounting principles as may be prescribed by the
BSP for the bank or non-bank financial intermediary performing quasi-
banking functions shall be the basis for the calculation of gross receipts.
 Nothing in these regulations shall preclude the Commissioner from imposing
the same tax herein provided on persons performing similar banking
activities.
Pre-Termination
 In case of pre-termination, the maturity period shall be reckoned to end as of
the date of pre-termination for purposes of classifying the transaction and
applying the correct rate of tax.
 Any adjustment in tax due caused by pre-termination of existing agreements
shall be reflected as a separate item in the GRT return covering all
transactions of the month in which the pre-termination take place.
Time and venue for the filing and payment of GRT.
 GRT shall be paid monthly within 20 days following the end of the taxable
month to the AAB of the RDO/LTDO/LTAID where the taxpayer is registered
or required to register.
 If the taxpayer is an EFPS taxpayer, the rules and regulations governing the
filing of returns and payment of taxes under EFPS shall be observed.
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20% final withholding tax on a bank’s passive income forms part of its
taxable gross receipts for purposes of computing the gross receipts tax.
 The BIR can collect a 5% gross receipts on the interest income of the bank
without deducting the 20% final withholding tax from its time deposits with the
bank.
 Since the final withholding tax on the interest income is an income owned by
the depositor, and the withholding tax is remitted to the government on its
behalf in satisfaction of its withholding taxes from the said interest income
derived from the bank, the same forms part of its gross receipts.
Taxation of rural banks formed through consolidation.
 Rural banks formed through consolidation (consolidated rural bank) of
existing rural banks shall not be entitled to tax exemption under RA 7353 in
cases when the constituent rural banks previously availed of this exemption.
 Should any or both of the constituent rural banks not be able to enjoy the tax
exemption for the entire 5-year-period, then the consolidated rural bank shall
be entitled to the exemption for the remaining period.
 The tax exemption may no longer availed by consolidated rural banks for the
following reasons:
1. The processes of consolidation involve existing and operating rural banks
that already cater to the public. For this reason, these processes do not
significantly promote the policy enunciated in RA 7353. It merely prolongs
the exemption beyond the period prescribed by law, thereby depriving the
government of much-needed revenues.
2. Section 80 of the Corporation Code sets forth the effects of consolidation:

a. The surviving or the consolidated corporation shall possess all the
rights, privileges, immunities and powers and shall be subject to all the
duties and liabilities of a corporation under this code;
b. The surviving or the consolidated corporation shall thereupon and
thereafter possess all the rights, privileges, immunities and franchises
of each of the constituent corporations; and all property, real or
personal, and all receivables due on whatever account, including
subscriptions to shares and other chooses in action, and all and every
other interest of, belonging to, or due to each constituent corporation,
shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and
c. The surviving or consolidated corporation shall be responsible and
liable for all the liabilities and obligations of each of the constituent
corporations in the same manner as if such surviving or consolidated
corporation had itself incurred such liabilities or obligations; and any
pending claim, action or proceeding brought by or against any of such
constituent corporation may be prosecuted by or against the surviving
or consolidated corporation, as the case may be.
Imposition of gross receipts tax on other non-bank financial
intermediaries.
 Gross receipts of other non-bank financial intermediaries (non-bank financial
intermediary not performing quasi-banking functions) doing business in the
Philippines shall be subject to GRT.
 Interest, commissions, discounts and all other items treated as gross income
(5%)
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 On interests, commissions and discounts from lending activities, as well as
income from financial leasing, on the basis of the remaining maturities of the
instruments from which such receipts are derived, in accordance with the
following schedule:
a. Maturity period is 5 years or less (5%)
b. Maturity period is more than 5 years (1%)
 In case of financial leasing, the taxable gross receipts shall consist only of
the interest income.
 In the case of transactions under operating lease agreements, the gross
receipts is the gross rental amount.
Financing lease vis-à-vis operating lease.
 In financial lease, a finance company purchases on behalf or at the instance
of the lessee the equipment or machinery which the latter is interested to buy
but has insufficient funds for the purpose.
 The finance company thereafter leases the equipment to the lessee in
consideration of the periodic payment by the lessee of a fixed amount of
rental sufficient to amortize at least 70% of the acquisition cost of the
equipment, including any incidental expenses and a margin of profit, over the
lease period during which the lessee has the right to possess and use the
leased equipment and to purchase it at the end of the lease period.
 It is different form an operating lease.
 Operating lease – a contract under which the asset is not wholly amortized
during the primary period of the lease, and when the lessor does not rely
solely on the rentals during the primary period for the profits, but looks for the
recovery of the balance of his costs and for the rest of his profits from the
sale or release of the returned asset at the end of the primary lease period.

Banks distinguished from financial intermediaries.
 RA 8791 provides that banks shall refer to entities engaged in the lending of
funds obtained in the form of deposits.
 Financial intermediaries are defined as persons or entities whose principal
functions include the lending, investing or placement of funds or evidences of
indebtedness or equity deposited with them, acquired by them, or otherwise
coursed through them, either for their own account or for the account of
others.
Bases of qualifying pawnshops as non-bank financial intermediaries.
 Pawnshop which a person or entity engaged in the business of lending
money, falls within the classification of non-bank financial intermediaries.
 Within the supervision of the BSP.
Imposition of GRT on pawnshops.
 Subject to 5% GRT because it falls under non-bank financial intermediaries.
 This effectively removed the services rendered by pawnshops from the VAT
system unless otherwise a similar legislation is enacted to place it under the
VAT system.
Tax treatment of pawnshop from 1996 and thereafter.
 First Planters Pawnshop, Inc. vs. CIR. Prior to the passing of the EVAT Law
in 1994, pawnshops were treated as lending investors subject to lending
investor’s tax. RA 9238 (1994) finally classified pawnshops as Other Non-
Bank Financial Intermediaries.
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Law governing the business and operations of pawnshops.
 PD 114 and CB Circular 374 (rules and regulations for Pawnshops)
What are insurance companies.
 Refer to entities that undertakes for a consideration to indemnify another
against loss, damage or liability from an unknown or contingent event.
Primary and predominant business activity of an insurance company.
 The writing of insurance or the reinsuring of risks underwritten by insurance
companies which are subject to the supervision by the Insurance
Commissions.
Meaning of the term doing an insurance business.
 Include:
1. Making or proposing to make, as insurer, any insurance contract;
2. Making or proposing to make, as surety, any contract of suretyship as a
vocation and not as merely incidental to any other legitimate business
activity of the surety;
3. Doing any kind of business, including a reinsurance business, specifically
recognized as constituting the doing of an insurance business within the
meaning of the Insurance Code; or
4. Doing or proposing to do any business in substance equivalent to any of
the foregoing in a manner designed to evade the provision of the Code.

Meaning the term variable contracts.
 The term variable contract shall mean any policy or contract on either a
group or an individual basis issued by an insurance company providing for
benefits or other contractual payments or values thereunder to vary so as to
reflect investment results of any segregated portfolio or of a designated
separate account in which amounts received in connection with such
contracts shall have been placed on accounted for separately and apart from
other investments and accounts.
 This contract may also provide benefits or values incidental thereto payable
in fixed or variable amounts, or both.
 It shall not be deemed to be a security.
Types of insurance companies.
1. Life insurance company – a company which deals with the insurance on
human lives and insurance appertaining thereto or connected therewith.
 Group insurance is essentially a single insurance contract that provides
coverage for many individuals.
2. Non-life insurance company – one which solicits insurance on the security of
property.
Business taxes of various activities of a life insurance company.
 Inasmuch as life insurance companies are allowed to pursue ancillary
business activities pursuant to the provisions of the Insurance Code, the
same should be treated as separate business independent from its main
business activity underwriting life insurance contracts.
1. Direct writing/premiums. Subject to premium tax of 2%.
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- Re-insurance fees, reinstatement fees, renewal fees as well as
penalties paid to the life insurance company which are incidental to or
in connection with the insurance policy contracts issued are
considered akin to premiums. Subject to 2% premium tax rate.
2. Management fees, rental income, commission income, re-issuance fees,
renewal fees, other income/fees.
- Those which can be pursued independently of the insurance business
activity are treated as income for services that are subject to VAT or
the percentage tax, not on premium tax.
3. Investment income
a. Investment income realized from the investment of premiums earned
– considered exempt from further imposition of business tax since the
premiums which have been the source of the funds invested had
already been subject to the 2% premium tax.
b. Investment income realized from the investment of funds obtained
from others – if these have been allowed and approved by the
Insurance Commission, the same are considered as incidental
activities to the main activity and, therefore, are subject to the 2%
premium tax.
c. Manner of apportionment to determine exempt investment income and
investment income subject to the applicable gross receipts tax.
Investment income that is exempt from the imposition of business only
pertains to that portion of investment income where the source of the
funds used in the investment activities comes from the owned funds of
the life insurance company.

 In order to determine which portion of the investment income earned for the
month is exempt and which portion is taxable, the investment income earned
for the month shall be allocated between the following:
1. Liability account balance pertinent to other funds solicited from the
policyholders as of the end of such month; and
2. The total premiums earned for the month.
Purely cooperative life insurance companies entitled to exemption from
the payment of taxes on life insurance premiums and documentary stamp
tax.
Consideration for the services rendered by an insurance company.
 Premium payment.
Taxation of other financial services/products sold by the life insurance
company, in addition to the life insurance policy solicited.
 The insurance company offers to its policyholders other financial
services/products, which upon acceptance by the policyholder, are made as
a rider, clause, warranty or endorsement attached to and formed part of the
insurance policy contract issued.
 Examples of such are the Variable Unit Link (VUL) or the Premium Deposit
Fund (PDF).
 VUL. Features:
1. In addition to the life insurance policy contracted, policyholders are made
to contribute to a fund set up the life insurance company;
2. Of the total amount given by the policyholder for the life insurance policy
and the contribution to be made to such fund, only 2% to 5% represents
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the premium payment for the life insurance policy, while the 95% to 98%
of the amount paid pertains to the amount contributed to the fund;
3. The contribution to the fund is represented by units of shares;
4. A fixed amount is set for each unit of share, thus, the percentage of
contribution of the policyholder to the fund corresponds to the number of
unit of shares he owns therein;
5. The amount pooled to the fund is then invested in stocks, securities, debt
instruments, and other similar passive investments, income derived from
which are those that are either exempt from tax or subject to final tax;
6. The life insurance company merely acts as fund manager. As such, the
fund is not commingled with the owned funds of the said life insurance
company;
7. The life insurance company does not share in the income derived by the
fund from the investment activities but rather derives income by charging
management fees based on a certain fixed rate; and
8. The income earned by the fund together with the contributions made are
then distributed to the policyholders upon surrender/redemption units of
shares.
 The amounts received on account of the life insurance solicited from the
policyholder, being the main business activity of the life insurance company
is, in addition to income tax, subject to business tax/premium tax and DST.
 For the management fees earned by the life insurance company in making
the investment portfolio of the VUL Fund, such management fees, in addition
to income tax or to the percentage tax.
 The certificated issued to the policyholder evidencing his contribution to the
VUL fund which partake the nature of deeds of trust shall not be subject to
DST.

 For the gain realized by the policyholder from the redemption of his units of
shares in the VUL fund, the same must be declared and reported by the said
policyholder for income tax purposes.
 PDF. Features:
1. In addition to the life insurance policy contracted, policyholders are made
to make deposits for the future premium payment;
2. Deposit of at least P500 each may be made to this fund for payment of
future premium on the policy;
3. The fund will be used in investment activities;
4. Interest shall be credited to the fund annually on each policy anniversary;
5. That the balance of the deposit inclusive of the interest earned, may be
withdrawn anytime at the option of the policyholder; and
6. That the insurance company treats such deposits in its books of accounts
as liabilities to the policyholders.
 Having no fixed term or period, whereby these deposits can be withdrawn
anytime at the option of the policyholder, the instrument issued to the
policyholder evidencing such deposit is exempt from the imposition of DST.
 The interest earned by the policyholder from the premium deposit fund shall
not be subject to 20% FWT as the same has already been subjected to final
tax as part of investment.
Business tax of insurance agents who transact with foreign insurance
companies.
 A tax equal to 4% shall be imposed on every agent of foreign insurance
company authorized under the insurance Code to procure policies of
insurance as he may have previously been legally authorized to transact on
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risks located in the Philippines for companies not authorized to transact
business in the Philippines.
Transactions not covered by Section 124.
 Reinsurance
 The right of an owner of property to apply for and obtain for himself policies
in foreign companies in cases where said owner does not make use of the
services of any agent, company or corporation residing and doing business
in the Philippines.
Premium tax payable by owners of property who directly obtain property
insurance from foreign companies.
 It shall be the duty of the said owners to report to the Insurance
Commissioner and to the Commissioner each case where insurance has
been so effected, and pay the tax of 5% on premiums paid.
Amusement tax.
 For the purpose of the amusement tax, the term gross receipt embraces all
the receipts of the proprietor, lessee or operator of the amusement place.
 Amusement tax is ayable at the end of each quarter and it shall be the duty
of the proprietor, lessee or operator concerned, as well as any party liable,
within 20 days after the end of each quarter, to make a true and complete
return of the amount of the gross receipts derived during the preceding
quarter and pay the tax due thereon.

Repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for
the imposition of amusement tax on the exhibition or showing of motion
pictures by local cinema houses.
 The removal of the prohibition under the Local Tax Code did not grant nor
restore to the national government the power to impose amusement tax on
cinema/theater operators or proprietors.
 Neither did it expand the coverage of VAT.
 Since the imposition of a tax is a burden on the taxpayer, it cannot be
presumed nor can it be extended by implication.
 The power to impose amusement tax on cinema/theater operators or
proprietors remains with the local government.
Proprietors, lessees or operators of videoke bars, karaoke bars, karaoke
televisions, karaoke boxes and music lounges covered by Section 125(b).
 Subject to 18% amusement tax.
Amusement tax on professional basketball fames a national internal
revenue tax.
 With reference to PD 871, there is a recognition under the laws of this
country that the amusement tax on professional basketball games is a
national, and not a local tax.
Persons liable to pay tax on winnings; Rates of tax.
1. Winners in horse races – 10% of the winnings or dividends based on the
actual amount paid to him for every winning ticket after deducting the cost of
the ticket;
2. Winners from double, forecast/quinella and trifecta bets – 4%;
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3. Owners of winning racehorses – 10% of the prize.
Tax on winnings, how collected.
 If 1 and 2, the tax on winnings shall be deducted from the dividends
corresponding to each winning ticket before paying the dividends to the
winners by the operator, manager or person in charge of horse races.
 If 3, the tax shall be withheld by the operator, manager or person in charge of
the horse races before paying prizes to the owners of the winning race
horses.
 The operator, manager or person in charge of the horse races shall, within
20 days from the date the tax was deducted and withheld, file a true and
correct return with the Commissioner and pay within the same period.
Persons liable to the tax.
 The following sellers or transferors of stock are liable to the tax on sale,
barter or exchange of shares of stock listed and traded through the local
stock exchange:
1. Individual taxpayer, whether citizen or alien;
2. Corporate taxpayer, whether domestic or foreign; and
3. Other taxpayers not falling under 1 and e, such as estate, trust, trust
funds and pension funds, among others.
Persons not liable to the tax.
1. Dealers in securities;
2. Investor in shares of stock in a mutual fund company in connection with the
gains realized by said investor upon redemption of said shares of stock in a
mutual fund company; and

3. All other person, whether natural or juridical, who are specifically exempt
from all national internal revenue taxes under existing investment incentives
and other special laws.
Tax on the sale, barter or exchange of shares of stock listed and traded
through the Local Stock Exchange.
 There shall be levied, assessed and collected on every sale, barter,
exchange or disposition of shares of stock listed and traded thru Local Stock
Exchange other than the sale by a dealer of securities, under the following
rules:
1. Tax rate. A stock transaction at the rate of ½ or 1% based on the amount
determined in the tax base.
2. Tax base. Gross selling price or gross value in money of the shares of
stock sold, bartered, exchanged or otherwise disposed which shall be
assumed and paid by the seller or transferor thru the remittance of the
stock transaction tax by the seller or transferor’s broker.
Tax on sale, barter or exchange, or issuance of shares of stock thru Initial
Public Offering (IPO).
 There shall be levied, assessed and collected on every sale, barter,
exchange or disposition thru IPO of shares of stock in closely held
corporations, under the following rules:
1. Tax rates.
Proportion of Disposed Tax
Shares to Outstanding Rate
Shares
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Up to 25% 4%
Over 25% but not over 33 2%
1/3%
Over 33 1/3% 1%
2. Tax base. Gross selling price or gross value in money of the shares of
stock sold, bartered, exchanged or otherwise disposed of.
3. Determination of the persons liable to pay the tax.
a. Primary offering. The tax herein imposed shall be paid by the issuer
corporation with respect to the shares of stock corresponding to the
Primary Offering.
b. Secondary Offering. The tax herein imposed shall be paid by the
selling shareholder with respect to the shares of stock corresponding
to the Secondary offering.
 In case of follow-on or follow through sale by the corporation which are
shares issued subsequent to IPO, shall no longer be taxed. The transaction,
however, is subject to DST similar to the transaction covered by Primary
Offering as well as Secondary offering of shares of stock.
 In case another existing shareholder decides to offer his existing shares to
the public subsequent to IPO, he shall be taxed accordingly.
 Follow on or follow through offering of shares refer to an offering of shares to
the investing public subsequent to an IPO.

Time of payment of tax and manner of filing returns.
1. Tax on sale of shares of stock listed and traded thru the Local Stock
Exchange.
- The stockbroker who effected the sale has the duty to collect the tax from
the seller upon issuance of the confirmation of sale, issue the
corresponding official receipt thereof and remit the same to the collecting
bank/officer of the RDO where the broker is registered within 5 banking
days from the date of collection thereof and to submit on Mondays of
each week to the secretary of the Local Stock Exchange, of which he is a
member, a true and complete return, which shall contain a declaration,
that he made under the penalties of perjury, of all the transactions
effected thru him during the preceding week and of taxes collected by him
and turned over to the concerned RDO.
- The secretary of the Local Stock Exchange shall reconcile the records of
the Local Stock Exchange with the weekly reports of stockbrokers and in
turn transmit to the RDO, on or before the 15th day of the following month,
a consolidated return of all transactions effected during the preceding
month thru the LSE.
- Stockbroker includes all persons whose business it is, for other brokers,
to negotiate purchases or sales of stocks, or engaged in the business of
effecting transactions in securities for the account of others but does not
include a bank or underwriters for one or more investment companies as
defined in the Investment Company Act.
- Broker is a person engaged in the business of buying and selling
securities for the account of others.
2. Tax on shares of stock sold or exchanged thru IPO.
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- The corporate issuer in Primary Offering shall file the return and pay the
corresponding tax to the RDO which has jurisdiction over said corporate
issuer within 30 days from the date of listing of the shares of stock in the
LSE. The return shall be accompanied with a copy of the instrument of
sale.
- In the case of stock sold or exchanged thru Secondary Offering at the
time of listing at the LSE of shares of closely-held corporations (1)
applies.
Effect of non-payment of tax.
 No sale, exchange, transfer or similar transaction intended to convey
ownership of, or title to any share of stock shall be registered in the books of
the corporation unless the receipts of payment of the tax is filed with and
recorded by the stock transfer agent or secretary of the corporation.
Sale of shares of stock listed and traded in the LSE not subject to the
capital gains tax.
 The sale of shares of stock thru his stockbroker is presumed to be a sale of
shares listed and traded in the stock exchange subject to the percentage tax
of ½ of 1% of the gross selling price, but not to the income tax or capital
gains tax.

Tax treatment of sales, barters, exchanges or other dispositions of shares
of stock of publicly-listed companies whose public ownership levels fall
below the mandatory Minimum Public Ownership (MPO) level, monitoring
of these companies and their stock transactions.
1. Rule on MPO.
- All publicly-listed companies are required, at all times, to maintain a
minimum percentage of listed securities held by the public or public float
of the higher rate of 10% of the publicly-listed companies’ issued and
outstanding shares, exclusive of any treasury shares or at such
percentage as may be prescribed by the SEC or PSE.
- The sale, barter, transfer and or assignment of publicly-listed companies
that still fail to meet the MPO after the lapse of the grace period shall be
subject to final tax at the rate 5% or 10% on the net capital gains.
2. Reportorial requirements.
3. Tax treatment of sales, barters, exchanges or other dispositions of
shares of stock of a publicly-listed company that is non-compliant with
the MPO.
a. Transactions up to Dec. 31, 2012. Non-compliant – subject to a stock
transaction tax at the rate of ½ of 1% of the gross selling price or gross
value in money of the shares of stock.
b. Transactions after Dec. 31, 2012. Non-compliant – subject to a final tax of
either 5% or 10% on the net capital gains.
4. Persons not liable to the tax.
a. Dealers in securities, provided that, they shall be subject to VAT on the
basis of their gross receipts and Income Tax from their sale or exchange
of securities.
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b. Investors in shares of stock in a mutual fund company, in connection with
the gains realized by said investor upon redemption of said shares of
stock in a mutual fund company; and
c. All other persons, whether natural or juridical, who are specifically exempt
from national internal revenue taxes under existing investment incentives
and other special laws.
5. Effect of non-payment of tax.
- It will not be registered in the books of the corporation.
Persons liable to pay percentage taxes; time for filing of the Percentage
Tax Return.
 Every person subject to the percentage taxes shall file a quarterly return of
the amount of his gross sales, receipts or earnings and pay the tax due
thereon within 25 days after the end of each taxable quarter: Provided, that in
case of a person whose VAT registration is cancelled and who become VAT
exempt, the tax accrue from the date of cancellation and shall be paid in
accordance with the provisions of this section.
 The Percentage Tax returns shall be filed by taxpayers, whether large or
non-large, on a monthly basis, and taxes paid, not later than the 20 th day
following the end of each month; Provided, however, That with respect to
taxpayers enrolled with the EFPS, the deadline of filing shall be 5 days later
than the deadline set herein.
Place of filing the Percentage Tax Return
 Except as the Commissioner otherwise permits, every person liable may, at
his option, file a separate return for each branch or place of business, or a
consolidated return for all branches or places of business with the AAB,
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RDO, Collection Agent or duly authorized Treasurer of the city or municipality 3. Petroleum products;
where the business or principal place of business is located, as the case may 4. Automobiles;
be. 5. Non-essential goods; and
6. Mineral products.
Person retiring from business.
 Shall notify the nearest internal revenue officer, file his return and pay the tax Other tax that may be imposed on goods subject to excise tax.
due thereon within 20 days after the closing of his business.  In addition to VAT.
Determination of correct sales or receipts.
 When it is found that a person has failed to issue receipts or invoices, or Kinds of excise tax.
when no return is filed, or when there is reason to believe that the books of 1. Specific tax – refers to the excise tax imposed which is based on weight
accounts or other records do not correctly reflect the declarations made or to or volume capacity or any other physical unit of measurement; and
be made in a return as required, the Commissioner may prescribe a 2. Ad valorem tax – refers to the excise tax which is based on selling price
minimum amount of such gross receipts, sales and taxable base and such or other specified value of the goods.
amount so prescribed shall be prima facie correct for purposes of
determining the internal revenue tax liabilities of such person. Excise taxes, defined; Concept and nature.
 Excise tax apply to taxes on goods manufactured or produced in the
Philippines for domestic sale or consumption or for any other disposition and
EXCISE TAXES ON CERTAIN GOODS to things imported, which tax shall be in addition to the VAT.
GENERAL PROVISIONS  The current definition of excise tax is that of a tax levied on a specific article
rather than one upon the performance, carrying on, or the exercise of an
Goods subject to excise tax. activity.
1. Certain goods manufactured or produced in the Philippines for domestic  Starting in 1986, excise tax in this jurisdiction refers exclusively to specific tax
sale or consumption or for any other disposition; and or ad valorem tax.
2. Certain goods/things imported in the Philippines.  As used in the NIRC, excise tax refer to the taxes applicable to certain
 These goods/articles are subject to excise taxes: specified or selected goods or articles manufactured or produced in the
1. Alcohol products; Philippines for domestic sale or consumption or for any other disposition and
2. Tobacco products; to things imported into the Philippines.
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 Basically an indirect tax, excise taxes are directly levied upon the
manufacturer or importer upon removal of the taxable goods from its place of
production or from the customs custody. These taxes, however, may be
actually passed on to the end consumer as art of the transfer value or selling
price of the goods sold, bartered or exchanged.
Persons liable to file and pay excise taxes.
1. In the case of domestic articles.
- The excise taxes are collected from manufacturers or producers before
removal of the domestic products from the place of production.
- The manufacturer, producer, owner or person having possession of the
article is the one liable for the tax. The mere fact of possession is enough
to make a person liable for the tax.
2. In the case of imported articles.
- The importer or owner of an imported article is the one liable for the
excise tax.
- An importer is the consignee of an imported article designated as such in
the bill of lading, or the person to whom the bill of lading has been duly
assigned or indorsed. In other words, the importer is the owner of the
goods at the time of withdrawal thereof from the customhouse.
 Every person liable to pay the excise tax shall file a separate return for each
place of production setting forth, among others, the description and quantity
or volume of products to be removed, the applicable tax base and the
amount of tax due thereon.
 In the case of indigenous petroleum, natural gas or liquefied natural gas, the
excise tax shall be paid by the first buyer, purchaser or transferee for local
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sale, barter or transfer, while the excise tax on exported products shall be
paid by the owner, lessee, concessionaire or operator of the mining claim.
 Should domestic products be removed from the place of production without
the payment of the tax, the owner or person having possession thereof shall
be liable for the tax due thereon.
Time for filing the return and payment of the excise tax; General Rule.
 The return shall be filed and the excise tax paid by the manufacturer or
producer before removal of domestic products from place of production.
 On locally manufactured petroleum products and indigenous petroleum, the
excise tax shall be paid before removal from the place of production.
 On nonmetallic mineral or mineral products, or quarry resources, the excise
tax shall be due and payable upon removal of such products from the locality
where mined or extracted.
 On locally produced or extracted metallic mineral or mineral products, the
excise tax shall be paid within 15 days after the end of the calendar quarter
when such products were removed. For this purpose, the taxpayer shall file a
bond in an amount which approximates the amount of excise tax due on the
removals for the said quarter.
 On imported mineral or mineral products, whether metallic or nonmetallic, the
excise tax shall be paid before removal from customs custody.
Place for filing of the return and payment of the tax.
 File with and the tax paid to any AAB or RCO, or duly authorized City or
Municipal Treasurer in the Philippines.

Determination of gross selling price of goods subject to ad valorem tax.
1. The whole sale price, excluding the VAT, at which the goods are sold in the
place of production or through their sales agents to the public shall constitute
the gross selling price.
2. If the manufacturer also sells or allows such goods to be sold at wholesale in
another establishment of which he is the owner or in the profits of which he
has an interest, the wholesale price in such establishment shall constitute the
gross selling price.
3. Should such price be less than the cost of manufacture plus expenses
incurred until the goods are finally sold, then a proportionate margin of profit,
not less than 10% of such manufacturing cost and expenses, shall be added
to constitute the gross selling price.
Manufacturer’s or Producer’s Sworn statement.
 Every manufacturer or producer of goods or products subject to excise taxes
shall file with the Commissioner, on the date or dates designated by the
latter, and as often as may be required, a sworn statement showing certain
information, as follows:
1. The different goods or products manufactured or produced;
2. Their corresponding gross selling price or market value;
3. The cost of manufacture or production;
4. Expenses incurred or to be incurred until the goods or products are finally
sold.
Credit for excise tax on goods actually exported.
 When goods locally produced or manufactured are removed and actually
exported without retuning to the Philippines, whether so exported in their
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original state or as ingredients or parts of any manufactured goods or
products, any excise tax paid thereon shall be credited or refunded upon
submission of the proof of actual exportation and upon receipt of the
corresponding of foreign exchange payment.
 The excise tax on mineral products, except coal and coke, shall not be
creditable or refundable even if the mineral products are actually sold.
Exceptions to the general rule.
 The SOF, upon recommendation of the Commissioner, may, by rules and
regulations, prescribe:
a. The time for filing the return; and
b. The manner and time of payment of excise taxes.
Excise tax may be passed on to the end consumer but direct liability for
the tax remains with the manufacturer or producer.
 Excise, whether classified as specific or ad valorem tax, is basically an
indirect tax imposed on the consumption of a specified list of goods or
products.
 The tax is directly levied on the manufacturer upon removal of the taxable
goods from the place of production but in reality, the tax is passed on to the
end consumer as part of the selling price of the goods sold.
 An excise tax is an indirect tax where the tax burden can be shifted to the
consumer but the tax liability remains with the manufacturer or producer.
 Where the burden is shifted, the amount passed on to the buyer is no longer
a tax but a part of the purchase price of the goods sold.

Owner of person having possession of excisable domestic product liable
to the tax due thereon.
 BSP vs. CIR. Should domestic products be removed from the place of
production without the payment of excise taxes, the owner or person having
possession thereof shall be liable for the tax due thereon.
 Minerals, mineral products and quarry resources – 2% excise tax based on
the actual market value of the gross output thereof at the time of removal, in
the case of those locally extracted or produced; or the value used by the
BOC in determining tariff or customs duties, net or excise and VAT, in the
case of importation.
Proper party to claim for the refund/tax credit of excise taxes paid on
aviation fuel; End consumer who paid the excise tax cannot apply for a
refund of the excise tax paid.
 The proper party to question, or seek 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.
Persons liable to excise tax on imported articles.
1. By the owner or importer to the Customs Officers before the release of such
articles from the customhouse; or
2. By the person who is found in possession of articles which are exempt from
excise taxes other than those legally entitled to exemption;
3. In the case of tax-free articles brought or imported into the Philippines, by
persons, entitled, or agencies exempt from tax which are subsequently sold,
transferred or exchanged in the Philippines to non-exempt persons or
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entities, the purchasers or recipients shall be considered the importers
thereof.
Excise tax on importation of cigars and cigarettes, distilled spirits,
fermented liquors and wines in the Philippines.
1. Even if destined tax and duty-free shops, shall be subject to all applicable
taxes, duties, charges, including excise taxes due thereon.
2. RA 10351. The importation of any alcohol or tobacco product bearing
suffixes or prefixed to the root name, color and/or form of packaging or size
of container of the product that is different from that already registered and
locally being sold in the domestic market shall be treated as a newly
introduced product.
Rate and basis of the excise tax on imported articles.
 The same rates and basis of excise taxes applicable to locally manufactured
articles.
Whether or not the Congress can enact a law withdrawing a tax exemption
privilege on importation.
 A tax exemption cannot be grounded upon the continued existence of a
statute which precluded its change or repeal. Flowing from the basic precept
of constitutional law that no law is irrepealable, Congress, in the legitimate
exercise of its lawmaking powers, can enact a law withdrawing a tax
exemption.

Whether or not a judge can issue a writ of preliminary injunction to enjoin
the collection of taxes on importation of alcohol and tobacco by SMBA-
registered enterprises.
 No. For a writ of preliminary injunction to issue, the applicant must establish
that:
1. There is a clear mistake and unmistakable right to be protected;
2. The invasion of the right sought to be protected is material and
substantial; and
3. There is an urgent and paramount necessity for the writ to prevent
serious damage.
Rules on computing contents of cask or package.
1. Every fractional part of a proof liter equal to or greater than a half liter in a
cask or package containing more than one liter shall be taxed as one liter;
2. Any smaller fractional part shall be exempt;
3. But any package of spirits, the total contents of which are less than a proof
liter, shall be taxed as one liter.
Removal of wines and distilled spirits for treatment of tobacco leaf.
 Manufacturers of cigars and cigarettes may withdraw from bond, free of
excise tax, local and imported wines and distilled spirits in specific quantities
and grades for use in the treatment of tobacco leaf to be used in the
manufacture of cigars and cigarettes (but such wines and distilled spirits
must first be suitably denatured), upon issuance of a permit from the
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Commissioner and subject to the rules and regulations prescribed by the
SOF.
Domestic denatured alcohol.
1. Domestic alcohol of not less than 180 degrees proof (90% absolute alcohol)
shall, when suitably denatured and rendered unfit for oral intake, be exempt
from excise tax but shall be subject to VAT.
2. If such alcohol, however, is to be used for motive power, it shall be subject to
excise tax.
3. Any alcohol, previously rendered unfit for oral intake after denaturing but
subsequently rendered fir for oral intake after undergoing fermentation,
dilution, purification, mixture or any other similar process shall be subject to
excise tax, and the person in possession of such will pay for the tax.
Petroleum products sold to International Carriers and exempt entities or
agencies.
 Petroleum products sold to the following are exempt from excise tax:
1. International carriers of Philippine or foreign registry on their use or
consumption outside the Philippines: Provided, That the petroleum
products sold to these international carriers shall be stored in a bonded
storage tank and may be disposed of only in accordance with the rules
and regulations to be prescribed by the SOF, upon recommendation of
the Commissioner.
2. Exempt entities or agencies covered by tax treaties, conventions and
other international agreements for their use or consumption: Provided,
That the country of said foreign international carrier or exempt entities or

agencies exempts from similar taxes petroleum products sold to the
Philippine carriers, entities or agencies; and
3. Entities which are by law exempt from direct and indirect taxes.
Objectives of Regulations regarding the grant of outright excise tax
exemption on removal of excisable articles intended for export or
sale/delivery to international carriers or to tax-exempt entities/agencies
and prescribing the provisions for availing claims for product
replenishment.
 To regulate the grant of tax relief in order to prevent possible abuses.
 As a general rule, all withdrawals of excisable articles from their place of
production must be subject to excise tax. The grant of outright tax exemption
is discouraged because it deprives the BIR the opportunity to evaluate
thoroughly the factual and legal bases of the tax relief sought. It is for this
reason that remedies after payment of the tax is more favored because this
option will five more protection to revenue collections without diminishing the
impact of the tax relief to which the taxpayers are entitled. These remedies
may either come in the form of:
1. A claim for excise tax credit/refund ; or
2. A product replenishment.
 These revenue regulations are being issued for the sole purpose of
attempting to maintain the enjoyment of tax privileges by these tax-exempt
persons or entities but, at the same time, maintaining the equilibrium
between stability of revenue collections on one side, and giving the taxpayers
what is legally due them on the other.
 These regulations likewise intend to minimize the rising incidents of reported
diversions of declared articles for export to the local market, as well as
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domestic sales originally declared as intended to tax-exempt persons and
entities but are subsequently found in possession of persons or entities that
are not entitled to such tax exemption privilege.
 These regulations also intend to rationalize the practice of some taxpayers of
immediately availing outright tax exemption but are delaying and/or totally
ignoring the prescribed submission and full liquidation of their claimed tax-
exempt shipments with complete supporting documents.
Imposition of excise tax on removal of excisable articles for export or
sale/delivery to international carriers and other tax-exempt
entities/agencies.
 Subject to the subsequent filing of a claim for excise tax credit/refund or
product replenishment, all manufacturers of articles subject to excise tax
shall pay the excise tax that is otherwise due on every removal thereof from
the place of production that is intended for exportation or sale/delivery to
international carriers or to tax-exempt entities/agencies: Provided, That in
case the said articles are likewise being sold in the domestic market, the
applicable excise tax rate shall be the same as the excise tax rate imposed
on the domestically sold articles.
 In the absence of a similar article being sold in the domestic market, the
applicable excise tax shall be computed based on the value appearing in the
manufacturer’s sworn statement converted to Philippine currency, as may be
applicable.

Discovery in the domestic market of tax-paid articles intended for exports.
 The payment of excise tax prescribed herein for articles exclusively intended
for export or for sale/delivery to tax-exempt entities/agencies or international
carriers, but later found in the domestic market, shall not give rise to the
automatic amendment of the previous permit to export issued for such
purpose.
 The same shall be subject to the applicable penalties attendant thereto.
Failure to comply with printing requirements, not entitled to Tax
Credit/Refund or product replenishment.
 The printing requirement on labels and packages on the articles exported or
sold/delivered to tax-exempt agency or international carrier shall be complied
with strictly, the same shall not be entitled to any tax credit/refund or product
replenishment.
Exemption from the imposition of excise tax upon removal.
 In case of sale/delivery to embassies, legated such as the Office of the Papal
Nuncio or international organizations, the excisable articles may be removed
from the place of production of the manufacturer without payment of the
excise tax, subject to the following conditions:
1. For each and every transaction, a prior written permit therefor shall be
secured from the LT Assistance Division II (LTAD II); and
2. No subsequent permit shall be approved and issued unless a liquidation
report on the previously purchased tax-exempt articles has been
submitted by the said tax-exempt entities to LTAD II within 30 days from
the date of removal of the tax-exempt article from the place of production.
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 The liquidation report shall be accompanied by copies of the following
documents:
1. Commercial invoice issued by the manufacturer;
2. Delivery of receipt issued by the manufacturer;
3. Official receipt issued by the manufacturer;
4. Certificate of registration with the LTO, in case of automobiles; and
5. Withdrawal certificate, official delivery invoice or any BIR-prescribed
forms to document removal of excisable articles from the place of
production.
Claim for product replenishment.
 In case the excisable products were removed by the manufacturer thereof
from his place of production or from any storage facility located outside his
place of production after prepayment of the excise tax for purposes of
exportation or sale/delivery to tax-exempt entities/agencies or international
carriers, the said manufacturer may, at its option, avail a claim for product
replenishment, instead of filing a claim for tax credit/refund of the excise tax
that has been previously paid on the articles removed for such purposes.
Conditions for product replenishment.
1. Excisable articles, regardless of volume and value, which are, likewise,
intended for exportation or sale/delivery to international carriers or tax-
exempt entities/agencies may be allowed to be removed from the place of
production without the payment of the excise tax in order to replenishment
the excise tax-paid article that was previously exported or sold-delivered to
international carriers or tax-exempt entities/agencies: Provided, That the total

excise tax due on the subsequent exportation or sale/delivery to international
carriers or tax-exempt entities/agencies.
2. In case of excise tax that has been actually paid in the previous exportation
or sale/delivery to tax-exempt entities/agencies or international carriers is
less than the excise tax that is otherwise due on the articles applied for
product replenishment, the difference shall be paid by the manufacturer
before the removal thereof from the place of production.
- In case the same is more than the excise tax that is otherwise die on
articles applied for product replenishment, the difference thereof may be
utilized for any future application for product replenishment.
- In lieu thereof, or at the option of the manufacturer, he may also file a
claim for tax credit/refund with the appropriate office in the BIR, subject to
the prescriptive period requirements of the Tax Code.
3. In case the rate of excise tax imposed at the time of application for
replenishment shall be different from that imposed and paid at the time of the
previous exportation or sale/delivery to tax-exempt entities/agencies or
international carriers, or in case the articles applied for replenishment are no
longer subject to excise tax, the following rules shall apply:
a. If the equivalent excise tax that was paid is more than the equivalent
excise tax that is otherwise due on the articles applied for replenishment,
the volume of articles representing the difference may be the subject of
any future application for product replenishment, or the manufacturer,
may, at his option, file a claim for tax credit/refund with the appropriate
office in the BIR for the excess excise tax paid which represents such
difference, subject to the prescriptive period requirements of the Tax
Code.
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b. If the equivalent excise tax that was previously paid is less than the
equivalent excise tax that is otherwise due on the articles applied for
replenishment, the volume of articles applied for replenishment
representing the difference shall be disallowed from the said application
and the corresponding excise tax due shall be paid by the manufacturer
before removal from the place of production.
c. If the articles applied for replenishment are no longer subject to excise
tax, the manufacturer shall file a claim for tax credit/refund for the excise
tax that has been pain on the previous exportation or sale/delivery to tax-
exempt entities/agencies or international carriers, subject to the
prescriptive requirements of the Tax Code.
4. The excise tax on articles intended for export or sale/delivery to tax-exempt
entity/agency or international carrier upon which a claim for replenishment
shall be subsequently filed with the BIR should ne actually paid before
removal from the place of production. Accordingly, claims for replenishment
of articles upon which the excise tax was paid under the advance deposit
schemes shall not be accepted.
5. For purposes of continuity on the availment of the product replenishment on
subsequent exportations or sales/deliveries to international carriers or tax
exempt entities/agencies of excisable articles, file an application for product
replenishment, together with a copy of the payment form as roof of additional
excise tax payment.

Time for filing a claim for product replenishment.
 File within 90 days from the actual date of exportation or sale/delivery to the
tax-exempt entity/agency or international carrier: Provided, That the failure to
file the said application within the prescribed period or the denial of the said
application shall not preclude the applicant from filing an application for tax
credit/refund.
Validity of the product replenishment certificate.
 It shall remain valid for 5 years from the date of issuance.
 In the event that the certificate has not been utilized within the said
prescribed period, a onetime revalidation thereof shall be allowed by filing an
application for revalidation with the BIR before the expiration of its validity.
 The duly-approved PRC, based on the outstanding balance, may be
converted into a TCC or tax refund at anytime during the validity thereof.
 The period of the validity of the TCC shall be the same with the remaining
period of validity of the PRC.
 The sale, assignment or transfer of any PRC to another person is prohibited.
Disallowances on claims for Tax Credit Certificate/Refund or Product
Replenishment.
 For purposes of filing a claim with the BIR for tax credit/refund or product
replenishment on excise taxes that have been paid on excisable article is
composed of locally manufactured excisable article and imported article, the
claim for excise tax on the imported article shall not be allowed.
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Meaning of the term exempt from all taxes.
 Excludes indirect taxes, unless the exempting statute is so couched as to
include indirect tax from the exemption.
Person who has the legal personality to file an administrative claim for
refund of excise taxes alleged to have been erroneously paid to supplier of
aviation fuel in the Philippines.
 The statutory taxpayer.
Tax treatment of all petroleum and petroleum products imported and its
subsequent exportation or sales to Freeport and Economic Zone Locators
or Other Persons/Entities; Refund of Taxes Paid; Authority to release
imported goods and other administrative requirements.
 Shall be paid by the importer to the BOC.
Rules on removal of spirits under bond for rectification.
 Spirits requiring rectification may be removed from the place of production to
another establishment for the purpose of rectification without the prepayment
of the excise tax;
 The distiller removing such spirits and the rectifier receiving them shall file
with the Commissioner their joint bond conditioned upon the payment by the
rectifier of the excise tax due of the rectified alcohol;
 In cases where alcohol has already been rectified either by original and
continuous distillation or by re-distillation, no loss for rectification and
handling shall be allowed and the rectifier thereof shall ay the excise tax due
on such losses;

 Where a rectifier makes use of spirits upon which the excise tax has not
been paid, he shall be liable for the payment of the tax otherwise due
thereon.
Rules on removal of fermented liquors to bonded warehouse.
 Any brewer may remove or transport from his brewery or other place of
manufacture to a bonded warehouse used by him exclusively for the storage
or sale in bulk of fermented liquors, not less than 1,000 liters at one removal,
without prepayment of the tax t/hereon under a permit which shall be granted
by the CIR.
 Such permit shall be affixed to every package so removed and shall be
cancelled or destroyed in such manner as the Commissioner may prescribe.
 Thereafter, the manufacturer of such fermented liquors shall pay the tax in
the same manner and under the same penalty and liability as when paid at
the brewery.
Rules on removal of damaged liquors free of tax.
 Brewers may sell any fermented liquor which has become sour or damaged
so as to be unfit for use as such, and after securing a special permit from the
Commissioner, remove the same without the payment of tax thereon, in cask
or other packages, distinct from those ordinarily used for fermented liquors,
each containing not less than 175 liters with a note of their contents
permanently affixed thereon.
Rules on Removal of tobacco products without prepayment of tax.
 Products of tobacco entirely unfit for chewing or smoking may be removed
free of tax for agricultural or industrial use.
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 Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing
tobacco, scraps, cuttings, clippings, stems or midribs, and sweepings of
tobacco may be sold in bulk as raw material by one manufacturer directly to
another without payment of the tax.
EXCISE TAX ON ALCOHOL PRODUCTS
Tax classification of alcohol and tobacco products.
 Any alcohol or tobacco product that is introduced in the domestic market on
or after the effectivity of RA 10351 shall be initially tax classified according to
their suggested net retail prices as declared in the prescribed manufacturer’s
or importer’s sworn statement.
 In case of alcohol and or tobacco product that was duly registered with the
BIR before the effectivity of RA 10352 but was not tax classified by the BIR
according to the new tax rates provided under the Act, such product shall be
treated as a newly introduced product upon re-introduction thereof in the
domestic market after the effectivity of the Act, such product upon re-
introduction thereof in the domestic market after the effectivity of the Act.
Accordingly, the tax classified thereof shall be based on the suggested net
retail price declared in the aforesaid sworn statement, subject to the initial
validation and revalidation requirements.
 The proper tax classification of all fermented liquors and tobacco products,
whether registered before or after the effectivity of the said Act, shall be
determined every two years from the date of effectivity thereof.
 For purposes of tax classification, alcohol and tobacco products, whether
imported or domestically manufactured, shall be taxed according to their

individual brand name, color and/or design of label, manner and/or form of
packaging or size of container of the product.
 The following instances, but not limited to, shall be taxed differently:
1. Two products bearing exactly the same root name but with different
suffixes or prefixes.
2. Two products bearing exactly the same brand name but with different
colors and/or design of labels.
3. Two products bearing exactly the same brand name and label but with
different forms of packaging.
4. Two products bearing exactly the same brand name and label but with
different sizes of container for alcohol products.
5. One product is sold in a regular basis while the other product is
introduced in a limited basis such as a special edition, for specific
occasion and other similar instances.
Revised revalidation period for newly introduced alcohol and tobacco
products.
 The revalidation of the suggested net retail price of a newly introduced
alcohol or tobacco product shall be conducted after the end of nine months
from the initial validation.
 Shall be conducted exclusively by the authorized representatives of the BIR.
Submission of sworn statement.
 Every local manufacturer or importer shall file a duly notarized
manufacturer’s or importer’s sworn statement for alcohol or tobacco product.
 The sworn statement shall be subject to verification by the BIR to validate its
contents with respect to its accuracy and completeness.
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Understatement of the suggested net retail price.
 The understatement by as much as 15% of the actual net retail price shall
render the manufacturer or importer liable for additional excise tax equivalent
to the tax due and difference between the understated suggested net retail
and the actual net retail price.
Locally produced wines derived from fruits and berries are subject to
excise tax.
 In its general meaning, the term wines is different from the term fermented
liquors, although the two products are both the results of fermented process.
 There are commonly accepted wines which derive from other basic raw
materials other than fruits, under which classification tuba, basi and tapuy
falls.
 Under the class of wine using non-fruits as basic raw materials, the
provisions of Section 143 of the NIRC that prescribes for the exemption
thereof from excise tax applies. The exemption is applicable only to
domestically produced fermented liquors.
 The term wines referred to under Section 142 that are subject to excise tax
pertain specifically to wines that are derived from fruits.
Downward reclassification of fermented liquors.
 Any downward classification of any fermented liquor product that is duly
registered with the BIT at the time of the effectivity of RA 10351 which will
reduce the tax imposed herein, or the payment thereof, shall be prohibited.

EXCISE TAX ON TOBACCO PRODUCTS
Revised provisions for the manner of packaging of cigarettes.
 All cigarettes whether packed by hand or acked by machine shall only be
packed in 20s, and thru other packaging combinations which shall result to
not more than 20 sticks of cigarettes.
 In case of cigarettes packed in not more than 20 sticks, the net retail price of
each individual packages shall be the basis of imposing the tax rate
prescribed under RA 10351.
Raising government revenue is not the sole objective of RA 8240.
 Congressional deliberation show that the shift from ad valorem to specific
taxes introduced by the law was not intended to curb the corruption that
became endemic to the imposition of ad valorem taxes. Since ad valorem
taxes were based on the value of goods, the prices of the goods were often
manipulated to yield lesser taxes. The imposition of specific taxes, which
were based on the volume of goods produced, would prevent price
manipulation and also cure the unequal tax treatment created by the skewed
valuation of similar goods.
What makes tobacco inspection fee a miscellaneous tax?
 Tobacco inspection fees are collected both for purposes of regulation and
control and for purposes of revenue regulation: half of the said fees accrues
to the tobacco Inspection Fund, while the other half accrues to the Cultural
Center of the Philippines.
 Tobacco inspection fees are imposed both as a regulatory measure and as a
revenue-raising measure.
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Definition of terms.
 Cigars – all rolls of tobacco or any substitute thereof, wrapped in leaf
tobacco.
 Cigarettes – all rolls of finely-cut leaf tobacco, or any substitute therefor,
wrapped in paper or in any other material.
 Wholesale price – the amount of money or price paid for cigars or cigarettes
purchased for the purpose of resale, regardless of quantity.
 Retail price – the amount of money or price which an ultimate consumer or
end-user pays for cigars or cigarettes purchased.
EXCISE TAX ON PETROLEUM PRODUCTS
Local government units cannot impose excise tax on petroleum products.
 Congress has the constitutional authority to impose limitations of the power
to tax of local government.
 The prohibition extends to all taxes, fees and charges.
Aviation jet fuel is considered as subject to specific tax.
 P3.67 per liter of volume capacity.
 Since the tax imposed is based on volume capacity, the tax is referred to as
specific tax.

EXCISE TAX ON MISCELLANEOUS ARTICLES
Persons liable for the payment of ad valorem tax on automobiles.
1. On locally manufactured/assembled automobiles – paid by the
manufacturer/assembler.
- Should the automobiles be removed from the place of
manufacture/assembly without payment of tax, the dealer/trader, owner, or
person having possession thereof shall be liable for the excise tax due
thereon.
- In case of transfer of locally manufactured/assembled automobiles from a
tax-exempt person to a non-tax exempt individual or entity, the transferee
or possessor thereof shall be liable for the excise tax.
2. On imported automobiles.
- Paid by the owner or importer of the automobile or by the dealer/trader, or
by any person who is found in possession of any untaxed automobiles
including any person other than the one legally entitled to exemption from
the ad valorem tax in the proper case.
- In cases where the automobiles are imported tax free into the country by
any one exempt from tax and are subsequently sold, transferred, or
exchanged in the Philippines to non-exempt persons, including the
introduction and re-introduction into customs the territory of automobiles
intended for exclusive use within the Freeport zones, the purchaser or
transferee, owner/possessor of the automobiles shall be considered as the
importer, and shall be liable for the excise tax due on such importation.
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Tax treatment on subsequent sale, transfer or exchange of tax-exempt
automobile by a tax-exempt person/entity to a non-exempt person/entity.
 In cases where a tax-exempt person/entity acquired an automobile, whether
locally purchased or imported, without payment of the tax by reason of
his/their exemption, the purchase thereof by a non-exempt shall be subject to
the ad valorem tax based on the higher of actual consideration between the
tax-exempt person/entity and the non-exempt; or the depreciated value of the
automobile at the time of sale, transfer, exchange which depreciated rate
shall be 10% per year, but in no case shall the amount of depreciation be
more than 50% of the original cost or value.
 Where a tax-exempt automobile subsequently sold by a tax-exempt person
was determined to be originally acquired primarily for the purpose of avoiding
the payment of excise tax, the ad valorem tax shall be computed based on
the original purchase price or value of importation of such motor vehicle at
the time of its original purchase without the benefit of any deduction for
depreciation.
Meaning of the term manufacturer’s or importer’s selling price.
 Refer to the price, net of excise and VAT, at which the locally
manufactured/assembled or imported automobiles are offered for sale by the
manufacturer/assembler or importer to the dealers, as reflected in the sworn
statement.
 In computing the manufacturer’s selling price, it shall always include the
value of car, air conditioner, radio and wag wheels including the cost of
installation thereof WON the same were actually installed.
 The suggested retail price shall not be less than the actual selling rice.

When automobile considered as brand new.
1. Of current or advance year model in the country of origin and/or
manufacture; or
2. Year model of immediately preceding year in the country of origin and/or
manufacture provided that:
a. The motor vehicle has a mileage of not more than 300 kms.; and
b. The motor vehicle has been acquired by the importer from the dealer as
first owner.
 #2 shall not be accorded any depreciation allowance.
When a motor vehicle deemed personally-owned or for personal use.
 If the invoice, bill of sale and bill of lading are made out in the name of a
natural person provided that the number of units imported by that person
shall not exceed 2 in any given 12 months.
 Should there be importations of automobiles made in the name of several
buyers but represented by a single person/entity, such importation shall be
deemed an importation of automobile for resale; therefore subject to ad
valorem tax based on importer’s selling price to be paid by such person/entity
representing the individual buyers.
When imported motor vehicles for sale may be released from custom’s
custody.
 After payment of ad valorem tax and the issuance of the appropriate
Authority to Release Imported Goods (ATRIG) by the BIR.
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What is the so called special purpose vehicle.
 Special purpose vehicle refers to a motor vehicle other than trucks, cargo
van, jeep, bus, single cab chassis designed for specific application such as
cement mixer, fire truck, boom truck, ambulance and/or medical unit and off-
road vehicles for heavy industries and not for recreational activities.
 The motor vehicle is designed in such a manner that it can only be used
strictly for the intended purpose for which it was manufactured.
 In order that a vehicle be classified as a SPV, and therefore exempt from
excise tax, the same must, in its original state, be ready for exclusive use for
the specific purpose for which it is being categorized as a SPV.
EXCISE TAX ON MINERAL PRODUCTS
Who is liable to pay the excise tax of small scale miners upon extraction of
the minerals.
 The one who removed the minerals.
Duties and obligations of the buyers of metallic minerals.
 Metallic minerals are subject to the 2% excise tax based on either the actual
market value of the gross output thereof at the time of removal, in case of
those locally extracted or produced; or the value used by the BOC in
computing tariff and duties, in case of importation.
 For purposes of these regulations, possession shall mean, not only the
actual current physical possession of said metallic minerals, but shall
likewise cover the inclusion of said mineral in the inventory of a person or
entity at any given point in time.

Owner or person having possession of excisable domestic product liable
to the tax due thereon.
Mode of collection and payment of taxes.
 All buyers of metallic minerals are hereby constituted as agents for the
collection of the 2% excise tax on metallic minerals and the 5% CWT
thereon.
Time and manner of filing of taxes withheld.
 On or before the 10th day of the following month to the BIR.
DOCUMENTARY STAMP TAX
Documentary stamp tax defined; Nature of documentary stamp tax (DST)
 DST is a tax on documents, instruments, loan agreements, and papers
evidencing the acceptance, assignment, sale or transfer of an obligation,
right or property incident thereto.
 A DST is in the nature of an excise tax levied on the exercise by persons of
certain privileges conferred by law for the creation, revision, or termination of
specific legal relationships thru the execution of specific instruments.
 i.e. Leases of lands, mortgages, pledges and trusts and conveyances of real
property.
 In imposing the DST, the court considers not only the document but also the
nature and character of the transaction.
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Documents subject to the DST.
 Applicable on all documents not otherwise expressly exempted by RA 9243,
notwithstanding the fact that they are in electronic form.
 Electronic Commerce Act. Electronic documents are the functional equivalent
of a written document under existing laws, and the issuance thereof is
therefore tantamount to the issuance a written document, and therefore
subject to DST.
When documentary stamp tax should be paid.
 DST is levied independently of the legal status of the transactions giving rise
to thereto.
 They must be paid upon the issuance of the said instruments, without regard
to whether the contracts which give rise to them are rescissible, void,
voidable or unenforceable.
 The DST return shall be filed within 5 days after the close of the month when
the taxable document was made, signed, accepted or transferred, and the
tax thereon shall be paid at the same time the aforesaid return is filed.
Persons liable for DST.
 It is imposed against the person making, signing, issuing accepting or
transferring the document or facility evidencing the aforesaid transactions.
 In general, it may be imposed on the transaction itself or upon the document
underlying such act.
 Any of the parties thereto shall be liable for the full amount of the tax due:
Provided, That as between themselves, the said parties may agree upon
themselves on who shall be liable for the tax.

 XPN. Whenever one of the parties to the taxable transaction is exempt from
tax, the other party thereto who is not exempt shall be the one directly liable
for the tax.
Distinguish shares of stock from certificate of stocks.
 Shares of stock shall include shares of stock of a corporation; warrants
and/or options to purchase shares of stock, as well as units of participation in
a partnership (except GPP), joint stock companies, joint accounts, joint
ventures taxable as corporations, associations, and recreation or amusement
clubs (such as golf, polo or similar clubs); and mutual fund certificates.
 Certificates of stock are certificates representing the capital stock of stock
corporations divided into shares signed by the President or VP,
countersigned by the secretary or assistant secretary, and sealed with the
seal of the corporation, issued in accordance with the by-laws.
Rationale for the imposition of DST on the original issue of shares of
stock.
 DST is imposed on the original issue of shares of stock.
 The DST, as an excise tax, is levied upon the privilege, the opportunity and
the facility of issuing shares of stock.
 CIR vs. Construction Resources of Asia, Inc. The DST attaches upon
acceptance of the stockholder’s subscription in the corporation’s capital stock
regardless of actual or constructive delivery of the certificates of stock.
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When the certificate of stock deemed issued for the purpose of imposing
the DST.
 The DST under Section 174 (shares of stock) may be levied only once, that
is upon the original issue of the certificate.
 CIR vs. Construction Resources of Asia, Inc. The DST accrues at the time
the shares are issued, not from the delivery of the certificates of stock.
Deposit on stock subscription NOT subject to DST.
 The deposit on stock subscription, as reflected in the Balance Sheet, is not a
subscription agreement subject to the payment of DST.
 The deposit on stock subscription is merely an amount of money received by
a corporation with a view of applying the same as payment for additional
issuance of shares in the future, an event which may or may not happen.
 The person making the deposit on stock subscription does not have the
standing of a stockholder and he is not entitled to dividends, voting rights or
other prerogatives and attributes of a stockholder.
 A taxpayer is not liable for the payment of DST on its deposit on subscription
because there is yet no subscription that creates rights and obligations
between the subscriber and the corporation.
 Capital stock issued connotes permanence of funds flowing into a
corporation which cannot be withdrawn.
 The phrase issuance of shares of stock must be viewed as permanent in
character.
 Future subscription to an increase in capital stock is not an original issue of
shares of stock nor is it a sale or transfer of shares of stock, but it is a
standard accounting term which refers to an amount of money transmitted by

a stockholder to a corporation on deposit with the possibility of the same
being later subscribed in the company’s capital.
 Campagnie Financiere Sucres et Denrees vs CIR. Sales to secure the future
transfer of due-bills, certificates of obligation or certificates of stock are
subject to DST. The transfer or assignment of deposits on stock subscription
is subject to DST.
Guidelines on the corporate stock DST program.
 RMO 8-98. All existing corporations shall file the Corporation Stock DST
Declaration, and the DST Return, if applicable, when DST is still due on the
subscribed share issued by the corporation, on or before the 5th day of the
month following the publication of this Order.
 All existing corporations with authorization for increased capital stock shall
file their Corporate Stock DST Declaration, together with the DST Return, if
applicable when DST is due on subscriptions made after the authorization,
on or before the 5th day of the month following the date of authorization.
 What is being taxed is the privilege on issuing shares of stock, and,
therefore, the taxes accrue at the time the shares are issued.
 Issuance – the point in which the stockholder acquires and may exercise
attributes of ownership over the stocks.
Person required to remit the DST.
 The corporation, which issued the shares of stock, shall remit the tax due on
the said issuance.
 The share of stock is considered issued upon acceptance by the corporation
of the subscriber’s subscription for stock in the corporation, the actual
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delivery by the corporation of the certificate evidencing the share of stock to
the contrary notwithstanding.
Stock Dividend and the basis of the DST on stock dividend.
 A stock dividend is any dividend payable in shares of stock of the corporation
declaring or authorizing such dividend.
 A stock dividend of a corporation is a dividend paid in shares of stock instead
of cash, and is properly payable only out of the surplus profits.
 A stock dividend is actually 2 things:
1. A dividend; and
2. The enforced use of the dividend money in purchase additional shares of
stock at par.
 Stock dividends are shares of stock and not certificates of stock which
merely represent them. There is no reason for determining the actual value
of such dividends for purposes of the DST if the certificates representing
them indicate a par value.
Shares of stock issued at the exercise of the stock option plan subject to
DST.
 If the shares to be issued at the exercise of the stock options come from the
unissued shares of stock of the issuing corporation, the original issuance of
the said shares is subject to DST.
 Subsequent sale or transfer of the said shares issued at the exercise of the
stock option plan is subject to DST upon the execution of the deed
transferring ownership or rights thereto, or upon delivery, assignment or
indorsement of such shares in favor of another.

Whether or not a tax-free exchange of properties for shares of stock
subject to DST.
 The exchange shall be exempt from DST.
 The exemption on transfer of property refers only to the DST due on the
deed transferring the property. The shares of stock issued in exchange of
said property is subject to the DST.
How shares of stock transferred to another person.
 Shares of stock so issued are personal property and may be transferred by
delivery of the certificate or certificates of stock indorsed by the owner or his
attorney-in-fact or other person legally authorized to make the transfer.
 No transfer shall be valid except as between the parties, until the transfer is
recorded in the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the number of certificate or
certificates and the number of shares transferred.
 The transfer of shares of stocks is subject to DST upon execution of the deed
transferring ownership or rights thereto, or upon delivery, assignment or
indorsement of such shares in favor of another.
 No transfer of shares of stock shall be recorded unless DST thereon has
been duly paid.
Instrument contemplated under 174 and 175.
 Contemplate a subscription agreement in order for the taxpayer to be liable
to pay the DST.
 A subscription contract is a contract by which the subscriber agrees to take a
certain number of shares of capital stock of a corporation, paying for the
same or expressly or impliedly promising to pay for the same.
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 The DST is imposed on the sales, agreements to sell, memoranda of sales,
deliveries or transfer of shares or certificates of stock in any association,
company, or corporation, or transfer of such securities by assignment in
blank, or by delivery, or by any paper or agreement, or memorandum or
other evidence of transfer or sale whether entitling the holder in any manner
to the benefit of such certificates of stock or to secure the future payment of
money, or for the future transfer of certificates of stock.
Tax treatment of the subsequent sale of stocks obtained from the exercise
of the stock option.
 The sale or transfer of said shares is subject to DST upon the execution of
the deed transferring ownership or rights thereto, or upon delivery,
assignment or indorsement of such shares in favor of another.
Bonds referred to as subject to DST.
 Refer to written obligations or undertakings that are sufficiently secured by
either cash or personal or real property or surety.
 Bonds issued in foreign countries but being sold or transferred in the
Philippines.
Definition of a bank check.
 A bank check is a bill of exchange drawn on a bank payable on demand.
 It is a negotiable instrument that serves as a substitute for money and as a
convenient form of payment in financial transactions and obligations.

Definition of a bank draft.
 A bank draft is a bill of exchange drawn by a bank upon it correspondent
bank, issued at the solicitation of a stranger who purchases and pays
therefor.
 An order for payment of money.
Certificates of deposit covered by Section 178 which are subject to DST.
 A certificate of deposit is a written acknowledgment by a bank or banker of
the receipt of a sum of money on deposit which the bank or banker promises
to pay to the depositor, to the order of the depositor, or to some other person
or his order, whereby the relation of debtor and creditor between the bank
and the depositor is created.
 The Certificates of deposit which are subject to DST of P1.50 are those not
drawing interest.
Meaning of the term debt instruments.
 Mean instruments representing borrowing and lending transactions including,
but not limited to. debentures, certificates of indebtedness, due bills, bonds,
loan agreements, including those signed abroad wherein the object of
contract is located or used in the Philippines, instruments and securities
issued by the government or any of its instrumentalities, deposit substitute
debt instruments, certificates or other evidences of deposits that are either
drawing interest significantly higher than the regular savings deposit taking
into consideration the size of the deposit and the risks involved or drawing
interest and having specific maturity date, orders of payment of any sum of
money otherwise than at sight or on demand, promissory notes, whether
negotiable or non-negotiable, except bank notes issued for circulation.
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Purpose of the amendment of Section 179 of the NIRC 1997.
 The amendment does not mean that prior to its further amendment, time
deposits for which passbooks were issued were exempted from payment of
DST.
 The further amendment was intended to eliminate precisely the scheme used
by banks of issuing passbooks to cloak its time deposits as regular savings
deposits.
Meaning of the term issue price.
 Refer to the face value of the debt instrument.
Person liable to remit the tax imposed under Section 179 (debt
instrument).
 It shall be remitted by the person who issued the instrument.
Basis of the DST under Section 179.
 All loan agreements, whether made or signed in the Philippines, or abroad,
when the obligation or right arises from the Philippine sources or the property
or object of the contract is located or used in the Philippines shall be subject
to DST.
 In cases where no formal loan agreements or promissory notes have been
executed to cover credit facilities, the DST shall be based on the amount of
drawings or availment of the facilities, which may be evidences by
credit/debit memo, advice or drawings by any form of check or withdrawal
slip.

DST on Government debt instruments and securities.
 Deposit substitutes mean an alternative form of obtaining funds from the
public, other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower’s own account, for the
purpose of relending or purchasing of receivables and other obligations, or
financing their own needs or the needs of their agent or dealer.
 Government debt instruments and securities, including bureau of treasury
issued instruments and securities, such as Treasury bonds, Treasury Bills,
and treasury notes, shall be considered as deposit substitutes irrespective of
the number of lenders at the time of origination if such debt instruments and
securities are to be traded and exchanged in the secondary market.
 The original issuance of these debt instruments is subject to DST.
 Any assignment or re-assignment of said debt instruments shall be subject to
the same DST if the assignment or re-assignment entails changing the
maturity date or remaining period of coverage from that of the original
instruments in the name of the transferee to replace the old ones. Otherwise,
the assignment or re-assignment shall be exempt from DST.
Advances extended to affiliates evidenced by instructional letters,
credit/debit memo, advice or drawings, journal or cash vouchers or by any
form of check or withdrawal slip shall be considered as loan agreements
subject to DST.
 Loan agreement – refers to a contract in writing where one of the parties
delivers to another money or other consumable thing, upon the condition that
the same amount of the same kind and quality shall be paid. The term shall
include credit facilities, which may be evidenced by credit memo, advice or
drawings.
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Only one DST imposed where a loan agreement and promissory note are
simultaneously issued.
 In cases where a loan agreement and a promissory note are simultaneously
issued and executed, the loan having been secured by the promissory note,
only one DST shall be imposed on either loan agreement or promissory note,
whichever is higher tax.
Rationale for imposing only one DST on a loan agreement which was
secured by a promissory note.
 RA 9243 was meant to minimize, if not remove, the heavy transaction costs
arising from the multiple imposition of DST on each and every phase of a
business transaction and movement of capital.
 This is particularly true in the case of a single continuous transaction, which
refers to transactions consisting of a single act and a single purpose but
which may have as its component more than one taxable transaction, if taken
separately.
What are bank deposits?
 Bank deposits are in the nature of irregular deposits; they are really loans
because they bear interest, and the relationship between a depositor and a
bank is one of creditor and debtor, and one fiduciary in nature, in which the
bank is under obligation to treat the accounts of its depositors with
meticulous care and utmost fidelity.

Meaning of the term Certificate of deposit.
 A certificate deposit is a written acknowledgment by a bank or banker of the
receipt of a sum of money on deposit which the bank or banker promises to
pay to the depositor, to the order of the depositor, or to some other person or
his order, whereby the relation of debtor and creditor between the bank and
the depositor is created.
 It is a receipt issued by a bank for an interest-bearing time deposit coming
due at a specified future date.
 Refers to a time deposit account.
 Demand deposits – deposits subject to withdrawal either by check or thru the
automated tellering machines which are otherwise known as current or
checking accounts. The Bank may or may not pay interest on these
accounts.
 Savings deposits – are interest-bearing deposits which are withdrawable
either upon presentation of a property accomplished withdrawal slip together
with the corresponding passbook or thru the automated tellering machines.
 Negotiable order of withdrawal accounts – interest-bearing savings deposit
which are withdrawable by means of Negotiable Orders of Withdrawal.
 Time deposits – interest-bearing deposits with specific maturity dates and
evidences by certificates issued by the bank.
 The definition of certificate of deposit is all encompassing to include a
savings account deposit.
Certificate of deposit drawing interest being referred to under 179.
 Refers to a time deposit account. the distinct features of a certificate of
deposit from a technical point of view are as follows:
1. Minimum deposit requirement;
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2. Stated maturity period;
3. Interest rate is higher than the ordinary savings account;
4. Not payable on sight or demand, but upon maturity or in case of pre-
termination, prior notice is required; and
5. Early withdrawal penalty in the form of partial loss or total loss of interest
in case of pre-termination.
Savings Plus deposit Accounts (SSDAs) and Fixed Savings deposit (FSDs)
subject to DST.
 The SSDA is for depositors who maintain savings deposits with substantial
average daily balance and which earn higher interest rates.
 There is not pre-termination of accounts in an SSDA because the account is
simply reverted to an ordinary savings status in case of early or partial
withdrawal or if the required holding period is not met.
 The SSDA has all of the distinct features of a certificate of deposit.
 The FSD, like a time deposit, provides for a higher interest rate when the
deposit is not withdrawn within the required fixed period; otherwise, it earns
interest pertaining to a regular savings deposit.
What are tiered deposits?
 Tiered deposits are usually long-term bond notes that are being floated to the
public to raise capital and the interest rates are usually fixed according to
their capital brackets.
 These are considered as debt instruments subject to DST upon placement of
the deposit by the subscriber or upon renewal of the placement.
 All debt instruments are subject to DST at P1.00 on each P200 or fractional
part thereof, of the issue price of any such debt instrument.

 If the term of the instrument is less than one year, the DST is computed by
taking into consideration the number of days that the instrument is
outstanding as a fraction 365 days.
 If the debt instrument has a term of one year or longer, the DST due shall be
computed based on the issue price of the debt instrument.
Regular savings deposit not subject to DST.
 Orders for the payment of sum of money payable at sight or on demand are
exempted from the payment of DST. Thus, a regular savings account with a
passbook which is withdrawable at any time is not subject to DST, unlike a
time deposit which is payable on a fixed maturity date.
Negotiable character of any document under Section 179 is immaterial for
purposes of imposing DST.
 A certificate of deposit may or may not be negotiable as gathered from the
use of the conjunction or, instead of and, in its definition.
Meaning of Bill of Exchange.
 An unconditional order in writing addressed by one person to another, signed
by the person giving it, requiring the person whom it is addressed to pay on
demand or at a fixed or determinable future time a sum certain in money to
order or to bearer.
When remittances of OFWs or OCWs exempt from the payment of DST.
 The remittances of all OCWs or OFWs, upon showing of the OEC or valid
OWWA membership certificate, or electronic receipt issued by POEA, by the
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OCWs or OFWs beneficiary or recipient, shall be exempt for the payment of
DST.
Meaning of letter of credit.
 One of the modes of payment, by which commercial banks sell foreign
exchange to service payments for the primary purpose of which is to
substitute for, and therefore support , the agreement of the buyer/importer to
pay money under a contract or other arrangement.
Telegraphic transfers subject to DST.
Contract of insurance, defined.
 A contract of insurance is an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising
from an unknown or contingent event.
 An unknown event is something which is certain to happen but the time of its
happening is not known, while a contingent event is something which is not
certain to take place.
Amount of insurance is the basis for the computation of the DST for
Personal Accident Insurance Policy.
 RA 10001. The basis for the computation of DST is the amount of insurance
or the insurance coverage, not anymore to the amount of premium collected.
 This is the rule regardless of whether the issuer is a life or non-life insurance
company because the transaction is in the nature of a life insurance policy.

Effective date for the implementation of RA 10001.
 April 1, 2010.
 If an insurance company used the old DST rates as basis in computing and
paying its DST liabilities on life insurance policies issued despite the
effectivity of RA 10001, said insurance company can recover any over-
payments made by filing a claim for DST refund/credit with the RDO having
jurisdiction over its business within 2 years from the payment of the tax.
 Any overpayments made due to the late application of the provisions of RA
10001 shall neither give rise to the direct offsetting of DST liability in
succeeding period not to the crediting of such overpayment to the taxpayer’s
eDST ledger.
Provisions of the RA 10001 regarding the DST of life insurance policies
five years after the effectivity of the said law.
 No tax on life insurance premium shall be collected.
 On the said date, all policies of insurance or other instruments by whatever
name the same shall be called whereby any insurance shall be made upon
any life or lives shall be exempt from the DST.
DST on automatic increase clause of life insurance policies.
 Automatic increase clause in the original insurance policy is subject to
separate DST.
Cooperatives engaged in the insurance business NOT subject to DST.
 Being a bona fide cooperative, taxpayer is exempt from payment of taxes on
life insurance premiums and DST because neither the Tax Code not the
Insurance Code mandates that it should be registered with the CDA.
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 The subjectivity of transactions of cooperatives to DST are as follows:
1. If the insurance cooperative transacts exclusively with members,
insurance policies issued are not subject to DST.
2. If the insurance cooperatives are transacting with both members and non-
members and the accumulated reserves and undivided net savings of
these cooperatives are not more than P10M, the transactions with
members are exempt from DST.
- With respect to non-members, they are liable for the payment of the DST.
3. If the insurance cooperatives are transacting with both members and non-
members and their accumulated reserves and undivided net savings are
more than P10M, all transactions shall be treated as taxable for DST
purposes.
Treatment of DST on group insurance policy on personal accident.
 The payment of DST on issued group insurance policies shall be based on
the amount of insurance or insurance coverage on the group master
insurance policy.
 For individual certificate issued to each and every ee covered by the group
insurance, considering that these individual certificates are separate and
distinct from the issued group master insurance policy, DST is likewise
imposed thereon.
 In case there are changes in the ees covered by the group insurance policy
and/or the amount of insurance coverage, the following rules shall apply:
1. If there is a reduction in covered ees and the corresponding amount of
insurance coverage, this will not give rise to the imposition of DST on the
amended insurance coverage.

2. If there is an increase in the covered ees as well as in the corresponding
amount of insurance coverage and such increase is covered by the
appropriate endorsement, this will result to imposition of the DST on the
revised/amended group insurance policy as well as on new certificates of
cover.
3. If there is no change in the covered ees but the amount of group
insurance coverage increased and the amount of coverage per ee
increased, this will result to imposition of the DST on the
revised/amended group insurance policy as well as on new certificates of
cover.
4. If there is no change in the number of covered ees but there was a
change in the imposition of ees, this will result to imposition of DST on the
new Certificates of Cover.
 The DST for each and every Certificate of Cover required to be issued shall
be paid by the insurance company, WON the individual certificate are
actually issued to the covered ees.
DST on insurance other than health and accident insurance policies
issued by non-life insurance companies.
 Subject to DST regardless of the fact that policies may have become
ineffective due to non-payment of the corresponding premiums.
 With regard to health and accident insurance policies issued by non-life
insurance companies, the basis for the payment of DST shall be the same as
that imposed on life insurance companies.
 Certificate of Cover issued pertinent to motor vehicle insurances shall be
subject to DST.
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Reason for the imposition of DST on fidelity bonds and other insurance
policies.
 The DST on insurance policies, though imposed on the document itself, is
actually levied on the privilege to conduct insurance business.
 It is imposed on the privilege of making or renewing any policy of insurance
(except life, marine, inland and fire insurance), bond or obligation in the
nature of indemnity for loss, damage or liability.
HMOs are not engaged in the insurance business; hence, Not subject to
the DST on other insurance policies.
 HMO – an entity that provides, offers or arranges for coverage of designated
health services needed by plan members for a fixed prepaid period.
 2 requisites concur before the DST can apply:
1. The document must be a policy of insurance or an obligation in the nature
of indemnity; and
2. The maker should be transacting the business of accident, fidelity, er’s
liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler,
or other branches of insurance (except life, marine, inland and fire
insurance).
Health Case agreement NOT considered insurance contract.
 Tax laws may not be extended by implication beyond the clear import of their
language, not their operation enlarged so as to embrace matters not
specifically provided. Tax statutes are strictly construed against the taxing
authority.

No legislative intent to impose DST on Health Care Agreements of HMOs.
 If it had been the intent of the legislature to impose DST on health care
agreements, it could have done so in clear and categorical terms.
Basis and the rate of the DST in the case of policies of annuities.
 On policies of annuities, the old tax base of capital of the annuity or annual
income has been removed and in its place, the tax is not based on the
premium or installment payment or contract price collected.
Basis and rate of the DST in the case of pre-need plans.
 Based on premium or contribution collected.
Requirements to all taxpayers issuing annuities and pre-need plans.
 Shall submit in hard and soft copy an inventory of all issued, outstanding and
valid life annuities and pre-need plans.
Documents or instruments subject to DST.
 Certificates and other necessary documents issued by the Construction
Industry Authority of the Philippines, which are not mentioned in Section 199,
are subject to DST of P15 as prescribed under Section 188:
1. Certificate of registration of overseas contractors;
2. Certificate of Renewal of registration of overseas contractors;
3. Contractor’s License (original);
4. Certificate of whether a certain contraction is licensed;
5. Certified true copies of license certificates;
6. Certified true copies of documents such as Affidavit of Undertaking of
Sustaining Technical Employee and Curriculum Vitae of STE;
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7. Certificate of Accreditation of Arbitrators; and
8. Case documents to be used to support petition to appeal in CA.
Meaning of warehouse receipt.
 A receipt issued by a warehouseman for commodity delivered to him in store
for a person to whom the receipt is issued.
 A warehouseman is a person lawfully engaged in the business of storing
goods for profit.
Person liable to remit the DST of jai-alai, horse race tickets, lotto or other
authorized numbers games.
 The proprietor or operator shall remit the tax.
 If such proprietor or operator is exempt from tax, he shall collect the tax from
the other party who is not exempt from the tax, and shall remit the same.
Meaning of bill of lading.
 A written acknowledgement or the receipt of the goods and an agreement to
transport and deliver theme at a specified place to a person named or on his
order.
 A bill of lading has a two-fold character: it is a receipt as to the quantity and
description of the goods shipped and a contract to transport the goods to the
consignee or other person therein designated, on the terms specified in such
instrument.

Meaning of the term chattel mortgage.
 A contract which purports to be and in form a sale of personal property,
intended as security for the payment of a debt, or the performance of some
other obligation specified therein, uon the condition subsequent that such
sale shall be void upon payment of the debt or performance of the specified
obligation according to the terms of the contract.
Meaning of antichresis.
 Antichresis is a mortgage in possession.
 It entails the lawful acquisition by the mortgagee of the possession, actually
or constructively, of immovable property mortgaged, with the creditor
standing upon his rights merely as mortgagee, not as owner, for the purpose
of enforcing his security upon such property and allowing its income to pay
for the debt.
Antichresis distinguished from mortgage.
 To be an antichresis, it must be expressly agreed upon between the creditor
and the debtor that the former, having been given possession of the property
as security for a debt, is to apply the fruits to the payment of the interest, if
any, and thereafter to the principal of the credit.
 In the absence of such agreement, the contract is one of mortgage, even
though the possession of the property is given to the mortgagee.
Meaning of the term deed of trust.
 A deed of trust in the nature of a mortgage is a conveyance in trust by way of
security, subject to a condition of defeasance, or redeemable at any time
before the sale of the property.
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Reason why pledge is subject to DST.
 A DST is an excise tax on the exercise of a right or privilege to transfer
obligations, rights or properties incident thereto.
 A pledge is among the privileges.
 It is an accessory, real and unilateral contract by virtue of which the debtor or
a third person delivers to the creditor or to a third person movable property
as security for the performance of the principal obligation, upon the fulfillment
of which the thing pledged, with all its accessions and accessories, shall be
returned to the debtor or to the third person.
 i.e. pawnshops, as persons or entities engaged in lending money on
personal property delivered as security for loans.
 Contents of a pawnshop ticket:
1. Amount of loan;
2. Date the loan was granted;
3. Rate of interest; and
4. Name and residence of the pawnee.
 Antam Pawnsho Corp. vs. CIR. The law does not consider the pawn ticket as
a security nor a printed evidence of indebtedness. However, what is subject
to DST is not the ticket itself but the privilege of entering into a contract of
pledge.

When interest and surcharges may not be imposed for failure to pay DST
on pledge transaction.
 MLhuillier vs. CIR. It is settled that ,good faith and honest belief that one is
not subject to tax on the basis of previous interpretations of the government
agencies tasked to implement the tax law are sufficient justification to delete
the imposition of surcharges and interest.
Tax implications of issuing two deeds of sale indicating the zonal value
and the other one, the true gross selling price.
 A final tax of 6% based on the gross selling price or current fair market value,
whichever is higher, 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, including pacto de retro sales
and other forms of conditional sales, by individuals, including estates and
trusts.
 All conveyances or deeds whereby any land sold or transferred to the
purchaser shall be subject to the DST of P15 for every P1,000, or fractional
part thereof, based on the consideration contracted to be paid for such realty
or on its fair market value, whichever is higher.
 When it appears the taxes paid have been incorrectly stated, the
Commissioner shall assess the property of its true market value and collect
the proper tax thereon.
Meaning of the term charter party.
 It is a charter party where there is an entire surrender by the owner of the
vessel to the charterer, and provides the officers and provisions, and, in
short, the entire outfit.
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 In such a contract, the charterer is substituted in place of the owner and
becomes the owner for the voyage.
Whether DST is imposed in all cases of assignments or re-assignments of
debt instruments.
 Any assignment or re-assignment of debt instruments shall be subject to
DST at the same rate imposed on the original instrument.
 This occurs only when the assignment or reassignment of the debt
instrument entails changing the maturity date or remaining period of
coverage from that of the original instrument or carries with it a renewal or
issuance of new instruments in the name of the transferee to replace the old
ones. Otherwise, the assignment or reassignment shall be exempt from DST.
General Rule regarding tax exemption.
 Exemption for taxation is never presumed. For tax exemption to be
recognized, the grant must be clear and express, it cannot be made to rest
on doubtful implications.
Only documents enumerated under Section 199 are exempt from DST.
Insurance policies and annuities exempt from DST.
 Policies of insurance or annuities made or granted by a fraternal or
beneficiary society, order, association or cooperative company, operated on
the lodge system or local cooperation plan and organized and conducted
solely by the members thereof for the benefit of exclusive benefit of each
member and not for profit are the ones exempt from DST.

Basis of exemption from DST of insurance cooperatives.
 Neither the Tax Code nor the Insurance Code mandates that it should be
registered with the CDA.
Certificates exempted from DST.
1. Certificate of oaths administered by any government official in his official
capacity or of acknowledgment by any government official in the
performance of his official duties;
2. Written appearance in any court by any government official, in his official
capacity;
3. Certificates of the administration of oaths to any person as to the authenticity
of any paper required to be filed in court by any person or party thereto,
whether the proceedings be civil or criminal;
4. Papers and documents filed in courts by or for the national, provincial, city or
municipal governments;
5. Affidavits of poor persons for the purpose of proving poverty;
6. Statements and other compulsory information required of persons or
corporations by the rules and regulations of the national, provincial, city or
municipal governments exclusively for statistical purposes and which are
wholly for the use of the bureau or office in which they are files, and not at
the instance or for the use or benefit of the person filing them;
7. Certified copies and other certificates placed upon documents, instruments
and papers for the national, provincial, city or municipal governments, made
at the instance and for the sole use of some other branch of the national,
provincial, city or municipal governments; and
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8. Certificates of assessed value of lands, not exceeding P200 in value
assessed, furnished by the provincial, city or municipal treasurer to
applicants for registration of title to land.
Securities exempted from DST.
 The borrowing and lending of securities executed under the Securities
Borrowing and Lending Program of a registered exchange, or in accordance
with regulations prescribed by the appropriate regulatory authority are the
ones exempt from the payment of DST.
Loan agreements exempted from DST.
 Loan agreements or promissory notes, the aggregate of which does not
exceed P250,000 or any such amount as may be determined by the SOF,
executed by an individual for his purchase on installment for his personal use
or that of his family and not for business or resale, barter or hire of a house,
lot, motor vehicle, appliance or furniture shall be exempt from the payment of
DST.
 The amount to be set by the SOF shall be in accordance with a relevant price
index but not to exceed 10% of the current amount and shall remain in force
at least for 3 years.
Basis of the exemption from DST of the sale, barter or exchange of shares
of stock listed and traded thru local stock exchange.
 RA 9648. This act shall take effect on March 20, 2008 or immediately upon
the expiration of the 5-year exemption from the DST on the sale, barter or
exchange of shares of stock listed and traded thru the local stock exchange
pursuant to RA 9243.

Requirements in order that assignment or transfer of any mortgage, lease
or policy of insurance, or the renewal or continuance of any agreement or
contract or any evidence of obligation or indebtedness may be exempted
from DST.
 The law requires that there should be no change in the maturity date or
remaining period of coverage from that of the original instrument.
Securities exempted from DST.
 Fixed income and other securities traded in the secondary market or through
an exchange.
Derivatives are exempted from DST.
 For purposes of this exemption, repurchase agreements and reverse
repurchase agreements shall be treated similarly as derivatives.
Advances are exempted from DST.
 Interbranch or interdepartmental advances within the same legal entity.
Forbearances exempted from DST.
 All forbearances arising form sales or service contracts, including credit card
and trade receivables.
 The exemption shall be limited to those executed by the seller or service
provider itself.
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Bank deposit exempted from DST.
 The exemption for bank deposit accounts without a fixed term or maturity
shall apply only to deposit account which does not qualify under the
provisions of Section 5 of RR 13-2004.
Contracts, deeds and documents exempted from DST.
 Those which are related to the conduct of business of the BSP.
Transfer of property exempted from DST.
 Exemption refers to the DST due on the deed transferring the property.
 The shares of stock issued in exchange of such property is subject to DST if
they are original issues.
Interbank call loans exempted from DST.
 For interbank call loans with maturity of not more than 7 days, including
those between and among banks and quasi-banks, the same must have
been made strictly to cover deficiency in reserves against deposit liabilities
for the same to be exempted from DST.
Regulations implementing the eDST system; Taxpayers covered by the
eDST system.
 eDST System – a web-based application created for taxpayers and the BIR
that is capable of affixing a secured documentary stamp on the taxable
documents thru the use of a computer unit.
 Mandated to use the eDST system:
1. Bank, quasi-bank or non-bank financial intermediary, finance company, or
insurance, surety, fidelity, or annuity company;

2. Shipping and airline companies;
3. Pre-need company on sale of pre-need plans;
4. Educational institutions, in respect to the issuance of taxable certificates
such as diploma, transcript of records and other documents taxable as
certificates;
5. Such other industries as may be required by the Commissioner.
 It shall also apply to taxpayers, who, at their option, choose to pay their DST
liabilities thru the eDST system.
 Payment of DST arising from transfers of shares of stocks classified as
capital asset or real property classified as capital or ordinary assets, shall not
be covered by the eDST system.
Regulations prescribing the manner of purchase and affixture or payment
of DST on taxable transactions.
 Generally, the payment of the DST due on any taxable
document/transaction, irrespective of the amount thereof, shall be made by
the filing of a tax return and the payment of the tax in accordance with the
existing rules and regulations.
 If the amount is P15 or less, the taxpayer has the option to buy the DST due
by way of purchasing loose documentary stamps.
 This general manner is called constructive stamping of DST on the taxable
document/facility evidencing the transaction or the receipt system.
Modes of payment and remittance of DST.
 GR. any of the parties to the taxable transaction shall pay and remit the full
amount of the tax.
 XPN.
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1. If one of the parties is exempt from the tax, the other party who is not
exempt shall be directly liable for the tax.
2. If the said tax-exempt party is one of the persons enumerated in Section
3(c)(4) hereof, he shall be constituted as agent of the Commissioner for
the collection of the tax;
3. The said tax-exempt arty who is constituted as agent shall issue an
acknowledgement receipt.
Persons liable to remit DST.
 GR. Any party or parties to the taxable transaction
 XPN.
1. Stamp on bonds, debentures, certificates of indebtedness, deposit
substitute, or other similar instrument. – remitted by the person who
issued the instrument.
2. Stamp tax on original issue of shares of stock in a corporation – the
corporation
3. Stamp tax on jai-alai, horse race lotto or other authorized number games
– proprietor or operator.
Effect of failure to stamp a taxable document.
 Does not affect its validity.
 However, such document cannot be recorded, nor may it or any copy thereof
or any record of transfer of the same be admitted thereof or used in evidence
in any court until the requisite stamp has been affixed.

Treatment of documents acknowledged before notaries public.
 No notary public or other officer authorized to administer oath shall add his
jurat or acknowledgement to any document subject to documentary stamp
tax unless the proper documentary stamps are affixed thereto and cancelled.
REMEDIES
REMEDIES IN GENERAL
When a final Deed of Sale may be issued to the purchaser of a property
which had been subjected to a tax lien.
 In the event that the delinquent taxpayer shall not redeem his property that
had been auctioned in order for the BIR to collect the delinquent taxes, the
RDO shall execute an Absolute Deed of Sale to the buyer of the property that
had been sold, free from all liens of any kind whatsoever, with a recitation of
all the proceedings that took place upon which the validity of the sale would
now depend.
Purpose of the period of limitation upon assessment and collection of
taxes.
 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 the citizens because after the lapse of the period of
prescription, citizens would have a feeling of security against scrupulous tax
agents who will always find an excuse to inspect the books of taxpayers, not
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to determine the latter’s real liability, but to take advantage of every
opportunity to molest peaceful, law-abiding citizens.
 The law on prescription, being a remedial measure, should be liberally
construed in order to afford protection.
Two kinds of prescriptive periods for the assessment and collection of
taxes.
1. Normal/regular prescriptive period of assessment and collection.
- Available tot eh government if the taxpayer filed a return and the return filed
is not false or fraudulent.
2. Exceptional prescriptive period of assessment and collection.
a. The taxpayer failed to file a return;
b. The taxpayer filed a false return with intent to evade tax;
c. The taxpayer filed a fraudulent return with intent to evade tax; or
d. The taxpayer and the Commissioner agreed in writing to waive the
prescriptive period of assessment of tax.
Normal/regular prescriptive period for the assessment and collection of
taxes.
 The Tax Code expressly provides only for the 3-year prescriptive period for
assessment but it is silent as to the prescriptive period for collection.
 Author’s opinion. The normal/regular prescriptive period for the collection of
taxes is 3 years in contradistinction with the exceptional prescriptive period
for collection of 5 years.
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How to count the normal 3-year prescriptive period of assessment. Construction of prescription of collection in civil tax cases and criminal
1. If the return was filed before or on the last day prescribed by law for the filing tax cases.
of return, it shall be counted from the date of deadline, which is the last day  In civil tax cases involving the collection of internal revenue taxes,
for filing of the return. prescription is construed strictly against the government and liberally in favor
2. If the return was filed after the last day prescribed by law for filing the return, of the taxpayer.
it shall be counted from the day the return was filed.  In criminal tax cases, prescription is construed strictly against the taxpayer.
3. If the return is amended substantially different from the original return, it shall
be counted from the filing of the amended return. Commissioner cannot legally enforce collection of the delinquent tax, if
 The normal 3-year prescriptive period expires on the 1095th day, the right to collect has already prescribed.
notwithstanding the fact that within the period, there is a leap which is 366
days. Distinction between compromise and abatement.
Compromise Abatement
Rules on prescriptive period for the collection of taxes The reduction of the The cancellation of
 The normal prescriptive period for the collection of taxes is applicable on in taxpayer’s tax the taxpayer’s tax
case a return was filed, and the return is not fraudulent or false. liability. liability.
 In case there is a prior assessment, collection shall be made within 3 years CIR and NEB & REB CIR has the sole
from the date of the final assessment notice of the tax due, either or both are authorized to authority to abate or
simultaneously: enter into a cancel tax liability of
1. By distraint of personal property, or by levy of real property of the compromise. a taxpayer
taxpayer; or Grounds: Grounds:
2. By judicial proceedings, thru civil or criminal action. 1. Reasonable doubt 1. The tax or any
 In case there is no prior assessment, collection proceedings shall be begun as to validity of portion thereof
within 3 years from the date of the filing of the return, or from the last day assessment; or appears to be
prescribed of the filing of the return, whichever is later, but only be judicial 2. Financial unjustly or
proceedings. incapacity of excessively
taxpayer. assessed; or
2. The administration

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and collection
costs involved do
not justify the
collection of the
amount due.
Commissioner’s authority to compromise tax cases; Grounds for
acceptance of compromise settlement.
 The offer to compromise a delinquent account or disputed assessment on
the ground of reasonable doubt as to the validity of the assessment may be
accepted when it is shown that:
1. The delinquent account or disputed assessment is one resulting from a
jeopardy assessment; or
2. The assessment seems arbitrary in nature, appearing to be based on
presumptions and there is reason to believe that it is lacking in legal
and/or factual basis;
3. The taxpayer failed to file an administrative protest on account of the
alleged failure to receive notice of assessment and there is reason to
believe that the assessment is lacking in legal and/or factual basis;
4. The taxpayer failed to file a request for reinvestigation/reconsideration
within 30 days from receipt of final assessment notice and there is reason
to believe that the assessment is lacking in legal and/or factual basis;
5. The taxpayer failed to elevate to the CTA an adverse decision of the
Commissioner, or his authorized representative, in some cases, within 30
days from receipt thereof and there is a reason to believe that the
assessment is lacking in legal and/or factual basis;
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6. The assessments were issued on or after Jan. 1, 1998, where the
demand notice allegedly failed to comply with the formalities as
prescribed under Section 228;
7. Assessments made based on the best evidence obtainable rule and there
is reason that the same can be disputed by sufficient and competent
evidence;
8. The assessment was issued within the prescriptive period for assessment
as extended by the taxpayer’s execution of Waiver of the Statute of
Limitation the validity or authenticity of which is being questioned or at
issue and there is strong reason to believe and evidence to prove that it is
not authentic; or
9. The assessment is based on an issue where a court of competent
jurisdiction made an adverse decision against the Bureau, but for which
the SC has not decided upon yet.
 The offer to compromise based on financial incapacity may be accepted
upon showing that:
1. The corporation ceased operation or is already dissolved. The tax
liabilities corresponding to the Subscription Receivable or Assets
distributed/distributable to the stockholders representing return of capital
at the time of cessation of operation or dissolution of business shall not
be considered to compromise;
2. The taxpayer, as reflected in its latest Balance Sheet is suffering from
surplus or earnings deficit resulting to impairment in the original capital by
at least 50%. The taxpayer has no sufficient liquid assets to satisfy the tax
liability.
3. The taxpayer is suffering from a net worth deficit, taken from the latest
audited financial statements, provided that in the case of an individual

taxpayer, he has no other leviable properties under the law other than his
family home;
4. The taxpayer is a compensation income earner with no other source of
income and the family’s gross monthly compensation income does not
exceed the levels of compensation income, and it appears that the
taxpayer possesses no other liable or distrainable assets, other than his
family home; or
5. The taxpayer has been declared by any competent authority as bankrupt
or insolvent.
 No offer of compromise shall be entertained unless and until the taxpayer
waives in writing his privilege of the secrecy of bank deposits.
Cases which may be compromised.
1. Delinquent accounts;
2. Cases under administrative protest after issuance of the final assessment
notice to the taxpayer which are still pending in the regional offices, RDOs,
Legal Service, LTS, Collection Service;
3. Civil cases being disputed before the courts;
4. Collection cases filed in courts;
5. Criminal violations, except those already filed in court, or those involving
criminal tax fraud.
 Exceptions:
1. Withholding tax cases, unless the applicant-taxpayer involves provisions
of law that cast doubt on the taxpayer’s obligation to withhold;
2. Criminal tax fraud cases confirmed as such by the CIR or his duly
authorized representative;
3. Criminal violations already filed in court;
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4. Delinquent accounts with duly approved schedule of installment
payments;
5. Cases where final reports of reinvestigation or consideration 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;
6. Cases which become final and executor after final judgment of a court,
where compromise is requested on the ground of doubtful validity of the
assessment; and
7. Estate tax cases where compromise is requested on the ground of
financial incapacity of the taxpayer.
Approval of offer of compromise.
 Except for offers of compromise where the approval is delegated to the REB
pursuant to the succeeding paragraph, all compromise settlements within the
jurisdiction of the NOR shall be approved of the Commissioner and the 4
deputy Commissioners. All decisions of the NEB shall have the concurrence
of the Commissioner.
 Offers of compromise issued by the RO involving basic deficiency taxes of
P500,000 or less and for minor criminal violations shall be subject to the
approval of the REB.
 The compromise offer shall be paid by the taxpayer upon filing of the
application for compromise settlement.
 In case of disapproval of the application for compromise, the amount paid
shall be deducted from the outstanding liabilities.

Commissioner not authorized to compromise the payment of withholding
tax.
 The subsequent inability of the withholding agent to pay/remit the tax
withheld is not a ground for compromise because the withholding tax is not a
tax upon the withholding agent but it is only a procedure for the collection of
tax.
Criminal violation which is already filed in court may not be compromised.
 The compromise settlement of the criminal violations will not relieve the
taxpayer from its civil liability. But the civil liability for taxes may be
compromised if the financial position of the taxpayer demonstrates a clear
inability to pay the tax.
Report of the Commissioner on the exercise of his authority to
compromise to the Congressional Oversight Committee.
 Every 6 months of each calendar year.
Commissioner has the sole authority to abate or cancel tax, penalties
and/or interest.
 This authority is generally applicable to surcharges and compromise
penalties only. However, in meritorious instances, the Commissioner may
likewise abate the interest, as well as the basic tax assessed
When penalties and/or interest imposed on taxpayer may be abated or
canceled on the ground that the imposition thereof is unjust or excessive.
1. When the filing of the return/payment of the tax is made at the wrong venue;
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2. When the taxpayer’s mistake in payment of his tax is due to erroneous
written official advice of a revenue officer;
3. When taxpayer fails to file the return and pay the tax on time due to
substantial losses from prolonged labor dispute, force majeure, legitimate
business reverses.
4. When the assessment is brought about or the result of taxpayer’s non-
compliance with the law due to difficult interpretation of said law;
5. When the taxpayer fails to file the return and pay the correct tax on time due
to circumstances beyond his control. Abatement shall cover only the
surcharge and the compromise penalty and not the interest;
6. Late payment of the tax under meritorious circumstanced.
When the tax liabilities, penalties and/or interest may be abated or
cancelled on the ground that the administration and collection cost are
more than the amount sought to be collected.
 The assessment may be reduced through abatement or entirely cancelled.
 Instances:
1. Abatement of penalties on assessment confirmed by the lower court but
appealed by the taxpayer to a higher court;
2. Abatement of penalties on withholding tax assessment under meritorious
circumstances;
3. abatement of penalties on delayed installment payment under meritorious
circumstances;
4. Abatement of penalties on assessment reduced after the reinvestigation
but taxpayer is still contesting reduced assessment;
5. Such other instances which the CIR may deem analogous to the
enumeration.

 For items 1 and 4, the abatement of the surcharge and compromise penalty
shall be allowed only upon written application by the taxpayer signifying his
willingness to pay the basic tax and interest or basic tax only, whichever is
applicable under the prevailing circumstances.
Processing time.
 The application for abatement or cancellation of tax, penalties and/or interest
should be acted upon by the processing office and reviewing office within 5
days from receipt by said office.
 The BIR NO has 30 days within which to act on the case.
Report of the CIR to the Congressional Committee.
Commissioner’s authority to refund erroneously or illegally collected
taxes.
1. Credit or refund taxes erroneously or illegally received;
2. Credit or refund penalties imposed without authority;
3. Credit or refund any sum of money alleged to have been excessively or in
any manner wrongfully collected;
4. Refund the value or internal revenue stamps when they are returned in good
condition by the purchaser; and
5. In his discretion, redeem or change unused stamps that have been rendered
unfit for use and refund their value upon proof of destruction.
Nature of a tax refund.
 In the nature of a tax exemption which must be construed strictissimi juris
against the taxpayer.
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 The return of what was erroneously paid is founded on the principle of
solution indebiti, a basic postulate that no one should be unjustly enriched
himself at the expense of another.
When there is parity between refund and tax exemption.
 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.
Tax refund vis-à-vis tax credit.
 Tax refund refers to the actual reimbursement of the erroneously or illegally
collected taxes, while tax credit refers to a Tax Credit Certificate which may
be utilized in the payment of the internal revenue taxes, excluding
withholding taxes, for which the taxpayer is directly liable.
Conditions required by the Tax Code before application for refund or TCC
due to taxes erroneously or illegally received may be granted by the CIR.
1. That the taxpayer should file a written claim for refund or tax credit with the
BIR within 2 years from the date of payment of the tax or penalty,
noncompliance with which the latter is precluded from exercising his authority
thereon.
2. If denied or not acted upon within said period, the petition for refund be filed
with the CTA within 30 days from receipt of the denial and within 2-year
period from the date of payment of the tax or penalty regardless of any
supervening cause, otherwise, the claim for refund shall have prescribed.
3. The claim for refund must be a categorical demand for reimbursement;
4. There must be a proof for payment of the erroneously or illegally collected
taxes; and

5. No refund shall be given resulting from availment of incentives granted
pursuant to special laws for which no actual payment was made.
 The claim for refund or tax credit are mutually exclusive such that resort to
one bars the application of the other.
Conditions in order that a claim for refund of creditable withholding taxes
may be granted.
1. A written claim must be filed with the CIR within 2 years from the date of
payment of the tax;
2. It is shown on the return of the recipient that the income payment received
was declared as part of the gross income; and
3. The fact of withholding is established by a copy of a statement duly issued by
the payor to the payee showing the amount paid and the amount of the tax
withheld therefrom.
Person entitled to claim for a tax refund; Withholding agent has the right to
file an application for tax refund.
 The person entitled to claim a tax refund is the taxpayer, but in case the
taxpayer does not file a claim for refund, the withholding agent may file the
claim.
 While the withholding agent has a legal right to claim for refund, he
nevertheless has the obligation to remit the same to the principal taxpayer.
Persons entitled to claim for a refund of excise tax.
 The one who is statutorily liable to pay the tax.
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When the CIR may also grant a refund even without a written claim for it.
 When the taxpayer files a return which on its face shows an overpayment of
the tax and the option to refund/claim a tax credit was chosen by the
taxpayer.
When request for the issuance of tax credit certificate may not be subject
to the 2-year limitation period.
 Upon basic consideration of equity and fairness.
CHAPTER 2 – CIVIL REMEDIES FOR COLLECTION OF TAXES
When is tax considered delinquent?
 A revenue tax is considered delinquent when it is unpaid after the lapse of
the last day prescribed for its payment.
 It is considered where an assessment for deficiency tax has become final,
executory and demandable and the taxpayer has not paid it within the period
given in the notice of assessment.
When the government may avail of the remedy of collection.
 When the assessment shall have become final, executory and demandable.
 The BIR can collect delinquent internal revenue taxes either by distraint, levy
or judicial action or both simultaneously. There should, however, first be an
assessment, except in case of false or fraudulent return with intent to evade
the tax or of a failure to file a return.
 The taxpayer’s failure to appeal to the CTA in due time makes the
assessment final, executory and demandable, and the taxpayer is barred
from disputing the correctness of the assessment or invoking any defense

that would reopen the question of its liability on the merits in the collection
case that the BIR may file.
Remedies of the BIR to collect delinquent taxes.
1. By distraint – refers to the remedy whereby the collection of delinquent taxes
is enforced thru seizure on the personal property, goods, chattels or effects
and other personal property of whatever character of the taxpayer, including
stocks and securities, debts, credits, bank accounts and interests in and
rights to personal property, followed by the public sale of such property, if the
taxpayer fails to pay the taxes voluntarily.
- Kinds
a. Constructive distraint – a preventive remedy by the government issued
when no actual tax delinquency of the taxpayer is necessary before the
same is resorted to. It aims to forestall the possible dissipation of the
taxpayer’s assets when delinquency sets in. Here, the property of the
delinquent taxpayer is not actually confiscated or seized by the revenue
officer.
b. Actual distraint – a remedy to collect actual delinquent taxes when at the
time required for payment of tax, a taxpayer fails to pay his delinquent
obligation. It consists in actual seizure and taking possession of personal
property of the taxpayer. The personal property is personally taken by the
distraining officer.
2. By Levy – a remedy resorted to by the Government enforced on the real
property belonging to the delinquent taxpayer to collect delinquent taxes
when at the time required for payment of tax, a taxpayer fails to pay his
delinquent tax obligation.
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- It may be exercised upon, before, simultaneously, or after the distraint of
personal property belonging to the delinquent taxpayer.
- The remedies of distraint and levy shall not be availed of where the amount
of tax involved is not more than P100.
3. By court actions
a. By filing a civil action for collection of sum of money with the proper
regular court;
b. By filing a criminal action against the delinquent taxpayer with the proper
regular court; or
c. Both simultaneously.
 Any of these remedies or all of them simultaneously may be pursued in the
discretion of the authorities charged with the collection of such taxes.
When civil remedies for the collection of delinquent tax resorted to by the
Government.
1. When tax is assessed and the assessment becomes final and unappealable
because the taxpayer fails to file an administrative protest with the CIR within
30 days from receipt of the FAN;
2. When a protest against assessment is filed and a decision of the CIR was
rendered but the said decision becomes final, executory and demandable for
failure of the taxpayer to appeal the decision to the CTA within 30 days from
receipt of the decision; or
3. When the protest is not acted upon by the CIR within 180 days from
submission of documents and the taxpayer failed to appeal with the CTA
within 30 days from the lapse of the 180-day period.

Necessity of assessment in case of civil actions.
 GR. There should be an assessment before resorting to judicial proceedings.
 XPN. In case of false or fraudulent return with intent to evade the tax or of a
failure to file a return.
Dismissal of the criminal case filed against a taxpayer not a meritorious
ground to dismiss civil case for collection filed against him.
 Reason: the criminal complaint was instituted not to demand payment, but to
penalize the taxpayer for violation of the Tax Code.
Why a criminal action considered as a collection remedy.
 Because the judgment in the criminal case shall:
a. Impose the penalty; and
b. Order the payment of taxes subject of the criminal case as finally decided
by the CIR.
BIR is authorized to collect estate tax deficiencies by the summary remedy
of levy upon and sale of real properties of the decedent without first
securing the authority of the court sitting in probate over the supposed
will of the decedent.
 Because the collection of estate tax is executive in nature. As such, the
estate tax is exempted from the application of the statute of non-claims, and
this is justified by the necessity of government funding, immortalized in the
maxim that taxes are the lifeblood of the government.
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BIR to defray costs of collection.
 The BIR shall advance the amounts needed to defray costs of collection by
means of civil or criminal action, including preservation or transportation of
personal property distrained and the advertisement and sale thereof, as well
as of real property and improvements thereon.
When property of taxpayer may be placed under constructive distraint.
1. The taxpayer is retiring from any business subject to tax; or
2. The taxpayer is intending to leave the Philippines; or
3. The Taxpayer is intending to remove his property from the Philippines; or
4. The taxpayer is intending to hide or conceal his property; or
5. The taxpayer is intending to perform any act tending to obstruct the
proceedings for collection the tax due or which may be due from him.
How to effect constructive distraint.
1. By requiring the taxpayer or any person in possession or control of such
property to sign a receipt covering the property distrained and obligate
himself to preserve the same intact and unaltered and not to dispose of the
same in any manner whatever, without the express authority of the CIR.
2. If the taxpayer or person in possession or control of the property sought to be
placed under constructive distraint refuses to sign the receipt, the revenue
officer shall prepare a list of the property and leave a copy of the such list in
the premises where the properties are located, after which the property shall
be deemed to have been placed under constructive distraint.

ACTUAL DISTRAINT OF PROPERTY
Who shall commence the distraint proceedings.
1. The CIR or his duly authorized representative, if the amount involved is in
excess of P1M; or
2. The RDO, if the amount involved is P1M or less.
How actual distraint of personal property effected.
1. Upon failure of the taxpayer to pay the delinquent tax at the time required by
law, the distraining officer shall seize the and distraint any goods, chattels, or
effects, and the personal property, including stocks and other securities,
debts, credits, bank accounts, and interests in and rights to personal property
of such persons in sufficient quantity to satisfy the tax, or charge, together
with any increment thereto incident to delinquency, and the expenses of the
distraint and the cost of the subsequent sale.
2. Within 10 days from the receipt of the warrant, a report on the distraint shall
be submitted by the distraining officer of the RDO and to the RD, provided
that a consolidated report by the RD may be required by the CIR as often as
necessary.
Remedy of a taxpayer once the CIR or other revenue officer issues a
warrant of distraint.
 The taxpayer may request the CIR that the warrant of distraint be lifted. The
CIR may, in his discretion, allow the lifting of the order of distraint. He may,
however, ask for a bond as a condition for the cancellation of the warrant.
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LEVY OF REAL PROPERTY
What should the notice to levy contain.
1. Name of the taxpayer; and
2. Amounts of the tax and penalty due from him.
 The certificate shall operate with the force of a legal execution throughout the
Philippines.
How is levy effected.
1. Levy shall be effected by writing upon said certificate the description of the
property upon which levy is made.
2. At the same time, written notice of the levy shall be mailed to or served upon
the ROD of the province or city where the property is located and upon the
delinquent taxpayer, or if he be absent from the Philippines, to his agent or
the manager of the business in respect to which the liability arose, or if there
be none, to the occupant of the property in question.
3. In case the warrant of levy is not issued before or simultaneously with the
warrant of distraint on personal property, and the personal property of the
taxpayer is not sufficient to satisfy the tax delinquency, the CIR or his
authorized representative shall, within 30 days after execution of the distraint,
proceed with the levy on the taxpayer’s real property.
4. Within 10 days after receipt of warrant, a report on any levy shall be
submitted by the levying officer to the CIR or his duly authorized
representative.
5. The RD may also be required by the CIR to submit a consolidated report as
often as necessary.

Remedy of a taxpayer once the CIR or other revenue officer issues the
warrant of levy.
 Same with distraint.
RULES ON THE ISSUANCE OF WARRANTS OF DISTRAINT OR LEVY
Person to issue the warrants of distraint/garnishment and/or levy.
 Upon the issuance by the CIR or its authorized representative of the final
decision on the disputed assessment against the taxpayer or upon filing of a
petition for Review before the CTA in Division or En Banc of its decision
upholding the assessment, warrants of distraint and garnishment, and/or levy
shall forthwith be immediately issued and served.
Salient provisions of RMO 39-2007 regarding the issuance of warrants of
distraint and garnishment, and/or levy of real property.
1. No appeal taken to the CTA from the decision of the CIR shall suspend the
payment, levy, distraint, and/or sale of any property of the taxpayer for the
satisfaction of his tax liability, unless the CTA suspends the collection under
certain conditions.
2. Upon the issuance of any ruling, order or decision of the CTA favorable to
the national government, the CTA shall issue an order authorizing the BIR to
seize and distraint any goods, chattel, or effects and the personal property,
including stocks and other securities, debts, credits, bank accounts, and
interests in and rights to personal property and/or levy the real property of the
taxpayer in sufficient quantity to satisfy the tax together with any increment
thereto incident to delinquency.
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3. No court, except the CTA, shall have the authority to grant an injunction to
restrain the collection of any national internal revenue tax, fee or charge
imposed by the Tax Code.
4. These rules are applicable to:
a. Disputed assessments finally decided by the CIR or RD, as the case may
be, against the taxpayer.
b. Assessment upheld by the CTA in Division WON appealed to the CTA en
banc, or upheld by the CTA en banc, WON appealed to the SC.
How a sheriff should effect the a levy upon real property.
1. He shall file with the ROD a copy of the order, description of the property
attached and notice of attachment; and
2. Leave with the occupant of the property copy of the same order, description
and notice.
 Non-compliance with any of such requisites is fatal.
 A levy of execution or attachment of land earlier recorded than a deed of sale
covering the same property executed before the levy but recorded thereafter
takes precedence over the sale. The auction sale following the levy retroacts
to the date of the levy and the purchaser at the public sale acquires a
superior right to the land than that of the buyer in the said deed of sale.

BIR is authorized to issue a warrant of garnishment against the bank
account of a taxpayer despite the pendency of the taxpayer’s protest.
 Nowhere in the Tax Code is the CIR required to rule first on the protest
before he can institute collection proceedings on the tax assessed.
 The legislative policy is to give the CIR much latitude in the speedy and
prompt collection of taxes because it is in taxation that Government depends
to obtain the means to carry on its operations.
Procedure for distraint and garnishment of the different kinds of personal
properties.
1. Personal properties – the distraining officer shall account the personal
property distrained by leaving a copy to the owner or person from whose
possession such personal property were taken, or at the dwelling or place of
business of such person and with someone of suitable age and discretion, to
which list shall be added a statement of the sum demanded and note of the
time and place of sale, signed by the said distraining officer.
2. Stocks and securities – these shall be distrained by serving a copy of the
warrant of distraint upon the taxpayer and upon the president, manager,
treasurer or other responsible officer of the corporation, company or
association which issued the said stocks or securities.
3. Debts and credits – these shall be distrained by leaving with the person
owing the debts or having in his possession or under his control such credits,
or his agent, a copy of the warrant of distraint. This warrant of distraint shall
be sufficient authority to the person owing the debts or having in his
possession or under his control any credits belonging to the taxpayer to pay
to the CIR the amount of such debts or credits.
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4. Bank accounts – these shall be garnished by serving a warrant of
garnishment upon the taxpayer and upon the president, manager, treasurer,
or other responsible officer of the bank. Upon the receipt of the warrant of
garnishment, the bank shall turn over to the CIR so much of the bank
accounts as may be sufficient to satisfy the claim of the government.
Garnishment of bank deposit.
 The garnishment of bank deposit of a defendant does not involve
examination or inquiry into the deposit, but is merely to inform the court
whether defendant has a deposit in the bank which may be garnished.
Sale of property distrained and disposition of proceeds.
 If the taxpayer does not request for the lifting of the warrant, the properties
will be sold in a public sale. Procedure:
Requirement of notice.
1. The RDO or his duly authorized representative, other than the distraining
officer, shall cause a notification to be exhibited in not less than 2 public
places in the municipality or city where the distraint is made.
2. Notice shall specify the time and place of sale and the articles distrained.
3. The time of sale shall not be less than 20 days after notice of the owner or
possessor of the property and the publication or posting of such notice. One
place for the posting of such notice shall be at the Office of the Mayor of the
city or municipality in which the property is distrained.

Rules governing sale at public auntion.
1. Sale shall be made at the time and place fixed in such notice;
2. Sale shall be conducted by the said revenue officer at public auction, to the
highest bidder for cash; or
3. In the case of shares of stock and other securities, sale shall be conducted
by a duly licensed commodity or stock exchanges with the approval of the
CIR. The officer making the sale shall execute a bill of sale which he shall
deliver to the buyer and a copy thereof furnished the corporation, company or
association which issued the stocks or other securities. Upon receipt of the
copy of the bill of sale, the corporation, company or association shall make
the corresponding entry in its books, transfer the stocks or other securities
sold in the name of the buyer, and issue, if required to do so, the
corresponding certificates of stock or other securities;
4. Any residue over and above what is required to pay the entire claim,
including expenses, shall be returned to the owner of the property sold;
5. The expenses chargeable upon each seizure and sale shall embrace only
the actual expenses of seizure and sale shall embrace only the actual
expenses of seizure and preservation of the property pending the sale, and
no charge shall be imposed for the services of the revenue officer or his
deputy;
6. The officer making the sale shall make a written report of the proceedings to
the CIR within 2 days after the sale.
Right of pre-emption.
 If at any time prior to the consummation of the sale, all proper charges are
paid to the officer conducting the sale, the goods or effects distrained shall
be restored to the owner.
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 There shall be no right of redemption in the case of sale of personal property,
only a right pre-emption.
Report of sale to the CIR.
 The officer making the sale shall make a written report of the proceedings
within 2 days after the sale and shall himself preserve a copy of such report
as an official record.
Purchase by Government at sale upon distraint.
 The CIR or his deputy may purchase the personal property involved in behalf
of the National Government for the amount of taxes, penalties and costs due
thereon when the amount of bid for the property under distraint is:
1. Not equal to the amount of the tax; or
2. Very much less than the actual market value of the articles offered for
sale.
 Property so purchased may be resold by the CIR or his deputy, and the net
proceeds therefrom shall be remitted to the National Treasury and account
for as internal revenue.
When advertisement of sale of property should be made.
 Should be made within 20 days after the levy, and the same shall be for a
period of at least 30 days.

How the advertisement of sale of property be effectuated.
1. By posting a notice at the main entrance of the municipal or city hall and in a
public and conspicuous lace in the barangay or district in which the real
estate lies; and
2. Publication once a week for 3 weeks in a newspaper of general circulation in
the municipality or city where the property is located.
What the advertisement should contain.
1. The amount of tax and penalties due;
2. Time and place of sale;
3. Name of the taxpayer against whom taxes are levied; and
4. Short description of the property to be sold.
Right of pre-emption.
 At any time before the day fixed for the sale, the taxpayer may discontinue all
proceedings by paying the taxes, penalties and interest.
Public auction of property under levy.
1. If the taxpayer does not pay the taxes, penalties and interest, the sale shall
proceed and shall be held either at the main entrance of the municipal
building or the city hall, or on the premises to be sold, as the officer
conducting the proceedings shall determine and as the notice of sale shall
specify.
2. Within 5 days after the sale, a return by the levying officer of the proceedings
shall be entered upon the records of the RCO, the RDO and the RD.
3. The RCO, in consultation with the RDO, shall then make out and deliver to
the purchaser a certificate of sale from his records, showing the proceedings
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of the sale, describing the property sold, stating the name of the purchaser
and setting out the exact amount of all taxes, penalties and interest.
4. In case the proceeds of the sale exceed the claim and cost of sale, the
excess shall be turned over the owner of the property.
5. The RCO, upon the approval by the RDO, out of his collection, advance an
amount sufficient to defray the costs of collection by means of the summary
remedies, including the preservation or transportation in case of personal
property, and the advertisement and subsequent sale, both in cases of
personal and real property including improvements found on the latter.
On levy to satisfy the delinquent estate tax, delinquent taxpayer is the
Estate of the deceased.
 In case of notices of levy issued to satisfy the delinquent estate tax, the
delinquent taxpayer is the estate, and not necessarily, and exclusively, the
heirs of the deceased.
Period of redemption.
 Real property – within 1 year from the date of sale.
 They shall have the right of paying to the RDO the amount of the:
1. Public taxes;
2. Penalties;
3. Interest from the date of delinquency to the date of sale; and
4. Interest on the said purchase price at the rate of 15% per annum form the
date of sale to the date of redemption.

Effects of redemption of property sold.
1. Such payment shall entitle the person paying to the delivery of the certificate
of sale issued to the purchaser and a certificate from the said RDO that he
has thus redeemed the property; and
2. The RDO shall forthwith pay over to the purchaser the amount b which such
property has thus been redeemed, and said property thereafter shall be free
from the lien of such taxes and penalties.
Rights of the owner during the one-year period of redemption.
 The owner shall not be deprived of the possession of the said property and
shall be entitled to the rents and other income thereof until the expiration of
the time allowed for its redemption.
Difference between seizure under forfeiture and seizure to enforce a tax
lien.
 Seizure under forfeiture – all the proceeds deprived from the sale of the thing
forfeited are turned over to the CIR.
 Seizure to enforce a tax lien – the residue of such proceeds over and above
what is required to pay the tax sought to be realized, including expenses, is
returned to the owner of the property.
When real property may be forfeited in favor of the Government.
1. In case there is no bidder for real property exposed for sale; or
2. If the highest bid is for an amount insufficient to pay the taxes, penalties and
costs.
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When the Revenue Officer shall make a return of the proceedings of
forfeiture.
 Within 2 days from the date of forfeiture.
Duty of the ROD after the forfeiture proceedings.
 To transfer the title of the property forfeited to the Government without the
necessity of an order form a competent court.
Period of redemption.
 Within 1 year from the date of forfeiture.
Effect when property is not redeemed by the taxpayer.
 The forfeiture shall become absolute.
 The Declaration of Absolute Forfeiture should be prepared and registered
with the ROD and simultaneously a request be made to transfer the title of
the property from the name of the taxpayer to the RP.
Administration and management.
 The Revenue Regional Officer and/or the RDO shall take possession of the
property, administer and manage the same, gather its civil fruits and account
the proceeds thereof and he shall see to it that the title and/or declaration of
the property is transferred from the name of the taxpayer to the RP.

Resale of real estate taken for taxes.
 After registration in the name of the RP, the same property may still be
disposed of either at public or at private sale.
 If at public auction, the CIR must give not less than 20 days notice.
 If private sale, it should be with the approval of the SOF.
 Fair market value at the time of sale
 Proceeds shall be deposited with the National Treasury.
Procedures for the resale of absolutely forfeited properties.
1. All acquired/forfeited properties transferred in the name of the RP, having
passed the one-year redemption period, shall be converted into cash from
the date of the acquisition or forfeiture.
2. The sale of acquired/forfeited properties shall be by sealed bids in a public
auction to be witnessed by a representative of the COA.
3. The notice of sale shall be published once a week for 2 consecutive weeks in
a newspaper of general circulation in the Philippines which must be
completed at least 20 days prior to the date of such public auction.
4. Unless the CIR provides otherwise, the Minimum Bid Price/Floor price shall
be the latest fair market value.
5. Anyone could bid, except foreign nationals, including the ees of the BIR.
6. Bidders shall be required to post a bond in cash or manager’s check in an
amount representing 10% of the minimum bid price at least one day before
the scheduled public auction.
7. Unless the CIR allows extension of time to pay, in meritorious cases, the
winning bidder shall pay the full amount of his bid cash or manager’s check
within 2 days after receipt of notice of award.
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8. All taxes and expenses relative to the issuance of title be borne by the
winning bidder.
9. The winning bidder shall be responsible at his own expense for the ejectment
of squatters and/or occupants, if any, of the auctioned property.
10. Negotiated or private sale be resorted to as a consequence of failed public
bidding for 2 consecutive times.
11. Negotiated or private sale shall in all cases be approved by the SOF.
12. Public auction sale shall be approved by the CIR or his authorized
representative.
13. The Government reserves the right to reject or cancel any or all bids.
Rationale of Section 218.
 Taxes are the lifeblood of the government should be collected promptly.
 No court shall have the authority to grant an injunction to restrain the
collection of any national internal revenue tax, fee or charge by the NIRC.
 If given by other courts, it must be annulled and cancelled for lack of
jurisdiction, with an appropriate administrative case against the erring judge.
No court, except the CTA, shall have authority to grant injunction to
restrain the collection of any national internal revenue tax.
 This prohibition shall apply to the following:
1. All collection activities, including imposition and collection of taxes
prescribed in tax laws;
2. Issuance of warrants of distraint and garnishment, and/or levy on final
decisions of the BIR on disputed assessments;
3. Cases filed before the CTA; and
4. The sale of property distrained and garnished.

 No appeal taken to the CTA from the decision of the BIR on disputed
assessment shall suspend the payment, levy, distraint, and/or sale of any
property of the taxpayer for the satisfaction of his tax liability, unless the CTA
suspends the collection under certain conditions.
When injunction may be allowed by the CTA.
1. When there is an appeal to the CTA from a decision of the CIR;
2. In the opinion of the CTA, the collection may jeopardize the interest of the
Government and/or the taxpayer;
3. The taxpayer may be required to deposit the amount claimed or to file a
surety bond for not more than double the amount with the Court.
Tax Lien
 Denotes a legal claim or charge on property, whether real or personal, as
security for the payment of some debt or obligation.
Nature of tax lien.
 When a taxpayer is liable to pay an internal revenue tax, neglects or refuses
to pay his internal revenue tax liability after demand, the amount so
demanded shall be a lien in favor of the government from the time the
assessment was made by the CIR until paid, with interest, penalties and
costs that may accrue in addition thereto upon all property and rights to
property belonging to the taxpayer.
When tax lien against a mortgagee, purchases or judgment creditor
considered valid.
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 When notice of such lien shall be filed by the CIR in the office of the ROD of
the province or city where the property of the taxpayer is situated or located.
When tax lien in favor of the Government may arise.
1. With respect to personal property, the lien in favor of the Government arises
from the time the tax became due and payable.
2. With respect to real property, the lien in favor of the Government arises from
the time of registration with the ROD.
Collection remedies of the government in a case where the estate had
already been distributed to the heirs.
1. Sue all the heirs and collect from each the amount of tax proportionate to the
inheritance received; or
2. By virtue of the lien, sue only one heir and subject the property he received
from the estate to the payment of the estate tax.
Form and mode of proceedings of court actions instituted in behalf of the
Government.
1. Civil and criminal actions and proceedings instituted in behalf of the
government shall be brought in the name of the Government of the
Philippines.
2. They shall be conducted by legal officers of the BIR.
3. No civil or criminal action for recovery of taxes or the enforcement of any
fine, penalty or forfeiture shall be filed in court without the approval of the
CIR.
4. The approval of the SolGen for civil actions for collection of delinquent taxes
is required before they are filed.

SolGen has the primary responsibility to appear for the government in
appellate proceedings.
 This finds justification in the various laws defining the Office of the SolGen.
How should approval of the CIR for the filing of information in Court be
signified.
 His signature need not appear on the Resolution of the State Prosecutor or
the Information itself.
Who has the obligation to determine the existence of tax fraud for the
imposition of criminal penalties.
 RTC
Jurisdiction of courts over civil tax cases.
1. CTA – original jurisdiction on civil cases where the principal amount of taxes
and fees, exclusive of charges and penalties claimed is P1M and above.
2. RTC, MTC, MeTC – original jurisdiction on civil tax cases where the principal
amount of taxes and fees, exclusive of charges and penalties claimed in less
than P1M.
Jurisdiction of courts over criminal cases.
1. CTA – principal amount of taxes and fees, exclusive of charges and
penalties, claimed is P1M and above.
2. RTC, MeTC, MTC – less than P1M or where there is no specified amount
claimed.
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What should be imposed in the judgment in a criminal case.
 Shall not only imposed penalty, but shall also order the payment of taxes
subject of the criminal case as finally decided by the CIR.
Principles in criminal actions.
1. Assessment is not a prerequisite in the filing of a criminal action. What is
involved here is not the collection of taxes where the assessment of the CIR
may be reviewed by the CTA, but a criminal prosecution for violation of the
NIRC which is within the cognizance of the RTC.
2. But filing of criminal action is not an implied assessment by the CIR. an
assessment contains not only a computation of tax liabilities, but also a
demand for payment within a prescribed period.
3. Criminal action may be filed during the pendency of an administrative protest
in the BIR. It is not a requirement for the filing of criminal action that there be
a precise computation and assessment of the tax, since what is involved in
the criminal action is not the collection of tax but a criminal prosecution for
the violation of the NIRC, for as long as there is a prima facie showing of a
willful attempt to evade taxes or failure to file the required return.
4. Effect of acquittal of the taxpayer in a criminal action. Does not necessarily
result in the exoneration of said taxpayer from his civil liability to pay taxes.
The civil liability to pay taxes arises not because of felony but upon
taxpayer’s failure to pay taxes. Criminal liability in taxation arises as a result
of one’s ability to pay taxes.
5. Effect of subsequent satisfaction of civil liability. Does not extinguish the
taxpayer’s criminal liability.
6. No subsidiary imprisonment. In case of insolvency on the part of the
taxpayer, subsidiary imprisonment cannot be imposed as regards the tax

which he is sentenced to pay. However, it may be imposed in cases of failure
to pay the fine imposed upon him by the court.
Rationale of the prescriptive period for the assessment and collection of
taxes.
 In order to safeguard the interest of the taxpayer against unreasonable
investigation.
When the exceptional prescriptive periods for assessment and collection
of taxes apply.
1. When the taxpayer filed a false return with intent to evade tax;
2. When the taxpayer filed a fraudulent return with intent to evade tax;
3. When the taxpayer failed to file a return; and
4. In case the Cir and the taxpayer have agreed in writing to extend the period
of assessment after the normal prescriptive period of assessment.
 1, 2, 3 – at any time within 10 years after the discovery of the falsity, fraud or
omission.
 A proceeding in court for the collection of tax may be filed without
assessment at any time within 10 years after the discovery of the falsity,
fraud or failure to file a return.
False return and fraudulent return not one and the same.
 A false return implies deviation from the truth or fact, whether intentional or
not. It may be due to mistakes, carelessness or ignorance of the person
preparing the return
 A fraudulent tax return implies intentional or deceitful entry with the sole
object of evading the tax.
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 It must be an intentional fraud, consisting of deception willfully and
deliberately done or resorted to in order to induce another to give up some
legal right.
 Negligence, whether slight or gross, is not equivalent to intentional
wrongdoing.
Distinguish tax avoidance and tax evasion.
 Tax avoidance is the tax saving device within the means sanctioned by law.
 Tax evasion is a scheme used outside of those lawful means and when
availed of, it usually subjects the taxpayer to additional civil or criminal
liabilities.
Essential elements of tax evasion.
1. The end to be achieved, i.e., the payment of less than that known by the
taxpayer to be legally dues, or the non-payment of tax when it is shown that
a tax is due.
2. An accompanying state of mind which is described as being evil, in bad faith,
willful, or deliberate and not accidental; and
3. A course of action or failure of action which is unlawful.
Tax fraud and tax evasion case basically a criminal case.
 The crime of tax evasion is complete when the taxpayer had knowingly and
willfully filed a fraudulent return with intent to evade and defeat tax.
 The presumption that an officer of the government has performed his duty
regularly as in the case of correctness of deficiency assessments, is not
applicable in fraud cases.

Assessment is NOT necessary before filing a criminal complaint for tax
evasion.
 Section 222 says so.
Prescriptive period for the assessment of tax in case of failure to file a
return.
 At any time within 10 years after the discovery of the omission.
In case of failure to file an estate tax return, the tax may be assessed at
any time within 10 years after the omission.
 And any tax so assessed may be collected by levy upon real property within
3 years following the assessment of the tax.
When the statute of limitations may be waived.
 If before the expiration of the time, both the CIR and the taxpayer agreed in
writing to its assessment after such time, the tax may be assessed within the
period agreed upon.
 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.
Waiver of the statute of limitations; how construed.
 A waiver of the statute of limitations, being a derogation of the taxpayer’s
right to security against prolonged and unscrupulous investigations, must be
carefully and strictly construed.
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Requisites of a valid waiver of the Statute of Limitations.
1. It must be in writing;
2. It must be agreed upon and signed by the CIR or his duly authorized
representative and by the taxpayer before the expiration of the time
prescribed to extend the period of assessment;
3. There must be a definite agreed date;
4. The date of acceptance must be indicated; and
5. The taxpayer must be furnished with a copy of the waiver.
Revenue officials authorized to sign waiver.
 Assistant CIR – for tax fraud and policy enforcement services cases.
 Assistant heads
 In case the authority is delegated by the taxpayer to a representative, the
concerned revenue official shall see to it that such delegation is in writing and
duly notarized.
 The waiver should not be accepted by the concerned BIR office and official
unless duly notarized.
Effect of the execution by a taxpayer of a waiver of the statute of
limitations on his defense of prescription.
 It signifies the acceptance of the BIR and the perfection of an agreement that
the making of an assessment and the collection of taxes are suspended
during the period of the said agreement.

Taxpayer who paid the tax assessment covered by waivers of the Statute
of Limitations is estopped from questioning the validity of the waivers with
respect to the other assessment of deficiency onshore tax.
 RCBC vs. CIR. RCBC, through its partial payment of the revised
assessments issued within the extended period as provided for in the
questioned waivers, impliedly admitted the validity of those waivers. Had
petitioner truly believed that the waivers were invalid and that the
assessments were issued beyond the prescriptive period, then it should not
have paid the reduced amount of taxes in the revised assessment.
Rules on exceptional prescriptive period for the collection of taxes.
1. In case there is a prior assessment, collection shall be made within 5 years
from the date of the final assessment notice (FAN) of the return either or both
simultaneously:
a. By distraint of personal property, or by levy of the real property of the
taxpayer; or
b. By judicial proceedings, thru civil or criminal actions.
2. In case there is no prior assessment, actions for collection of tax may be filed
within 10 years after the discovery of the falsity, fraud or failure to file a
return, but only by judicial proceedings.
Construction of prescription of collection in civil taxes and criminal taxes
cases.
 In civil cases, prescription is construed against the government and liberally
in favor of the taxpayer.
 In criminal cases, prescription is construed strictly against the taxpayer.
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No proceedings could be initiated in court for the collection of tax, and
claim for collection barred for having been made beyond the 5-year
prescriptive period set by law.
 Absent the assessment, no proceedings could be initiated in court for the
collection of said tax, and claim for collection, filed with the probate court,
was barred for having been made beyond the 5-year prescriptive period set
by law.
Doctrine of estoppel prevented the taxpayer from raising the defense of
prescription.
 CIR vs. Suyoc Consolidated Mining Co. After inducing the BIR to delay
collection as he in fact did, it is most unfair for taxpayer to now take
advantage of such desistance to elude his deficiency income tax liability to
the prejudice of the Government invoking the technical ground of
prescription. He who prevents a thing from being done may not avail himself
of the nonperformance which he has himself occasioned, for the law says to
him in effect “this is your own act, and therefore you are not damnified”.
Grounds for the suspension of the running of the Statute of Limitations.
 The BIR is prohibited from making assessment or collection in respect of any
tax deficiency of a taxpayer for that period for which it is prohibited and for 60
days thereafter on the following grounds:
1. When the taxpayer filed a protest thru a request for reinvestigation which
is granted by the CIR;
2. When the taxpayer cannot be located in the address given him in the
return filed upon which a tax is being assessed or collected, unless the
taxpayer informs the CIR of any change in his address.

3. When the warrant of distraint or levy is duly served upon the taxpayer, his
authorized representative, or a member of his household with sufficient
discretion, and no property could be located; and
4. When the taxpayer is out of the Philippines.
Difference between a Request for Reconsideration and a Request for
Reinvestigation.
 Reconsideration – refers to a plea of re-evaluation of the assessment on the
basis of existing records without need of additional evidence. It may involve
both question of fat or of question of law of both. A request for
reconsideration does not toll the running of the prescriptive period for the
collection of an assessed tax.
 Re-investigation – refers to a plea of re-evaluation of the assessment on the
basis of newly discovered evidence that a taxpayer intends to present in the
reinvestigation. It may also involve a question of fact or of law or both. The
grant suspends the running of the prescriptive period to collect the tax due a
taxpayer.
Enforcement of forfeitures of personal properties and real properties.
 The forfeiture of personal properties of all sorts shall be enforced by the
seizure and sale, or destruction, of the specific forfeited properties.
 The forfeiture of real properties shall be enforced by a judgment of
condemnation and sale in a legal action or proceeding, civil or criminal, as
the case may require.
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Enforcement of the remedy of forfeiture of personal property.
 Sales of forfeited chattels and removable fixtures shall be effected, do far as
practicable, in the same manner and under the same conditions as the public
notice and the time and manner of sale as are prescribed for sales of
property distrained for the non-payment of taxes.
 Distilled spirits, liquors, cigars, cigarettes, other manufactured products of
tobacco, and all apparatus used in or about the illicit production of such
articles may, upon forfeiture, be destroyed by order of the CIR, when the sale
of the same for consumption or use would be injurious to the public health or
prejudicial to the enforcement of law.
 All other articles subject to excise tax, which have been manufactured or
removed in violation of this Code, as well as dies for the printing or making of
internal revenue stamps and labels which are in imitation of or purport to be
lawful stamps, or labels may, upon forfeiture, be sold or destroyed in the
discretion of the CIR.
 Forfeited property shall not be destroyed until at least 20 days after seizure.
Disposition of funds recovered in legal proceedings or obtained from
forfeitures.
 All judgments and monies recovered and received for taxes, costs,
forfeitures, fines and penalties shall be paid to the BIR just like any other
taxes which are required to be paid, and except as specially provided, shall
be accounted for and dealt with in the same way.
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Distinction between the effects of the forfeiture of personal property and PROTESTING AN ASSESSMENT, REFUND, ETC.
seizure for the enforcement of tax lien.
 The effect is to transfer the title to the specific thing from the owner to the ASSESSMENT PROCESS
government. All the proceeds in case of a sale go to the coffers of the I. TAX AUDIT OR INVESTIGATION BY THE REVENUE
government. EXAMINER/OFFICER
 In the case of seizure for the enforcement of a tax lien, the residue, after
deducting the tax liability and expenses will go to the taxpayer. What is tax audit.
 In a tax audit, revenue officers examine the books of account and other
Satisfaction of judgment recovered against any internal revenue officer. accounting records of taxpayers to determine their correct tax liability.
 If by reason of any act done in the performance of the official duty, an action  This is done through the issuance of letter of authority.
is brought against the Internal Revenue Officer to recover damages and the
CIR is notified of such action in time to make defense against the same thru Issuance of a Letter of Authority.
the SolGen, any judgment, damages or costs recovered in such action shall  A taxpayer’s first encounter with the BIR after filing his return/s, whether on
be satisfied by the CIR, upon approval of the SOF. income tax, VAT or other types of internal revenue taxes, is when he is
 If the same is paid by the Revenue Officer sued, the same shall be repaid or served with a LA by a revenue enforcement officer or investigating officer of
reimbursed to him. the BIR.
 It the Revenue Officer acted negligently or in bad faith, or with willful  LA – an official document that empowers a Revenue Officer to examine and
oppression, no judgment, damages, or costs shall be paid or reimbursed to scrutinize a taxpayer’s books of accounts and other accounting records, in
him. order to determine the taxpayer’s correct internal revenue tax liabilities for a
particular period.
 In the absence of such an authority, the assessment or examination is a
nullity.

Persons authorized to issue LA.

1. CIR or his duly authorized representative – for audit/investigation of
taxpayers under the jurisdiction of the National Office;
2. RD – for audit of taxpayers under the jurisdiction of the regional offices.
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When must an LA be served.
 Within 30 days from its date of issuance, otherwise, it shall become null and
void. The taxpayer shall then have the right to refuse the service of this LA,
unless the same is revalidated.
How often can an LA be revalidated.
 An LA is revalidated thru the issuance of a new LA.
 An LA issued in the Revenue Regional Offices can be revalidated only once;
but an LA issued by the National Office can be revalidated twice.
 Any suspended LA must be attached to the new LA issue.
Tax Cases which need not be covered by an LA.
1. Cases involving civil or criminal tax fraud which shall fall under the
jurisdiction of the National Investigation Division (NID) under the
Enforcement and Advocacy Services (EAS) of the BIR; and
2. Policy cases under audit by the special teams in the National Office.
Effect of issuance of LA.
 A tax return, statement or declaration filed by a taxpayer in any office
authorized to receive the same shall not be withdrawn, but the same may be
modified, changed or amended within three years from the date of such filing.
 When an LA or investigation of such return, statement or declaration has
been actually served upon the taxpayer, said return, statement or declaration
shall no longer be allowed to be amended.
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Extent of authority of a Revenue Officer performing assessment functions.
 He must not go beyond the authority given.
 LA should cover a taxable period not exceeding one taxable year. The
practice of issuing Las covering the audit of unverified prior years is hereby
prohibited. If the audit of a taxpayer shall include more than one taxable
period, the other periods or years shall be specifically indicated in the LA.
Effect of the issuance and receipt of Letter Notice to the taxpayer’s right to
amend its returns.
 Letter notices being served by the BIR upon taxpayers who were found to
have underdeclared their sales or sales or purchasers thru the Third Party
Information Program can be considered a notice of audit or investigation
which would in effect disqualify the taxpayers concerned from amending any
return which is the subject of such audit or investigation.
Treatment of Letter of Notice (LN).
 may commence even without the prior issuance of LA.
Number of times that a taxpayer’s books of accounts may be subjected to
audit.
 GR. For income tax purposes, such examination and inspection shall be
made only once in a taxable year.
 XPN.
1. When the CIR determines that fraud, irregularities, or mistakes were
committed by the taxpayer;
2. When the taxpayer himself requests a reinvestigation of his books of
accounts;

3. When there is a need to verify the taxpayer’s compliance with the
withholding tax laws and regulations;
4. When the taxpayer’s capital gains tax liabilities must verified; and
5. When the CIR opts to exercise his power to obtain information from other
persons relative to the examination of the books of account of that third
party who is being audited.
Period to conduct audit.
 An Internal Revenue Officer is allowed only o120 days from the date of
receipt of an LA by the taxpayer to conduct the audit and submit the required
report of investigation.
 If he is unable to submit his final report of investigation within the 120-day
period, he must then submit a Progress Report to his Head Office and
surrender the LA for revalidation.
Audit Report of the Revenue Officer.
 Shall state in his report WON the taxpayer agrees with his findings that the
taxpayer is liable for the deficiency tax or taxes.
 If the taxpayer is not amenable, he shall be informed in writing of the
discrepancy in the taxpayer’s payment of his internal revenue taxes, for the
purpose of Informal Conference, in order to afford the taxpayer with an
opportunity to present his side of the case.
 If the taxpayer is amenable, and the latter pays the tax, the conduct of audit
ends.
 If the RO does not find any deficiency tax, the conduct of audit ends.
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Obligations of a taxpayer who is being audited.
1. Duly acknowledge his receipt of the LA upon its presentation;
2. Resent within a reasonable period of time his books of accounts and other
related accounting records as that may be required by the RO;
3. Submit necessary schedules as may be requested by the RO within the
prescribed period as stated in the LA; and
4. If, believing that he cannot present his books of accounts and/or other
accounting records as required, and he intends to request for more time to
present the said documents in order to avoid the issuance of a jeopardy
assessment, the taxpayer may execute what is referred to as Waiver of the
Statute of Limitations.
II. ISSUANCE OF A NOTICE OF INFORMAL CONFERENCE
Notice of informal conference.
 A written notice informing a taxpayer that the findings of the audit conducted
on his books of accounts and accounting records indicate that there is a
discrepancy in his tax payments which has to be paid.
 The taxpayer is given 15 days from the date of his receipt of the NIC in order
to afford the taxpayer with an opportunity to present his case.
 If the taxpayer responds within 15 days, an informal conference will be held.
 If the taxpayer fails to respond within 15 days, he shall be considered in
default, in which case, the RDO or the Chief of the Special Investigation
Division of the RO, of the Chief Division in the NO, as the case may be, shall
endorse the case with the lease possible delay to the Assessment Division of
the RO or to the CIR or his duly authorized representative, as the case may

be, for appropriate review and issuance of a deficiency tax assessment, if
warranted.
III. INFORMAL CONFERENCE.
What takes place in the informal conference.
 Informal conference is the discussion on the merits of the assessment
between the taxpayer and the Revenue Officer.
 The RO communicates to the taxpayer the imposition of deficiency
assessment if any.
 The taxpayer may attempt to convince the examiner to conduct a re-
investigation or a re-examination of his tax case. The taxpayer may advise
the examiner if he will submit his position paper regarding the issues raised
in the informal conference.
 If there is no sufficient basis for assessment, the case shall be dismissed.
 If there is a basis for the assessment, a Preliminary Assessment Notice
(PAN) shall be issued.
IV. ISSUANCE OF A PRELIMINARY ASSESSMENT NOTICE (PAN)
What is a PAN.
 It is a communication issued by the Regional Assessment Division, or by the
Cir or his duly authorized representative informing a taxpayer who has been
audited of the findings of the Revenue Officer, following the review and
evaluation of these findings.
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 The PAN shall be in writing, and shall show in detail the facts and the law,
rules and regulations or jurisprudence on which the proposed assessment is
based, otherwise the assessment is void.
How PAN is issued to a taxpayer.
 If after review and evaluation by the Assessment Division or by the
Commissioner or his duly authorized representative, as the case may be, it is
determined that there exists sufficient basis to assess the taxpayer for any
deficiency tax or taxes, the said office shall issue to the taxpayer, at least by
registered mail, a PAN for the proposed assessment, showing in detail, the
facts and the law, regulations, or jurisprudence on which the proposed
assessment is based.
Mandatory nature of service of a PAN.
 Failure is tantamount to a denial of due process.
 The Tax Code requires that the taxpayer must first be informed that he is
liable for tax deficiency thru the sending of a PAN.
Concept of Assessment.
 Assessment is a statement that the amount therein stated is due from a
taxpayer as a tax.
 3 kinds of assessment
1. Self-assessed or voluntary assessment
- This is an assessment where the taxpayer assesses his own tax.
2. Jeopardy assessment
- This is an assessment made by an authorized Revenue Officer
without the benefit of complete or partial audit in the light of the

Revenue Officer’s belief that the assessment and collection of the
deficiency tax will be jeopardized by delay caused by the taxpayer’s
failure to comply with audit and investigation requirements to present
his books of accounts and/or pertinent records; or to substantiate all
or any of the reductions, exemptions or credits claimed in his return.
3. Deficiency assessment – this is an assessment rendered by the tax
authority where the correct amount of the tax is determined after an
examination or investigation is conducted.
Requisites for a valid assessment notice.
 A taxpayer must be informed in writing of the legal and factual bases of the
tax assessment made against him.
Underlying reason for the new requisites.
 No person shall be deprived of his property without due process of law.
When assessment is deemed made.
 Only when the demand letter or notice of assessment is released, mailed or
sent by an internal revenue officer to the taxpayer. It is not required that the
notice be received by the taxpayer within the prescribed period. But the
sending of the notice must be clearly proven
What are considered as constructive service.
1. If the notice to the taxpayer is served by registered mail, and no response is
received from the taxpayer within the prescribed period from the date of
posting thereof in the mail;
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2. If the notice is personally served on the taxpayer or his duly authorized
representative who, however, refused to acknowledge receipt thereof.
 Constructive service shall be considered effected by leaving the same in the
premises of the taxpayer and this fact of constructive service is attested to,
witnessed and signed by at least two revenue officers other than the revenue
officer who constructively served the same.
It is incumbent upon the BIR to prove competent evidence that Notice of
Assessment was indeed received by the taxpayer.
Persons authorized to make tax assessments.
 CIR
 But it may be delegated to subordinate officers.
Instances when a PAN is not required.
 Issuance of a FAN for the payment of the taxpayer’s deficiency tax liability
shall be sufficient:
1. When the finding for any deficiency tax is the result of mathematical error
in the computation of the tax appearing on the face of the tax of the tax
return filed by the taxpayer; or
2. When the discrepancy has been determined between the tax withheld
and the amount actually remitted by the withholding agent; or
3. When a taxpayer who opted to claim a refund or tax credit of excess
creditable withholding tax for a taxable period was determined to have
carried over and automatically applied the same amount claimed against
the estimated tax liabilities for the taxable quarter/s of the succeeding
taxable year; or

4. When the excise tax due on excisable articles has not been paid; or
5. When an article locally purchased or imported by an exempt person, such
as, but not limited to, vehicles, capital equipment, machineries and spare
parts, has been sold, traded or transferred to non-exempt persons.
When a PAN was considered as a FAN appealable to the CTA.
 It is the formal letter of demand and assessment notice that must be
administratively protested or disputed within 30 days, and not the PAN. The
counting of the 30 days within which to institute an appeal in the CTA
commences from the date of receipt of the decision of the CIR on the
disputed assessment, not from the date the assessment was issued.
 Oceanic Wireless, Inc. vs. CIR. The Formal Letter of Demand with
Assessment Notices which was not administratively protested by the
petitioner can be considered final decision of the CIR appealable to the CTA
because the words used, specifically the words “final decision” and “appeal”,
taken together led petitioner to believe that the Formal Letter of Demand with
Assessment Notices was in fact the final decision of the CIR on the letter-
protest it filed and the available remedy was appeal the same to the CTA.
BIR cannot use as an excuse to the delay in the issuance of the
assessment notice failure of the taxpayer to furnish the BIR of the required
documents.
 As to the delay of the taxpayer to furnish the BIR of the required documents,
this cannot be taken against the taxpayer.
 Neither can the BIR use this as an excuse for issuing the assessment
beyond the 3-year prescriptive period because with or without the required
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documents, the CIR has the power to make assessments based on the best
evidence obtainable.
V. REPLY TO A PAN
What is the reply to a PAN.
 A reply to the PAN is the response of the taxpayer to the PAN to contest in
writing the findings of the revenue officers contained in a PAN which should
be filed within 15 days from the date of receipt of the PAN.
 Failure to reply to a PAN makes the taxpayer in default and authorizes the
revenue officials to issue the FAN. However, no additional tax liability or
deficiency tax arises from such failure to reply to a PAN.
Effect of failure to respond to the PAN.
 If the taxpayer disagrees with the findings stated in the PAN, he shall then
have 15 days from the receipt of the PAN to file a written reply contesting the
proposed assessment.
 If the taxpayer fails to respond within 15 days from date of receipt of the
PAN, he shall be considered in default, in which case, a formal letter of
demand and assessment notice shall be caused to be issued by the said
Office calling for payment of the taxpayer’s deficiency tax liability, inclusive of
the applicable penalties.

VI. ISSUANCE OF FORMAL LETTER OF DEMAND/FINAL ASSESSMENT
NOTICE (FAN)
Formal Letter of Demand and FAN.
 The FAN is declaration of deficiency taxes issued to a taxpayer who fails to
respond to a PAN within the prescribed period of time, or whose reply to the
PAN was found to be without merit.
 The FAN contains not only a computation of tax liabilities, but also a demand
for payment within a prescribed period and shall state the facts, the law, rules
and regulations, or jurisprudence on which the assessment is based
otherwise, the formal letter of demand and the notice of assessment shall be
void.
 To enable the taxpayer to determine his remedies thereon, due process
requires that it must be served on and received by the taxpayer.
Who shall issue the FAN.
 Shall be issued by the CIR or his duly authorized representative.
How a FAN sent to the taxpayer.
 The FAN shall be sent to the taxpayer only by registered mail or by personal
delivery.
 If sent by personal delivery, the taxpayer or his duly authorized
representative shall acknowledge receipt thereof in the duplicate copy of the
letter of demand, showing the following:
1. His name;
2. Signature;
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3. Designation and authority to act for and in behalf of the taxpayer, if
acknowledged/received by a person other than the taxpayer himself; and
4. Date of receipt thereof.
Formality of a control number in the assessment notice NOT a requirement
for its validity.
 Both the formal letter of demand and the notice of assessment shall be void if
the former failed to state the fact, law, rules and regulations or jurisprudence
on which the assessment is based.
Instances when FAN becomes final, executor, and demandable.
1. Taxpayer failed to file a valid protest against the FAN within 30 days from
receipt.
2. Taxpayer failed to appeal to CTA from the adverse decision of the CIR or his
representative on the protest within 30 days from receipt thereof, except if
the protest is decided by the CIR’s authorized representative and taxpayer
later elevates it to the CIR, in which case, it is the latter’s decision that
becomes final and executor if not appealed by the taxpayer to the CTA.
3. Taxpayer failed to appeal to the SC from the adverse decision of the CTA
within 15 days.
 But the failure of the taxpayer to appeal the inaction on the disputed
assessment by the CIR or his representative within 30 days after the lapse of
180 days from the submission of supporting documents will not result in the
finality of the FAN.
 The taxpayer is given the option to either
1. Appeal the inaction within 30 days following the 180-day period; or

2. Await the decision of the CIR even beyond the 180-day period, and
appeal such decision, if adverse, within 30 days from the receipt of the
decision of the CIR.
Presumption of correctness of the assessments rendered by tax
examiners.
 An assessment may be protested by filing a request for consideration or
reinvestigation within 30 days from receipt of the assessment by the
taxpayer.
Commissioner has authority to make subsequent assessments or modify
or revise the original assessment.
 As long as the modification or revision is done within the prescriptive period
for making assessments, and even while the appeal of the taxpayer from the
original assessment is still pending in the CTA, so as to avoid multiplicity of
suits.
Issuance of an assessment distinguished from the filing of a criminal
complaint.
 The criminal complaint is instituted not to demand payment, but to penalize
the taxpayer for violation of the Tax Code.
An affidavit, which was executed by revenue officers stating the tax
liabilities of a taxpayer and attached to a criminal complaint for tax
evasion, cannot be deemed an assessment that can be questioned before
the CTA.
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 To consider the affidavit attached to the complaint as a proper assessment is
to subvert the nature of an assessment and to set a bad precedent that will
prejudice innocent taxpayers.
 An assessment must be sent to and received by a taxpayer, and must
demand payment of the taxes described therein within a specific period.
TAXPAYER’S ADMINISTRATIVE REMEDY (PROTEST)
Protested/disputed assessment.
 Within 30 days from date of receipt thereof.
 It is an act by the taxpayer of questioning the validity of the imposition of the
delinquency assessments and increments for internal revenue taxes as
shown in the notice of assessment and letter of demand.
 If there are several issues involved in the formal letter of demand and
assessment notice, but the taxpayer only disputes or protests against the
validity of some of the issues raised, the taxpayer shall be required to pay the
deficiency tax or taxes attributable to the disputed issues, in which case, a
collection letter shall be issued to the taxpayer calling for payment of the said
deficiency tax, inclusive of the applicable surcharge and/or interest.
 No action shall be taken on the taxpayer’s disputed issues until the taxpayer
has paid the deficiency tax or taxes attributable to the said undisputed
issues.
 The prescriptive period for assessment or collection of the tax or taxes
attributable to the disputed issues shall be suspended.

Remedy of the taxpayer when the CIR’s authorized representative denied
the protest.
 The taxpayer may elevate the protest to the CIR within 30 days from receipt
of the decision, otherwise, the assessment shall become final, unless appeal
to the CTA is taken.
 The decision of the CIR’s authorized representative may be directly appealed
to the CTA because the CIR has the authority to delegate his assessment
functions to subordinate officers and the assessment shall have the same
force and effect as that issued by the CIR himself if not elevated to the latter.
Form of protest.
1. Request for consideration – which is a plea for a re-evaluation of an
assessment on the basis of existing records without need of additional
evidence which may involve a question of fact or law or both. This does not
toll the running of the Stature of Limitations; or
2. Request for reinvestigation – which is a plea for the reinvestigation of the
assessment on the basis of the newly-discovered or additional evidence that
a taxpayer intends to present in the reinvestigation. It may also involve a
question of law or fact or both. It tolls the running of the Statute of
Limitations.
 When no protest is seasonably made by the taxpayer, the assessment shall
become final, executor, demandable and unappealable, and thus, the tax
shall already be collectible.
Requisites of a valid administrative protest.
1. It must be made in writing and addressed to the CIR;
2. It must contain all the information required by the rules, viz:
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a. Name of the taxpayer and address for the immediate past 3 taxable
years;
b. Nature of the request, specifying the newly discovered evidence he
intends to present;
c. Taxable periods covered by the assessment;
d. Amount and kind of tax involved and the assessment notice or letter of
demand;
e. Itemized statement of the findings to which the taxpayer agrees, if any, as
basis for the computation of the tax due, which must be paid immediately
upon the filing of the protest; and
f. Itemized schedule of the adjustments to which the taxpayer does not
agree.
3. It should state the facts, applicable law, rules and regulations or
jurisprudence on which his protest based, otherwise the protest shall be
considered void and without force and effect.
- 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.
4. It should be filed within 30 days from the receipt of the FAN;
5. Within 60 days from the date of filing of the protest, all relevant supporting
documents must be submitted, otherwise the assessment shall become final,
executory and demandable.
6. It must be accompanied by the waiver of the Statute of Limitations in favor of
the Government.

Effect of failure to file a valid protest on time.
 The assessment shall become final, executory and demandable.
An assessment that has become final, executory and enforceable can no
longer be contested by means of a disguised protest.
 Certiorari may not be used as a substitute for a lost appeal or remedy.
Payment under protest.
 GR. Prior payment of assessed internal revenue tax is not required when
protesting or disputing an assessment.
 XPN. If there are several issues involved in the FAN but the taxpayer only
disputes or protests against the validity of some of the issues raised, the
taxpayer shall be required to pay the deficiency tax or taxes attributable to
the undisputed issues. No action shall be taken on the taxpayer’s disputed
issues until the taxpayer has paid the deficiency tax or taxes attributable to
the undisputed issues.
FINAL DECISION OF THE CIR ON DISPUTED ASSESSMENT
What constitutes a final decision of the CIR on a disputed assessment.
 In general, if the protest is denied, in whole or in part, by the CIR or his duly
authorized representative, the taxpayer may appeal to the CTA within 30
days from the date of receipt of the said decision, otherwise, the assessment
shall be final, executory and demandable. If the taxpayer elevates his protest
to the CIR within 30 days from the date of receipt of the final decision of the
CIR’s duly authorized representative, the latter’s decision shall not be
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considered final, executory and demandable, in which case, the protest shall
be decided by the CIR.
 If the CIR or his duly authorized representative fails to act on the taxpayer’s
protest within 180 days from date of submission, by the taxpayer, of the
required documents in support of his protest, the taxpayer may appeal to the
CTA within 30 days from the lapse of the said 180-day period, otherwise, the
assessment shall become final, executory and demandable.
 The decision of the CIR of his duly authorized representative shall:
1. State the facts, the applicable law, rules and regulations, or jurisprudence
on which such decision is based, otherwise, the decision shall be void, in
which case, the same shall not be considered a decision on a disputed
assessment; and
2. That the same is his final decision.
Forms of denial of the CIR on the disputed assessment by the taxpayer.
1. Direct denial of protest – the decision of the CIR or his duly authorized
representative on the disputed assessment shall state the facts, applicable
law, rules and regulations or jurisprudence on which such decision is based,
otherwise, the decision shall be void, and the same shall not be considered a
decision on a disputed assessment. The CIR should state that the same is
his final decision.
2. Indirect denial of protest
a. If the CIR or his duly authorized representative fails to act on the
taxpayer’s protest within 180 days from date of submission, by the
taxpayer, of the required documents in support of his protest, the
taxpayer may appeal to the CTA (in Division) within 30 days from the
lapse of the said 180-day period, or await the final decision of the CIR on

the disputed assessments and appeal such final decision to the CTA (in
Division) within 30 days after receipt of a copy of such decision.
- These options are mutually exclusive and resort to one bars the
application of the other.
- In both cases, the taxpayer may apply with the CTA for the issuance of an
injunctive writ to enjoin the BIR from collecting the disputed tax during the
pendency of the proceedings.
b. Other forms of indirect denial of protest which may be appealed to the
CTA:
i. The words final decision and appeal taken together in the Formal
Letter of Demand with FAN may be considered as indirect denial of
protest. The formal letter of demand with Final Assessment Notice
which was not administratively protested by the taxpayer can be
considered a final decision of the CIR appealable to the CTA because
the words used, specifically the words “final decision and appeal”
taken together led petitioner to believe that the formal letter of demand
with FAN was in fact the final decision of the BIR on the letter protest
filed and that the available remedy was to appeal the same to the
CTA.
ii. Civil action for collection can also be considered as denial of protest of
assessment.
iii. CIR did not rule on the taxpayer’s motion for reconsideration of the
assessment. It was only when taxpayer received the summons on the
civil action for the collection of deficiency income tax that the period to
appeal commenced to run. Preliminary collection letter may serve as
assessment notice.
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iv. Filing of a criminal action against the taxpayer can be considered as
denial of the protest.
v. When there is a request for reconsideration, issuance of warrant of
distraint and levy to enforce of deficiency assessment is tantamount to
outright denial of the request for consideration which is appealable to
the CTA.
TAXPAYER’S JUDICIAL REMEDIES
Remedies of the taxpayer in case the CIR denied the protest.
1. In case of denial of protest by the CIR
a. May appeal to the CTA (in Division) within 30 days from receipt of the
decision on a disputed or protested assessment.
b. The 30-day period starts when the taxpayer receives the decision of the
CIR denying the protest which categorically states that his action on the
disputed assessment is final, otherwise, the assessment shall become
final, executory and demandable, thereby precluding the taxpayer from
interposing the defenses of legality or validity of the assessment and
prescription of the Government’s right to assess.
2. In case of inaction by the CIR within 180 days from submission of documents
in support of the protest, the taxpayer can either:
a. File an appeal through a petition for review to the CTA in Division within
30 days from the lapse of the 180-day period; or
b. Await the final decision of the CIR on the disputed assessments and
appeal such final decision tot eh CTA in Division within 30 days after
receipt of a copy of such decision.

- These options are mutually exclusive and resort to one bars the application
of the other.
- In both cases, the taxpayer may apply with the CTA the issuance of an
injunctive writ to enjoin eh BIR from collecting the disputed tax during the
pendency of the proceedings.
3. If the taxpayer is not satisfied with the decision of the CTA in Division, he
may resort to the following remedy:
a. File a MR before the same Division of the CTA within 15 days from
receipt of the decision of the CTA.
b. Then, again if he is adversely affected by the resolution of the CTA in
Division on his MR, he may file a petition for review with the CTA en
banc.
4. If he is not satisfied with the decision of the CTA en banc, then the party
adversely affected by a decision or ruling of the CTA en banc may file with
the SC within 15 days from the receipt of the adverse decision of the CTA en
banc, a verified petition for review on certiorari.
5. In the case where the BIR decides to utilize its judicial tax remedies for
collecting the taxes by means of an ordinary suit filed with the regular courts
for the collection of a sum of money, the taxpayer should oppose the same
going up the ladder of judicial processes from the MTC to the RTC, to the
CTA and finally to the SC.
6. The taxpayer may choose to pay the assessed tax within 30 days from
receipt of assessment and then file a claim for refund or tax credit of these
taxes on grounds that they are erroneously paid within 2 years from date of
payment. If there is a denial of claim, appeal to the CTA shall be made within
30 days from denial but within 2 years from the date of payment.
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7. If the CIR fails to act on the claim for refund or tax credit and the 2-year
period is about to expire, the taxpayer should consider the continuous
inaction of the CIR as a denial and elevate the case to the CTA before the
expiration of the 2-year period.
8. In cases of grave abuse of discretion, lack of jurisdiction or excess of
jurisdiction, the taxpayer may file a Petition for Certiorari, Prohibition and
Mandamus to the SC.
9. In case of the seizure of personal property under claim of forfeiture, the
taxpayer/owner desiring to contest validity of the forfeiture may, at any time
before the sale or destruction of the forfeited property, bring an action against
the person seizing the property or having possession thereof to recover the
same, and upon giving proper bond, may enjoin the sale; or after the sale
and within 6 months, ha may bring an action to recover the net proceeds
realized at the sale.
10. The taxpayer may also file an action for damages against the internal
revenue officer by reason of any act done in the performance of an official
duty.
11. The taxpayer may also file an injunction to the CTA if the collection of the tax
may jeopardize his interest.

EFFECTS OF TAXPAYER’S FAILURE TO APPEAL
Effects of taxpayer’s failure to appeal the decision of the CIR to the CTA.
1. The decision or the assessment shall become final, executory and
demandable;
2. The taxpayer is barred in an action for the collection of the tax by the
government from reopening the question already decided;
3. The assessment is considered correct which may be enforced by summary
proceedings or judicial actions;
4. In a proceeding for collection of tax by judicial action, the taxpayer’s
defenses are similar to those of the defendant in a case for the enforcement
of a judgment by judicial action; and
5. The assessment which has become final and executory cannot be
superseded anymore by a new assessment.
Distinction between an appeal and a protest.
 Appeal refers to the filing of a Petition for Review with the CTA.
 Protest, reinvestigation and reconsideration refer to the administrative
remedies a taxpayer may take before the CIR, while the term appeal refers
to the remedy available to the taxpayer before the CTA.
When the 30-day period to appeal commences to run.
1. The decision of the CIR must categorically sate that his action on the
disputed assessment is final, otherwise period to appeal will not commence
to run; and
2. The 30-day period to appeal starts to run when the taxpayer receives the
decision of the CIR denying the protest.
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CIR does not acquire jurisdiction over an appeal filed by a taxpayer
beyond the 30-day period to appeal from the receipt of the decision.
 The CTA should dismiss the same for being filed out of time, hence, the CTA
does not acquire jurisdiction.
Exception to the rule on exhaustion of administrative remedies.
 Estoppel on the part of the administrative agency concerned, when it stated
that CIR’s decision is final.
Scope of claim of refunds.
1. Credit or refund erroneously or illegally received;
2. Credit or refund penalties imposed without authority;
3. Credit or refund any sum of money alleged to have been excessively or in
any manner wrongfully collected;
4. Refund the value of internal revenue stamps when they are returned in good
condition by the purchaser; and
5. In the discretion of the CIR, redeem or change unused stamps that have
been rendered unfit for use and refund their value upon proof of destruction.
Nature and legal basis of a tax refund.
 The tax refund is in the nature of a tax exemption which must be construed
strictissimi juris against the taxpayer.
 The return of what was erroneously paid is founded on the principle of solutio
indebiti, a basic postulate that no one should unjustly enrich himself at the
expense of another.

When there is parity between tax refund and tax exemption.
 There is a parity between the tax refund and tax exemption only when the
former is based either on a tax exemption statute or a tax refund statute.
Tax refund vis-à-vis Tax credit.
 Tax refund refers to the actual reimbursement of the erroneously or illegally
collected taxes.
 Tax credit refers to the issuance of a Tax Credit Certificate which may be
utilized in the payment of the internal revenue taxes, excluding withholding
taxes, for which the taxpayer is directly liable.
Requirements for the refund of taxes erroneously or illegally paid by
taxpayers.
1. The taxpayer must file a written claim for refund or tax credit with the CIR
within 2 years from the date of payment of the tax or penalty;
2. If denied or not acted upon within said period, the petition for refund be filed
with the CTA within 30 days from receipt of denial and within 2-year period
from the date of payment of the tax or penalty regardless of any supervening
cause;
3. The claim or refund must be a categorical demand for reimbursement;
4. There must be a proof of payment of the erroneously or illegally collected
taxes; and
5. No refund shall be given resulting from availment of incentives granted
pursuant to special laws for which no actual payment was made.
 The options to claim for refund or tax credit are mutually exclusive such that
resort to one bars the application of the other.
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Conditions in order that a claim for refund of creditable withholding tax
may be granted.
1. A written claim must be filed with the CIR within 2 years from the date of
payment of the tax;
2. It is shown on the return of the recipient that the income payment received
was declared as part of the gross income; and
3. The fact of withholding is established by a copy of a statement duly issued by
the payor to the payee showing the amount paid and the amount of the tax
withheld therefrom.
When the CIR may also grant a refund without a written claim for it.
 When a taxpayer files a return which on its face shows an overpayment of
the tax and the option to refund/claim a tax credit was chosen by the
taxpayer.
 This is so because a return filed showing an overpayment shall be
considered as a written claim for credit or refund.
Theory of supervening cause.
 The theory of supervening cause expresses that regardless of any event
which is beyond the control of the parties that may arise after payment,
recovery of erroneously or illegally collected taxes cannot be allowed when it
has been made beyond the prescriptive period from the occurrence of such
event.
 Claims for refund must be elevated to the CTA before the expiration of the 2-
year period because the prescriptive period will not be suspended regardless
of any supervening event.

Reckoning of the commencement of the 2-year period.
 From the date the tax was paid;
 If the tax is paid on installment, the last or final installment or payment
because for tax purposes, there is no payment until the whole or entire tax
liability is fully paid.
 In case taxpayer merely made a deposit, from the conversion of the deposit
to payment. Merely making a deposit is not equivalent to payment until the
amount is actually applied to the specific purpose for which it was deposited.
 In case tax has been withheld from source, counted from the date it falls due
at the end of the taxable year. A taxpayer who contributes to the withholding
tax system does not really deposit an amount to the government, but in truth,
performs and extinguishes his tax obligation for the year concerned.
 End of the taxable year versus date of the filing of the final adjustment return
– from the date when the final adjustment return was filed. The rationale in
computing this period is the fact that it is only then that the corporation can
ascertain whether it made profits or incurred losses in its business
operations.
 Date when quarterly income tax was paid vs. date when final adjustment was
filed – from the date when the final adjustment return was filed. The quarterly
payment is considered mere installments of the annual tax due.
 Date when the final adjustment return was actually filed vs. the last day for
the filing of the final adjustment return – from the date the final adjustment
return was actually filed.
 Tax was not erroneously or illegally paid but the taxpayer became entitled to
refund because of supervening circumstances – from the date the taxpayer
becomes entitled to refund and not from the date of payment.
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 In case of dissolution of corporation – 30 days after the approval by the SEC
of the plan for dissolution which should be considered as the date of payment
of the taxes withheld on the earned income.
When can there be a waiver of the 2-year period of prescription in an
action for refund.
 GR. If the government failed to plead prescription in a motion to dismiss or as
a defense in its answer to the petition for review.
 XPN. When the taxpayer amends his petition for review alleging therein a
new cause of action and the government pleads prescription in its answer to
the amended petition for review.
When request for issuance of tax credit certificate may not be subject to
the 2-year limitation period.
 Upon basic consideration of equity and fairness. When it is undisputed that
petitioner is entitled to refund, the State should not invoked technicalities to
keep money not belonging to it.
Underlying principle for the grant of tax refund of erroneous payment.
 Substantial justice, equity and fair play.
Only preponderance of evidence needed for the approbation of a claim for
refund.
Right to contest tax before or after payment.
 The taxpayer’s willingness to pay the tax is no waiver to raise defense
against the tax’s legality.

Protest at the time of payment of taxes not a requirement to preserve the
taxpayers’ right to claim a refund.
 Section 229 provides that a suit or proceeding may be maintained for the
recovery of national internal revenue taxes or penalty alleged to have
erroneously assessed or collected whether such tax or penalty has been paid
under protest or duress.
Interest on tax refunds.
 GR. The Government cannot require to pay interest on taxes refunded to the
taxpayer in the absence of a statutory provision clearly or expressly directing
or authorizing such payment.
 XPN.
1. When the CIR acted with patent arbitrariness. Arbitrariness presupposes
inexcusable or obstinate disregard of legal provisions.
2. Income tax withheld on the wages of ees. Any excess withheld over the
tax due from the taxpayer shall be returned or credited within 3 months
from the 15th day of April. Refunds or credits made after such time shall
earn interest at the rate of 6% per annum, starting after the lapse of the 3-
month period to the date the refund or credit is made.
Person entitled to claim for a tax refund; Withholding agent has the right to
file an application for tax refund.
 The person who is statutorily liable to the tax or the person on whom the tax
is imposed by the statute.
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 In case the taxpayer does not file a claim for refund, the withholding agent
may file the claim. He has the obligation to remit the same to the principal
taxpayer.
Withholding agent may be properly regarded as a taxpayer within the
meaning of Sections 204 (C) and 229, and may be impliedly authorized to
file a claim for refund and the suit to recover the claim.
 He is made personally liable for the tax to be withheld.
 A taxpayer is any person subject to tax.
Rule not applicable to the refund of excise taxes.
 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.
BIR should release the tax refund without any unreasonable delay.
 Fair dealing is expected by our taxpayers from the BIR and this duty
demands that the BIR should refund without any unreasonable delay what it
has erroneously collected.
BIR can waive the prescriptive period or the filing of a written claim within
said 2-year period.
 The period is prescriptive and not jurisdictional.
Laws governing the computation of the 2-year prescriptive period.
 The court holds that the Administrative Code, being the more recent law,
governs the computation of legal periods.

Taxpayer’s remedy in case a claim for refund is denied by the CIR.
1. In case of denial, the taxpayer may appeal to the CTA within 30 days from
the receipt of the CIR’s decision and within 2 years from the date of full and
final payment.
2. In case of inaction by the CIR and the 2-year period is about to lapse, the
said inaction may be taken as a denial of the claim for refund which is
appealable to the CTA and the taxpayer must file a claim to the CTA before
the 2-year period lapses.
Sources of tax credit. A tax credit is being granted for the following:
1. At the option of the taxpayer, excess quarterly income taxes paid reflected in
the final adjustment return.
2. At the option of the taxpayer, overwithholding at source of income taxes to
the extent that the amount of such overpayment was not deducted or applied
against income tax due.
3. Input taxes as follows:
a. Attributed to zero-rated sales made by VAT-registered taxpayer, including
export sales by a VAT-registered exporter.
b. Attributed to effectively zero-rated sales made by VAT-registered
taxpayer;
4. Unused input taxes resulting from cancellation of VAT registration due to
retirement from or cessation of business, or due to charges in or cessation of
status as VAT taxable taxpayer.
5. Excise taxes paid on:
a. Petroleum products sold to tax-exempt entities and international carriers;
b. Goods locally produced or manufactured and actually exported without
returning to the Philippines.
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6. Taxes erroneously or illegally paid or penalties imposed without authority.
 Any taxpayer who is erroneously or illegally registered as a VAT person will
not be covered by 3 and 4.
 In no case shall a tax refund or tax credit certificate be given resulting from
availment of incentives granted pursuant to special laws for which no actual
tax payment was made.
Uses of Tax Credit Certificate
 May be used by the grantee or his assignee in the payment of his direct
internal revenue tax liability.
 TCC shall not be used in payment of the following:
1. Payment or remittance for any kind of withholding tax;
2. Payment arising from the availment of tax amnesty declared under a
legislative enactment;
3. Payment of deposits on withdrawal of excisable articles;
4. Payment of taxes not administered or collected by the BIR;
5. Payment of compromise penalty.
Assignment or transfer of TCC issued by the BIR not allowed.
Period of Validity, Conversion and Revalidation.
 Any TCC which remains unutilized after 5 years from date of issue shall,
unless revalidated before the end of the 5th year, be considered invalid and
shall not be allowed for use in payment of any of the taxpayer’s internal
revenue tax liability and the unutilized amount thereof shall revert to the
General fund of the Government.

 Any request for conversion into cash refund of unutilized tax credits may be
allowed during the validity of the TCC; Provided, however, that the original
copy of the TCC showing a creditable balance is surrendered to the Assistant
CIR, Collection Service or other duly authorized Revenue Officer for
verification and cancellation.
 A TCC may be revalidated prior to the expiration of its validity period.
 The revalidation of any TCC shall be initiated by the filing of an application
therefor with the Collection Service or other duly authorized Office of the BIR.
 The revalidation shall be accomplished through the issuance of a new TCC,
reflecting its unutilized amount or creditable balance.
 No revalidation shall be issued unless the CIR’s duly authorized
representative has certified that the applicant taxpayer has no outstanding
tax liability.
 If the holder has any outstanding tax liability, said liability shall be applied first
against the TCC sought to be revalidated through the issuance of a Tax
Debit Memo.
 Outstanding tax liability refers to an assessment that is already final and
executory.
Persons allowed to transact with the BIR regarding TCC issuance,
utilization, and revalidation.
 Only the registered owner of the TCC and persons/representatives duly
authorized by said owner.
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Documents required to prove the authority to transact with the BIR
regarding TCC issuance, utilization, and revalidation.
 If corporation – the authority of a duly authorized representative should be
contained in a Board Resolution of said corporation, evidenced by a
Secretary’s Certificate of the minutes or contents of said Board Resolution.
 If individual – the authority of the duly designated representative should be
contained in a SPA executed by the TCC’s registered owner.
 One claiming to have an authority to process TCC needs only to show 2 valid
government-issued ID, and/or the above mentioned evidence of authority.
Amount of TCC may not be offset against a potential tax liability.
 Because both obligations are not yet fully liquidated.
 While the amount of the TCC has been determined, the amount of deficiency
tax is yet to be determined through the completion of the audit.
Post-audit not necessary for the validity of a TCC.
 Nowhere in the governing laws does the post-audit become necessary for
the validity or effectivity of the TCC, or that a TCC is issued subject to a
suspensive condition.
 What has been used up, debited, and cancelled cannot anymore be declared
to be void, ineffective and cancelled anew.
 A payment through a TCC cannot be both effective when made and
dependent on a future event for its effectivity.
 If the TCCs are considered to be subject to post-audit as a suspensive
condition, the very purpose of the TCC would be defeated as there would be
no guarantee that the TCC would be honored by the government as payment
for taxes.
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Action to contest forfeiture of personal property.

1. At any time before the sale or destruction of the property, bring an action
against the person seizing the property or having possession thereof in order
to recover the same.
2. He may enjoin the sale upon giving proper bond.
3. Bring an action to recover the net proceeds realized at the sale within 6
months from the date of sale.

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