TAXATION II – Reviewer (Atty.

Bolivar Notes) The phrase 'in the course of trade or business' means the regular conduct or pursuit
of a commercial or an economic activity, including transactions incidental thereto,
by any person regardless of whether or not the person engaged therein is a
TITLE 4
nonstock, nonprofit private organization (irrespective of the disposition of its net
VALUE ADDED TAX income and whether or not it sells exclusively to members or their guests), or
government entity.
Chapter 1 – Imposition of Tax
The rule of regularity, to the contrary notwithstanding, services as defined in this
Why is this tax called “Value Added Tax”? Code rendered in the Philippines by nonresident foreign persons shall be considered
This tax is called VAT because the tax payable by the seller, etc. is based on the as being course of trade or business.
values added by him to the cost of goods or merchandise which he previously
purchased which he in turn sells to his customers. There values are the input tax
and gross profit.  [Mem!] Value-added tax is a percentage tax imposed at every stage of
the distribution process on the sale, barter, exchange, or lease of goods, or
A, a retailer purchased from B, a wholesaler, an equipment with a cost of Php properties and on the performance of service in the course of trade or
10,000.00 plus value added tax of Php 1,200.00 or at a total cost of Php 11,200.00. business, or on the importation of goods, whether for business or non-
A sold said equipment to C with a profit of 20% based on total cost. business purposes. It is essentially a tax on spending or consumption
levied on certain transactions such tax being payable by the seller,
1. How much is the selling price of the equipment to C? transferor, lessor or importer.

Total Cost Php 11,200.00  The tax is so-called because it is imposed on the value not previously
Profit (Php 11,200.00 x 20%) 2,240.00 subjected to the VAT, i.e., on the value added to the goods or services at
Selling price without VAT Php 13,440.00 each stage of the distribution chain.
VAT (Php 13,440.00 x 12%) 1,612.80
Selling price with VAT Php 15,052.80 o Certain sales of goods and/or services are either 0-rated or
exempted from the VAT
2. How much is the VAT payable by A?
o Any person whose sales or receipts are exempt under Section
Output Tax Php 1,612.80 109(1)(V) of the Tax Code from payment of VAT and who is not a
LESS: Input Tax 1,200.00 VAT-registered person shall pay percentage tax equivalent to 3%
VAT Payable Php 412.80
Values Added o Any individual engaged in business or businesses where the
(Php 1,200.00+ Php 2,240.00) Php 3,440.00 aggregate gross sales or receipts do not exceed Php 100,000.00
Tax Rate 12% during any 12-month period shall be considered principally for
VAT Payable Php 412.80 subsistence or livelihood and not in the course of trade or
business, and shall be exempt from the payment of VAT and from
any percentage tax
SEC. 105. Persons Liable. - Any person (natural or juridical) who, in the course of
trade or business, sells barters, exchanges, leases goods or properties, renders o The dissolution of the co-ownership and the partition of the
services, and any person who imports goods (whether in the course of trade or properties is not a sale of goods and services
business or not) shall be subject to the value-added tax (VAT) imposed in Sections
106 to 108 of this Code. o The allocation of condominium units to partners of a joint venture
or consortium formed for the purpose of undertaking construction
The value-added tax is an indirect tax and the amount of tax may be shifted or projects as a return on their contributions is not subject to:
passed on to the buyer (but the VAT is payable to the BIR by the seller, transferor
or lessor or by the person who renders the services or by the importer), transferee  Income tax, because it is merely a return of contribution
or lessee of the goods, properties or services. This rule shall likewise apply to and no income is realized
existing contracts of sale or lease of goods, properties or services at the time of the
effectivity of Republic Act No. 7716.  VAT because it is not a sale, barter or exchange of real
property done in the ordinary course of business

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  Documentary stamp tax, because the transfer is without
consideration
o A sale of lot which is involuntary and only forced upon the seller
by virtue of the exercise of the government‟s power of eminent
domain cannot be said to have been conducted in the course of
the taxpayer‟s trade or business and, therefore, not subject to
VAT.
 VAT is an indirect tax. As such, it can be shifted to the
purchasers/transferees, or lessees of goods, properties, and services.
 As a general rule, the VAT system, uses the destination principle as a
basis for the jurisdictional reach of the tax. Goods and services are taxed
only in the country where they are consumed. Thus, exports are 0-rated,
while imports are taxed.
 Some basic principles governing VAT
o It is the end user of consumer goods or services which ultimately
shoulders the tax, as the liability therefore/thereon is passed on to
the end users by the providers of these goods or services who, in
turn, may credit their own VAT liability (or input VAT) from the
VAT payments they receive from the final consumer (or output
VAT). The final purchase by the end consumer represents the final
link in a production chain that itself involves several transactions
and several acts of consumption.
o The VAT system assures fiscal adequacy through the collection of
taxes on every level of consumption
 Shifting of VAT
o [Impt!] The exemption of cooperatives from taxes under Articles
61 and 62 of the Cooperatives Code is limited only to taxes
directly payable to them. The VAT is an indirect tax payable by the
seller and not by the purchaser of the goods. Being an indirect
tax, it can be added to the cost of goods purchased, not as tax but
as additional cost which the purchaser has to pay to obtain the
goods purchased. Similarly, suppliers of goods and services to a
company which is a holder of a legislative franchise and subject to
a 3% franchise tax based on gross receipts, “in lieu of any and all
taxes on its franchise, rights, privileges, receipts, revenues and
profits and properties used,” can pass-on VAT to the latter on its
purchases of goods and services in pursuit of its franchise.
Indirect taxes like VAT are not covered by the exemption.
 The cooperative or the corporation enjoying a franchise is
exempt from payment of taxes but if it mere purchase
goods or properties from a seller who is liable to pay VAT
the cooperative or franchisee cannot claim exemption
from the VAT because it is not the taxpayer, rather, it is
the seller who is liable to pay the VAT.
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o Purchases by non-stock non-profit organizations are likewise
subject to VAT where there is no-showing that they are exempt
from VAT.
o While VAT is an indirect tax and can be shifted to the lessee, the
lessor may elect to absorb the tax himself. Thus, where a lease
agreement provides that all taxes, government fees and charges
due on the land subject of the lease are to be paid by the lessor,
the latter cannot legally pass on the VAT to the lessee by including
it in the rental payments. The lessor is considered to have agreed
to absorb the VAT.
o The sale of goods (such as office equipment) and services to
government agency is not exempt from VAT. Hence, the VAT on
the security services rendered to a government agency may be
passed on to said agency since VAT is an indirect tax
o A diplomatic agent shall be exempt from all dues and taxes,
personal or real, national, regional, or municipal except indirect
taxes of a kind which are normally incorporated in the price of
goods or services. Accordingly, the tax exemption of an Embassy
or its diplomatic agents does not include exemption from the VAT.
In other words, purchases of locally-produced automobiles by the
Embassy shall be subject to both VAT and excise taxes under
Sections 106(A) and 149, respectively, in relation to Section 128.
o The sale of services by stock transfer agents to stockbrokers
through clearing houses is subject to VAT pursuant to Section
108(A).
o A foreign contractor, organized under the foreign laws, rendering
services for the construction of the NPC Gas Turbine Plant Project
funded from a foreign loan agreement, is subject to VAT despite
the NPC is tax exempt under its charter and their contract
stipulated that NPC will assume the responsibility for taxes due
said foreign contractor. Such stipulation is binding only upon the
parties in their private capacities and the contractor‟s personal
liability to pay its taxes cannot be transferred to the NPC with
binding effect on the BIR.
But, in case the loan agreement was made pursuant to the
Foreign Borrowings Act, the contractor may be exempted from
VAT if said agreement contains a proviso that a contractor shall be
exempt from taxes, including the VAT.
 Techniques of or in computing the value-added tax:
1. Addition Method
- Here, the tax is applied on the value added to the service which
includes all payments made at each stage in the form of wages,
 salaries, rents, interests, profits and other inputs (such as
materials);
- Applicable to sales of services and leases of properties
2. Tax Credit Method
- The value-added tax rate is applied on the total sales price
without any deduction whatsoever; and from the tax arrived at,
are deducted all previous tax payments on purchases made. In
other words, the tax is applied only to the value added by the
taxpayer, that is, to the excess of his/its sales over his/its
purchases from other business taxpayers. This is also known as
the “invoice method”.
- This is the most acceptable and common method which is
applicable to sales of goods and other properties.
3. Cost-deduction or cost-subtraction method
- The value-added tax rate is applied on the difference between the
gross selling price or gross value of the taxable article and the
cost of raw materials utilized by the taxpayer which have been
previously subject to tax.
- Applicable to sales of manufactured products
 The present VAT has only 2 rates: 0% and 12%. Zero-rated sales are
considered taxable sales but subject to zero-rate.
 Advantages of VAT
1. It makes the sales tax system more equitable because:
(1) It is imposed only on the value added by the seller, etc.
thereby avoiding the cascading effect of the former sales tax
system
(2) It is generally applicable to all persons and transactions,
thereby establishing a wider tax base and spreading the
burden of paying the tax
(3) It is imposed at a uniform rate, thereby equalizing the tax
burden
2. It has a built-in self-policing feature which will ensure proper collection
of the tax at all stages of distribution.
3. It is simple and consistent, having only 2 tax rates (0% and 12%).
4. It is easy to administer and to comply with, and expected to generate
large revenues.
 [Impt!] Definitions:
1. Person refers to any individual, trust, estate, partnership, corporation,
joint venture, cooperative or association
2. Taxable person refers to any person liable for the payment of value-
added tax, whether or not registered in accordance with Section 236.
3. VAT-registered person refers to any person who is registered as a
VAT taxpayer under Section 236. His status as a VAT registered person
shall continue until the cancellation of such registration.
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4. Taxable sale refers to the sale, barter, exchange, and/or lease of
goods or properties including transactions “deemed sale” and the
performance of service for a consideration, all of which are subject to
tax.
 Requisites for liability
1. There must be a sale, etc. in the Philippines
2. The sale, etc. must be of taxable goods, properties, or services
3. The sale, etc. must be made by a taxable person in the course or
furtherance of his/its business
 Government entities and instrumentalities including government-owned or
controlled corporations, and non-stock, non-profit organizations are subject
to VAT if in the course of trade or business they sell, etc., goods or
properties, or render services, or whether for business or not, import goods
 A non-stock, non-profit corporation or organization deriving income
principally from contributions is exempt from VAT. However, if it engages
in any of the taxable activities stated in Section 105, it will become liable to
VAT. It is exempt only from direct taxes such as income tax, and this
exemption cannot be extended to indirect taxes like VAT. Thus, its
purchases of goods and services (as well as importation of goods) from
VAT registered (or VAT-registerable) suppliers are subject to VAT.
 All sellers of goods, properties, and services whose aggregate gross annual
sales or receipts exceed Php 1,919,500.00 (beginning January 1, 2012) will
be covered by the VAT, unless such sales are specifically exempt.
SEC. 106. Value-Added Tax on Sale of Goods or Properties. –
(A) Rate and Base of Tax. - There shall be levied, assessed and collected on every
sale, barter or exchange of goods or properties, value-added tax equivalent to
ten percent (10%) of the gross selling price or gross value in money of the
goods or properties sold, bartered or exchanged, such tax to be paid by the
seller or transferor. Provided, that the President, upon the recommendation of
the Secretary of Finance, shall, effective January 1, 2006, raise the rate of
value-added tax to twelve percent (12%), after any of the following
conditions has been satisfied:
i. Value-added tax collection as a percentage of Gross Domestic
Product (GD) of the previous year exceeds two and four-fifth
percent (2 ⁄ %); or
ii. National government deficit as a percentage of GDP of the
prevous year exceeds one and one-half percent (1½ %). (As
amended by RA No. 9337).
(1) The term 'goods or properties' shall mean all tangible and intangible
objects which are capable of pecuniary estimation and shall include:
(a) Real properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business;
 (b) The right or the privilege to use patent, copyright, design or
model, plan, secret formula or process, goodwill, trademark, trade
brand or other like property or right;
(c) The right or the privilege to use in the Philippines of any
industrial, commercial or scientific equipment;
(d) The right or the privilege to use motion picture films, tapes and
discs; and
(e) Radio, television, satellite transmission and cable television time.
The term 'gross selling price' means the total amount of money or its
equivalent which the purchaser pays or is obligated to pay to the seller in
consideration of the sale, barter or exchange of the goods or properties,
excluding (if the output tax is included the term is total selling price or
selling price with VAT) the value-added tax but including the input tax.
The excise tax, if any, on such goods or properties shall form part of the
gross selling price.
(2) [Mem!] The following sales by VAT-registered persons shall be subject to
zero percent (0%) rate (the purpose is to encourage export sales and
foreign currency denominated sales and thereby increase foreign
reserves):
(a) Export Sales. - The term 'export sales' means:
(1) The sale and actual shipment of goods from the Philippines
to a foreign country, irrespective of any shipping
arrangement that may be agreed upon which may influence
or determine the transfer of ownership of the goods so
exported and paid for in acceptable foreign currency or its
equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(2) Sale of raw materials and/or packaging materials to a
nonresident buyer for delivery to a resident local export-
oriented enterprise (impliedly the finished products together
with the packaging materials will ultimately be destined for
export) to be used in manufacturing, processing, packing or
repacking in the Philippines of the said buyer's goods and
paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(3) Sale of raw materials and/or packaging materials to export-
oriented enterprise whose export sales exceed seventy
percent (70%) of total annual production;
(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP);
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(5) Those considered export sales under Executive Order NO.
226, otherwise known as the Omnibus Investment Code of
1987, and other special laws; and
(6) The sale of goods, supplies, equipment and fuel to persons
engaged in international shipping or international air
transport operations. (As amended by RA No. 9337).
(b) Foreign Currency Denominated Sale. (or Foreign Exhange
Denominated Sale or Internal Export) - The phrase 'foreign
currency denominated sale' means sale to a nonresident of goods,
except those mentioned in Sections 149 and 150, assembled or
manufactured in the Philippines for delivery to a resident in the
Philippines, paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP).
(c) Sales to persons or entities whose exemption under special laws
or international agreements to which the Philippines is a signatory
effectively subjects such sales to zero rate.
(B) [Mem!] Transactions Deemed Sale. - The following transactions shall be
deemed sale:
(1) Transfer, use or consumption not in the course of business (such
as donations to relief organizations in time of calamities) of goods
or properties originally intended for sale or for use in the course of
business;
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the profits of the
VAT-registered persons; or
(b) Creditors in payment of debt;
(3) Consignment of goods if actual sale is not made within sixty (60)
days following the date such goods were consigned; and
(4) Retirement from or cessation of business, with respect to
inventories of taxable goods existing as of such retirement or
cessation.
(C) Changes in or Cessation of Status of a VAT-registered Person. - The tax
imposed in Subsection (A) of this Section shall also apply to goods disposed of
or existing as of a certain date if under circumstances to be prescribed in rules
and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, the status of a person as a VAT-
registered person changes or is terminated.
(D) Sales Returns, Allowances and Sales Discounts. - The value of goods or
properties sold and subsequently returned or for which allowances were
granted by a VAT-registered person may be deducted from the gross sales or
receipts for the quarter in which a refund is made or a credit memorandum or
refund is issued. Sales discount granted and indicated in the invoice at the
time of sale and the grant of which does not depend upon the happening of a
 future event may be excluded from the gross sales within the same quarter it
was given.
(E) Authority of the Commissioner to Determine the Appropriate Tax Base. - The
Commissioner shall, by rules and regulations prescribed by the Secretary of
Finance, determine the appropriate tax base incases where a transaction is
deemed a sale, barter or exchange of goods or properties under Subsection
(B) hereof, or where the gross selling price is unreasonably lower than the
actual market value.
 In computing the VAT payable (total output tax EXCEEDS total input tax
during a particular period) or excess input VAT (total input tax EXCEEDS
total output tax during a particular period, this happens if purchases
exceeds sales during a particular period), the basis is the total output tax
during the period (month or quarter) less total allowable input tax during
the same period. The allowable input tax includes a carry-over of the
excess input tax from the preceding period in addition to those derived
from current purchases.
 Export Sales – they are zero-rated if made by VAT-registered persons; if
the person is not registered, they are treated as exempt sales.
o Under Subsection (A,2,a,1) of Section 106, the sale of goods by X
to Y, notwithstanding the fact, that Y is a foreign corporation, is
subject to the 12% VAT. Actual shipment of the goods from the
Philippines to a foreign country is a precondition of an export sale
following the destination principle being adhered to by our VAT
System.
o Sales of raw materials and/or packing materials to an export-
oriented enterprise whose export sales exceed 70% of its total
annual production are to be zero-rated provided the seller
complies with other requirements, like registration with the Board
of Investments (BOI) and the Philippine Economic Zone Authority
(PEZA). It is the entirety or totality of the sales to such enterprise
that is to be zero-rated, not just the percentage of the sale in
proportion to the actual exports made by such enterprise.
o While an ecozone is geographically within the Philippines, it is
deemed a separate customs, territory and is regarded in law as
foreign soil. Sales by suppliers from outside the borders of the
ecozone to this separate customs territory are deemed as exports
and treated as export sales.
 Foreign currency denominated sales as foreign exchange
denominated sales or internal exports are zero-rated.
o Moreover, although loan agreements between the government
and foreign creditors may provide for the exemption from taxes,
charges and other levies of local contractors and suppliers for
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projects utilizing proceeds from said loans, this exemption
privilege is extended only to the awardee of the contract (i.e. the
contractor) and not to suppliers of such contractors. Hence, the
sale of steel pipes to a contractor of a government agency for a
waterworks project funded by the World Bank cannot be legally
considered VAT exempt nor zero-rated.
o Sales of locally manufactured or assembled goods for household
and personal use to Filipinos abroad and other non-residents of
the Philippines as well as returning Overseas Filipinos under the
Internal Export Program of the Government paid for in convertible
foreign currency and accounted for in accordance with the rules
and regulations of the BSP shall also be considered export sales.
o Goods purchased from local suppliers and subsequently sold by
duty-free shops to returning Filipinos, balikbayans or other non-
residents, which are paid for in acceptable foreign currency can be
considered foreign currency denominated sales subject to 0%
VAT. Similarly, goods purchased from foreign suppliers and
subsequently sold by duty-free shops also qualify for VAT zero-
rating pursuant to the “destination principle” which provides that
goods and services are taxed only in the country where they are
consumed. Thus, exports are zero-rated because the consumption
is made outside the Philippines.
o Sales by a DC to its non-resident clients for delivery to Philippine
residents which are paid for in US currency through credit card
charging are considered as “foreign currency-denominated sales”
and are subject to 0% VAT rate. The unused excess input VAT
credits of the DC from its local purchases which are directly
attributable or ratably apportioned to its zero-rated sales, can be
claimed for refund or tax credit pursuant to Section 112.
 Zero-rated sale of goods or properties – Such sale by a VAT-registered
person is a taxable transaction for VAT purposes, but shall not result in any
output tax. However, the input tax on purchases of goods, properties, or
services related to such zero-rated sales shall be available as tax credit or
refund.
Examples of zero-rated sales:
 Goods sold directly to the Asian Development Bank shall not be
subject to sales tax, and services rendered under contracts
entered into with the said bank shall not be subject to contractor‟s
tax. In this case, the sale of goods and services to Asian
Development Bank are effectively zero-rated (EO 161).
 The sale of gold to the Central Bank (now BSP) is considered
export sale; hence, the sale of gold tailings is subject to VAT of
0% pursuant to Section 106 (A,2,a,4) if the seller is a VAT-
registered person; otherwise (the seller is NOT a VAT-registered
person such as when his gross receipts or gross sales during the
 preceeding year do not exceed Php 1,919,500.00), as exempt
(from the 3% percentage tax), pursuant to Section 109 (O)
(Section 2, EO 581).
 [Impt!] Effectively zero-rated sale of goods or properties (Section
106,A,2,c) – it refers to the local sale of goods and properties by a VAT-
registered person to a person or entity granted indirect tax exemption
under special laws or international agreement.
o Although not involving actual export, it is considered as
“constructive export”, such as sale to export-oriented enterprises,
sale to persons engaged in international shipping or air transport
operations, foreign currency denominated sale, and sale to tax-
exempt persons or entities. Except export sale and foreign
currency denominated sale, other cases of zero-rating require
prior application and approval by the BIR for effective zero-rating.
o Sales of Goods to international organizations and diplomats
which/who are tax-exempt under special laws or international
agreements are effectively zero-rated
o The sale of goods and services to persons engaged in international
shipping are subject to VAT zero-rating only if the sale pertains to,
or is directly attributable to, the transport of goods and
passengers from a port in the Philippines directly to a foreign port.
Products such as projectors, printers, and photocopying machines
do not pertain to, or are not directly attributable to, the transport
of goods and passengers from a part in the Philippines directly to
a foreign port. Hence, their sale of such goods even to persons
engaged in international shipping company is subject to 12% VAT.
 The VAT is based on the gross selling price of the goods sold. The trade
practice of giving goods (product samples which are considered
promotional and advertising expenses) free to customers in order to
promote sales efforts in the course of trade or business is not considered a
transaction deemed sale and not subject to VAT.
 In the case of the sale, barter or exchange of real property subject to VAT,
gross selling price 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.
o If the VAT is not billed separately the selling price shall be deemed
to be inclusive of VAT. The VAT is determined or computed by
dividing the selling price by 112% and then by multiplying the
quotient by 12%.
Example:
If the selling price is Php 1,120,000.00 the VAT is
computed or determined as follows:
Php 1,120,000.00 112% x 12% = Php 120,000.00
 Allowable deductions from gross selling price – they include the
selling price of goods or properties returned and not resold; bona fide or
regular sales discounts given at the time of sale and are expressly
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indicated in the invoice and the grant of which does not depend upon the
happening of a future event (such as payment of the selling price at a
specified future date).
 Sale of real property – sale of real properties held primarily for sale to
customers or held for lease and ultimately sold to a customer in the
ordinary course of trade or business of the seller shall be subject to VAT.
o In the case of real properties on the instalment plan, the real
estate dealer shall be subject to VAT on the instalment payments
(not on the total instalment price), including interests and
penalties, actually and/or constructively received by the seller.
o “Sale of real property on the instalment plan” means sale of real
property by a real estate dealer, the initial payments of which in
the year of sale do not exceed 25% of the gross selling price (if
initial payments exceed 25% the sale cannot be reported on the
instalment basis and the entire selling price shall be subject to
VAT in the month of sale)
o “Sale of real property by a real estate dealer on deferred payment
basis,” not on the instalment plan means sale of real property, the
initial payments of which in the year of sale exceeds 25% of the
gross selling price. The transaction shall be treated as cash sale
which makes the entire selling price taxable in the month of sale
(VAT is payable monthly within 20 days following the end of each
month EXCEPT the third month).
o “Initial payments” means payment or payments which the seller
receives before or upon execution of the instrument of sale and
payments which he expects or is scheduled to receive in cash or
property (other than evidence of indebtedness of the purchaser)
during the year when the sale or disposition of the real property
was made. It covers any downpayment made and includes all
payments actually or constructively received during the year of
sale, the aggregate of which determines the limit set by law.
o “Real estate dealer” includes any person engaged in the
business of buying, developing, selling exchanging real properties
as principal and holding himself out as a full or part-time dealer in
real estate.
SEC. 107. Value-Added Tax on Importation of Goods. -
(A) In General. - There shall be levied, assessed and collected on every
importation of goods a value-added tax equivalent to ten percent (10%)
based on the total value used by the Bureau of Customs in determining tariff
and customs duties, plus customs duties (ad valorem or face value), excise
taxes, if any, and other charges (such as wharfage dues), such tax (VAT) to
be paid by the importer to the collector of customs prior to the release of such
 goods from customs custody: Provided, That where the customs duties
(specific) are determined on the basis of the quantity or volume of the goods,
the value-added tax shall be based on the landed cost (invoice amount, etc.)
plus excise taxes, if any and other charges: Provided, further, That the
President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent
(12%), after any of the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth
percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 1/2%).
(B) Transfer of Goods by Tax-exempt Persons. - In the case of tax free
importation of goods into the Philippines by persons (such as diplomatic
officials), entities (such as non-stock non-profit educational institution) or
agencies (government agencies such as AFP) exempt from tax where such
goods are subsequently sold, transferred or exchanged in the Philippines to
non-exempt persons or entities, the purchasers, transferees or recipients shall
be considered the importers thereof, who shall be liable for any internal
revenue tax (VAT and excise tax, if any) on such importation. The tax due on
such importation shall constitute a lien on the goods superior to all charges or
liens on the goods, irrespective of the possessor thereof.
 “Advance Sales Tax” now VAT
 The rationale for imposing compensating tax (now VAT) applies likewise
to the VAT on importation of goods for non-business use.
o The VAT on importation is a tax on the privilege of importing
goods. It shall be paid by the importer to the collector of customs
prior to the release of the imported goods from customs custody.
 Rate and base of tax on importation of goods – the 12% VAT is
based:
o On the total value by the Bureau of Customs in determining tariff
and customs duties (ad valorem) which value shall include (a)
dutiable value in pesos of the goods or articles, (b) the customs
duties, (c) excise taxes, if any, and (d) other charges (e.g.
wharfage dues, brokerage fees, etc.) or
o On the landed cost plus excise tax where the customs duties
(specific) are determined on the basis of the quantity or volume of
the imported goods. [Mem!] Landed cost consists of the invoice
amount, customs 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.
7
 Importer refers to any person who brings goods into the Philippines,
whether or not made in the course of his trade or business. It includes
non-exempt persons or entities who acquire tax-free imported goods from
exempt persons, entities or agencies.
 Cases when tax applicable
o Importations are subject to VAT, whether donated or purchased.
Such being the case, importation of articles consigned to
charitable, religious, cultural or social welfare corporations or
institutions, e.g., church bells and spares consigned to a parish
church, are not exempt but are subject to VAT pursuant to Section
107. This, however, does not apply to transactions where the
recipient is granted special exemption privileges, i.e., exemption
from indirect taxes like VAT, under its charter or provided for
under the Constitution (such as NSNPEI).
o A non-profit organization is exempt only from income tax on
income received by it as a social welfare organization under
Section 30(G), and is not exempt from other taxes. As such,
imported relief goods and equipment received as donation from
abroad by such organization are subject to VAT pursuant to
Section 107.
o Equipment of a foreign contractor which is brought into the
Philippines to be used in discovering and locating oil and
petroleum basins in the Philippines is subject to compensating tax
(now VAT) despite the fact that the same will be re-exported after
the work.
o Imported cotton is subject to VAT pursuant to Section 107. If the
imported cotton is processed into textile by textile mills and
subsequently sold to garment manufacturers, the sale is also
subject to VAT in the same manner as the sale of textile
manufactured out of locally-produced cotton.
 The VAT on importation of cotton is considered input tax
deductible from the VAT on the sale of the textile to the
garment factories.
o Sale of goods consummated (sale) outside the territorial
jurisdiction of the Philippines between a Philippine supplier and
Philippine buyer is not subject (because only sales made in the
Philippines are subject to VAT) to VAT. However, as importer of
the goods, the Philippine buyer is subject to VAT on the
importation of the goods.
 Cases when tax not applicable – no VAT is payable on importation of
goods which are specifically exempted under Section 109(1).
o Imported articles which are merely to replace those returned by
reason of their defective quality, are no longer subject to the
advance sales tax (now VAT). The advance sales tax (now VAT)
paid on the original importation can be applied against the tax due
 on the replacement shipment, provided that no additional amount
is expended for the importation of the replacement and that the
replacement shipment is the same kind of articles as those re-
exported to the foreign supplier.
o Exported merchandise which were shipped back to the Philippines
on account of rejection by port authorities in the port of
destination or by the buyers abroad are not subject to the VAT
because the shipment back to the Philippines does not constitute
importation.
o Where the imported goods (such as newly invented equipment)
are for viewing and display only and the same shall be shipped out
of the Philippines after the exhibition is over, the importation is
exempt from VAT. However, the exhibitor is required to put a
bond equivalent to the value of the imported goods which shall
answer for VAT and excise tax, if any, in the event of failure to
ship back the goods after the exhibition.
 Only the VAT, and not any other kind of import duties and charges paid on
imported raw materials, can be claimed as input tax credit against output
tax liabilities.
 [BAR!] [Mem!] When importation begins and ends – importation begins
when the carrying vessel or aircraft coming from a foreign country enters
the jurisdiction of the Philippines with intention to unload therein.
Importation is deemed terminated upon payment of the 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.
o [VIP!] Under the concept of bonded manufacturing warehouse
(considered by law to be beyond the jurisdiction of the Bureau of
Customs), the importation of articles brought to such warehouse
for processing and re-exportation is not yet complete; hence, no
tax (the articles are NOT subject to customs duties and VAT)
consequence results as long as the imported article remains
therein within the prescribed (by the Bureau of Customs) period of
time. Where the processing is not done within the prescribed
period in said warehouse, then the processing is said to be done in
the so-called “customs territory” (territory within the
ecozones). Since the importation in such case is deemed
complete, the same shall be subject to VAT pursuant to Section
107(A), which provides that the tax shall be paid prior to (or
upon) release from customs custody.
o Customs-bonded manufacturing warehouse is removed from
the jurisdiction of the Philippine Customs Territory; hence,
payment of internal revenue taxes shall be made only upon
withdrawal or removal directly from customs custody. Similarly,
the Industry Specific Bonded Warehouse (IC[might stand for
customs]BW) is considered removed from Philippine Customs
8
Territory; therefore, shipment or delivery of imported goods
thereto is not subject to VAT. In addition, since the ICBW leases
space only to companies selling exclusively to customers located
in PEZA-registered Ecozones and industrial parks, the importation
of products and/or supplies that are merely consigned and stored
in an ICBW is not subject to VAT, since by the very nature of the
consignment into the ICBW, there articles are not intended to
enter Customs Territory.
o Importations through a customs-bonded manufacturing
warehouse of raw materials and spare parts used in the
manufacture/assembly of export are not subject to VAT. The
customs-bonded manufacturing warehouse is removed from the
jurisdiction of the Philippine customs territory; thus, the raw
materials and/or spare parts are deemed not to have entered the
customs territory and, therefore, are never introduced into
Philippine commerce. Hence, imported articles brought into the
bonded manufacturing warehouse which are used as raw materials
for finished products that are eventually exported are exempt
from VAT.
o Importation by a domestic corporation of raw materials through
its customs-bonded warehouse is not subject to VAT because said
importation is still beyond the taxing authority of the Philippine
Government. The withdrawal by the corporations from its
registered customs-bonded warehouse of goods which are being
held in trust on behalf of its foreign company principals for
delivery to the latter‟s ultimate buyers is not considered a sales
transaction. If, however, the foreign company principal of said
corporation sells the goods to customers located in the customs
territory, i.e., outside the ECOZONES, the same is subject to VAT.
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of
Properties. –
(A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-
added tax equivalent to ten percent (10%) of gross receipts derived from the
sale or exchange of services, including the use or lease of properties:
Provided, That the President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has been
satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth
percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 1/2%).
The phrase 'sale or exchange of services' means the performance
of all kinds of services in the Philippines for others for a fee,
remuneration or consideration, including those performed or rendered
by construction and service contractors; stock, real estate,
commercial, customs and immigration brokers; lessors of property,
whether personal or real; warehousing services; lessors or distributors
of cinematographic films; persons engaged in milling, processing,
manufacturing or repacking goods for others; proprietors, operators or
keepers of hotels, motels, rest-houses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and
other eating places, including clubs and caterers; dealers in securities;
lending investors; transportation contractors on their transport of
goods or cargoes, including persons who transport goods or cargoes
for hire and other domestic common carriers by land relative to their
transport of goods or cargoes; common carriers by air and sea relative
to their transport of passengers, goods or cargoes from one place in
the Philippines to another place in the Philippines; sales of electricity
by generation companies, transmission, and distribution companies;
services of franchise grantees of electric utilities, telephone and
telegraph, radio and television broadcasting and all other franchise
grantees except (NOT subject to VAT) those under Section 119 of this
Code; and (subject to VAT) non-life insurance companies (except their
crop insurances (NOT subject to VAT)), including surety, fidelity,
indemnity and bonding companies; and similar services regardless of
whether or not the performance thereof calls for the exercise or use of
the physical or mental faculties. The phrase 'sale or exchange of
services' shall likewise include:
(1) The lease or the use of or the right or privilege to use any
copyright, patent, design or model plan, secret formula or
process, goodwill, trademark, trade brand or other like
property or right;
(2) The lease or the use of, or the right to use of any industrial,
commercial or, scientific equipment;
(3) The supply of scientific, technical, industrial or commercial
knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary
to and is furnished as a means of enabling the application or
enjoyment of any such property, or right as is mentioned in
subparagraph (2) or any such knowledge or information as
is mentioned in subparagraph (3);
(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;
9
(6) The supply of technicai advice, assistance or services
rendered in connection with technical management or
administration of any scientific, industrial or commercial
undertaking, venture, project or scheme;
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television,
satellite transmission and cable television time.
Lease of properties shall be subject to the tax herein imposed
irrespective of the place where the contract of lease or licensing
agreement was executed if the property is leased or used in the
Philippines.
The term 'gross receipts' means the total amount of money or its
equivalent representing the contract price, compensation, service fee,
rental or royalty, including the amount charged for materials supplied
with the services and deposits and advanced payments actually or
constructively received during the taxable quarter for the services
performed or to be performed for another person, excluding value-
added tax (output tax).
(B) Transactions Subject to Zero Percent (0%) Rate. - The following services
performed in the Philippines by VAT-registered persons shall be subject to
zero percent (0%) rate:
(1) [The processing or manufacturing or repacking is done in the
Philippines] Processing, manufacturing or repacking of goods for
other persons doing business outside the Philippines which goods
are subsequently exported, where the services are paid for in
acceptable foreign currency (if paid in Philippine currency, the
services are subject to 12% VAT even if the finished products are
exported) and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than (the services are rendered in the Philippines
such as shipping or transport or warehousing services) those
mentioned in the preceding paragraph rendered to a person
engaged in business conducted outside the Philippines or to a
nonresident person not engaged in business who is outside the
Philippines when the services are performed, the consideration for
which is paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption under
special laws or international agreements to which the Philippines is
a signatory effectively subjects the supply of such services to zero
percent (0%) rate;
 (4) Services rendered to persons engaged in international shipping or
international air transport operations, including leases of property
for use thereof;
(5) Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual
production;
(6) Transport of passengers and cargo by air or sea vessels from the
Philippines to a foreign country; and
(7) Sale of power or fuel generated through renewable sources of
energy such as, but not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy, and other emerging
energy sources using technologies such as fuel cells and hydrogen
fuels.
 Service – “the art of doing something useful for a person or company for a
fee” or “useful labor or work rendered by one person to another.” A person
is subject to VAT only if he renders service “in the course of trade or
business.” This implies that the rendering of service is done regularly and
continuity, and not just occasionally.
o Since the VAT has replaced, among others, the contractor‟s and
broker‟s taxes effective January 1, 1988, the buying and selling of
TV airtime constitutes the rendition of services to others for a
consideration subject to VAT. The sale of a specific TV airtime
contemplates the use by the contractor-buyer of television
broadcast facilities of the station owner and/or availment of the
services of the latter wherein the consideration is measured by the
length of time allowed to the buyer to use TV broadcast facilities.
o A customs broker who transports goods of customers from the
customs premises to their place of establishment for a fee is
subject to 12% VAT on the gross receipts he derives from the sale
of his services. However, he is no longer subject to the 3%
common carriers tax imposed by Section 117.
o A domestic corporation engaged in physical fitness program and
maintains physical fitness equipment and facilities, and gives
instruction to each member on how to use the different equipment
and facilities to attain physical fitness, and for such services and
facilities receives monthly membership fees and one-time
entrance fee, is not subject to the VAT imposed by Section 108(A)
as such activities do not constitute sale of services but it is subject
to income tax under Section 27(A).
o Film producers/owners/importers who share their gross sales on a
percentage basis with owners or operators of movie houses as
10
well as those who rent or lease movie houses on a flat rental basis
for exhibition of their films are subject to VAT.
o A U.S. company that established a Philippine branch to render
engineering and marketing support consultancy services should be
subject to 30% corporate income tax as a resident foreign
corporation and also subject to VAT.
o One engaged in the business of door-to-door delivery service to
the Philippines is subject to VAT under Section 108(A). any fees or
charges paid for services performed outside the Philippines, say,
fees for the transport or carriage of goods from foreign port bound
for the Philippines shall not form part of the taxable receipts.
o The business of leasing a space on public utility vehicles for the
purpose of putting up advertising boards, which are then sublet or
offered to the general public for a fee, involves a sale of service.
Hence, companies engaged in said business activity is subject to
VAT pursuant to Sections 105 and 108.
o To be liable for VAT under Subsection (A), the service must be
done or rendered in the Philippines. Hence, the commission paid
for selling abroad real property located in the Philippines is not
subject to VAT.
o Production of live concerts which involves rendering of amusement
services is not subject to VAT, since the jurisdiction to impose
amusement tax on gross receipts from admission to places of
amusement shall be exercised by the provinces and cities, to the
exclusion of the national or municipal government. However, other
revenues or receipts from the conduct of live or televised
concerts, other than admission receipts, which are in the nature of
revenues or receipt s from advertising services rendered, such as
payments received from sponsors of the live/televised concert
whose products are advertised in the course of such concert, shall
be subject to VAT pursuant to Section 108.
Moreover, gross receipts from management of local talent involve
sales of services; hence, are also subject to VAT under Section
108.
o Placement fees, charged by recruitment agencies from applicants
or would-be contract workers are part of gross receipts from the
“sale of services” as defined in Section 108. Generally, even if the
placement fees are paid for by the prospective employers on
behalf of the applicants, the sale of services by the placement
agencies are still subject to VAT.
o Tollway operators are subject to VAT. The sale of services of
franchises grantees except those excluded under Section 119 is
 subject to VAT toll services being rendered by tollway operators
do not render the exceptions specified under Section 119.
o Shipping services performed within the Philippines by VAT-
registered lease shipping companies for a non-resident foreign
corporation, where the services are paid for in acceptable foreign
currency are automatically subject to VAT at 0% rate under
Section 108 (B,2)
o Similarly VAT-registered freight forwarders whose services are
rendered to clients outside the Philippines and paid for in
acceptable foreign currency and accounted for in accordance with
BSP rules and regulations are zero-rated pursuant to Section
108(B,2).
o The current administrative position of the BIR on the issue of
whether or not condominium corporations are subject to income
tax and VAT remains as follows:
 Condominium dues and assessments are not taxable
income of the condominium corporations, but are funds
held by them in trust for their unit owners or members;
 Condominium corporations are not subject to VAT when
they collect association dues from unit owners pursuant
to their corporate purpose as trustees of the fund; and
 Membership dues, fees and assessment collected by
condominium corporations and homeowners associations
are not considered payments for the sale of services.
Condominium corporations clearly collect funds in trust
for unit owners, members and occupants to be disbursed
for maintenance and utilities expenses. Unless the
condominium corporation engages in activities for profit,
it is not subject to VAT.
 Collections of a condominium association which are used
for administrative expenses in implementing its corporate
purposes are not subject to income tax, withholding tax,
and VAT considering that the association does not sell,
barter, exchange, lease goods or property, and neither
does it render service for a fee but merely implements
the administration of the required services to collect the
association dues from the unit owners pursuant to its
corporate purposes as “trustee” for the fund thereof.
o Director‟s fees are taxable, for income tax purposes, as
compensation income when the recipient director is an employee
(e.g., President sitting as a member of the board) of the
corporation which pays the same.
11
It the fees are paid to a director who is not an employee of the
corporation (i.e. whose duties are confined to the attendance of
and participation in the meetings of the board), such fees fall
under Section 32(A)(2) of the Tax Code under the caption “Gross
income derived from the conduct of trade or business or exercise
of a profession.” Such director falls under the category of seller of
services liable to pay 12% VAT on his gross income pursuant to
Section 108 or to the 3% percentage tax composed under Section
116 should he fail to meet the VAT threshold of Php 1,919,500.00
beginning January 1, 2012.
o Membership dues, seminar fees and funds collected by a non-
stock, non-profit corporation, organized for the exclusive benefit
of its members held in trust by the said corporation for the
exclusive use and benefit of its members, are exempt from
income tax, withholding tax, and VAT. The corporation merely acts
as a collecting agent in receiving the membership dues, fees, and
funds, and such funds are used solely for the payment of the
association‟s common administrative expenses.
o Monies received by a corporation (X Corp) primarily engaged in
real estate (Mall developer/owner) from its mall tenants as
payments for common usage and service area expenses such as
electricity, water, repairs and maintenance, which expenses are
billed by the utility and service providers to the X Corp. which
initially advances the payment and then issues a billing statement
to its tenants to charge the above expenses at cost in a pro-rate
basis, are not subject to VAT. By its very nature, reimbursement
of expenses is not income. The amounts received by a corporation
in trust for another do not form part of gross taxable receipts even
for VAT purposes.
 The VAT on rental and/or royalties payable to non-resident 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 the licensor and the licensee. The licensee shall be responsible for the
payment of VAT on such rentals and/or royalties on behalf of the non-
resident foreign corporation or owner by filing a separate VAT
declaration/return for this purpose.
Non-resident lessor/owner refers to any person, natural or juridical, an
alien or a citizen who establishes to the satisfaction of the Commissioner
the fact of his physical presence abroad with a definite intention to reside
therein, and who owns/leases properties, real or personal, whether
tangible or intangible, located in the Philippines.
 Gross receipts in the case of hotel and restaurant operators, includes,
among others, charges for rooms, laundry and valet services, food and
beverages consumption, corkage, handling charges for providing
telephone, telex, cable or fax services, cake shop sales, lease to
concessionaries, compensation and other service fees.

 Gross receipts for purposes of franchise grantees subject to VAT 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 for
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.
 Non-life insurance companies except on Crop Insurances including surety,
fidelity, indemnity and bonding companies are now subject to VAT on gross
premiums
o They are no longer liable to the payment of the 5% premium tax
under Section 123 of the Tax Code. Premiums on crop, life, health
and accident insurance policies are not subject to VAT.
o Health and accident insurance partakes of the nature of a life
insurance, and thus, premiums received in relation thereto,
regardless of whether they are received by a life or non-life
insurance company, shall be subject to the premium tax (5%),
and not to 12% VAT, therefore, shall not form part of its gross
receipts for VAT purposes.
o Non-life insurance premiums are subject to VAT except on Crop
Insurances.
o The VAT due from the foreign reinsurance company is to be
withheld by the local insurance company and to be remitted to the
BIR by filing the Monthly Remittance Return of Value-Added Tax
Withheld.
o Commissions whether life or non-life, of insurance agents and/or
brokers are subject to VAT.
 Gross receipts from non-life insurance companies shall mean total
premiums collected, whether paid in money, notes, credits or any
substitute for money.
 Pre-need companies are corporations registered with the SEC and
authorized/licensed to sell or offer for sale pre-need plans, whether a
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 service is the premiums or
payments received from the plan holders.
12
 Rev. Memo. Cir. No. 39-07 clarifies the income tax and VAT treatment of
agency fees/gross receipts of security agencies, including the withholding
of taxes thereon.
o On the part of the security agency – For VAT purposes, the
taxable gross receipts of the Security Agency pertains to the
amount actually or constructively received by it constituting its
gross income. Since only the amount covering the Agency Fee
represents its gross income, then that portion alone of the
Contract Price, when actually or constructively received, will
constitute the Security Agency‟s taxable gross receipts. This
means that the amount received by the Security Agency which is
segregated, earmarked or set aside for the salaries of the security
guards will not form part of its gross receipts but should be
recognized as a liability. Accordingly, the 12% output tax will only
be computed on the Agency Fee which shall in turn be the input
tax of its Client.
Example:
 Debit:
Cash Php 17,931.77
Prepaid income tax
(2% EWT on agency fee) 68.23
 Credit:
Service Income (agency fee) Php 3,411.54
Output Tax (on agency fee) 409.38
Due to security guards 14,179.08
o On the part of the client – Only the portion of the payment
representing the Agency Fee (Php 3,411.54), if covered by a VAT
Official Receipt, will entitle the VAT-registered Client to a claim of
input tax credit. This means that the amount of output tax (Php
409.38) paid to the Security Agency is the amount to input tax
available to the client. The client cannot claim an input tax on the
salary portion of the expense because it pertains to services
exempt from VAT. Section 109(1) specifically exempts from VAT
services rendered by individuals pursuant to an employer-
employee relationship.
 Constructive receipt of payment – it occurs when the money
consideration or its equivalent for the articles or property sold, exchanged
or leased, or services rendered has already been placed under the control
of the seller/transferor/lessor of the article or property or person who
rendered the services without any restriction by the payor.
 VAT on contractors – it is a privilege tax on the sale of services or labor.
It is an indirect tax and whether or not the contractor or employer is
exempt from internal revenue taxes is immaterial. The services may be
actual or technical, physical or mental. It is directly collectible from the
contractee.
 Test of being a contractor – the true test would seem to be that he
renders services in the course of an independent occupation representing
the will of his employer (the person who employs the services of the
contractor) only as to the result of his work and not as to means and
methods by which it is accomplished.
o In a case, X corporation rendered technical services through its
“work engineers” to PNB, DBP and SSS in the construction of their
buildings. The “work engineers” acted as overseers of X
corporation, rendering their professional services as employees of
X. The contractor‟s tax (now VAT) imposed on X is a tax on its
business and privilege of selling the services of those employees
themselves.
o A lawyer acted as conservator of an insurance company in distress
is neither an employee of the Insurance Commission who
appointed him nor of the insurance company which paid for his
services but an independent contractor whose professional
judgment is being relied upon during the period that the company
is under conservatorship.
 It has been administratively ruled that a partnership of licensed
professional engineers and architects rendering professional services by
preparing plans and specifications for a particular project without actually
undertaking the actual construction is not subject to VAT of 12% and is not
considered a contractor for purposes of the contractor‟s percentage tax
(now VAT) under Section (108,2) of the Tax Code. But a firm engaged in
performing professional and management services to its managed
companies is engaged in the sale of its services to them and is subject to
VAT of 12%.
 VAT liabilities of contractors of government projects – the following
clarifications are made in connection with the VAT liabilities of a contractor
of a government contract or project:
o Only the 1% expanded withholding tax on gross collections net of
VAT is automatically deducted in contract awarded by any
government entity;
o Gross receipts of the main contractor is subject to VAT but he
shall be allowed credits for payments (input tax) to the
subcontractors and the gross receipts of the subcontractor from
the main contractor shall be subject to 12% output tax.
o Note: Under Section 114(C), the Government or any of its political
subdivisions is required to deduct or withhold a VAT at the rate of
5% of the gross payment for the purchase of goods and services.
13
Example:
Corporation X is engaged in construction business and a
government agency hired the said corporation to construct a
building at a contract price of Php 100M without VAT of 12%. The
gross amount collectible by Corporation X is Php 112M which
includes 12% VAT on Php 100M or Php 12M. Corporation X hired a
subcontractor for labor in the amount of Php 20M without VAT.
The amount collectible by the subcontractor from Corporation X is
Php 20M + Php 2.4M representing VAT of 12% on Php 20M.
Corporation X purchased construction materials at a total cost of
Php 54.5M which includes VAT of Php 4.5M. The government
agency will withhold 1% on the Php 100M representing
withholding tax on the income of Corporation X and 5%
withholding tax for VAT or Php 5M. Corporation X‟s liability to the
BIR is computed as follows:
Output Tax Php 12,000,000.00
LESS: Input Tax
(Php 2.4M + Php 4.5M) 6,900,000.00
VAT payable to the BIR Php 5,100,000.00
LESS: Withholding tax on VAT 5,000,000.00
VAT still due 100,000.00
 Broker refers to one whose occupation is to bring parties together to
bargain or to bargain for them in matters of trade, commerce or
navigation. He is strictly a middleman and for some purposes, the agent of
both parties. It is immaterial whether the fee paid to him is a fixed, regular
amount or not, or whether the act performed by him can be performed by
the principal.
o The management of a subdivision may be regarded as a part of
the real estate broker‟s business. Hence, not only the sales
commission on the sales of subdivision lots but also the fees
received for planning, supervising and managing other people‟s
lands and for collecting payments are subject to the real estate
broker‟s percentage tax (now VAT).
o Fish brokers who sell fish and other marine and fresh water
products brought or shipped by traders, producers or shippers
from different provinces to public markets in Divisoria, Malabon
and the Navotas Fish Port Complex on wholesale basis to the
highest bidders and in return charge 5% commission based on the
amount of sales of the fish and other products sold which are
basically owned or produced by the traders, producers or
shippers, are commercial brokers, subject to the VAT under
Section 108(A).
o The income derived from the hauling and handling of merchandise
by a customs broker with the use of trucks for hire is income from
the rendering of a forwarding service and not from a common
 carrier. Therefore, such income is subject to VAT to be reported  A person (such as copra, flour and animal feed millers) engaged in milling
together with the income as a customs broker. for others (except palay into rice, corn into corn grits, and sugarcane into
raw sugar) is subject to value-added tax on sale of services.
 Dealer in securities refers to a merchant of stock and other securities,
whether an individual, partnership, or a corporation, with an established o If the miller is paid in cash for his services, the VAT shall be based
place of business and regularly reselling to customers at a profit. This on his gross receipts for the month or quarter.
excess or mark-up represents remuneration for his labor as a middleman in
bringing together buyer and seller and in performing the usual services of o If he receives a share of the milled products instead of cash, the
retailer or wholesaler of goods. VAT shall be based on the actual market value of his share in the
milled products.
A subsequent ruling held that a corporation, holder of investment
certificates that sells the same to prospective buyers in the ordinary course o Sale by the owner or the miller of his share in the milled products
of business, is a dealer in securities and is subject to VAT on sale of (except rice, corn grits and raw sugar) is subject to VAT.
services because the term “dealers in securities” means “a person who
buys and sells securities for his/her own account in the ordinary course of
 [VIP!] All receipt from service, hire or operating lease of transportation
business.”
equipment not subject to percentage tax on domestic common carriers and
keepers of garages imposed under Section 117 are subject to VAT.
 Lending investor/pawnshop
[Domestic Common Carriers by land and keepers of garages are NOT
“lending investor” is defined under the former provision of the Tax Code as
subject to VAT]
one “who make(s) a practice of lending money for themselves (the source
of funds lent to borrowers is the Capital Investment of the lending
o Common carriers refer to persons, corporations, firms or
investor) or others (the source of additional funds is from 3rd persons) at
associations engaged in the business of carrying or transporting
interest.
passengers or goods or both, by land, water, or air, for
compensation, offering their services to the public, and shall
o On the issue of whether pawnshop (considered lending investors
include transportation contractors.
under Section 108A, 2nd paragraph) are liable to pay VAT, the
Supreme Court, in First Planters Pawnshop, Inc. vs. Comm. held
o Domestic common carriers by land with respect to their gross
that since a pawnshop is non-bank financial intermediary, it is
receipts from the transport of passengers, including operators of
subject to VAT.
taxicabs, utility cars for rent or hire driven by the lessees (rent-a-
car companies) and tourist buses, used for the transport of
Note: The imposition of VAT on banks, etc. was deferred for tax
passengers are subject to the percentage tax (3%) imposed under
years 1996-2002. With no further deferments by law, the levy was
Section 117 and not to VAT.
finally made effective beginning January 1, 2003.

o A bank depositor is not a lending investor. While bank deposits o Domestic common carriers by air and sea are subject to VAT on
are in the nature of loans, this does not make the depositor a their gross receipts from their transport of passengers, goods or
lending investor since the act of opening and maintaining a cargoes from one place in the Philippines to another place in the
deposit with a bank cannot be considered a business. Philippines.
[International common carriers by air and sea are subject to VAT
o Lending investor includes all persons, other than banks, non- but at 0% rate on their gross receipts from their transport of
bank financial intermediaries, finance companies, and other passengers, goods or cargoes from the Philippines to a foreign
financial intermediaries not performing quasi-banking functions, country (Section 108, B, 6)]
who make a practice of lending money for themselves or others at
interest.  Warehousing service means rendering personal services of a
warehouseman such as:
 Services of franchise grantees of telephone and telegraph, radio and/or
television broadcasting, toll road operations, and all other franchise o Engaging in the business of receiving and storing goods of others
grantees except gas and water utilities shall be subject to VAT in lieu of for compensation or profit
franchise tax. [The person rendering services as warehouseman stores the
goods NOT in his own warehouse BUT in another‟s warehouse]

14
 o Receiving foods and merchandise to be stored in his warehouse
for hire (for rent)
 Sale of electricity by generation, transmission, and distribution companies
is subject to VAT on their gross receipts which refer to the following:
o Total amount charged by generation companies (such as
geothermal plant in tiwi) for the sale of electricity and related
ancillary services
o Total amount charged by transmission companies (such as
National Power Corporation) for transmission of electricity and
related ancillary services
o Total amount charged by distribution companies and electric
cooperatives for distribution and supply of electricity, and related
electric service
 The performance of certain services to be qualified for 0-rating must
somehow translate to the export of goods or activities, in general. This is
consistent with the Destination Principle or Cross-Border Doctrine of
the VAT System which is being observed in our jurisdiction, i.e., exports
are exempt while imports are taxable. (on application of the destination
principle)
 Effectively zero-rated sale of services – it refers to the local sale of
services by a VAT-registered person to a person or entity granted indirect
tax exemption (such as NSNPEI) or international agreement. They are
limited to local sales to persons or entities that enjoy tax exemptions from
indirect taxes under Subsection (B), Nos. 3,4, and 5.
 Destination Principle or Cross Border Doctrine – our VAT Law adheres
to the “Destination Principle” or the “Cross Border Doctrine,” as basis for
the coverage of VAT whereby imports are subject to VAT and exports are
free of the tax. 0-rated transactions generally refer to the export sale of
goods and supply of services. The tax rate is set at 0. When applied to the
tax base, such rate results in no tax chargeable against the purchase. The
seller charges no output tax but can claim a refund of a tax credit
certificate for the VAT previously charged by suppliers to the seller or
exporter.
 [Impt!] Customs territory means “the national territory of the Philippines
outside of the proclaimed boundaries of the ECOZONES (or Freeport zones)
except those areas specifically declared by other laws and/or presidential
proclamations to have the status of special economic zones and/or free
ports.” Ecozones, by fiction of law, are considered foreign territories.
o Pursuant to Section 12 and 15 of RA No. 7227, as amended by RA
9400, the foregoing Freeport Zones shall be operated and
managed as separate customs territories (they are beyond the
jurisdiction of the Bureau of Customs). The free flow or movement
15
of goods and capital within, into and exported out of the said
Freeport Zones, as well as the implementation of tax incentives
and duty-free importations of raw materials, goods and capital
equipment shall be ensured. Being separate customs territories,
the exportation (does not mean that the goods are shipped to a
foreign country, rather they are shipped to other parts of the
Philippine territory known as “Customs Territory”) or removal of
goods from the said Freeport Zones to the other parts of the
Philippine territory shall be subject to customs duties and taxes
under the Customs and Tariff Code, the Tax Code of and other
relevant tax laws of the Philippines.
These Freeport Zones therefore, by legal fiction, are regarded as
foreign territories. This legal fiction is necessary to give
meaningful effect to the policies of the special law creating the
said Freeport Zone.
o [READ EXAMPLES in NIRC II BOOK PAGE 93-98]
 [Impt!] Tax treatment of shifted VAT – VAT, being an indirect tax, is
passed-on or shifted by the service-provider to the service-recipient or
shifted by the seller to the buyer of goods.
o If the service-recipient or the buyer of goods is a taxpayer
engaged in trade, business/calling or profession liable to VAT on
sale of goods or services or the so-called output VAT, the shifted
VAT on purchases in the course of trade or business is considered
as an input VAT which can be claimed as tax credit against (or
deduction from) the output VAT in arriving at the VAT payable
(output tax EXCEEDS input tax such as when all the goods
purchased were eventually sold) or excess input tax (input tax
EXCEEDS output tax)
o On the other hand, if the service-recipient (or buyer of goods) is a
taxpayer engaged in trade, business/calling or profession not
liable to VAT (such as when the annual gross receipts do not
EXCEED Php 1,919,500.00), the shifted VAT on the purchases in
the course of trade or business shall be treated as part of
purchases or expenses (VAT is NOT an income tax but a business
tax, hence, may be treated as an allowable deduction)
[The taxpayer cannot treat the input tax both as part of purchases
and as an expense, otherwise, it will result to double deduction]
o If the service-recipient or buyer of goods is not engaged in trade,
business/calling or profession, or if the purchase is done not in the
course of trade or business, the passed-on or shifted VAT shall
form part of the cost or expense he incurred for personal use or
consumption and, therefore, not deductible in computing any kind
of tax.
  [VIP!] The GPP shall be treated as a separate and distinct taxable person
from the individual partners composing the partnership. For VAT purposes,
all gross receipts from the sales of services rendered by the partners for
and in the name of the partnership shall be entirely taxable against the
partnership.
[GPP is NOT a taxable entity for purposes of income tax but it is a taxable
entity for purposes of VAT]
However, the sales of service made by any of the partners thereof, in his
personal and individual capacity, shall not be attributed to the partnership,
but shall be taxable against such partner in his individual capacity.
 For VAT purposes, the GPP is treated as a separate and distinct taxable
person from the individual partners composing the partnership. As such, in
determining whether or not a professional is subject to VAT using the Php
550,000.00 (now Php 1,919,500.00 beginning January 1, 2012) VAT
threshold, his recipient of the net share in the net income of GPP of which
he is a partner should not be considered.
Example:
L, a lawyer, received Php 300,000.00 as his share in the net income of the
GPP of which he is partner. In addition thereto, gross receipts he derived
from his personal and individual practice not attributable to the partnership
amounted to Php 400,000.00
In this case, the Php 300,000.00 L derived from the GPP shall not be
considered in computing the Php 1,919,500.00 VAT threshold. Neither shall
it be subjected again to VAT or percentage tax. Therefore, having derived
gross receipts amounting only to Php 400,000.00. L is not subject to VAT
but instead subject to percentage tax at the rate of 3%.
[VVIP!] SEC. 109. Exempt Transactions. - (1) Subject to the provisions of
subsection (2) hereof, the following transactions shall be exempt from the value-
added tax:
(A) Sale or importation of agricultural and marine food products in their
original state, livestock and poultry of a kind generally used as, or
yielding or producing foods for human consumption; and breeding stock
and genetic materials therefor.
Products classified under this paragraph shall be considered in their
original state even if they have undergone the simple processes of
preparation or preservation for the market, such as freezing, drying,
salting, broiling, roasting, smoking or stripping. Polished and/or husked
rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra
shall be considered in their original state;
(B) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish,
prawn, livestock and poultry feeds, including ingredients, whether locally
16
produced or imported, used in the manufacture of finished feeds (except
specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals
and other animals generally considered as pets);
(C) Importation of personal and household effects belonging to the residents
of the Philippines returning from abroad and nonresident citizens coming
to resettle in the Philippines: Provided, That such goods are exempt
from customs duties under the Tariff and Customs Code of the
Philippines;
[If the personal and household effects are subject to customs duties they
are also subject to 12% VAT]
(D) Importation of professional instruments and implements, wearing
apparel, domestic animals, and personal and household effects (except
any vehicle, vessel, aircraft, machinery, other goods for use in the
manufacture and merchandise of any kind in commercial quantity)
belonging to persons (non-resident aliens in the case of personal and
household effects) coming to settle in the Philippines, for their own use
and not for sale, barter or exchange, accompanying such persons, or
arriving within ninety (90) days before or after their arrival, upon the
production of evidence satisfactory to the Commissioner, that such
persons are actually coming to settle in the Philippines and that the
change of residence is bona fide;
(E) Services subject to percentage tax under Title V;
(F) Services by agricultural contract growers and milling for others of palay
into rice, corn into grits and sugar cane into raw sugar;
(G) Medical, dental, hospital and veterinary services except those rendered
by professionals;
(H) Educational services rendered by private educational institutions, duly
accredited by the Department of Education (DEPED), the Commission on
Higher Education (CHED), the Technical Education And Skills
Development Authority (TESDA) and those rendered by government
educational institutions;
(I) Services rendered by individuals pursuant to an employer-employee
relationship;
(J) Services rendered by regional or area headquarters established in the
Philippines by multinational corporations which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries
or branches in the Asia-Pacific Region and do not earn or derive income
from the Philippines;
(K) Transactions which are exempt under international agreements to which
the Philippines is a signatory or under special laws, except those under
Presidential Decree No. 529;

(L) Sales by agricultural cooperatives duly registered with the Cooperative
Development Authority to their members as well as sale of their produce,
whether in its original state or processed form, to non-members; their
importation of direct farm inputs, machineries and equipment, including
spare parts thereof, to be used directly and exclusively in the production
and/or processing of their produce;
(M) Gross receipts from lending activities by credit or multi-purpose
cooperatives duly registered with the Cooperative Development
Authority;
(N) Sales by non-agricultural, non-electric and non-credit cooperatives duly
registered with the Cooperative Development Authority: Provided, That
the share capital contribution of each member does not exceed Fifteen
thousand pesos (P15,000) and regardless of the aggregate capital and
net surplus ratably distributed among the members;
(O) Export sales by persons who are not VAT-registered;
[Export Sales by VAT registered persons are Zero-rated (Section 106, A,
2, a, 1)]
(P) Sale of real properties not primarily held for sale to customers (Capital
Asset regardless of the value) or held for lease in the ordinary course of
trade or business, or real property utilized for low-cost and socialized
housing as defined by Republic Act No. 7279, otherwise known as the
Regardless Urban Development and Housing Act of 1992, and other related laws,
of its residential lot valued at One million five hundred thousand pesos
classification (P1,500,000) Php 1,919,500.00 beginning January 1, 2012 and below,
residential house and lot, and other residential dwellings (such as
condominium units) valued at Two million five hundred thousand pesos
(P2,500,000) Php 3,199,200.00 beginning January 1, 2012 and below:
Provided, That not later than January 31, 2009 and every three (3) years
thereafter, the amounts herein stated shall be adjusted to their present
values using the Consumer Price Index, as published by the National
Statistics Office (NSO);
(Q) Lease of a residential unit with a monthly rental not exceeding Ten
thousand pesos (P10,000) Php 12,800.00 beginning January 1, 2012
Provided, That not later than January 31, 2009 and every three (3) years
thereafter, the amount herein stated shall be adjusted to its present
value using the Consumer Price Index as published by the National
Statistics Office (NSO);
(R) Sale, importation, printing or publication of books and any newspaper,
magazine, review or bulletin which appears at regular intervals with fixed
prices for subscription and sale and which is not devoted principally to the
publication of paid advertisements;
17
(S) Sale, importation or lease of passenger or cargo vessels and aircraft,
including engine, equipment and spare parts thereof for domestic or
international transport operations;
(T) Importation of fuel, goods and supplies by persons engaged in
international shipping or air transport operations;
(U) Services of banks, non-bank financial intermediaries performing quasi-
banking functions, and other non-bank financial intermediaries; and
(V) Sale or lease of goods or properties or the performance of services other
than the transactions mentioned in the preceding paragraphs, the gross
annual sales and/or receipts do not exceed the amount of One million five
hundred thousand pesos (P1,500,000) Php 1,919,500.00 beginning
January 1, 2012: Provided, That not later than January 31, 2009 and
every three (3) years thereafter, the amount herein stated shall be
adjusted to its present value using the Consumer Price Index as published
by the National Statistics Office (NSO);
[Sale or lease of goods or properties or the performance of services NOT
mentioned in paragraphs A-U are subject to VAT of 12% but if the gross
annual sales or receipt do not exceed Php 1,919,500.00 said sale or lease or
performance of services is exempt from VAT]
(2) A VAT-registered person (he/it wants to be subject to 12% VAT so that he/it
can deduct his input tax from his/its output tax) may elect that Subsection (1)
not apply to his/its sale of goods or properties or services: Provided, That an
election made under this Subsection shall be irrevocable for a period of three
(3) years from the quarter the election was made.
 Exemption means that the sale of goods or properties and/or services and
the use or lease of properties are not subject to VAT (output tax) and the
seller, etc. is not entitled to claim tax credit on VAT (input tax) previously
paid (the input tax may be treated either as part of purchases in the case
of goods or as an expense in the case of services).
 Exempt transaction – one involving goods, properties or services which,
by their nature, are specifically listed in and expressly exempted from VAT
under the Tax Code, without regard to the tax status of the party in the
transaction.
 The person making the exempt sale of goods, properties or services shall
not bill any output tax to his customers or clients because the said
transaction is not subject to VAT
 Food products – agricultural and marine food products in their original
state, the sale or importation of which is exempt from VAT under Section
109 (1, A) refer only to those intended for human consumption.
o The term agricultural products is not limited to vegetables and
substances directly resulting from the tillage of the soil but
includes everything which serves to satisfy human needs which is
grown upon the land whether it pertains to the vegetable kingdom
or to the animal kingdom. Hence, a person engaged in the
business of raising poultry and swine is not subject to VAT.
o Livestock and poultry refer to live animals of a kind generally
used as, or yielding or producing food for human consumption.
Livestock shall include cows, bulls and calves, pigs, sheep, goats
and rabbits.
o Poultry includes fowls, ducks, geese and turkey. Livestock or
poultry does not include fighting cocks, race horses, zoo animals
and other animals generally considered as pets.
o Marine food products include fish and crustaceans, such as but
not limited to eels, trout, lobsters, shrimps, prawns, oysters,
mussels and clams
o Meat, fruit, fish, vegetables and other agricultural and marine food
products, shall be considered in their original state even if they
have undergone the simple processes of preparation or
preservation for the market, such as freezing, drying, salting,
broiling, roasting, smoking or stripping, including those using
advanced technological means of packaging, such as shrink
wrapping in plastics, vacuum packing, tetra-pack and other similar
packaging methods.
o Polished and/or husked rice, corn grits, raw cane sugar and
molasses, ordinary salt and copra shall be considered as
agricultural food products in their original state.
o Raw cane sugar refers to the crystallized or solidified juice (or
moulded or hardened molasses) of sugarcane through a milling
process, short of the process of being refined, without any
addition of chemicals resulting in muscado (or brown sugar
produced without additives) or granulated sugar. It does not
include refined sugar, molasses (thick brownish syrups obtained
as a by-product in the manufacture of sugar) and bagasse
(crushed and dried remains of sugarcane after most of the juice
has been extracted [bagaso]). The sale of refined sugar is subject
to the VAT imposed by Section 106(A) as it is not included among
the products under the definition of “raw cane sugar” exempt from
VAT.
o Specialty feeds refer to non-agricultural feeds or food for race
horses, fighting cocks, aquarium fish, zoo animals and other
animals generally considered as pets.
18
o Hence, the importation of horses (thoroughbred broadmares) for
breeding purposes to be used in sports or games which cannot be
classified as livestock, is not exempt from VAT
o Coffee beans are agricultural food products in their original state;
hence, the sale and subsequent sale thereof is not only exempt
from VAT pursuant to Section 109(1, A) but the seller is likewise
exempt from registering as a VAT taxpayer. However, when the
seller opts to register as such pursuant to Section 109(2) and
Section 236 (I), his local sales become subject to VAT, while his
export sales are 0-rated under Section 106(A,1). On the other
hand, if the coffee bean trader is not VAT-registered, the sale,
subsequent sale, or export of the coffee beans are exempt in
accordance with Section 109(1,A).
o Ordinary salt is considered agricultural product in its original state.
Accordingly, the importation of marine solar salt is exempt from
VAT pursuant to Subsection (1,A). Iodized salt is no longer in its
original state as it has already been enriched with iodine
o The process of making century eggs is a simple process to prepare
or preserve the same for the market. It is similar to the making of
“balut, penoy” and salted eggs. Accordingly, the importation of
century eggs is exempt from the 12% VAT pursuant to Section
109(1,A).
o The following processed food products which are packed in bulk
plastic bags and sold for resale or further processing are no longer
in their original state as contemplated in Section 109(1,A):
 Dried fruits
 Dried and ground fruits and tubers
 Fruits preserved in syrup
 Herbal products which have undergone drying,
pulverizing and encapsulation or tea bagging as they are
not among the simple methods of freezing, etc.
o In all cases of importation of VAT-exempt goods, the same shall
not be released from customs custody unless a duly approved
Authority to Release Imported Goods (ATRIG) is secured from the
Revenue District Office of the place where the port of entry is
located.
 The milling for others of palay into rice, corn into grits, and sugar cane into
raw sugar by owners of corn mills, “conos,” “kiskisan,” threshers or sugar
centrals or mills is exempt from VAT. The total receipts of the miller
whether paid in cash or in kind is exempted from VAT. Agricultural contract
growers refer to those persons producing for others poultry, livestock or
other agricultural and marine food products in their original state.
 o The services of agricultural contract growers involve growing of
poultry, livestock or other agricultural and marine food products
into marketable poultry, livestock or other agricultural and marine
food products.
There are agricultural contract growers which offer toll (or
charge) processing/toll dressing/toll manufacturing as a packaged
service to its contract growing. Toll processing/toll dressing/toll
manufacturing involves procedures such as weighing, killing,
dressing, scalding, cut-ups and packaging. In this case, the
contract growing and toll processing/toll dressing/toll
manufacturing services by agricultural contract growers are
exempt from VAT.
Rev. Memo. Cir. No. 97-2010 classifies the VAT exemption of
services by agricultural contract growers. Under the circular the
toll processing services confirmed as VAT-exempt pertain only to
services to clients from which growing of animals as contracted.
As such, preparing and packaging hogs/chicken ready for delivery,
after producing or growing them, falls within the purview of
agricultural contract growing. However, if such an activity is done
independently of growing poultry, livestock or other agricultural
and marine food products, such activity is subject to VAT because
this is a service not covered by agricultural contract growing.
Thus, toll processing/toll dressing/toll manufacturing services
performed independently from growing poultry, livestock or other
agricultural and marine food products are subject to VAT.
 [VVIP!] Medical, dental, hospital and veterinary services other than those
rendered by professionals (subject to VAT) are exempt (the hospital and
clinic which rendered medical, dental, hospital and veterinary services)
from VAT. Thus, in cases where the payment received by the hospital or
clinic also includes the professional fee of the medical doctor, the
professional fee when paid to the doctor constitutes his gross receipts
inclusive of VAT which must be receipted by him using a VAT-Official
receipt.
o In the case of an OB-Gyne for example, who also owns a
maternity clinic, how will the payments of patients treated or
confined therein be treated for VAT purposes?
Since payments received may consist of the professional fees of
the OB-Gyne, laboratory fees, charges for use of medical supplies
and facilities, only that portion of payment not pertaining to the
professional fees of the OB-Gyne is exempt from VAT. For this
purpose, in receiving such payments, professional fees on the
services rendered by OB-Gyne must be issued a VAT-official
receipt while those appertinent to laboratory fees, use of medical
facilities and supplies must be receipted using a Non-VAT Official
Receipt specifically detailing the nature of the billed fees and
charges attributable to the clinic; otherwise, the total amount
19
will be treated as derived from the exercise of profession and,
therefore subject to VAT.
o Laboratory services are also exempted. If the hospital or clinic
operates a pharmacy or drug store, the sale of drugs and
medicines (to out-patients and other customers), if it exceeds Php
1,919,500.00 beginning January 1, 2012 during a 12-month
period is subject to VAT.
o Hospital and medical services rendered by Ospital Ng Maynila are
not subject to VAT pursuant to Section 109(1,G). The exemption,
however, applies only to taxes for which it is directly liable and
does not apply to taxes which are being passed on to it by its
suppliers. Consequently, as regards purchases of goods and
services by the hospital, the VAT thereon paid by the supplier to
his own supplier can be passed on to said hospital (this means
that the supplier of goods and services to the hospital can pass on
the 12% VAT on said goods and services even if the hospital itself
is exempt from VAT) and ultimately be considered as added cost
of goods and services procured, for the VAT at this stage is merely
an indirect tax.
Example:
1. Drug company A, a VAT-taxpayer, sold medical and hospital
supplies to Hospital B worth Php 100,000.00 exclusive of VAT.
Drug Company A can pass on the 12% VAT or can bill Hospital
B the total amount of Php 112,000.00 even if Hospital B is
exempt from VAT on Medical and Hospital Services income
received from its patients.
The hospital is exempt only to taxes which it is directly liable
and it is NOT exempt from indirect taxes such as VAT.
2. Doctor C, a medical professional practitioner/VAT-taxpayer,
rendered professional services to a patient of Hospital B at an
agreed professional fee of Php 50,000.00 exclusive of VAT.
Doctor C can pass on to Hospital B the 12% VAT or he can bill
Hospital B the total amount of Php 56,000.00.
o The term medical services has been defined to include various
items of services like general treatment, physical examination,
consultation, medication, dressing, suturing surgical operation,
and all that pertain to or deal with the healing art of the science of
medicine.
o [VIP!] The maintenance and operation of a pharmacy or drugstore
by a hospital is a necessary and essential service or facility
rendered by any hospital for its patients. In the legal sense, a
hospital is an institution devoted primarily to the operation of
facilities for the diagnosis, treatment and care of individuals
 suffering from illness. A person who resorts to the hospital for
medical treatment can reasonably expect that the hospital would
make available to its patients immediate and prompt access not
only to the services of doctors, nurses, and allied medical
personnel, but also to necessary laboratory services as well as
medicines, drugs and pharmaceutical items which are
indispensable aids in practically any form of medical treatment
and care of patients. Accordingly, the sale of drugs or medicine
and pharmaceutical items to in-patients of hospital should be
exempt from VAT since they are considered part of hospital
services. However, the sale of medicines by hospitals to out-
patients and other customers are not part of hospital services
and are this subject to VAT.
o A drug testing clinic is exempt from VAT as far as medical services
are concerned, but the professional fees received by the medical
technologist who performs the service and issues the result of the
test to clients, are subject to VAT. But if the services of the
medical technologist are rendered under an employer-employee
relationship all remuneration received on account thereof, whether
these be in the form of salaries, wages, emoluments, honoraria or
fees, are considered as compensation income exempt from the
imposition of VAT pursuant to Section 109(I) of the Tax Code but
subject to withholding tax on salaries of said employee pursuant
to Section 79 of the NIRC.
o A company operating a laboratory and diagnostic center is VAT-
exempt from its sale of medical, dental, and health services to the
public through its medical personnel and facilities as it is regarded
as an entity rendering nonprofessional services, but is indirectly
liable to VAT passed on to it by its supplier‟s of goods and
services. Said suppliers are not exempt from VAT. If the
diagnostic services will be done by independent professionals, the
services will be subject to VAT and the persons directly liable to
VAT are the independent professionals (not employees of the
company).
o The act of making available medicines to in-patients must be
considered an indispensable part of “hospital services” and,
therefore, exempt from VAT. Conversely, the pharmacy sales to
out-patients and other customers are subject to VAT.
 Educational services exempted refer to academic, technical or vocational
education provided by private educational institutions duly accredited by
the DepED, CHED, TESDA and those rendered by government educational
institutions. It does not include seminars, in-service trainings, review
classes and other similar services rendered by persons (such as Bar or
Board Reviewers) who are not accredited by the DepEd.
o Educational services rendered by private educational institutions
duly accredited by the DepEd and the CHED are exempt from VAT
20
pursuant to Section 109(1, H). However, this exemption does not
extend to its other activities involving sale of goods (such as Sale
of Food and Drinks made by the school canteen) and services are
subject to VAT.
Likewise, importation of books, films, slides, and other educational
materials and equipment such as computers to be actually,
directly, and exclusively used for educational purposes by NSNPEI
shall be exempt from VAT and customs duties, provided the
guidelines under Department Order No. 137-87 in addition to the
usual import requirements are observed.
o The purchase of school supplies by said institutions (other than
NSNPEI) and their purchase of materials for repair of their
buildings are subject to VAT imposed under Section 106. Such tax
may legitimately be passed on to customers like educational
(other than NSNPEI) institutions
[If the educational institution is a proprietary institution the
importation shall be subject to customs duties and VAT]
 If an account executive is an employee of a company, there being an
employer-employee relationship, his commission income shall be exempted
from VAT pursuant to Section 109 (1, I). However, the employer shall
deduct and withhold the withholding tax on wages.
If there is no employer-employee relationship, he shall be subject to VAT
as a seller of service in the course of his business or practice of profession,
pursuant to Section 108(A). Moreover, he shall not be subject to the
expanded withholding tax because VAT is not covered by the Expanded
Withholding Tax Regulations.
 [VIP!] Revenues from port services, as an independent line of business, are
understood to include revenues from berthing (or mooring; berth is a
place at a wharf or port or pier where a ship or vessel can lie at anchor),
terminalling, lease of service equipment at the port and warehousing
services, such activities being mainly connected with, if not incidental to or
as a necessary consequence of, port service business. The same are,
accordingly, indivisible; hence, may not be detached and treated as
revenues arising from different independent line of businesses.
Thus, berthing fees and receipts from warehousing services may not be
considered revenues from distinct, separate and independent lines of
businesses with the end in view of treating them as lease of real property.
Rather, the same are all classified as gross receipts from port services
business, which involves sale of services other than the real estate leasing
and accordingly, subject to VAT pursuant to Section 108.
 A contract with an owner/operator of cold storage facilities is not a lease of
real property but, rather, a warehousing contract. As such, the warehouse
operator is subject to VAT pursuant to Section 108.

Warehousing business is not considered leasing of real property and the
warehouseman‟s compensation for his warehousing services cannot be
considered rentals from lease of real property. Instead, a warehouseman‟s
services consist of receiving and storing goods and merchandise for others,
for a fee and his gross receipts from the sales of such services are subject
to VAT in accordance with Section 108.
 Export by persons who are not VAT-registered are exempt; if by VAT-
registered persons, they are subject to 0%. (Sec. 106 [A,2,a,1])
 [VVIP!] [BAR!] Sales of real properties are exempt from VAT, if such
properties are:
o Not primarily (capital asset) held for sale to customers or for lease
in the ordinary course of trade or business
o Utilized for low-cost housing
o Utilized for socialized housing
o Residential lot valued at Php 1,919,500.00 and below, or
residential house and lot and other residential dwellings (such as
condominium unit) valued at Php 3,199,200.00 and below
If two or more adjacent residential lots are sold or disposed of by
the same seller (Rev. Reg. No. 3-2012) in favour of one buyer, for
the purpose of utilizing the lots as one residential lot, the sale
shall be exempt from VAT only if the aggregate value of the lots
does not exceed Php 1,919,500.00. Adjacent residential lots,
although covered by separate titles and/or separate tax
declarations, when sold or disposed of to one and the same buyer,
whether covered by one or separated Deed of Conveyance, shall
be presumed as a sale of one residential lot.
[If the residential lot is valued at more than Php 1,919,500.00 or
if the value of residential house and lot and other residential
dwellings is more than Php 3,199,200.00 the sale thereof is
subject to 12% VAT]
o The assignment by way of dacion en page of lots and all
improvements which are not primarily held for sale (capital asset)
to customers or lease in the ordinary course of trade or business
is exempt (but it is subject to 6% CGT) from VAT pursuant to
Section 109(1, P).
 [Mem] [BAR!] Lease of residential units is exempt if the monthly rental per
unit does not exceed Php 12,800.00 regardless (whether the total rentals
for the year exceeds Php 1,919,500.00 or not) of the amount of aggregate
rentals received by the lessor during the year; or it (monthly rental per
unit) exceeds Php 12,800.00, but the aggregate rentals during the year
21
does not exceed Php 1,919,500.00 in which case the same shall be subject
to 3% percentage tax. (Section 116)
Lease of Residential Units
If the monthly rental per unit does not exceed Php 12,800.00, the lease is
not subject to VAT regardless of the total rentals during the year, that is,
even if it exceeds Php 1,919,500.00. Whether the annual rentals exceed
Php 1,919,500.00 or not they are not subject to 12% VAT nor to the 3%
percentage tax.
Why is it that when the annual rentals do not exceed Php 1,919,500.00
they are not subject to 3% percentage tax?
ANS: It is because if the monthly rental per unit does not exceed Php
12,800.00 the transaction or lease is covered by Section 109 (1,Q)
and transactions covered by Section 109 (1,A-U) are not subject to
3% percentage tax even if the annual sales or receipts do not exceed
Php 1,919,500.00.
If the monthly rental per unit exceeds Php 12,800.00, the lease is not
subject to VAT if the total rentals received during the year does not exceed
Php 1,919,500.00 in which case the total rentals is subject to 3%
percentage tax. If the total rentals for the year exceed Php 1,919,500.00 it
is subject to 12% VAT. In other words, the lease is subject to VAT if the
monthly rental per unit exceeds Php 12,800.00 and the total rentals for
the year exceeds Php 1,919,500.00.
In cases where a lessor has several residential unit for lease, some are
leased out for a monthly rental per unit of not exceeding Php 12,800.00
while others are leased out for more than Php 12,800.00 per unit, his tax
liability will be as follows:
o The gross receipts from rentals not exceeding Php 12,800.00 per
month per unit shall be exempt from VAT regardless of the
aggregate annual gross receipts.
o The gross receipts from rentals exceeding Php 12,800.00 per
month per unit shall be subject to VAT if the aggregate annual
gross receipts from said units only (not including the gross
receipts from units leased for not more than Php 12,800.00)
exceeds Php 1,919,500.00, otherwise, the gross receipts will be
subject to the 3% tax.
 The term residential units refers to apartments,
houses, and lots for residential purposes, and buildings,
or parts or units thereof used solely as dwelling places
(e.g., dormitories, rooms, and bed spaces) excepts
motels, motel rooms, hotels and hotel rooms, lodging
houses, inns and pension houses.
  Section 116 which imposes a percentage tax at the rate
of 3% is imposed only on transactions covered by
Section 109(1,V); hence, it excludes from its coverage
other VAT-exempt transactions mentioned in Section
109(1), (A to U), such as item (Q) pertaining to the lease
of residential units with monthly rent not exceeding Php
12,800.00, even if the annual gross receipts therefrom
exceeds Php 1,919,500.00 for the reason that the same
has been explicitly excluded from the scope of Section
109(1,V) by the insertion of the phrase “other than the
transactions mentioned in the preceding paragraphs.”
o This differs from the lease transaction being described under
Section 109(1,V) on which the percentage tax is imposed. An
application (or example) of Section 109(1,V) would be the lease of
a 2-unit residential apartment for Php 50,000.00 a month per unit
(this is no longer covered by Section 109 (1,Q), hence, this is
subject to 12% VAT but since the total annual rentals is (Php
50,000.00 x 2 x12) Php1.2M which does not exceed Php
1,919,500.00 the total rentals is exempt from VAT but the same is
subject to 3% percentage tax under Section 116). In this
particular case, while the transaction is generally considered as
one on which VAT is imposed because the rental payment exceeds
Php 12,800.00, it is nevertheless subject to percentage tax
because the gross annual receipts derived therefrom is below the
Php 1,919,500.00 threshold limit.
o The lease of 2 residential apartment buildings with a monthly
rental not exceeding Php 12,800.00 per unit by a non-VAT
registered taxpayer is exempt from VAT (because the monthly
rental does not exceed Php 12,800.00 per unit per month) and the
3% percentage tax (because this is covered by Section 109, 1, Q
all transactions covered by Section 109, 1, A-U are not subject to
percentage tax of 3% even if the total annual receipts is Php
1,919,500.00 or less) regardless of the total amount of rentals
received by the lessor during the year.
[The only transactions that will be subject to 3% percentage tax
are those not covered by Section 109,1,A-U when the total annual
receipts does not exceed Php 1,919,500.00]
 [Impt!] Gross receipts from the lease of commercial units are subject to
12% VAT (even if the monthly rental stall or unit does not exceed Php
12,800.00) under Section 105 if they exceed the threshold amount of Php
1,919,500.00 if they do not exceed Php 1,919,500.00 they are subject to
percentage tax of 3%.
 Sale, etc. of books, etc.
o The word “books” as used in Subsection (1,R) is a general term
and embraces all kinds of books, including a school or college
22
class album. Such being the case, a printer of an annual school
yearbook is exempt from VAT.
The importation and distribution of comics is VAT-exempt.
o Book – a printed non-periodical publication of at least 48 pages
(exclusive of cover pages), published in the country and made
available to the public. Textbook – a book which is an exposition
of generally accepted principles in one subject, intended primarily
as a basis for instruction in a classroom or pupil-book-teacher
situation. Manual – is a book that is conveniently handled,
especially handbook.
Based on these definitions, textbooks and teachers‟ manuals may
be legally treated as books and, therefore, exempt from VAT.
o Under the Electronic Commerce Act documents, messages or
information which are electronically written, capable of being sent,
received, recorded, stored, downloaded, transmitted, retrieved,
and reduced into printed form may be considered as equivalent to
print media. Accordingly, the sale of online journal, E-books and
online academic library resources which appear at regular
intervals with a fixed price, either for subscription or sale, and are
not principally devoted for the publication of paid advertisements,
is exempt from VAT.
 Those with annual gross sales and/or receipts not exceeding the amount of
Php 1,919,500.00 are considered small business enterprises under Section
116.
o Commissions on the sale of real property earned by individual
agents (real estate brokers or salesman) who are not employees
of real estate companies are subject to VAT if such commissions
per 12-month period exceed Php 1,919,500.00. However, it is not
subject to withholding of VAT. On the other hand, commissions
not exceeding Php 1,919,500.00 are subject to the 3% tax
prescribed in Section 116.
 Distinctions between 0-rating and exemption – Both are 2 different
ways by which transactions subject to the VAT are given preferential
treatment.
o Under the first, the transaction is completely free of VAT. On the
other hand, the second only removes the VAT at the exempt stage
(the transaction is covered by Section 109,1,A,2b).
o A VAT-payer who is subject to 0 rate of tax can claim and enjoy a
credit or refund for the input tax invoiced to him on his purchases.
The same privilege is not given to exempt taxpayers. In view of
these differences, the total taxes payable by the exempt taxpayer
may increase rather than decrease this is the reason why a VAT-
 registered person may elect that his transactions be subject to
12% VAT even if said transactions are covered by Section 109,1.
The person making the exempt transaction shall not separately bill
any output tax to his customers because the said transaction is
not subject to VAT. On the other hand, a VAT-registered
purchaser of goods or services which are exempt from VAT on the
sale of said goods and services is not entitled (he cannot deduct
the input tax because he has no output tax and he cannot even
claim for tax refund or tax credit of the input tax unlike in the case
of 0-rated seller) to any input tax on such purchase.
 Effectively 0-rated transactions cover local sale of goods, properties, and
services to purchasers (such as NSNPEI and International Organizations
such as WHO) enjoying exemption from indirect taxes under special laws
and international agreements.
In an effectively 0-rated transaction, the VAT-registered seller of goods or
services is required to file an application and secure approval for 0-rating,
whereas in an automatically 0-rated transaction, the VAT-registered seller
need not file an application for 0-rating.
 Importations of certain articles by a foreign Embassy, or its personnel, are
exempt from the VAT in accordance with Article 36(1) of the Vienna
Convention.
 RHQs established in the Philippines by multinational companies are exempt
from the VAT. In addition, the sale or lease of goods and property and the
rendition of services to RHQs are subject to 0% VAT rate. ROHQs are
subject to VAT as provided under the Tax Code.
An alien executive of the RHQ or ROHQ shall enjoy tax and duty free
importation of personal and household effects as provided for under
Section 105(h) of the Tariff and Customs Code and Section 109(1,D) of the
Tax Code, provided, such effects shall arrive in the Philippines within 90
days before or after conversion of the alien executive‟s category to multiple
entry visa issued under Executive Order No. 226.
 Sale to senior citizens – Senior citizens or those resident citizens at least
60 years old are entitled to 20% discount on their purchase of basic
essential goods and services. With the passage of RA No. 9994, otherwise
known as “Expanded Senior Citizens Act of 2010,” exempting their
purchases from VAT, they now enjoy the full 20% discount.
NOTE: Input VAT for 0-rated sales may be refunded or applied against the
output VAT of sellers on their gross sales/receipts. The law, however,
declares the transaction (purchase by senior citizen) as VAT-exempt sale.
23
SEC. 110. Tax Credits. -
(A) Creditable Input Tax. –
(1) Any input tax evidenced by a VAT invoice or official receipt issued in
accordance with Section 113 hereof on the following transactions shall be
creditable against the output tax:
(a) Purchase or importation of goods:
(i) For sale; or
(ii) For conversion (such as raw materials) into or intended to form
part of a finished product for sale including packaging
materials; or
(iii) For use as supplies (such as factory supplies or office supplies)
in the course of business; or
(iv) For use as materials (such as supplies to be used in Hotels,
Motels, etc.) supplied in the sale of service; or
(v) For use in trade or business for which deduction for
depreciation (such as machinery and equipment, furniture and
fixtures, etc.) or amortization (such as patent, trademark,
goodwill, copyright, franchise, etc.) is allowed under this Code.
(b) Purchase of services on which a value-added tax has actually been
paid.
(2) The input tax on domestic purchase or importation of goods or properties
by a VAT-registered person shall be creditable:
(a) To the purchaser upon consummation of sale and the input tax on
importation of goods or properties; and shall be creditable
(b) To the importer upon payment of the value-added tax prior to the
release of the goods from the custody of the Bureau of Customs.
Provided, That the input tax on goods (depreciable assets)
purchased locally or imported in a calendar month for use in trade
or business for which deduction for depreciation is allowed under
this Code, shall be spread evenly over the month (VAT returns is
filed quarterly but the VAT is payable monthly [Section 114,A]) of
acquisition and the fifty-nine (59) succeeding months if the
aggregate acquisition cost for such goods (depreciable assets),
excluding the VAT component thereof, exceeds One million pesos
(P1,000,000): Provided, however, That if the estimated useful
life of the capital good (depreciable assets) is less than five (5)
years, as used for depreciation purposes, then the input VAT shall
be spread over such a shorter period: Provided, finally, that in
the case of purchase of services, lease or use of properties, the
input tax shall be creditable to the purchaser, lessee or licensee
upon payment of the compensation, rental, royalty or fee.
(3) A VAT-registered person who is also engaged in transactions not subject
to the value-added tax shall be allowed tax credit as follows:
 (a) Total input tax which, can be directly attributed to transactions
subject to value-added tax; and The claim for tax credit referred to in the foregoing paragraph shall include
not only those filed with the Bureau of Internal Revenue but also those filed
(b) A ratable portion (on the basis of volume of sales or gross sales with other government agencies, such as the Board of Investments and the
or receipts) of any input tax (such as input tax on the purchase of a Bureau of Customs.
delivery truck which is used to deliver goods sold some are subject
to VAT and the others are exempt) which cannot be directly
 Input tax includes taxes which can be directly attributed to transactions
attributed to either activity (transactions subject to VAT and
subject to the VAT plus a ratable portion of any input tax which cannot be
transactions exempt from VAT).
directly attributed to either the taxable or exempt activity.

Example: [VIP!] NOTE: Refund of input tax on capital goods (depreciable assets) is
The VAT-registered person purchased a delivery truck at a cost of no longer allowed because refund of input tax applies only to 0-rated sales
Php 2,000,000.00 plus VAT of Php 240,000.00. The truck is used it does not even apply to sales exempt from VAT
to deliver goods sold some are subject to VAT and the others are
exempt from VAT. The useful life of the truck is 10 years, hence,  Creditable Input Tax – Section 110 considers a duly executed VAT
the input tax of Php 240,000.00 can be spread over 5 years at invoice or official receipt as sufficient evidence to support a claim for input
Php 48,000.00 per year. During the first year of the acquisition of credit tax. The input tax on the following transactions shall be creditable
the truck, the gross sales subject to VAT amount to Php against the output tax:
2,000,000.00 while gross sales which are exempt amount to Php
1,000,000.00. The input tax which can be deducted from the 1. Purchase or importation of goods
output tax is (Php 48,000.00 x 2/3) Php 32,000.00 while the 2. Purchase of real properties for which a VAT has actually been paid
remaining (Php 48,000.00 x 1/3) Php 16,000.00 cannot be 3. Purchase of services for which a VAT has actually been paid
deducted as input tax but can be considered as an expense. 4. Transactions “deemed sale” (such as consigned goods NOT sold
within 60 days)
5. Transitional input tax
[Mem!] The term 'input tax' means the value-added tax due from or
6. Presumptive input tax
paid by a VAT-registered person in the course of his trade or business
on importation of goods or local purchase of goods or services, including
The unutilized input taxes which a VAT taxpayer has accumulated over the
lease or use of property, from a VAT-registered person (except in the
years are available as a deduction from the output taxes payable for the
case of importation of goods where the exporter or seller is obviously
current year.
NOT a VAT-registered person). It shall also include the transitional
input tax determined in accordance with Section 111 of this Code.
Input tax attributable to VAT-exempt transactions cannot be credited
against output tax but should be treated as part of cost (in the case of
[Mem!] The term 'output tax' means the value-added tax due on the
input tax on goods purchased) or expense (in case of input tax on
sale or lease of taxable goods or properties or services by any person
services; an allowable deduction in the form of taxes from gross profit to
registered or required to register under Section 236 of this Code.
arrive at net income)
(B) Excess Output or Input Tax. - If at the end of any taxable quarter the
 60-month period amortization – “Subsection (A)(2)(b) prescribes a 60-
output tax exceeds the input tax, the excess shall be paid by the VAT-
month period within which to amortize the creditable input tax on purchase
registered person to the BIR. If the input tax exceeds the output tax, the
or importation of capital goods (or depreciable assets) with acquisition cost
excess shall be carried over to the succeeding quarter or quarters: Provided,
exceeding Php 1,000,000.00, exclusive of the VAT component. Such
however, That any input tax attributable to zero-rated sales by a VAT-
spreading out only poses a delay in the crediting of the input tax. Again,
registered person may at his option be refunded or credited against other
for whatever is the purpose of the 60-month amortization, this involves
internal revenue taxes, subject to the provisions of Section 112.
executive economic policy and legislative wisdom in which the Court cannot
intervene”
(C) Determination of Creditable Input Tax. - The sum of the excess input tax
carried over from the preceeding month or quarter and the input tax
 Capital goods or properties refer to goods or properties with estimated
creditable to a VAT-registered person during the taxable month or quarter
useful life longer than 1 year and which are treated as depreciable assets
shall be reduced by the amount of claim for refund or tax credit for value-
under Section 34(F) of the Tax Code, used directly or indirectly in the
added tax and other adjustments, such as purchase returns or allowances and
production or sale of taxable goods or services.
input tax attributable to exempt sale.

24
 The aggregate acquisition cost of depreciable assets 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 Php 1,000,000.00, excluding the VAT, will be subject to
the amortization of input tax despite the fact that the monthly
payments/instalments may not exceed Php 1,000,000.00.
 [Impt!] The amortization of the input tax is required only if the purchased
or imported goods or properties to be used in business are subject to
depreciation in their present state. If the said goods or properties are not
depreciable per se, but will only be used as materials in the construction or
assembly of a depreciable asset, the input tax on the said goods or
properties is not required to be amortized. For input taxes to be amortized
all of the following conditions must be present:
 [Impt!] In computing the VAT payable to the BIR, three possible scenarios
may arise:
First, if at the end of a taxable quarter the output taxes charged by the
seller to his customers or buyers are equal to the input taxes that he paid
and passed on by the suppliers, then no payment is required;
Second, when the output taxes exceed the input taxes, the person shall
be liable for the excess, which has to be paid to the BIR; and
Third, if the input taxes exceed the output taxes, the excess shall be
carried over to the succeeding quarter or quarters. Should the input taxes
relate to 0-rated transactions, any excess over the output taxes shall
instead be refunded to the taxpayer or credited against other internal
revenue taxes, at the taxpayer‟s option.

1. Input tax is paid on the purchase and/or importation of goods or  Formula for computing VAT
properties
2. Aggregate acquisition cost (excluding VAT) of the goods for the Output tax on sale, etc., of goods/properties/services
month exceeds Php 1,000,000.00; and Less: Input tax on purchases, etc., and/or importation
3. Goods purchased or imported refer to an existing or finished = VAT payable
depreciable asset at the time of acquisition
The VAT payable is the excess of output tax over allowable input tax. In
 [Impt!] Excess input taxes may be carried over to the succeeding quarter the case of importation, it is the VAT due on such importation.
or quarters. If the input tax is attributable to the purchase of capital goods
or to (see Page 129, last paragraph and Page 134, first paragraph) 0-rated Thus (figures assumed)
sales, it may be refunded or credited (the BIR will issue certificate of tax (1) Sales (domestic) Php 550,000.00
credit) at the option of the VAT-registered person against his liability for Output tax (12%) Php 066,000.00
other internal revenue taxes. LESS: Input tax on purchases
and/or importation
 If a VAT-registered person is engaged in VAT-subject and VAT-exempt Raw materials Php 180,000.00
transactions, the tax credits allowable will be computed under an Supplies 040,000.00
apportionment formula (on the basis of volume of sales) Capital goods 060,000.00
Services 50,000.00
 Note that in the definition of input tax, the payment by the VAT-registered Total Php 330,000.00
must be in the course of trade or business, implying that if the importation Input tax (12%) 39,600.00
of goods is not in the course of trade or business (such as if the imported VAT payable Php 26,400.00
goods are for personal consumption of the importer), no input tax can be
credited. The importer can credit the input tax paid to the Bureau of (2) Export Sales Php 300,000.00
Customs on his importation of goods against the output tax payable on the Output tax (0%) 0.00
sale of the imported goods, whether sold in their original state or as LESS: Tax credit (12%)
ingredients or parts of any finished product which is finally sold.
Purchases Input Tax
The payment of the excess of output tax over the input tax is the obligation Raw Materials P 77,000.00 P 9,240.00
of the seller, not of the purchaser. Supplies 16,500.00 1,980.00
Capital goods 11,000.00 1,320.00
Services 5,500.00 660.00
 As amended by RA No. 9337, the Tax Code no longer allows the refund of Total P 110,000.00 P 13,200.00
input VAT paid on purchase of capital goods (depreciable assets).

25
 a) Export sales are 0-rated and the exporter is entitled
to tax credits or refund to all input tax attributable to
the goods exported.
b) Under Section 110(B) and subject to Section 112(A),
the exporter has the option to apply for refund of the
entire amount of Php 13,200.00, or credit the
amount to Php 13,200.00 (the exporter can do this if
the BIR has already issued in his favour a certificate
of tax credit) against his liability for other internal
revenue taxes
 Substantiation of claims for input taxes
1. Input taxes for the importation of goods or the domestic purchases of
goods, properties, or services is (the importation or the domestic
purchase) made in the course of trade or business, whether such input
taxes shall be credited against zero-rated sales, non-zero-rated sales,
or subjected to 5% or 10% Final Withholding VAT under Section 114C,
must be substantiated and supported by the following documents, and
must be reported in the information returns required to be submitted
to the BIR
a. For the importation of goods – import entry (or written
declaration of importation by the collector of customs) or other
equivalent document (such as official receipt issued by the
collector of customs or the payment of customs duties, fees and
other charges and the VAT)
b. For the domestic purchase of goods and properties –
invoice showing the information required under Secs. 113 and
237
c. For the purchase of real property – public instrument, i.e.,
deed of absolute sale, deed of conditional sale,
contract/agreement to sell, etc., together with VAT invoice
issued by the seller.
d. For the purchase of services – official receipt showing the
information required under Secs 113 and 237
A cash register machine tape issued to a registered buyer shall
constitute valid proof of substantiation of tax credit only if it shows
the information required under Secs. 113 and 237
2. Transitional input tax – it shall be supported by inventory of goods
as shown in a detailed list to be submitted to the BIR
3. Input tax on deemed sale transactions – it shall be substantiated
with the required invoices (delivery receipts)
4. Input tax from payments made to non-residents – it shall be
supported by a copy of the Monthly Remittance Return of VAT withheld
26
return filed by the resident payor on behalf of the non-resident
evidencing remittance of the VAT due which was withheld by the
payor.
 [Impt!] Other rulings holding liability to VAT
o Service income consisting of gross receipts for cleaning and
roasting of coffee beans for other persons of firms is subject to
the VAT of 12% if the gross receipts arsing from the performance
of such service exceed Php 1,919,500.00; otherwise, if the gross
receipts are Php 1,919,500.00 or less and the taxpayer did not opt
to register under the VAT, he is exempt from the VAT but subject
to the 3% percentage tax based on his gross quarterly sales of
receipts. However, if his gross receipts are Php 1,919,500.00 or
less but he is registered under the VAT, he is subject to the VAT
pursuant to Sections 109(2) and 116.
[A is engaged in the business of buying and selling merchandise
and his transaction does not fall under Section 109 A-U, hence, he
is subject to VAT of 12%. However, if his annual gross
sales/receipts does not exceed Php 1,1919,500.00 he is not
subject to 12% VAT instead he is subject to 3% percentage tax
under paragraph V of Section109 EXCEPT if he opts to be
registered under the VAT System in which case he is subject to
12% VAT even if his gross annual sales of receipts does not
exceed Php 1,919,500.00 (Section 109, 2 in relation to Section
116)]
o Under the manning contract with the owners/managers of the
vessels to provide/supply the crew and personnel management
requirements of a foreign-owned, but Philippine-flag vessels
engaged in worldwide trade (or international trade), a taxpayer
engaged in the business of crewing/manning vessels trading
worldwide is deemed to have performed all of such services within
the Philippines; hence, he is taxable under Section 108(A). If he is
VAT-registered and the consideration paid to him is in acceptable
foreign currency remitted inwardly and accounted for in
accordance with the rules and regulations of the Central Bank. He
is subject to the VAT of 0% pursuant to Section 108(B,2).
o As long as the amount of sales exceeds Php 1,919,500.00 during
a 12-month period, a hospital operating a pharmacy or drugstore
becomes subject to VAT irrespective of whomsoever the medicine
or drug is sold whether to inpatient or outpatient
o Essential Oil used in the manufacture of bath soap is not subject
to the 20% excise tax imposed by Section 150. However, said
importation of essential oil is subject to VAT based on the total
value used by the Bureau of Customs in determining tariff and
customs duties, plus customs duties, excise tax, if any, and other
charges pursuant to Section 107.
 exempt from the value-added tax in all stages of distribution.
o Although corn starch is a by-product in the process of milling corn, However, if the ground coffee is packed or placed in bottles or
it is not one of those considered in their original state for purposes cans and sold, the same is already a manufactured product;
of Section 109(1,A). Under said provision, only corn grits, another hence, subject to VAT if the sales exceed Php 1,919,500.00 during
by-product, is considered in the original state. Such being the the 12-month period. But if the sales derived from all lines of
case, corn starch which is a manufactured product and no longer business do not exceed Php 1,919,500.00 during any 12-month
in its original state is subject to the VAT. Similarly, corn germ is period, the business is exempt from VAT but subject to 3% of
subject to VAT gross sales or receipts pursuant to Section 109(1,V) in relation to
Section 116.
[Because although it is in the original state it is NOT for human
consumption but for planting purposes] o In the manufacture of fresh and cooked dog foods, the
manufacturer uses agricultural by-products such as soya beans,
o Cassava starch can no longer be considered in its original state; chicken heads, organs, fish, animal and poultry feeds as raw
hence, the same is subject to VAT imposed by Section 106(A). materials. All of such raw materials fall under the category of
The process involved in the conversion of cassava tubers into agricultural products and the sale thereof to the manufacturer of
cassava starch reveals that the same is not a mere simple process fresh and cooked dog foods is exempt from VAT. The sale of fresh
of preparation, etc. as provided in Section 109(1,A) but rather the and cooked dog food by the manufacturer to the retailers falls
process of manufacturing. However, the sale of cassava tubers by within the purview of animal feeds pursuant to Section 109(1,B)
the growers and/or purchasers to the manufacturer of cassava under the exception portion, hence, subject to VAT. Note: Fish
starch is exempt from VAT pursuant to Section 109(1,A). and animal specialty feeds, are no longer exempt under
Subsection (1,B) of 109.
o The local sales of crude coconut oil and copra pellets are subject
to VAT pursuant to Section 106(A) because the same are no o Prawn feeds are expressly exempt under Subsection (1,B) of 109
longer in their original state, but a processed food product. On the
other hand, the export of coconut oil is subject to VAT at 0% o Dealers of dried fruits and vegetables as well as food companies
pursuant to Section 106(A,2,a) engaged in the simple processing of agricultural and marine food
products are exempt from the VAT
o Copra cake, also known as copra meal (ground copra), is a by-
product of copra, which comes out in pellet form after the oil is o Other exempt transactions: importation of frozen sliced potato
extracted using solvents or through pressing. Since it is a still in its original state is exempt under Section 109(1,A) and
processed product ultimately used as ingredient or supplement to industrial salt, alternatively known as table salt which is neither
animal feeds, it cannot be considered exempt under Section iodized nor refined under Section 109(1,A); importation or sale of
109(1,A). potassium nitrate as it is classified as a non-traditional forliar
fertilizer under Section 109(1,B); shipment of prawn feeds,
o Hamburger patties are “processed meat products” having though in big quantity under Section 109(1,B); and sale of
undergone manufacturing process thru mixture of salt, pepper, “alamang” to which little salt has been added to preserve its
garlic, powder, monosodium glutamate, hydrolyzed vegetable, freshness, to processors of “bagoong” under Section 109(1,A).
protein and water; hence, are no longer meat products in their
original state. Such being the case, their sales are subject to VAT
[Impt!] SEC. 111. Transitional/ Presumptive Input Tax Credits. –
pursuant to Section 106.
(A) Transitional Input Tax Credits. - A person who becomes liable to value-
 Other rulings exempting from VAT
added tax because his annual gross sales or receipt exceeds Php
1,919,500.00 and his transactions are NOT covered by Section 109(1,A-U)
o The business of supplying fresh water to inter-island and ocean-
or any person who elects to be a VAT-registered person (under Section
going vessels is exempt; fresh water comes within the purview of
109(2)) although his transactions are exempt from VAT under Section
agricultural food products
109(1,A-U) shall, subject to the filing of an inventory according to rules and
regulations prescribed by the Secretary of Finance, upon recommendation of
o Export sales of more than Php 1,919,500.00 of roasted coffee
the Commissioner, be allowed input tax on his beginning inventory of goods,
beans are subject to 0% if business is VAT-registered; otherwise,
materials and supplies equivalent to two percent (2%) of the value of such
exports shall be exempt. Roasted and ground coffee beans are not
inventory or the actual value-added tax paid on such goods, materials and
considered manufactured products; hence, the sales thereof are
27
 supplies, whichever is higher, which shall be creditable against the output
tax.
(B) Presumptive Input Tax Credits (because when the person or firm engage
in the processing of sardines, etc. purchases the agricultural products used
as inputs to the production of said sardines he/it did not pay input tax
because agricultural and marine food products in their original state are
exempt from VAT). – Persons or firms engaged in the processing of sardines,
mackerel and milk, and in manufacturing refined sugar, cooking oil and
packed noodle based instant meals, shall be allowed a presumptive input
tax, creditable against the output tax, equivalent to four percent (4%) of
the gross value in money of their purchases of primary agricultural products
which are used as inputs to their production.
As used in this Subsection, the term 'processing' shall mean pasteurization,
canning and activities which through physical or chemical process alter the
exterior texture or form or inner substance of a product in such manner as to
prepare it for special use to which it could not have been put in its original form
or condition.
 Transitional input tax on beginning inventories – taxpayers who
became VAT-registered persons upon exceeding the threshold amount of
Php 1,919,500.00 or who voluntarily registered even if the threshold
amount does not exceed Php 1,919,500.00 or even if their transactions are
exempt from VAT under Section 109(1,A-U) shall be allowed to a
transitional input tax on the inventory on hand as of the effectivity of their
VAT registration
o The transaction input tax shall be 2% of the value of the
beginning inventory on hand or the actual VAT paid, on such
goods, materials and supplies, whichever is higher, which amount
may be allowed as tax credit against the output tax of the VAT-
registered person. To avail of the benefit, the taxpayer must have
paid input tax on his inventory. In the case of presumptive input
tax credit the taxpayer did not pay any input tax on the marine or
agricultural products he purchased.
[Impt!] SEC. 112. Refunds or Tax Credits (this term refers to the issuance by the
BIR of tax credit certificate which may be used by the VAT-registered person to pay
his other NIR taxes such as Income Tax, Donor‟s Tax, Documentary Stamp Tax, etc.
This term does not refer to the input tax deductible from the output tax) of Input
Tax. –
(A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-registered
person, whose sales are zero-rated or effectively zero-rated may, within two
(2) years after the close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certificate or refund of creditable input
tax due or paid attributable to such sales, except transitional input tax
(because transitional input tax is deductible from output tax of the person
who becomes liable to VAT), to the extent that such input tax has not been
28
applied against output tax: Provided, however, That in the case of zero-
rated sales under Section 106(A)(2)(a)(1), (2) (Export Sales of Goods)and
(B) (transactions deemed sale) and Section 108 (B)(1) (Zero-rated sales of
service) and (2), the acceptable foreign currency exchange proceeds thereof
had been duly accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the
taxpayer is engaged in zero-rated or effectively zero-rated sales and also in
taxable or exempt sale of goods of properties or services, and the amount of
creditable input tax due or paid cannot be directly and entirely attributed to
any one of the transactions, it shall be allocated proportionately on the basis
of the volume of sales: Provided, finally, That for a person making sales
that are zero-rated under Section 108 (B)(6) (Transport of Passengers and
Cargo by air or sea vessels from the Philippines to a foreign country), the
input taxes shall be allocated ratably between his zero-rated and non-zero-
rated sales.
[Input tax paid on goods purchased and subsequently sold and the sale is
exempt from VAT cannot be availed of as tax refund or tax credit. This input
tax is part of the cost of sales, more particularly part of purchases or it can
be treated as an allowable deduction in the form of taxes. The same is true
with respect to input tax on Capital Goods)
(B) Cancellation of VAT Registration. - A person whose registration has been
cancelled due to retirement from or cessation of business, or due to changes
(such as when the volume of sales no longer exceeds Php 1,919,500.00) in
or cessation of status under Section 106(C) of this Code may, within two (2)
years from the date of cancellation, apply for the issuance of a tax credit
certificate (tax refund is NOT allowed) for any unused input tax which may
be used in payment of his other internal revenue taxes.
(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In
proper cases, the Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred twenty (120) days
from the date of submission of complete documents in support of the
application filed in accordance with Subsection (A) hereof.
[The law does not require the CIR to decide written claims for tax refund or
tax credit because if the CIR does not decide the taxpayer can appeal the
inaction of the CIR to the CTA]
[VIP!] In case of full or partial denial of the claim for tax refund or tax credit, or
the failure on the part of the Commissioner to act on the application within the
period prescribed above, the taxpayer affected may, within thirty (30) days
from the receipt of the decision denying the claim or within 30 days after the
expiration of the one hundred twenty day-period, appeal the decision or the
unacted claim (or inaction) with the Court of Tax Appeals.
(D) Manner of Giving Refund. - Refunds shall be made upon warrants
(treasury warrants or government checks) drawn by the Commissioner or by
his duly authorized representative without the necessity of being
countersigned by the Chairman, Commission on Audit, the provisions of the
Administrative Code of 1987 to the contrary notwithstanding: Provided,
 That refunds under this paragraph shall be subject to post audit by the sales) of input taxes allocated to zero-rated or effectively zero-rated sales
Commission on Audit. can be refunded or issued a tax credit certificate.

In the case of a person engaged in the transport of passenger and cargo

 [Impt!] Only a VAT-registered person may be given a tax credit certificate
(Section 108, B, 6 in relation to Section 112A) by air or sea vessels from
or refund of unutilized input VAT paid corresponding to the zero-rated sales
the Philippines to a foreign country, the input taxes shall be allocated
or effectively zero-rated sales of goods, properties or services.
ratably between his zero-rated sales and non-zero-rated sales (sales
subject to regular rate, subject to final VAT withholding and VAT-exempt
o The application for refund or tax credit of unutilized input VAT
sales).
attributable to zero-rated or effectively zero-rated sales should be
filed “within 2 years after the close of the taxable quarter when
 A VAT-registered person whose registration has been cancelled due to
[such] sales were made,” regardless of when the input VAT was
retirement from or cessation of business, may, within 2 years from the
paid or when the related official receipt was issued. Thus, when a
date of cancellation, apply for the issuance of a tax credit certificate (tax
zero-rated VAT taxpayer pays its input VAT a year after the
refund is not allowed) for any unused input tax which he may use in
pertinent transaction (the zero-rated sale was made), said
payment of his other internal revenue taxes. However, he shall be entitled
taxpayer only has a year to file a claim for refund or tax credit of
to a refund if he has no internal revenue tax liabilities against which the tax
the unutilized creditable input VAT.
credit certificate may be utilized.
Example:
 [VIP!] Input taxes on capital goods (depreciable assets) – Input taxes
A is engaged in import and export business. On Jan. 16, 2014
on capital goods can no longer be refunded (May the VAT-registered
he purchased locally manufactured products at a cost of Php
person who purchased capital goods or depreciable assets and who paid an
10M without VAT, hence, A paid to his supplier the total
input tax thereon file with the BIR a written claim for issuance of tax credit
amount of Php 11.2M on said date. On Jan. 16, 2015 A
certificate? ANS: NO, claim for refund or tax credit certificate is applicable
exported the said products to Singapore which sale is a zero-
only on input tax on goods the sale thereof is zero-rated or effectively
rated sale.
zero-rated). Under Section 110(B), the input tax on (capital) goods for
which deduction depreciation is allowed, shall be spread evenly for 60
Until when may A file with the BIR a written claim for tax
months starting from the month of acquisition or during the useful life of
refund of Php 1.2M?
the asset whichever is shorter. This applies if the aggregate acquisition
cost of such asset excluding the VAT component thereof exceeds Php 1M.
ANS: The claim for tax refund may be filed until March 21,
2017. The export sale was made on January 16, 2015
and the taxable quarter ends on March 31, 2015 and A In the case, however, of zero-rated and effectively zero-rated taxpayers,
is given a period of 2 years after the close of the they continue to be entitled to issuance of tax credit certificate or refund of
taxable quarter when the sale is made. input taxes paid on capital goods (THIS IS WRONG! See Page 129 last
paragraph, Page 134 1st paragraph and Page 154 last paragraph)
o Section 204 (C) also sets a 2-year prescriptive period, reckoned
from date of payment of the tax or penalty, for the filing of a
[VIP!] NOTE: Refund of input tax on capital goods (depreciable assets) is
claim for refund or tax credit. Said provision applies only to
no longer allowed because refund of input tax applies only to 0-rated sales
instances of erroneous payment or illegal collection of internal
it does not even apply to sales exempt from VAT
revenue tax not to claim for tax refund on unutilized input tax on
zero-rated sales.
 [Impt!] Requirements for claim of refund or tax credit – To claim a
 [Impt!] Allocation of proportionate share of input taxes – where the refund or tax credit of input VAT attributable to zero-rated or effectively
taxpayer is engaged in both zero-rated or effectively zero-rated sales and zero-rated sales, the taxpayer must satisfy the following requirements:
in taxable (including sales subject to final withholding VAT [Section 114, C
– 5% or 10%]) or exempt sales (Section 109,1,A-U) of goods, properties 1. Taxpayer is VAT-registered
or services, and the amount of creditable input tax due or paid cannot be 2. Taxpayer is engaged in zero-rated or effectively zero-rated sales
(such as purchase of raw materials to be manufactured into finished 3. Input taxes are due or paid
products and eventually sold some of them are zero-rated some are 4. Input taxes are not transitional input taxes
taxable and some are exempt) directly and entirely attributable to any one 5. Input taxes have not been applied against output tax during and in the
of the transactions, only the proportionate share (on the basis of volume of succeeding quarters

29
 6. Input taxes claimed are attributable to zero-rated or effectively zero-
rated sales
7. Zero-rated sales under Sections 106(A)(2)(1) and (2);106(B), and
108(B)(1) and (2), 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 and
entirely attributable to any of these sales, the input taxes shall be
proportionately allocated on the basis of sales volume
9. Claim is filed within 2 years after the close of the taxable quarter when
such sales were made
The failure to print the word “zero-rated” on the invoices or receipts is fatal
to a claim for credit or refund or input VAT on zero-rated sales. Invoices or
receipts which are not duly registered have no probative value for the
purpose of refund or credit
 [VVIP!] Filing of claims for refund or tax credit – they shall be filed
with the appropriate BIR Office-Large Taxpayers Service (LTS) or Revenue
District Office (RDO) – having jurisdiction over the principal place of
business of the taxpayer. However, direct exporters may also file their
claim for tax credit with the One-Stop-Shop Center of the Department of
Finance. The filing of a claim with one office shall preclude the filing of the
same claim with another office.
o The commissioner shall grant a tax credit/refund for creditable
input taxes within 120 days from the date of submission of
complete documents (such as Quarterly VAT Returns, Purchase
Invoice and Sales Invoice) in support of the application filed for
tax refund or credit under Section 112(A).
o In case of full or partial denial of the claim for tax credit/refund as
decided by the Commissioner of Internal Revenue, the taxpayer
may appeal to the CTA within 30 days from the receipt of said
denial; otherwise, the decision will become final. However, if no
action on the claim for tax credit/refund has been taken by the
CIR after the 120-day period from the date of submission of the
application with complete documents, the taxpayer may appeal
(the taxpayer will appeal the inaction of the CIR or his (taxpayer)
unacted claim for refund or credit) to the CTA within 30 days
from the lapse of the 120-day period.
o While the period under Section 112(A) for filing a claim for refund
or credit of input VAT or the issuance of a tax credit certificate is
reckoned from the close of the taxable quarter when the sales
were made, the period under Section 229 for filing an action to
recover taxes which have been erroneously paid is reckoned from
the date of payment. It is settled that in the case of input VAT,
the date of payment of the input tax is not deemed to be the close
30
of the quarter involved, but rather the date of the filing of the
quarterly VAT return, because it is only then that the amount of
refund, if any, can be determined.
o To claim a refund for input VAT attributable to zero-rated sales,
the claimant-taxpayer must be VAT-registered and must comply
with the statutory invoicing requirements. Specifically, the
taxpayer must imprint the word “zero-rated” on his sales invoices
and official receipts. Failure to do so will result in the disallowance
of his claim for refund. The appearance of the word “zero-rated”
on the face of invoices covering zero-rated sales prevents a buyer
from falsely claiming input VAT from its purchases when it did not
pay any VAT to the seller. Absent such word, if a successful claim
for input VAT is made, the government would be refunding money
it did not collect in the first place. The requirement to imprint the
word “zero-rated” in official receipts and invoices is reasonable
and is in accord with the efficient collection of VAT from the
covered sales of goods and services.
o The second paragraph of Section 112 (C) envisions 2 scenarios:
(a) when a decision is or rendered issued by the Commissioner
before the lapse of the 120-day period, and or (b) when no
decision is made after the 120-day period. In both instances, the
taxpayer has 30 days within which to file an appeal with/to the
CTA. The filing of a judicial claim (or appeal) with the CTA by a
taxpayer who did not wait for the decision of the Commissioner
and before the lapse of the 120-day period would be premature
and the CTA would not acquire jurisdiction over the matter.
A decision rendered by the Commissioner after the 120-day can
still be appealed to the CTA within 30 days from receipt thereof.
o Section 112(C) provides for a specific period within which a
taxpayer should appeal to the CTA the decision or inaction of the
CIR: within 30 days from receipt of decision rendered by the CIR
before or after the lapse of the 120-day period, or within 30 days
after the 120-day (the 180-day period applies to protested
assessment under Section 228 last paragraph) period when no
decision is made. The filing of appeal with the CTA before the
rendition of the decision of the CIR and before the lapse of the
120-day period would be premature.
o When claiming tax refund or credit, the VAT taxpayer must be
able to establish that he has refundable or creditable input VAT,
and the same has not been applied against its output VAT
liabilities – information which is supposed to be reflected in the
taxpayer‟s VAT returns. Thus, an application for tax refund or
credit must be accompanied by copies of the taxpayer‟s VAT
return or returns for taxable quarter or quarters concerned.
  [Impt!] Tax credit certificates – insofar as BIR-issued tax credit
certificates are concerned, there is no provision in the Tax Code expressly
prohibiting their transfer or assignment, hence, they can be transferred or
assigned by the owner provided that the same have not expired and
remain valid in the hands of the original holder pursuant to Section 230.
The law specifically allows the conversion of unutilized tax credits into cash
refund within 5 years from the date of issue. If the taxpayer can ultimately
dispose the cash proceeds of his TCCs in any manner he chooses, there is
no cogent reason why the source of such proceeds should be treated
differently. At any rate, the conversion into cash refund or the transfer of
the TCC to another yields the same result without any revenue loss or
prejudice to the government
Chapter 2 – Compliance Requirements
SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. –
(A) Invoicing Requirements. - A VAT-registered person shall issue:
(1) A VAT invoice for every sale, barter or exchange of goods or properties;
and or
(2) A VAT official receipt for every lease of goods or properties, and for every
sale, barter or exchange of services.
(B) Information Contained in the VAT Invoice or VAT Official Receipt. - The
following information shall be indicated in the VAT invoice or VAT official
receipt:
(1) A statement that the seller is a VAT-registered person, followed by his
taxpayer's identification number (TIN);
(2) The total amount which the purchaser pays or is obligated to pay to the
seller with the indication that such amount includes the value-added tax:
Provided, That:
(a) The amount of the tax shall be shown as a separate item in the
invoice or receipt;
(b) If the sale is exempt from value-added tax, the term "VAT-exempt
sale" shall be written or printed prominently on the invoice or
receipt;
(c) If the sale is subject to zero percent (0%) value-added tax, the
term "zero-rated sale" shall be written or printed prominently on
the invoice or receipt;
(d) If the sale involves goods, properties or services some of which are
subject to and some of which are VAT zero-rated or VAT-exempt,
the invoice or receipt shall clearly indicate the breakdown of the
31
sale price between its taxable, exempt and zero-rated components,
and the calculation of the value-added tax on each portion of the
sale shall be shown on the invoice or receipt: Provided, That the
seller may issue separate invoices or receipts for the taxable,
exempt, and zero-rated components of the sale.
(3) The date of transaction, quantity, unit cost selling price and description of
the goods or properties or nature of the service; and
(4) In the case of sales in the amount of one thousand pesos (P1,000) or
more where the sale or transfer is made to a VAT-registered person, the
name, business style, if any, address and taxpayer identification number
(TIN) of the purchaser, customer or client.
(C) [Read!] Accounting Requirements. - Notwithstanding the provisions of
Section 233, all persons subject to the value-added tax under Sections 106
and 108 shall, in addition to the regular accounting records required,
maintain a subsidiary sales journal and subsidiary purchase journal on which
the daily sales and purchases are recorded. The subsidiary journals shall
contain such information as may be required by the Secretary of Finance.
(D) [Read!] Consequence of Issuing Erroneous Vat Invoice or Vat Official
Receipt. –
(1) If a person who is not a VAT-registered person issues an invoice or
receipt showing his Taxpayer Identification Number (TIN), followed by the
word "VAT":
(a) The issuer shall, in addition to any liability to other percentage
taxes, be liable to:
(i) The tax imposed in Section 106 or 108 without the benefit of
any input tax credit; and
(ii) A 50% surcharge under Section 248 (B) of this code;
(b) The VAT shall, if the other requisite information required under
Subsection (B) hereof is shown on the invoice or receipt, be
recognized as an input tax credit to the purchaser under Section
110 of this Code.
(2) If a VAT-registered person issues a VAT invoice or VAT official receipt for
a VAT-exempt transaction, but fails to display prominently on the invoice
or receipt the term "VAT-exempt Sale", the issuer shall be liable to
account for the tax imposed in Section 106 or 108 as if Section 109 did
not apply.
(E) Transitional Period. - Notwithstanding Subsection (B) hereof, taxpayers may
continue to issue VAT invoices and VAT official receipts for the period July 1,
2005 to December 31, 2005, in accordance with Bureau of Internal Revenue
administrative practices that existed as of December 31, 2004.
  VAT-registered persons must issue duly registered (with authority to print
receipts and commercial invoices from the BIR before the printer can print
the same and to be submitted to the BIR for stamping) invoice or receipt
for every sale or lease of goods, properties or services regardless of
amount (See Section 237), containing the required information and must
comply with accounting and record-keeping requirements.
 Only VAT-registered persons can print their TIN, followed by the word
“VAT” in their invoice or receipt
o All purchases covered by invoices other than VAT invoice shall not
give rise to any input tax
 Consequences of issuing erroneous VAT invoice or VAT-official
receipt
1. By a non-VAT person – if a person who is not VAT-registered issues
an invoice or receipt showing his TIN, followed by the initials “VAT”,
the erroneous issuance shall result to the following:
 The non-VAT person shall be liable to:
i. Percentage taxes applicable to his transactions
ii. VAT due on the transactions under Section 106 or 108,
without the benefit of any input tax credit
iii. 50% surcharge under Section 248(B)
2. On exempt transaction by a VAT-registered person – if a VAT-
registered person issues a VAT invoice or VAT official receipt for a VAT-
exempt transaction, but fails to display prominently on the invoice or
receipt the 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
 It is clear from the provisions of the VAT regulations and the Tax Code that
the buyer must be properly identified in the invoice before it is given the
privilege to claim an input VAT on its purchase of taxable goods and
services. This provision is designed to avoid the possibility of a VAT
taxpayer claiming an input VAT based on a VAT invoice or receipt issued to
another taxpayer.
 A VAT-registered person required to issue VAT invoices or receipts for its
VAT taxable transactions, non-VAT invoices or receipts for exempt
transactions, and VAT invoices or receipts with “zero-rated” imprinted on
the invoice covering zero-rated sales.
[BAR!] [Impt!] SEC. 114. Return and Payment of Value-Added Tax. -
(A) In General. - Every person liable to pay the value-added tax imposed under
this Title shall file a quarterly return of the amount of his gross sales or
receipts within twenty-five (25) days following the close of each taxable
quarter prescribed for each taxpayer: Provided, however, That VAT-
32
registered persons shall file a monthly VAT declaration and pay the value-
added tax on a monthly basis.
Any person, whose registration has been cancelled in accordance with
Section 236, shall file a return and pay the tax due thereon within twenty-
five (25) days from the date of cancellation of registration: Provided (this
is applicable also to the first paragraph), That only one consolidated return
shall be filed by the taxpayer for his principal place of business or head office
and all branches.
(B) Where to File the Return and Pay the Tax. - Except as the Commissioner
otherwise permits, the return shall be filed with and the tax paid to an
authorized agent bank, Revenue Collection Officer or duly authorized city or
municipal Treasurer in the Philippines located within the revenue district
where the taxpayer is registered or required to register.
(C) Withholding of Value-Added Tax. - The Government (Even private
individual or private entity who or which leases property owned by non-
resident must withhold 10% of the rental from the non-resident lessor.
Although this is not included in the law it is provided under the Rules and
Regulations of the BIR pursuant to the power of CIR to interpret the
provisions of the NIRC and the power to recommend to the Secretary of
Finance the promulgation of Rules and Regulations for the effective
enforcement of said provisions) or any of its political subdivisions,
instrumentalities or agencies, including government-owned or -controlled
corporations (GOCCs) shall, before making payment on account of each
purchase of goods and services (How about lease of properties belonging to
resident owners? ANS: It is believed that the payment is also subject to final
withholding tax of 5% by reason of Section 108A – lease of property is
considered sale of services under the 2nd paragraph hereof) which are
subject to the value-added tax imposed in Sections 106 and 108 of this
Code, deduct and withhold a final value-added tax at the rate of five percent
(5%) thereof: Provided, That the payment for lease or use of properties or
property rights to nonresident owners shall be subject to ten percent (10%)
withholding tax at the time of payment. For purposes of this Section, the
payor or person in control of the payment shall be considered as the
withholding agent.
The value-added tax withheld under this Section shall be remitted within ten
(10) days following the end of the month the withholding was made.
 [Impt!] Where to file and pay
o The monthly VAT declaration and quarterly return shall be filed
with, and VAT due thereon paid to, an Authorized Agent Bank
(AAB) under the jurisdiction of the Revenue District/BIR Office
where the taxpayer (head office of the business establishment) is
required to be registered.
[For every quarter the VAT registered person will file 2 monthly
VAT declaration for the first 2 months and quarterly VAT-return
for 3 months]

o In cases where there are no duly accredited agent banks within
the municipality or city, the monthly VAT declaration and quarterly
VAT return, shall be filed with and any amount sue shall be paid to
the RDO, Collection Agent or duly authorized Treasurer of the
Municipality/City where such taxpayer is required to be registered.
o Only one consolidated quarterly VAT return or monthly VAT
declaration covering the results of operation of the head office as
well as the branches for all lines of business subject to VAT shall
be filed by the taxpayer, for every return period, with the BIR
Office where said taxpayer is required to be registered.
 [Impt!] Time of filing and payment – the quarterly return must be filed
within 25 days following the close of each calendar quarter.
o The tax shall be paid monthly, based on the taxable sales/receipts
for the month, using the prescribed monthly VAT declaration form
within 20 days following the end of each month. The declaration
shall be accomplished only for the first 2 months of each calendar
quarter
o 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 a quarter
 Filing of return by VAT-registered exporters – Sales of Vat-registered
exporters of garments are automatically subject to VAT at zero-rated
pursuant to Section 106(A,2,a). Such exporters are, however, still required
to file a quarterly VAT return which will be used as basis for a refund of the
input taxes paid to suppliers of goods and services in connection with their
export activity.
[Export Sales are zero-rated provide the payment to the exporter is
acceptable foreign currency so that is the payment is in the Philippine
currency the export sales are subject to 12% VAT]
 Electronic filing of tax returns and payment of taxes – the Electronic
Filing and Payment System (EFPS) is an alternative mode of filing returns
and payment of taxes which deviates from the conventional manual
process of encoding paper bound tax returns filed which is highly
susceptible to human errors and intervention. The system allows the
taxpayers to directly submit their tax returns and pay their taxes due
online over the internet through the BIR website, thereby reducing the
government‟s administrative and operational costs in interacting with
taxpayers and in collecting taxes.
33
 Short period return – Any person who returns from business with due
notice to the BIR Office where the taxpayer is registered 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 VAT registration has been officially
cancelled.
 Withholding of VAT on government money payments and payments to non-
residents
o 5% final VAT – the 5% final VAT deducted by the government
shall represent the net VAT payable of the seller-payee. The
remaining 7% effectively accounts for the standard input VAT for
sales of goods or services to government or any of its political
subdivisions, instrumentalities or agencies including GOCCs, in lieu
of the actual input VAT directly attributable or ratably apportioned
to such sales. Should actual input VAT exceed 7% of gross
payments, the excess may form part of the seller‟s expense (in
the case of sale of services the expense is taxes as an allowable
deduction thereby decreasing the taxable income and finally
decreasing the income tax) or cost (in the case of sale of goods
where the excess is added to purchases thereby increasing the
cost of sales and decreasing the gross profit). On the other hand,
if actual input VAT is less than 7% of gross payment, the
difference must be credited against expense or cost (the
difference shall be deducted from taxes as an allowable deduction)
which in effect constitutes as additional income to the seller.
o 10% VAT – the government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs, as well as private
corporations, individuals, estates and trusts (although this is not
mentioned in the law this is correct pursuant to the power ranted
to the CIR to interpret the provisions of the NIRC and to
recommend the promulgation of Rules and Regulations), shall
withhold 10% VAT with respect to the following payments:
 Lease or use of properties or property rights owned by
non-residents
o It is provided in Section 114(C): “final VAT due at the rate of five
percent (5%).” This means that taxable transactions with the
government are subject to a 5% rate, which constitutes as full
payment of the tax payable on the transaction. This represents
the net VAT payable of the seller. The other 7% effectively
accounts for the standard input VAT, in lieu of the actual input
VAT directly or attributable to the taxable transaction.
[If actual input tax exceeds 7% the difference shall be treated as
part of sales or as expense, as the case may be. If actual input
tax is less than 7% the difference shall be deducted from cost of
sales or deducted from the expense, as the case may be.

In no event or case shall the seller of goods or provider of services
be liable for VAT to the BIR]
SEC. 115. Power of the Commissioner to Suspend the Business Operations of a
Taxpayer. - The Commissioner or his duly authorized representative is hereby
empowered to suspend the business operations and temporarily close the business
establishment of any person for any of the following violations:
(a) In the case of a VAT-registered Person. –
(1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax return as required under Section 114; or
(3) Understatement of taxable sales or receipts by thirty percent (30%) or
more of his correct taxable sales or receipts for the taxable quarter.
[If the understatement of sales or receipts is less than 30% the CIR
cannot suspend the business operations nor can he order the temporary
closure of the business establishment. But the VAT registered person can
be held liable for tax evasion in addition to the imposition of 50%
surcharge.]
(b) Failure of any Person to Register as Required under Section 236. –
The temporary closure of the establishment shall be for the duration of not less
than five (5) days and shall be lifted only upon compliance with whatever
requirements prescribed by the Commissioner in the closure order.
TITLE 8
REMEDIES
Chapter 1 – Remedies in General
SEC. 202. Final Deed to Purchaser. - In case the taxpayer shall not redeem the
property as herein provided the Revenue District Officer shall, as grantor, execute a
deed conveying to the purchaser so much of the property as has been sold, free
from all liens of any kind whatsoever, and the deed shall succintly recite all the
proceedings upon which the validity of the sale depends. [should be next to or after
Section 214]
[Mem!] SEC. 203. Period of Limitation Upon Assessment and Collection. - Except
as provided in Section 222 (false or fraudulent return or failure to file a return
where the prescriptive period to assess is 10 years from discovery), internal
revenue taxes shall be assessed within three (3) years after the last day prescribed
by law for the filing of the return, and no proceeding (the BIR cannot file a collection
case in court if the tax is NOT assessed within 3 years in the case of a return filed
which is NOT false or fraudulent) in court without assessment for the collection of
such taxes shall be begun after the expiration of such period: Provided, That in a
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case where a return is filed beyond the period prescribed by law, the three (3)-year
period shall be counted from the day the return was filed. For purposes of this
Section, a return filed before the last day prescribed by law for the filing thereof
shall be considered as filed on such last day.
 The 3-year prescriptive period starts to run 1 day after the last day
prescribed by law for the filing of the return or from the date the return
was actually filed whichever comes later.
The last day prescribed by law for the filing of the ITR of individuals is April
15, when will the 3-year prescriptive period to assess start to run if:
1. The return is filed on January 5 – April 16
2. The return is filed on April 15 – April 16
3. The return is filed on July 1 – July 1
 [Impt!] Limitations (or prescriptions) on the government‟s right to assess
and collect taxes cannot be presumed in the absence of legislation to the
contrary, and where the government has not, by statutory provision limited
its right to assess unpaid taxes, such right is imprescriptible (if the NLRC
does not contain a provision prescribing a period of limitation to assess, the
right of the government to assess, does not prescribe)
 After the expiration of the prescriptive period, the government loses the
right to assess a tax; any assessment thereafter made is invalid
 The general rule as to the prescriptive period for assessment is that where
a return was filed, the period is within 3 years after the date the return was
due or was filed which is not false or fraudulent, whichever comes later.
Thus, if the income tax return due on April 15, 2011 was filed on April 10,
2011, the 3-year period is counted from April 16, 2011 (the law says
“after” not “on)
 An assessment is deemed made for the purpose of giving effect thereto
(the assessment is valid and the BIR can proceed to collect) if:
1. Made within the period of 3 or 10 years, as the case may be; and
2. Notice of the assessment (official or formal or final assessment notice)
is released, mailed, or sent to the taxpayer also within the same
period
It is not required that the notice be received by the taxpayer within the
prescribed period.
It is required that the taxpayer should actually receive, even beyond the
prescriptive period, the assessment notice which was timely released,
mailed and sent. The 3-year period for collection of the assessed tax begins
to run on the date the assessment has been released, mailed, or sent.
Example:
The ITR was filed on April 15, 2011. When will the 3-year prescriptive
 period to assess expire?
ANS: The 3-year prescriptive period to assess will expire on April 14,
2014 NOT on April 16, 2014 because 2012 is a leap year
If the ITR was filed on April 15, 2012 the 3-year prescriptive
period to assess will expire on April 15, 2015
 An assessment contains not only a computation of tax liabilities, but also a
demand for payment within a prescribed period (in the notice of
assessment)
 The period (3 years or 5 years) of prescription provided (Section 222c) by
law to make a collection by distraint or levy or by a proceeding in court is
interrupted once a taxpayer requests for reinvestigation or reconsideration
of the assessment
o The summary remedy of distraint or levy is begun by the issuance
of a warrant of distraint or levy. Such issuance has the effect of
stopping the running of the prescriptive period to collect and it is
not necessary (such as when after the issuance of the warrant of
distraint the BIR did not seize personal property of the taxpayer
and instead it filed a collection case in court) that it be actually
executed to be made effective

 [VIP!] The general rule as to the prescriptive period for collection by SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or
judicial action or by distraint or levy where an assessment was made, is Credit Taxes. - The Commissioner may –
within 3 years after the date of assessment (there is NO express provision
under the New NIRC regarding prescriptive period to collect in case a (A) Compromise the payment of any internal revenue tax, when:
return is filed and said return is NOT false or fraudulent unlike under the
old NIRC. Hence, apply Section 222c by analogy); where no assessment (1) A reasonable doubt (such as 1loss of pertinent documents evidencing
was made and a return was filed and the return is not false, fraudulent, the payments of taxes; 2taxpayer claims that the assessment has already
period for collection is the same as the period for assessment, that is, prescribed) as to the validity of the claim against the taxpayer exists; or
within 3 years after the return was due or filed, whichever comes later
(2) [BAR!] The financial position of the taxpayer demonstrates a clear inability
Prescriptive Period to Prescriptive Period to (such as occurrence of natural calamity) to pay the assessed tax.
Assess Collect
1. Return which 3 years after the last day 3 years from the date of The compromise settlement of any tax liability shall be subject to the following
is NOT false prescribed by law for assessment (3 years from minimum amounts:
or fraudulent filing or from the day the the date the taxpayer
return was actually filed, received the For cases of financial incapacity, a minimum compromise rate equivalent to
whichever comes later formal/official/final ten percent (10%) of the basic (surcharge and interest must be paid in full
assessment notice) because they cannot be compromised) assessed tax; and
2. False or 10 years after the 5 years from the date of
fraudulent discretionary by the BIR assessment if the For other cases (reasonable doubt), a minimum compromise rate equivalent
return or for of the falsity, fraud or assessment was made; if to forty percent (40%) of the basic assessed tax.
failure to file omission no assessment was made a
a return case in court may be filed Where the basic tax involved exceeds One million pesos (P1,000.000) or
by the BIR anytime within where the settlement offered is less than the prescribed minimum rates, the
10 years after discovery of compromise shall be subject to the approval of the Evaluation Board which
falsity, fraud or omission shall be composed of the Commissioner and the four (4) Deputy
Commissioners.
o The prescriptive period for enforcing a tax compromise is 1o years
(B) Abate or cancel a tax liability, when:
from the time the right of action accrues as fixed in the Civil Code.
Compromise is a contract
(1) The tax or any portion thereof appears to be unjustly or excessively
assessed; or
Consequently, the 3-year prescriptive period for assessment under
Section 203 shall have an aggregate number of 1,095 days,
(2) The administration and collection costs involved do not justify the
reckoned from the date of the filing of the return or after the last
collection of the amount due.
day prescribed by law for the filing of the return, whichever comes
later
All criminal violations may be compromised except: (a) those already filed in
court, or (b) those involving fraud.

35
(C) Credit or refund taxes erroneously or illegally received or penalties
imposed without authority, refund the value of internal revenue stamps
when they are returned in good condition by the purchaser, and, in his
discretion, redeem or change unused stamps that have been rendered unfit
for use and refund their value upon proof of destruction. [Mem!] No credit
or refund of taxes or penalties shall be allowed unless the taxpayer files in
writing with the Commissioner a claim for credit or refund within two (2)
years after the payment of the tax or penalty: Provided, however, That a
return filed showing an overpayment shall be considered as a written claim
for credit or refund.
A Tax Credit Certificate validly issued under the provisions of this Code may
be applied against any internal revenue tax, excluding withholding taxes, for
which the taxpayer is directly liable. Any request for conversion into refund of
unutilized tax credits may be allowed, subject to the provisions of Section 230 of
this Code: Provided, That the original copy of the Tax Credit Certificate showing
a creditable balance is surrendered to the appropriate revenue officer for
verification and cancellation: Provided, further, That in no case shall a tax refund
be given resulting from availment of incentives granted pursuant to special laws
for which no actual payment was made.
The Commissioner shall submit to the Chairmen of the Committee on Ways and
Means of both the Senate and House of Representatives, every six (6) months, a
report on the exercise of his powers under this Section, stating therein the
following facts and information, among others: names and addresses of
taxpayers whose cases have been the subject of abatement or compromise;
amount involved; amount compromised or abated; and reasons for the exercise
of power: Provided, That the said report shall be presented to the Oversight
Committee in Congress that shall be constituted to determine that said powers
are reasonably exercised and that the government is not unduly deprived of
revenues.
 Compromise is a contract whereby the parties by reciprocal concessions
avoid a litigation or put an end to one already commenced
 The Commissioner of Internal Revenue is the only official vested with the
power and discretion to enter into compromise of criminal and civil cases
and to abate or cancel a tax liability or any portion thereof. This power
cannot be delegated (Section 7C – basic deficiency tax of Php 500,000.00
or less can be compromised by the Regional Evaluation Board)
 Abatement
- is the act of “diminution or decrease in the amount of tax imposed;”
- it refers to “the act of eliminating or nullifying or lessening or
moderating”
To abate
- is to nullify or reduce in value or amount
To cancel
- is to obliterate, cross out, or invalidate and to strike out, make void or
invalid, annul, destroy, revoke or recall
36
[VIP!] The BIR may, therefore, abate or cancel the whole or any unpaid
portion of a tax liability, inclusive of increments (surcharge, interest and
other penalties), if its assessment is excessive or erroneous; or if the
administration costs involved do not justify the collection of the amount
due
 [Impt!] The authority of the Commissioner to compromise is not absolute
as it is subject to the limitations prescribed in Section 204
o In civil cases – the compromise settlement of any tax liability is
subject to the minimum amounts provided. Compromise is not
permitted with respect to the liability of the taxpayer for
surcharge as its imposition is mandatory nor in cases which have
been finally terminated since there is no more reason or basis for
it
o In criminal cases – with respect to those not involving the
commission of fraud (e.g. failure to keep or preserve books and
other records), after they reach the prosecutor‟s office, the
prosecutor must give his consent to the compromise. Once the
information is filed in court, compromise is no longer allowed
[Mem!] In fine, under Section 204, all criminal violations may be
compromised except: (a) those already filed in court although they do not
involve fraud; and (b) those involving fraud although they have not yet
been filed in court
 [VVIP!] Filing of claim for credit or refund and appeal
o Both the claim for refund with the BIR and the subsequent appeal
to the CTA must be filed within the 2-year period. These 2
requirements are mandatory and non-compliance therewith would
be fatal to the action for refund or tax credit
o A return filed showing an overpayment is automatically considered
as a written claim for credit or refund
o [BAR!] The taxpayer should not wait for the decision of the
Commissioner because the filing of the claim for refund with the
Commissioner does not suspend the running of the prescriptive
period of 2 years to file the appeal to the CTA. If the
Commissioner takes time in deciding the claim, and the period of
2 years is about to end, the suit or proceeding must be stated in
the CTA before the end of the 2-year period without awaiting the
decision of the Commissioner
o [BAR!] However, should the Commissioner deny the claim for
refund within the 2-year period, the taxpayer has 30 days from
the receipt of the denial within which to appeal to the CTA;
otherwise, the court would not acquire jurisdiction (the appeal to
the CTA must be filed both within 30 days from receipt of the
notice of denial AND within 2 years from payment. The 30-day
period is jurisdictional while the 2-year period is prescriptive) to
entertain the appeal.
Example:
A, a resident Filipino, filed his ITR for the taxable year 2010
on April 15, 2011 and erroneously paid the amount of Php
1.5M instead of the correct amount of Php 1M. The excess
payment of Php 500,000.00 was discovered by A on April 15,
2012 and 5 days later or on April 20, 2012 A filed a written
claim for tax refund with the CIR.
A. Assuming that the CIR denied the claim for tax refund
and the notice of denial was received by A on March 1,
2013, A has until March 31, 2013 to appeal the denial to
the CTA
1. If A filed his appeal to the CTA on March 31, 2013,
the CTA acquired jurisdiction because both the claim
for refund with the CIR and the appeal to the CTA
were filed within 2 years from payment. Moreover,
the appeal was filed within the jurisdictional period of
30 days
2. If A filed his appeal to the CTA on April 15, 2013, the
CTA did not acquire jurisdiction because although
both the claim for refund and the appeal were filed
within 2 years from payment, YET the appeal was
filed beyond the jurisdictional period of 30 days. This
is true even if the CIR did not move for the dismissal
of the appeal because jurisdictional issue cannot be
waived
B. Assuming that the CIR denied the claim for tax refund
and the notice of denial was received by A on April 10,
2013 and A filed his appeal with the CTA on May 10,
2013, the CTA acquired jurisdiction if the CIR failed to
move for the dismissal of the Appeal. The failure of the
CIR to move for the dismissal of the appeal constitutes
waiver and prescription, as a rule, is waivable
This is to be so because although the appeal was filed
beyond the prescriptive period of 2 years, yet it was filed
within the jurisdictional period of 30 days. This is the
meaning of the phrase “the 2-year period is prescriptive
while the 30-day period is jurisdictional”
C. Assuming that the CIR did not act on the claim for tax
refund filed by A, the latter must appeal the inaction of
the CIR to the CTA on or before April 15, 2013, because
the filing of the claim for tax refund with the CIR does
37
not suspend the running of the prescriptive period of 2
years
 An assessment that has become final and executor because of failure to
dispute the same within 30 days from receipt of the formal or official or
final assessment notice may no longer be contested on its merits by paying
the tax liability and then claiming the refund thereof; otherwise, the 30-
day period for appeal of disputed assessments would make little sense
 Commencement of the 2-year period
o If the tax sought to be refunded is illegally or erroneously
collected, the period of prescription starts from the date the tax
was paid
o If the tax is paid in instalments or only in part, the period is
counted from the date of the last or final instalment or payment
because for tax purposes, there is no payment until the whole or
entire tax liability is full paid
o If the taxpayer merely made a deposit, the period should be
counted from the conversion of the deposit to payment
o If the tax has been withheld from source (through the withholding
tax system), the period is counted from the date it falls due at the
end of the taxable year
o The 2-year prescriptive period within which to claim a refund
commences to run, at the earliest, on the date of the filing of the
adjusted final return (or annul ITR or consolidated ITR or the 4th
ITR in the case of a corporation)
o Consequently, the 2-year prescriptive period provided in Section
229 should be computed from the time of filing of the Adjustment
Return or Annual Income Tax Return and final payment of income
tax
o If the tax was not erroneously or illegally paid, but the taxpayer
became entitled to refund because of supervening circumstances,
as where a law is passed repealing another law under which the
tax was collected and providing for the refund of the tax paid, or
where the basis of tax credit is a tax exemption granted by the
Board of Industries pursuant to law, the 2-year period should start
to run from the date the taxpayer becomes entitled to refund
(specified in the repealing law or amendatory law) and not from
the date of payment
 [VIP!] Party entitled to refund/credit – generally, the person entitled to
ask for a refund/credit is the taxpayer who paid the same

o Where tax has been shifted – the rule applies even if the tax
has been actually shifted by the taxpayer to his customers as in
sales tax (VAT) and even if the tax has been billed as a separate
item in the invoice
o Where payer is not the taxpayer – in said cases, theatre
owners who paid illegal municipal taxes (amusement tax) billed to
and collected from theatre goers were held not entitled to claim
refund of such taxes. The reason given is that taxes paid were
municipal imposts which were levied upon the theatre goers who
actually paid the tax
o Where payer is withholding tax (such as corporation with
respect to dividend tax) – the withholding agent is directly and
independently liable for the correct amount of tax that should be
withheld, and for deficiency assessments, surcharges and
penalties. Therefore, a withholding agent is properly regarded as a
“taxpayer” within the meaning of Section 204(3)
 [Mem!] Doctrine of equitable recoupment
When the refund of a tax illegally or erroneously collected or overpaid
by a taxpayer is barred by the statute of limitations (2 years from
payment), and a tax is being presently assessed against said taxpayer,
such present tax may be recouped or set-off against the tax, the
refund of which has been barred. Similarly, when the collection of a
tax is already barred by such statute (3 or 5 years from receipt of
notice of assessment) and the taxpayer is entitled to a refund or credit
of a tax illegally or erroneously collected and such refund is not yet
barred, the government may set off the tax whose collection is barred
against the refund of the tax illegally or erroneously collected.
The Supreme Court has held that the doctrine, which is a common law
principle or doctrine, is not binding in our jurisdiction.
Example:
1. In 2011, A made an overpayment of tax Php 500,000.00
which he discovered only in 2014, hence, the refund of which
is now barred or has already prescribed. In 2014, A received
a final notice of assessment for tax deficiency in 2013 in the
amount of Php 800,000.00. A offered to pay Php 300,000.00
claiming that the 2013 deficiency tax of Php 800,000.00 can
be recouped or set-off against the excess payment in 2011 of
Php 500,000.00, thereby leaving a balance of Php
300,000.00. A claims that the doctrine of equitable
recoupment is applicable in this case. Is A correct?
ANS: NO, the doctrine of equitable recoupment, although is
applicable in this case, is not applicable in the
Philippines.
38
2. On April 15, 2011, A filed his ITR for taxable year 2010. On
June 1, 2011, A received a final assessment notice for tax
deficiency of Php 300,000.00 in 2010, although A‟s ITR for
said taxable year is neither false nor fraudulent. As of today,
Aug. 3, 2014, A has not received any warrant of distraint or
warrant of levy or summons from the court, hence, the
collection of the tax deficiency of Php 300,000.00 is now
barred or has already prescribed. In 2013, A made an
overpayment of tax in the amount of Php 500,000.00 which
he discovered in 2014 and he promptly filed a written claim
for refund. The CIR offered to refund to A the amount of Php
200,000.00 claiming that the deficiency tax of A of Php
300,000.00 in 2010 can be recouped or set off against the
excess tax paid in 2013 of Php 500,000.00 thereby leaving a
balance of Php 200,000.00. The CIR claims that the doctrine
of equitable recoupment is applicable in this case. Is the CIR
correct?
ANS: NO, the doctrine of equitable recoupment, although is
applicable in this case, is not applicable in the
Philippines.
Chapter 2 – Civil Remedies for Collection of Taxes
SEC. 205. Remedies for the Collection of Delinquent Taxes. - The civil remedies for
the collection of internal revenue taxes, fees (such as registration fee under Section
236) or charges (such as change for failure to file information return under Section
250), and any increment (such as interest and surcharge for late filing of return)
thereto resulting from delinquency shall be:
Administrative
(a) By distraint of goods, chattels, or effects, and other personal property of
whatever character, including stocks and other securities (such as bonds),
debts, credits, bank accounts and interest in and rights to personal
property, and by levy upon real property and interest in rights to real
property; and
Judicial
(b) By civil or criminal action (only in case of false or fraudulent return with
intent to evade tax).
Either of these remedies or both simultaneously (without prejudice to the provisions
of the Rules of Court against forum-shopping) may be pursued in the discretion of
the authorities charged with the collection of such taxes: Provided, however, That
the remedies of distraint and levy shall not be availed of where the amount of tax
involve is not more than One hundred pesos (P100).
[Mem!] The judgment in the criminal case shall not only impose the penalty
(imprisonment and/or fee) but shall also order payment of the taxes subject of the
criminal case as finally decided (determined) by the Commissioner.
The Bureau of Internal Revenue shall advance the amounts needed to defray costs
of collection by means of civil or criminal action, including the preservation or
transportation of personal property distrained and the advertisement and sale
thereof, as well as of real property and improvements thereon.
 [Mem!] Distraint is the seizure by the government of personal property,
tangible or intangible (such as shares of stock, bonds, receivables, bank
deposits, etc.), to enforce the payment of taxes, to be followed by its
public sale, if the taxes are not voluntarily paid.
 2 Kinds of Distraint
1. Actual – there is a taking of possession of personal property out of
the taxpayer into that of the government. Physical transfer of
possession is, however, impossible in the case of intangible personal
property like stocks (Distraint is effected by serving copy of the
warrant of distraint to the taxpayer and the corporation and the
creditors or debtors of the taxpayer) and credits.
2. Constructive – the owner (taxpayer) is merely prohibited from
disposing of his personal properties
 Criminal action is now a mode for the collection of taxes. Before, it was
allowed only for the enforcement of statutory penalties such as fines
and/or imprisonment
o Big-Ticket Items – refer to transactions that are significant in
size and volume, i.e., amount exceeds Php 200 million with
substantive tax consequences
 [VVIP!] R.A. 1125 creating the CTA allows the taxpayer to dispute the
correctness or legality of an assessment both in the purely administrative
level (the protest is filed with the CIR) and in said court (Decision of the
CIR is appealed to the CTA). It does not, however, prohibit the
Commissioner from collecting the tax through any of the means provided
for in Section 205 except when enjoined by said court. The CTA has
jurisdiction over disputed assessments of the BIR
 Where an assessment is pending (the CIR has not yet issued the final or
official or formal assessment notice) with the Commissioner, it cannot yet
serve as the basis of collection by distraint or levy or by judicial action.
Such assessment is clearly not yet final, executor or demandable.
Formal assessment notice which is not disputed or contested within 30
days from receipt thereof by the taxpayer becomes final, executor and
demandable.
If the tax assessment (final or formal or official) is not disputed, an
ordinary action for the collection of the tax may be filed by the
Commissioner of Internal Revenue with the CTA if the principal amount of
taxes and fees, exclusive of charges and penalties, claimed is Php 1M or
more. If said amount is less than Php 1M, the collection case should be
filed with the RTC or MTC (RA 9282)
39
SEC. 206. Constructive Distraint of the Property of A Taxpayer. - To safeguard
the interest of the Government, the Commissioner may place under constructive
distraint the personal property of a delinquent taxpayer or any taxpayer (even if not
delinquent) who, 1in his opinion, is retiring from any business subject to tax, or 2is
intending to leave the Philippines or to remove his property therefrom or to hide or
conceal his property or 3to perform (“is performing” [Section 6,D]) any act tending
to obstruct the proceedings for collecting the tax due or which may be due from
him.
The constructive distraint of personal property shall be affected by requiring the
taxpayer or any person having possession or control of such property to sign a
receipt covering the property distrained and obligate himself to preserve the same
intact and unaltered and not to dispose of the same; in any manner whatsoever,
without the express authority of the Commissioner.
In case the taxpayer or the person having the possession and control of the
property sought to be placed under constructive distraint refuses or fails to sign the
receipt herein referred to, the revenue officer effecting the constructive distraint
shall proceed to prepare a list of such property and, in the presence of two (2)
witnessed, leave a copy thereof in the premises where the property distrained is
located, after which the said property shall be deemed to have been placed under
constructive distraint.
SEC. 207. Summary Remedies. -
(A) Distraint of Personal Property. - Upon the failure of the person owing
any delinquent tax or delinquent revenue (or free or charge) to pay the
same at the time required (in all the official or formal or final assessment
notice and in the warrant of distraint), the Commissioner or his duly
authorized representative, if the amount involved is in excess of One million
pesos (P1,000,000), or the Revenue District Officer, if the amount involved
is One million pesos (P1,000,000) or less, shall seize and distraint (the
actual seizure of personal property is preceded by the issuance of a warrant
of distraint) any goods, chattels or effects, and other 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 1tax fee, or charge, together with any 2increment
(interest and surcharge) thereto incident to delinquency, and the 3expenses
of the distraint (such as transportation and warehousing expenses) and the
4
cost of the subsequent sale.
A report on the distraint shall, within ten (10) days from receipt (by the
distraining officer) of the warrant of distraint, be submitted by the
distraining officer to the Revenue District Officer, and to the Revenue
Regional Director: Provided, That the Commissioner or his duly authorized
representative shall, subject to rules and regulations promulgated by the
Secretary of Finance, upon recommendation of the Commissioner, have the
power to lift such order warrant of distraint: Provided, further, That a
consolidated report by the Revenue Regional Director may be required by
the Commissioner as often as necessary.
 (B) Levy on Real Property. - After the expiration of the time required to pay
the delinquent tax or delinquent revenue fee or charge as prescribed in this
Section, real property may be levied upon, before simultaneously or after
the distraint of personal property belonging to the delinquent. To this end,
any internal revenue officer designated by the Commissioner or his duly
authorized representative shall prepare a duly authenticated certificate (or
warrant of levy) showing the name of the taxpayer and the amounts of the
tax, fee or charge and penalty increment due from him. Said certificate shall
operate with the force of a legal execution throughout the Philippines.
Levy shall be affected by writing upon said certificate a description of the property
upon which levy is made. At the same time, written notice of the levy shall be
mailed to or served upon the Register of Deeds for 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.
In case the warrant of levy on real property is not issued before or simultaneously
with the warrant of distraint on personal property, and the personal property of the
taxpayer is not sufficient to satisfy his tax delinquency, the Commissioner or his
duly authorized representative shall, within thirty (30) days after execution of the
distraint, proceed with the levy on the taxpayer's real property.
Within ten (10) days after receipt by the levying officer of the warrant of levy, a
report on any levy shall be submitted by the levying officer to the Commissioner or
his duly authorized representative: Provided, however, That a consolidated report
by the Revenue Regional Director may be required by the Commissioner as often as
necessary: Provided, further, That the Commissioner or his duly authorized
representative, subject to rules and regulations promulgated by the Secretary of
Finance, upon recommendation of the Commissioner, shall have the authority to lift
warrants of levy issued in accordance with the provisions hereof.
 Officials authorized to sign Warrants of Distraint and Levy or Writ of
Garnishment
1. Commissioner of Internal Revenue – Amount involved is above
Php 1M
2. Deputy CIR (Operations) – above Php 500,000.00 to Php 1M
3. Assistant CIR for Collection Service – above Php 300,000.00 but
not over Php 500,000.00
4. Regional Director – above Php 100,000.00 but not over Php
300,000.00
a. Revenue District Officer – Php 100,000.00 and below
 [Impt!] As a rule, the warrant of distraint or levy is, “proof of the finality of
assessment” and renders hopeless a request for reconsideration, being
tantamount to an outright denial thereof and makes the said request
deemed rejected
[Impt!] SEC. 208. Procedure for Distraint and Garnishment. - The officer
(distraining) serving the warrant of distraint shall make or cause to be made an
account (or list or inventory) of the goods, chattels, effects or and other personal
40
property distrained, a copy of which, signed by himself (distraining officer), shall be
left either with the owner or person from whose possession such goods, chattels, or
effects or other 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 (or claim of the government
or entire claim or all proper charges) and note of the date, time and place of sale.
Stocks and other securities shall be distrained by serving a copy of the warrant of
distraint upon the taxpayer and upon the president, manager, treasurer or other
responsible officer of the corporation, company or association, which issued the said
stocks or securities.
Debts (Taxpayer is the creditor) and credits (taxpayer is the debtor who
previously issued an instrument of credit, such as check or promissory note) shall
be distrained by leaving (or serving) with the person owing (debtor of the taxpayer)
the debts or having in his possession or under his (creditor of the taxpayer) control
such credits, or with his agent, a copy of the warrant of distraint. The warrant of
distraint shall be sufficient authority to the person owning the debts or having in his
possession or under his control any credits belonging to the taxpayer to pay to the
Commissioner the amount of such debts or credits.
Bank accounts shall be garnished by serving a warrant (or writ) of garnishment
upon the taxpayer and upon the president, manager, treasurer or other responsible
officer of the bank. Upon receipt of the warrant of garnishment, the bank shall turn
over to the Commissioner so much of the bank accounts as may be sufficient to
satisfy the claim of the Government ([1]Tax fee or charge [2]Interest and
surcharge [3]Expenses of distraint [4]Expenses of auction sale).
SEC. 209. Sale of Property Distrained and Disposition of Proceeds. - The Revenue
District Officer or his duly authorized representative, other than the Officer
(Distraining) referred to in Section 208 of this Code shall, according to rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, forthwith cause a notification (or notice of auction sale) to be
exhibited (or posted) in not less than two (2) public places in the municipality or
city where the distraint is made, specifying; the date, time and place of sale and the
articles distrained. The time of sale shall not be less than twenty (20) days after
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.
At the date, time and place fixed in such notice, the said revenue officer (RDO or his
DAR) shall sell the goods, chattels, or effects, or and other personal property,
including stocks and other securities so distrained, at public auction, to the highest
bidder for cash, or with the approval of the Commissioner, through duly licensed
commodity or stock exchanges.
In the case of Stocks and other securities, the officer making the sale shall execute
a bill of sale (or deed 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.
Any residue (or excess) over and above what is required to pay the entire claim,
including expenses, shall be returned given to the owner (or taxpayer) of the
property sold. The expenses chargeable upon each seizure and sale shall embrace
only the actual expenses of seizure and preservation of the property pending ;the
sale, and no charge shall be imposed for the services of the local internal revenue
officer or his deputy.
SEC. 210. Release of Distrained Property Upon Payment Prior to Sale. - 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.
SEC. 211. Report of Sale to Bureau of Internal Revenue. - Within two (2) days after
the sale, the officer making the same shall make a report of his proceedings in
writing to the Commissioner and shall himself preserve a copy of such report as an
official record.
SEC. 212. Purchase by Government at Sale Upon Distraint. - When the amount bid
for the property under distraint is not equal to the amount of the tax or is very
much less than the actual market value of the articles offered for sale, the
Commissioner or his deputy may purchase the same in behalf of the national
Government for the amount of taxes, penalties and costs due thereon.
Property so purchased may be resold by the Commissioner or his deputy, subject to
the rules and regulations prescribed by the Secretary of Finance, the net proceeds
therefrom shall be remitted to the National Treasury and accounted for as internal
revenue.
Actual distraint Constructive Distraint
Made on the property of a delinquent Made on the property of any taxpayer,
taxpayer whether delinquent or not
The taxpayer is merely prohibited from
There is taking of possession
disposing of his personal property
Effected by requiring the taxpayer to
Effected by leaving a list of the personal
sign a receipt of the personal property to
property seized
be preserved
 [Mem!] Requisites of (actual) distraint and levy
1. Taxpayer must be delinquent in the payment of tax
2. There must be a subsequent demand for its payment
3. Taxpayer failed to pay the delinquent tax at the time required
4. Period (3 years or 5 years) within which to collect the tax has not yet
prescribed
 Bank accounts may be distrained notwithstanding R.A. 1405 which
prohibits inquiry into bank accounts, since in the case of distraint, no
inquiry is made. The BIR simply seizes so much of the deposit as is
41
sufficient to discharge the obligation without having to know how much the
deposits are, or where the money or any part of it came from.
Levy of Real Property
SEC. 213. Advertisement and Sale. - Within twenty (20) days after levy (after
service of notice or warrant of levy to the taxpayer), the levying officer conducting
the proceedings shall proceed to advertise the property or a usable portion thereof
as may be necessary to satisfy the claim ([1]Tax fee or charge [2]Interest and
surcharge [3]Expenses of Auction Sale (i.e. publication fee)) and cost of sale; and
such advertisement shall cover a period of at least thirty (30) days. It shall be
effectuated by posting a notice (of auction sale) at the main entrance of the
municipal building or city hall and in public and conspicuous place in the barrio or
district in which the real estate lies and by publication once a week for three (3)
weeks in a newspaper of general circulation in the municipality or city where the
property is located. The advertisement shall contain a statement of the amount of
taxes and penalties so due and the time and place of sale, the name of the taxpayer
against whom taxes are levied, and a short description of the property to be sold. At
any time before the day fixed (in the warrant of levy and in the notice of auction
sale) for the sale, the taxpayer may discontinue all proceedings by paying the taxes,
penalties and interest claim. If he does not do so, the sale shall proceed and shall
be held either at the main entrance of the municipal building or city hall, or on the
premises to be sold, as the officer conducting the proceedings shall determine and
as the notice of sale shall specify.
Within five (5) days after the sale, a return (or report) by the distraining or
levying officer of the proceedings shall be entered upon the records of the Revenue
Collection Officer, the Revenue District officer and the Revenue Regional Director.
The Revenue Collection Officer, in consultation with the Revenue district Officer,
shall then make out and deliver to the purchaser a certificate (of auction sale or
provisional deed of sale) from his records, showing the proceedings 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: Provided, however, That in case
the proceeds of the sale exceeds the claim and cost of sale, the excess shall be
turned over to the owner of the property.
[TRANSFERRED FROM SECTION 214]
The owner shall not, however, 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 (1 year) allowed for its redemption.
The Revenue Collection Officer, upon approval by the Revenue District Officer may,
out of his collection, advance an amount sufficient to defray the costs of collection
by means of the summary remedies provided for in this Code, 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. In his monthly collection reports, such advances
shall be reflected and supported by receipts.
SEC. 214. Redemption of Property Sold. - Within one (1) year from the date of
sale, the delinquent taxpayer, or any one acting for him, shall have the right of to
redeem the property by paying to the Revenue District Officer the amount of the
public taxes, penalties, and interest thereon from the date of delinquency to the
date of sale purchase price at the auction sale, together with interest on said
purchase price at the rate of fifteen percent (15%) per annum from the date of
purchase (or auction sale) to the date of redemption, and such payment shall entitle
the person paying to the delivery of the certificate of auction sale or Provisional
Deed of Sale issued to the purchaser and a certificate of redemption from the said
Revenue District Officer that he has thus redeemed the property, and the Revenue
District Officer shall forthwith pay over to the purchaser the amount (the purchase
price at auction sale and the 15% interest) by which such property has thus been
redeemed, and said property thereafter shall be free from the lien of such taxes and
penalties.
[SECTION 202 SHOULD BE HERE]
SEC. 215. Forfeiture to Government for Want of Bidder. - In case there is no bidder
for of the real property exposed advertised for sale as herein above provided or if
the highest bid is for an amount insufficient to pay the taxes, penalties and costs
entire claim, the Internal Revenue Officer conducting the sale shall declare the
property forfeited to the Government in satisfaction of the claim in question and
within two (2) days thereafter, shall make a return of his proceedings and the
forfeiture which shall be spread upon the records of his office. It shall be the duty of
the Register of Deeds concerned, upon registration with his office of any such
declaration of forfeiture, to transfer the title of the property forfeited to the
Government without the necessity of an order from a competent court.
Within one (1) year from the date of such forfeiture, the taxpayer, or any one acting
for him may redeem said property by paying to the Commissioner or the latter's
Revenue Collection Officer the full amount of the taxes and penalties claim, together
with interest (from forfeiture to redemption at 15% per annum) thereon and the
costs of sale, but if the property be not thus redeemed, the forfeiture shall become
absolute.
SEC. 216. Resale of Real Estate Taken for Taxes. - The Commissioner shall have
charge of any real estate obtained by the Government of the Philippines in payment
or satisfaction of taxes, penalties or costs arising under this Code or in compromise
or adjustment of any claim therefore, and said Commissioner may, upon the giving
of not less than twenty (20) days notice, sell and dispose of the same of public
auction or with prior approval of the Secretary of Finance, dispose of the same at
private sale. In either case, the proceeds of the sale shall be deposited with the
National Treasury, and an accounting of the same shall rendered to the Chairman of
the Commission on Audit.
[Impt!] SEC. 217. Further Distraint or Levy. - The remedy by of distraint of
personal property and levy on realty may be repeated if necessary until the full
amount due, including all expenses of the claim of the government is collected, is
collected.
 Levy refers to the act of seizure of real property in order to enforce the
payment of taxes
42
 If the requirements (especially the notice of auction sale and the
publication thereof) are not strictly complied with, such sale may be
voided. Thus, the court declared as void a tax sale
 Real property placed under levy may be sold at public auction for less than
its market value since the taxpayer is given the right to redeem. With
respect to distrained personal property (must be sold at fair market value),
the rule is different
 The 1 year period for redemption begins from the registration of the
provisional deed of sale although the law says “1 year from the date of
sale” or from the date of forfeiture
 [VIP!] The forfeiture of real property advertised for sale for want of bidder
does not operate as a total discharge of the claim
 Distraint and levy distinguished
Distraint Levy
Personal property Real Property
Forfeiture by the government is not Forfeiture of the government is
provided authorized
No right of redemption Right of redemption is given
 [VIP!][BAR!] As a rule, the warrant of distraint or levy is “proof of the
finality of the assessment” and “renders hopeless a request for
reconsideration,” being “tantamount to an outright denial thereof and
makes the said request deemed rejected,” because it is the most drastic
action of all means of enforcing the collection of tax
Life-Blood Doctrine
SEC. 218. Injunction not Available to Restrain Collection of Tax. - 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 this Code.
 The government is never estopped (because of the Lifeblood Doctrine;
except if the collection period has already expired) to collect legitimate
taxes because of the error committed by its agent
 Action of Commissioner on request for reinvestigation
- The Commissioner of Internal Revenue is not required by the Tax Code
to rule (or decide) first on a taxpayer‟s request for reinvestigation
before he can go to court of the purpose of collecting the tax assessed.
On the contrary, Section 218 withholds from all courts, except the
Court of Tax Appeals, the authority to restrain the collection of any
national internal revenue tax, fee or charge thereby indicating the
legislative policy to allow the Commissioner much latitude in the
speedy and prompt collection of taxes. Taxes, being the chief sources
of revenue for the Government to keep it running, must be paid
immediately and without delay
  The “court” mentioned by Section 218 refers only to ordinary courts
because under Section 11 of RA No. 1125, as amended, the Court of Tax
Appeals is empowered to suspend the collection of internal revenue taxes
and customs duties in cases pending appeal subject to certain conditions
([1] The appeal is meritorious [2] Taxpayer must file a bond). The
legislative policy is to allow the CIR much latitude on the prompt and
speedy collection of taxes.
SEC. 219. Nature and Extent of Tax Lien. - If any person individual, corporation,
partnership, joint-account (cuentas en participacion), association or insurance
company liable to pay an internal revenue tax, neglects or refuses to pay the same
after demand (formal or official or final assessment notice), the amount shall be a
lien (or encumbrance) in favor of the Government of the Philippines from the time
when the assessment was made by the Commissioner until paid, with interests,
penalties, and costs that may accrue in addition thereto upon all property and rights
to property belonging to the taxpayer: Provided, That this lien shall not be valid
against any mortgagee purchaser or judgment creditor until notice of such lien shall
be filed by the Commissioner in the office of the Register of Deeds of the province
or city where the property of the taxpayer is situated or located.
 [Mem!] Tax Lien - is a legal claim or charge or encumbrance on property,
real or personal, established (or created) by law as security in default of
the payment of taxes.
 Rights to property include products of the property such as the proceeds
of insurance policy on the property subject to the lien
 In a seizure to property to enforce a tax lien, the residue after the payment
of taxes and expenses goes to the taxpayer or owner of the property
 [Impt!] Extinguishment of tax liens
1. By payment or abatement of the tax [No more tax liability]
2. By prescription of the right of the government to assess or (tax lien
attaches from the time of assessment, hence, if the period to assess
has already prescribed, the tax lien did not attach so there is nothing
to extinguish) collect [No more tax liability]
3. By failure to file notice of such lien in the office of the Register of
Deeds, as against any mortgagee, purchaser, or judgment creditor
[Taxpayer is still liable and the tax may be enforced against the other
properties of the taxpayer]
4. By destruction of the property subject of the lien [Taxpayer is still
liable and the tax may be enforced against the other properties of the
taxpayer]
SEC. 220. Form and Mode of Proceeding in Actions Arising under this Code. - Civil
and criminal actions and other proceedings (distraint and levy) instituted in on
behalf of the Government under the authority of this Code or other law enforced by
the Bureau of Internal Revenue shall be brought in the name of the Government of
the Philippines and shall be conducted by legal officers of the Bureau of Internal
Revenue but no civil or criminal action for the recovery of taxes or the enforcement
43
of any fine, penalty or forfeiture under this Code shall be filed in court without the
approval of the Commissioner.
SEC. 221. Remedy for Enforcement of Statutory Penal Provisions. - The remedy for
enforcement of statutory penalties (such as interest, surcharge, fine and
imprisonment) of all sorts shall be by criminal or civil action, as the particular
situation may require, subject to the approval of the Commissioner.
 An assessment of a tax deficiency is not necessary to a criminal
prosecution for tax evasion. The crime is complete when the violator
knowingly and willfully filed a fraudulent return with intent to evade and
defeat the tax
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
violations of the NIRC which is within the cognizance of the RTCs (if the
principal amount of the basic taxes and fees, exclusive of charges and
penalties is Php 1M or more, CTA has exclusive and original jurisdiction
involving criminal offenses). While there can be no civil action to enforce
collection before the assessment procedures provided in the Code have
been followed, there is no requirement for the precise computation and
assessment of the tax before there can be a criminal prosecution under the
Code (Section 222)
So, a petition for reconsideration of an assessment may suspend the
running of the prescriptive period for collection of the tax but not the
prescriptive period of a criminal action for violation of law
[VVIP!] SEC. 222. Exceptions as to Period of Limitation of Assessment and
Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of
failure to file a return, the tax may be assessed, or a preceeding in court for
the collection of such tax may be filed without assessment (including
criminal action), at any time within ten (10) years after the discovery of the
falsity, fraud or omission: Provided, That in a fraud assessment which has
become final and executory, the fact of fraud shall be judicially taken
cognizance of in the civil or criminal action for the collection thereof.
(3 years – 3 years; 10 years – 5 years)
(b) If before the expiration of the time prescribed in Section 203 (3 years) for
the assessment of the tax, both the Commissioner and the taxpayer have
agreed in writing to its assessment after such time, the tax may be
assessed within the period agreed upon. The period so agreed upon may
be extended by subsequent written agreement made before the expiration
of the period previously agreed upon.
(c) Any internal revenue tax which has been assessed within the period (10
years) of limitation as prescribed in paragraph (a) hereof may be collected
by distraint or levy or by a proceeding in court within five (5) years
following the assessment of the tax.
 beginning of distraint or levy a proceeding in court for collection, in respect of any
(d) Any internal revenue tax, which has been assessed within the period deficiency, shall be suspended 1for the period (fixed in the Writ of Injunction) during
agreed upon as provided in paragraph (b) hereinabove, may be collected which the Commissioner is prohibited (by the CTA) from making the assessment or
by distraint or levy or by a proceeding in court within the period agreed beginning distraint or levy or a proceeding in court and for sixty (60) days
upon in writing before the expiration of the five (5) -year period. The thereafter (after the expiration of the period stated in the Writ of Injunction);
2
period so agreed upon may be extended by subsequent written (what is suspended is the prescriptive period to collect) when the taxpayer
agreements made before the expiration of the period previously agreed requests for a reinvestigation (or recomputation or reconsideration of the
upon. assessment) which is granted by the Commissioner; 3when the taxpayer cannot be
located in the address given by him in the return filed upon which a tax is being
(e) Provided, however, That nothing in the immediately preceding and assessed or collected: Provided, that, if the taxpayer informs the Commissioner of
paragraph (a) hereof shall be construed to authorize the examination and any change in address, the running of the Statute of Limitations will not be
investigation or inquiry into any tax return filed in accordance with the suspended; 4(what is suspended is the prescriptive period to collect) when the
provisions of any tax amnesty law or decree. 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
 It is essential that the discovery of the falsity or fraud or of failure to file property could be located; and 5when the taxpayer is out of the Philippines.
must have been made within the 3-year period following the general rule
 In the following cases, the running of the statute of limitations provided in
Section 222 states that an assessment is not necessary before a criminal Sections 203 and 222 was held suspended:
charge can be filed. This is the general rule. Private respondents failed to 1. Where an appeal is filed by the taxpayer with the Court of Tax Appeals
show that they are entitled to an exception. Moreover, the criminal charge and the appeal precludes the Commissioner from instituting an action
need only be supported by a prima facie showing of failure to file a in court for collection
required return. This fact need not be proven by an assessment 2. Where a bond is filed by the taxpayer to secure the payment of his tax
obligation, the period during which the bond remains in full force and
 Distinction between false return and fraudulent return effect may be considered to have suspended the running of the 3 year
period to collect provided for in the Tax Code
False Return Fraudulent Return 3. Where a request for a reinvestigation (of the assessment) is made by
May be due to mistake, carelessness Made with intent to evade the the taxpayer, provided it “is granted by the Commissioner.” The mere
or ignorance taxes due request for re-investigation alone does not suspend the prescriptive
Implies intentional or deceitful period. To effect a suspension, the request should first be granted
Merely implies deviation from the 4. Where there is a written agreement between the taxpayer and the
entry with intent to evade the
truth Commissioner or where there is a waiver (on the part of the taxpayer)
taxes due
May not be an attempt to evade a tax Always an attempt to evade a tax 5. Where the taxpayer‟s conduct may constitute estoppel so as to
Fraud is never imputed and the courts preclude the defense of prescription even if he has not previously
never sustain findings of fraud upon waived it in writing as where the taxpayer admitted his obligation and
circumstances which, at most, create promised to pay the same in various letters to the BIR and the delay
only suspicion and the mere was due to his own repeated requests for reinvestigation and similarly
understatement of a tax is not itself repeated requests for extension of time to pay
proof of fraud for the purpose of tax
evasion SEC. 224. Remedy for Enforcement of Forfeitures. - The forfeiture of chattels and
Fraud contemplated by law must be removable fixtures of any sort shall be enforced by the seizure and sale, or
actual and not constructive; it must destruction, of the specific forfeited property. The forfeiture of real property shall be
be intentional consisting of deception enforced by a judgment of condemnation and sale in a legal action or proceeding,
willfully and deliberately done or civil or criminal, as the case may require.
resorted to
SEC. 225. When Property to be Sold or Destroyed. - Sales of forfeited chattels and
 RA No. 8424 extends the period for collection in Subsections (c) and (d) removable fixtures shall be effected, so far as practicable, in the same manner and
from 3 years to 5 years under the same conditions as the public notice and the time and manner of sale as
are prescribed for sales of personal property distrained for the non-payment of
SEC. 223. Suspension of Running of Statute of Limitations. - The running of the taxes.
Statute of Limitations (or prescriptive periods) provided in Sections 203 (3 years
and 3 years) and 222 (10 years and 5 years) on the making of assessment and the
44
Distilled spirits, liquors, cigars, cigarettes, other manufactured products of tobacco,
and all apparatus used I or about the illicit production of such articles may, upon
forfeiture, be destroyed by order of the Commissioner, when the sale of the same
for consumption or use would be injurious to public health or prejudicial to the
enforcement of the 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
Commissioner.
Forfeited property shall not be destroyed until at least twenty (20) days after
seizure.
SEC. 226. 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 Commissioner or his authorized
deputies as the taxes themselves are required to be paid, and except as specially
provided, shall be accounted for and dealt with the same way.
SEC. 227. Satisfaction of Judgment Recovered Against any Internal Revenue
Officer. - When an action is brought against any Internal Revenue officer to recover
damages by reason of any act done in the performance of official duty, and the
Commissioner is notified of such action in time to make defense against the same,
through the Solicitor General, any judgment, damages or costs recovered in such
action shall be satisfied by the Commissioner, upon approval of the Secretary of
Finance, or if the same be paid by the person used shall be repaid or reimbursed to
him.
No such judgment, damages, or costs shall be paid or reimbursed in behalf of a
person who has acted negligently or in bad faith, or with willful oppression.
Chapter 3 – Protesting an Asessment, Refund, etc.
[VVIP!][BAR!] SEC. 228. Protesting of Assessment. - When the Commissioner or his
duly authorized representative finds that proper taxes should be assessed, he shall
first notify the taxpayer of his findings: Provided, however, That a preassessment
notice shall not be required in the following cases (formal or official or final
assessment notice may immediately be issued:
(a) When the finding for any deficiency tax is the result of mathematical error
in the computation of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the tax withheld and
the amount actually remitted by the withholding agent (the person to
whom the formal assessment notice will be issued); or
(c) When a taxpayer who opted to claim a refund or tax credit of excess
creditable withholding tax for a taxable period was determined to have
carried over and automatically applied the same amount claimed against
45
the estimated tax liabilities for the taxable quarter or quarters of the
succeeding taxable year; or
(d) When the excise tax due on excisable articles (such as alcohol, tobacco,
petroleum and mineral products) has not been paid; or
(e) When the 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.
The taxpayers shall be informed in writing (preliminary assessment notice or pre-
assessment notice) of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void.
Within a period (15 days) to be prescribed by implementing rules and regulations,
the taxpayer shall be required to respond (not to protect) to said notice. If the
taxpayer fails to respond, the Commissioner or his duly authorized representative
shall issue an assessment (formal or official or final which can now be protested)
based on his findings.
Such assessment (formal or official or final which can now be protested) may be
protested administratively by filing a request (or motion or petition) for
reconsideration or reinvestigation or recomputation within thirty (30) days from
receipt of the assessment in such form and manner as may be prescribed by
implementing rules and regulations. Within sixty (60) days from filing of the protest,
all relevant supporting documents shall have been submitted; otherwise, the
assessment shall become final.
The relevant supporting documents may be filed together with the request or
motion or petition.
If the protest is denied in whole or in part, or is not acted upon within one hundred
eighty (180) days from submission of documents, the taxpayer adversely affected
by the decision or inaction may appeal to the Court of Tax Appeals within thirty
(30) days from receipt of the said decision, or from the lapse of the one hundred
eighty (180)-day period; otherwise, the decision or the assessment, as the case
may be, shall become final, executory (the CIR will then issue warrant of distraint
and/or warrant of levy or will file a collection case in court) and demandable.
Example:
A, a resident citizen, received from the BIR an official assessment notice of his
delinquency tax of Php 2M for the taxable year 2014 on June 1, 2015. On July 1,
2015 A filed with the CIR a request for reconsideration and on August 1, 2015 he
submitted to the CIR all the relevant supporting documents thereto.
1. Assuming that the CIR denied A‟s protest and the latter received the notice
of denial on Nov. 5, 2015, until when may A file his appeal to the CTA?
ANS: The taxpayer is given a period of 30 days from receipt of the notice
of denial to appeal to the CTA, hence, A has until December 5, 2015 to
appeal.

2. Assuming that the CIR did not act on the protest of A, until when may A
file his appeal to the CTA?
Solution:
August – 30
September – 30
October – 31
November – 30
December – 31
January – 28
180 days
The 180-day period expired on January 28, 2016, hence, A may appeal the
inaction of the CIR to the CTA until February 27, 2016.
 A taxpayer has a right to be informed of his liability for deficiency taxes
both through a preliminary assessment notice (PAN) and a final (or formal
or official) assessment notice (FAN). The assessment is void if only the FAN
is issued except in cases where PAN is not required by law (Section 228,
first paragraph, a-e) for it violates the taxpayer‟s right to due process.
Thus, in a case, for failure to send the PAN which states the facts and the
law on which the assessment was made, the assessment contained in a
final letter of demand (this usually accompanies the FAN and said final or
formal letter of demand reiterates the law and the facts on which the
assessment was made which were already contained in the PAN previously
issued) served on taxpayer was held void.
 Both the formal letter of demand and the notice of assessment (FAN)shall
be void if the former fails to state the facts, the law, rules and regulations
or jurisprudence on which the assessment is based, which is a mandatory
requirement under Section 228. A notice containing a mere computation of
the tax deficiency and a demand for payment does not comply with the
requirement.
The law requires that the legal and factual bases of the assessment be
stated in the formal letter of demand and assessment notice. Thus, such
cannot be presumed. Otherwise, the express provisions of Article 228 of
the NIRC and RR No. 12-99 would be rendered nugatory. The alleged
„factual bases‟ in the advice, preliminary letter and „audit working papers‟
did not suffice.
 Preliminary Assessment Notice (PAN)
o 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 be registered mail a PAN for
the proposed assessment showing in detail, the facts and the law,
46
rules and regulations or jurisprudence on which the proposed
assessment is based.
o 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 such as
surcharge or interest
 Exceptions to prior notice of the assessment
- The notice for informal conference and the preliminary assessment
notice shall not be required in any of the 5 cases enumerated in
Section 228, in which case, issuance of the formal assessment
notice for the payment of the taxpayer‟s deficiency tax liability
shall be sufficient
 [VIP!] Disputed assessment
- The taxpayer or his duly authorized representative may protest
administratively the aforesaid formal letter of demand and formal
assessment notice within 30 days from date of receipt thereof
o If the taxpayer fails to file a valid protest against the formal letter
of demand and assessment notice within 30 days from date of
receipt thereof, the assessment shall become final, executory and
demandable
o If the protest is denied, in whole or in part, by the Commissioner,
the taxpayer may appeal to the Court of Tax Appeals within 30
days from date of receipt of the said decision; otherwise, the
assessment shall become final, executory and demandable
o If the Commissioner 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 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
 Appeal to the Courts
o From the decision of the Commissioner or his duly authorized
representative on the disputed assessment, the taxpayer
adversely affected may appeal to the CTA within 30 days from
receipt thereof; or he may appeal within 30 days from the lapse of
the 180-day period because of the BIR‟s inaction. The effect of the
appeal is to deprive the BIR of administrative jurisdiction over the
case
o A party (CIR or taxpayer) adversely affected by a resolution of a
Division of the CTA on an MR or new trial, may file a petition for
review with the CTA en banc

o From the CTA, en banc, the taxpayer or CIR may file with the
Supreme Court a verified petition for review on certiorari as
provided in Rule 45 of the Rules of Court. The findings of fact of
the CTA when supported by substantial evidence shall be final
 Under the penultimate and last paragraphs, the failure of the taxpayer to
submit all “relevant supporting documents” within 60 days from filing the
protest shall render the assessment final, and his failure to appeal to the
CTA the decision or inaction on his protest within the prescribed 30-day
period shall render the decision or assessment final, executory and
demandable
 The CTA can entertain an appeal only from a final decision on the
assessment of the Commissioner, or in cases where the Commissioner has
not acted within the period (180 days) prescribed by Section 228. It is the
Formal Letter of Demand and Formal Assessment Notice that must be
administratively protested or disputed within 30 days and not the
Preliminary Assessment Notice
 The decisions, rulings or inaction of the Commissioner are necessary in
order to vest the CTA with jurisdiction to entertain the appeal, provided it
is filed within 30 days after the receipt of such decision or ruling, or within
30 days after the expiration of the 180-day period fixed by law for the
Commissioner to act on the disputed assessments.
o Period for appeal jurisdiction – this 30-day period within which
to file an appeal is jurisdictional (if the appeal to the CTA is filed
beyond the 30-day period the CTA does not acquire jurisdiction
even if the CIR did not file a motion to dismiss) and failure to
comply therewith would bar the appeal and deprive the CTA of its
jurisdiction to entertain and determine the correctness of the
assessments. Such period is not merely directory but mandatory
and it is beyond the power of the courts to extend the same
 [Mem!] The filing of a criminal complaint need not be preceded by an
assessment. Section 222 specifically states that in cases where a false or
fraudulent return with intent to evade tax is submitted or in cases of failure
to file a return, proceedings in court may be commenced without an
assessment. Furthermore, Section 205 clearly mandates that the civil and
criminal aspects of the case may be pursued simultaneously. In Ungab v
Cusi, petitioner therein sought the dismissal of the criminal complaints for
being premature, since his protest to the CTA had not yet been resolved.
The Supreme Court held that such protests could not stop or suspend the
criminal action which was independent of the resolution of the protest in
the CTA. This was because the CIR had, in such tax evasion cases,
discretion on whether to issue an assessment or to file a criminal case
against the taxpayer or to do both.
To reiterate, an assessment is not necessary before a criminal charge can
be filed. This is the general rule. The taxpayer must show that he is
47
entitled to an exception. Moreover, the criminal charge need only be
supported by a prima facie showing of failure to file a required return. This
fact need not be proven by an assessment.
SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or
proceeding shall be maintained in any court (appeal to the CTA) for the recovery of
any national internal revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been collected
without authority, of any sum alleged to have been excessively or in any manner
wrongfully collected without authority, or of any sum alleged to have been
excessively or in any manner wrongfully collected, until a claim for refund or credit
has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest
or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2)
years from the date of payment of the tax or penalty regardless of any supervening
cause (filing fo the written claim for tax refund or tax credit with the CIR) that may
arise after payment: Provided, however, That the Commissioner may, even
without a written claim therefor, refund or credit any tax, where on the face of the
return upon which payment was made, such payment tax appears clearly to have
been erroneously paid.
 The 2-year prescriptive period in Section 229 refers exclusively to claim for
refund of national internal revenue taxes erroneously or illegally collected
and not to a refund of local or municipal license taxes or fees illegally
collected. [THE FOLLOWING IS WRONG!] The period for prescription of
action to recover municipal license taxes is 6 years (The applicable
provision is Section 196 of the LGC of 1991/2 where the prescriptive period
is also 2 years from payment) under Article 1145 (2) of the Civil Code.
Section 229 stipulates that the 2-year period to claim refund should be
counted from date of payment of the tax sought to be refunded. When
applied to taxpayers filing income tax returns on a quarterly basis, the date
of payment mentioned in Section 229 must be deemed to be qualified by
Sections 75 and 76. Clearly, the prescriptive period of 2 years should
commence to run only from the time that the refund is ascertained, which
can only be determined after a final adjustment return in accomplished.
Consequently, the 2-year prescriptive period provided in Section 229
should be computed from the time of filing the Adjustment Return or
Annual Income Tax Return and Final Payment of Income Tax.
When a tax is paid on installments, the prescriptive period of 2 years
should be counted from the date of final payment. This ruling was
reiterated in Commissioner vs. Palanca, wherein the Supreme Court stated
that where the tax was paid on installment, the computation of the 2-year
prescriptive period under Section 229 should be from the date of the last
installment.
 This is erroneous payment of tax when a taxpayer pays under a mistake of
fact, as, for instance, in a case where he is not aware of an existing
exemption in his favor at the time the payment was made. The ground
upon which the right of recovery rests is that money paid through
misapprehension of facts belong in equity and in good conscience to the
person who paid it. Tax refunds are based on the principle of quasi-
contract or solution indebiti. The government is not exempted from the
application of this doctrine.
 Tax credit certificate
- A certification, duly issued to the taxpayer named therein, by the
Commissioner or his duly authorized representative, reduced in a
BIR Accountable Form in accordance with the prescribed
formalities, acknowledging that the grantee-taxpayer named
therein is legally entitled to a tax credit, the money value of which
may be used in payment or in satisfaction of any of his internal
revenue tax liability, or may be converted as cash refund, or may
otherwise be disposed of in the manner and in accordance with
the limitations, if any, as may be prescribed by the provisions of
these Regulations
 Requirements for claim for refund or credit
1. In writing, stating clearly the basis or grounds for such claim
2. Filed by the taxpayer with the Commissioner within 2 years after the
payment of the tax or penalty
The taxpayer is the person entitled to claim a tax refund; hence, the
proper party to file a claim for refund or credit of taxes allegedly to have
been illegally assessed or erroneously collected. He is the “party adversely
affected” who is given the right to appeal the decision or ruling of the
Commissioner. However, in case the taxpayer does not file a claim for
refund, the withholding agent may file the claim. Thus, a withholding agent
was considered a proper party to file a claim for refund of the withheld
taxes of its foreign parent company. In case of indirect taxes (e.g., excise
taxes (VAT)), the proper party to question, or seek a refund “is the
statutory taxpayer (the seller), the person on whom the tax is imposed by
law and who paid the same even if he shifts the burden thereof to another”
 [Impt!] The purposeof the written claim requirement before maintaining a
suit or proceeding in any court (i.e., appeal to the CTA) is to afford the
Commissioner an opportunity to correct the mistake, if any, committed by
him or his subordinate officers and the filing of the written claim is also
intended, first, to afford the Commissioner an opportunity to correct the
action of subordinate officers; and second, to notify the government that
such taxes have been questioned, and the notice should then be borne in
mind in estimating the revenue available for expenditure. The filing of the
claim is mandatory and is a condition precedent and non-compliance
therewith precludes the CIR from exercising the authority thereunder
given. Thus, mere adjustments by BIR examiners showing an overpayment
of tax, without any accompanying written claim for refund, filed by the
taxpayer will not authorize the approval of the refund.
48
 The subsequent appeal for refund or credit must also (the written claim for
refund to be filed with the CIR must be within 2 years from payment) be
filed within the said 2-year period
o If the CIR takes time in deciding the claim and the period of 2
years is about to end, the suit or proceeding must be started
(because the CIR did not act on the claim, hence, there was no
proceeding before the CIR) in the CTA before the end of the 2-
year period without awaiting the decision of the Commissioner.
The taxpayer need not pay under protest (because the
overpayment may have been discovered by the taxpayer only
after payment). The rule is different under the Tariff and Customs
Code (if the importer does not agree with the assessment made
by the collector of customs, the importer can protest the
assessment BUT he must first pay the customs duties taxes and
other charges. Such payment must be made by the importer
under protest. – protest made 15 days from payment then appeal
to the commissioner of customs after 15 days).
o [VIP!] If the claim is denied by the Commissioner within the 2-
year period, the taxpayer has 30 days from receipt of the denial
within which to appeal to the CTA provided the 2-year period has
not yet expired
o [VIP!] The 2-year period is not a jurisdictional requirement but a
prescriptive period. Even if it had already lapsed, the same may
be suspended for reasons of equity and other special
circumstances. It is subject to waiver in the absence of objection
on the part of the CIR to the appeal to the CTA filed after 2 years.
 Offsetting (no longer allowed under the 1998 NIRC)
The same provision was omitted when the NIRC of 1997 was enacted.
Section 56 (A), as now worded, does not provide for any offsetting by the
taxpayer of a claim not yet approved.
The present rule is that a taxpayer cannot defer the payment of taxes by
raising the defense that he still has a pending claim for refund or credit;
otherwise, he shall be subject to the imposition of surcharges and interest
which is mandatory
 As a rule, the government is not liable to pay interest on refund of taxes.
The exceptions are: (1) where the tax was arbitrarily collected and (2) in
case of taxes withheld upon wages under Section 79 (C, 2)
 The CTA is not a mere superior administrative agency or tribunal but is a
part of the judicial system of the Philippines. It was created by Congress
pursuant to RA No. 1125 as a regular court, a centralized court,
specializing in tax cases. RA No. 9282 expanded the jurisdiction of the CTA,
 elevated its rank to the level of the CTA, enlarging its membership to
include a Presiding Justice and 8 Associate Justices.
 [VVIP!] Under the LGC, the Central Board of Assessment Appeals has
jurisdiction over appealed assessment of real property taxes cases decided
by the Local Board of Assessment Appeals of the province or city. The
decision of the Central Board of Assessment Appeals is final and executory
(THIS IS WRONG! Under Section 7,a,5 of RA 9282, decision of the CBAA is
already appealable to the CTA) (Sec 229 thereof).
 The rules is that for the CTA to acquire jurisdiction, an assessment must
first be disputed by the taxpayer and ruled upon by the CIR to warrant a
decision from which a petition for review may be taken to the CTA.
However, if the Commissioner does not decide the request for
reconsideration but instead goes to court to collect the taxes or proceeds to
collect the same by distraint or levy, this move on his part might amount
to a decision denying the reconsideration, and may be appealable to the
CTA.
 When a taxpayer fails to appeal to the CTA in due time:
o Decision or assessment (CIR did not decide the protest and the
180-day period has expired and the taxpayer did not appeal to the
CTA within 30 days from the expiration of the 180-day period)
becomes final and executory
o Taxpayer is thereafter barred, in action for collection of the tax by
the government, from alleging in his defense that the assessment
is excessive or illegal or invoking any defense that will in effect re-
open the question of his liability on the merits, including that of
prescription
o Assessment is considered correct and all that is necessary is for
the Commissioner to enforce the collection of the tax by summary
remedies or by judicial action
 The Tax Code does not bar the right to contest the legality of the
assessment of the tax after the taxpayer pays it. Under Section 229, he
can pay the tax (the purpose of the taxpayer is to avoid payment of
surcharge and interest in case the protest is denied) and claim a refund
therefore. A fortiori (with an even stranger reason or More so), his
willingness to pay the tax is no waiver to raise defense against the tax‟s
legality or against assessment of the tax
 It is doctrinal that the findings of fact of the CTA, when supported by
substantial evidence, will not be disturbed on appeal, unless it is shown
that it committed gross error in the appreciation of facts “Substantial
evidence” has been construed to mean not necessarily preponderant proof
as is required in ordinary civil action, but such kind of “relevant evidence
as a reasonable man might accept as adequate in support of a conclusion”
The CTA is a highly specialized body specifically created for the purpose of
reviewing tax cases. Consequently, as a matter of principle, the SC “will
not set aside the conclusion reached xxx by the CTA which is, by the very
49
nature of its function, dedicated exclusively to the study and consideration
of tax problems and has necessarily developed an expertise on the subject
unless there has been an abuse or improvident exercise of authority on its
part.”
 A taxpayer cannot raise the issue that is exempt from tax for the first time
in the CTA based on the concept of exhaustion of administrative remedies
SEC. 230. Forfeiture of Cash Refund and of Tax Credit. -
(A) Forfeiture of Refund. - A refund check or warrant issued in accordance with
the pertinent provisions of this Code, which shall remain unclaimed or
uncashed within five (5) years from the date the said warrant or check was
mailed or delivered, shall be forfeited in favor of the Government and the
amount thereof shall revert to the general fund.
(B) Forfeiture of Tax Credit. - A tax credit certificate issued in accordance with
the pertinent provisions of this Code, which shall remain unutilized after
five (5) years from the date of issue, shall, unless revalidated, be
considered invalid, and shall not be allowed as payment for internal
revenue tax liabilities of the taxpayer, and the amount covered by the
certificate shall revert to the general fund.
(C) Transitory Provision. - For purposes of the preceding Subsection, a tax
credit certificate issued by the Commissioner or his duly authorized
representative prior to January 1, 1998, which remains unutilized or has a
creditable balance as of said date, shall be presented for revalidation with
the Commissioner or his duly authorized representative or on before June
30, 1998.
SEC. 231. Action to Contest Forfeiture of Chattel. - In case of the seizure of
personal property under claim of forfeiture, the owner desiring to contest the
validity of the forfeiture may, at any time before sale or destruction of the 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 six (6) months, he may bring an action to recover the net proceeds
realized at the sale.
TITLE 9
COMPLIANCE REQUIREMENTS
Chapter 1 – Keeping of Books of Accounts and Records
SEC. 232. Keeping of Books of Accounts. -
(A) Corporations, Companies, Partnerships or Persons Required to Keep Books
of Accounts. - All corporations, companies (or associations), partnerships
or persons individuals required by law to pay internal revenue taxes shall
keep a journal and a ledger or their equivalents: Provided, however, That
those whose quarterly sales, earnings, receipts, or output do not exceed
Fifty thousand pesos (P50,000) shall keep and use simplified set of
bookkeeping records duly authorized by the Secretary of Finance where in
 all transactions and results of operations are shown and from which all
taxes due the Government may readily and accurately be ascertained and
determined any time of the year: Provided, further, That corporations,
companies, partnerships or persons whose gross quarterly sales, earnings,
receipts or output exceed One hundred fifty thousand pesos (P150,000)
shall have their books of accounts audited and examined yearly by
independent Certified Public Accountants and their income tax returns
accompanied with a duly accomplished Account Information Form (AIF)
which shall contain, among others, information lifted from certified balance
sheets, profit and loss statements, schedules listing income-producing
properties and the corresponding income therefrom and other relevant
statements.
(B) Independent Certified Public Accountant Defined. - The term 'Independent
Certified Public Accountant', as used in the preceding paragraph, means an
accountant who possesses the independence as defined in the rules and
regulations of the Board of Accountancy promulgated pursuant to
Presidential Decree No. 692, otherwise known as the Revised Accountancy
Law.
SEC. 233. Subsidiary Books. - All corporations, companies, partnerships or persons
keeping the books of accounts mentioned in the preceding Section may, at their
option, keep subsidiary books as the needs of their business may require: Provided,
That were such subsidiaries are kept, they shall form part of the accounting system
of the taxpayer and shall be subject to the same rules and regulations as to their
keeping, translation, production and inspection as are applicable to the journal and
the ledger.
SEC. 234. Language in which Books are to be Kept; Translation. - All such
corporations, companies, partnerships or persons shall keep the books or records
mentioned in Section 232 hereof in native language, English or Spanish: Provided,
however, That if in addition to said books or records the taxpayer keeps other books
or records in a language other than a native language, English or Spanish, he shall
make a true and complete translation of all the entries in suck other books or
records into a native language; English or Spanish, and the said translation must be
made by the bookkeeper, or such taxpayer, or in his absence, by his manager and
must be certified under oath as to its correctness by the said bookkeeper or
manager, and shall form an integral part of the aforesaid books of accounts. The
keeping of such books or records in any language other than a native language,
English or Spanish, is hereby prohibited.
[Impt!] SEC. 235. Preservation of Books and Accounts and Other Accounting
Records. - All the books of accounts (journal and ledger), including the subsidiary
books and other accounting records of corporations, partnerships, or persons other
persons, shall be preserved by them for a period beginning from the last entry in
each book until the last day prescribed by Section 203 within which the
Commissioner is authorized to make an assessment. The said books and records
shall be subject to examination and inspection by internal revenue officers:
Provided, That for income tax purposes, such examination and inspection shall be
made only once in a taxable year, except in the following cases:
(a) Fraud, irregularity or mistakes, as determined by the Commissioner;
50
(b) The taxpayer requests reinvestigation;
(c) Verification of compliance with withholding tax laws and regulations;
(d) Verification of capital gains tax liabilities; and
(e) In the exercise of the Commissioner's power under Section 5(B) to obtain
information from other persons in which case, another or separate
examination and inspection may be made. Examination and inspection of
books of accounts and other accounting records shall be done in the
taxpayer's office or place of business or in the office of the Bureau of
Internal Revenue. All corporations, partnerships or persons that retire from
business shall, within ten (10) days from the date of retirement or within
such period of time as may be allowed by the Commissioner in special
cases, submit their books of accounts, including the subsidiary books and
other accounting records to the Commissioner or any of his deputies for
examination, after which they shall be returned. Corporations and
partnerships contemplating dissolution must notify the Commissioner and
shall not be dissolved until cleared of any tax liability.
Any provision of existing general or special law to the contrary notwithstanding,
the books of accounts and other pertinent records of tax-exempt organizations
or grantees of tax incentives shall be subject to examination by the Bureau of
Internal Revenue for purposes of ascertaining compliance with the conditions
under which they have been granted tax exemptions or tax incentives, and
their tax liability, if any.
 The preservation of books of accounts for the prescribed period from the
last entry (December 31 if the accounting period is calendar year) until the
last day prescribed for making an assessment is mandatory. The
Commissioner is without authority to shorten it (BIR Ruling, Jan. 31,
1975). 1Thus, if the last entry in the 2004 records is December 31, 2004,
and the return was field on April 15, 2005, the records must be preserved
for three (3) years or up to April 15, 2008 (last day prescribed by law to
make assessment).
If for instance the fiscal year starts April 1 it will end March 31 of the
following year, hence, the last entry date is March 31.
2
If the ITR was filed on March 1, 2005 the books must be preserved until
April 15, 2008.
3
If the ITR was filed on July 1, 2005, the books must be preserved until
June 30, 2008
- This is because 2008 is a leap year, if during the 3-year period
there is no leap year the last day to make assessment should be
July 1
4
If in the 3-year period there is no leap year the last day in numbers 1 and
2 is April 16 not April 15.
Chapter 2 – Keeping of Books of Accounts and Records
SEC. 236. Registration Requirements. –
(A) Requirements. - Every person subject to any internal revenue tax shall
register once with the appropriate Revenue District Officer:
(1) Within ten (10) days from date of employment, or
(2) On or before the commencement of business, or
(3) Before payment of any tax due, or
(4) Upon filing of a return, statement or declaration as required in this
Code.
The registration shall contain the taxpayer's name, style, place of
residence, business, and such other information as may be required by the
Commissioner in the form prescribed therefor.
A person maintaining a head office, branch or facility shall register with the
Revenue District Officer having jurisdiction over the head office, branch or
facility. For purposes of this Section, the term 'facility' may include but not
be limited to sales outlets, places of production, warehouses or storage
places.
(B) [Impt!] Annual Registration Fee. - An annual registration fee in the
amount of Five hundred pesos (P500) for every separate or distinct
establishment or place of business, including facility types where sales
transactions occur, shall be paid upon registration and every year
thereafter on or before the last day of January: Provided, however, That
cooperatives, individuals earning purely compensation income, whether
locally or abroad, and overseas workers are not liable to the registration
fee herein imposed.
The registration fee shall be paid to an authorized agent bank located
within the revenue district, or to the Revenue Collection Officer, or duly
authorized Treasurer of the city or municipality where each place of
business or branch is registered.
(C) Registration of Each Type of Internal Revenue Tax. - Every person who is
required to register with the Bureau of Internal Revenue under Subsection
(A) hereof, shall register each type of internal revenue tax for which he is
obligated, shall file a return and shall pay such taxes, and shall update
such registration of any changes in accordance with Subsection (E) hereof.
(D) Transfer of Registration. - In case a registered person decides to transfer
his place of business or his head office or branches, it shall be his duty to
update his registration status by filing an application for registration
information update in the form prescribed therefor.
(E) Other Updates. - Any person registered in accordance with this Section
shall, whenever applicable, update his registration information with the
Revenue District Office where he is registered, specifying therein any
change in tax type and other taxpayer details.
(F) Cancellation of Registration. –
51
(1) General Rule. - The registration of any person who ceases to be
liable to a tax type shall be cancelled upon filing with the Revenue
District Office where he is registered, an application for registration
information update in a form prescribed therefor;
(2) Cancellation of Value-Added Tax Registration. - A VAT-registered
person may cancel his registration for VAT if:
(a) He makes written application and can demonstrate to the
Commissioner's satisfaction that his gross sales or receipts for
the following twelve (12) months, other than those that are
exempt under Section 109 (A) TO (U), will not exceed One
million five hundred thousand pesos (P1,500,000) Php
1,919,500.00 beginning January 1, 2012; 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
twelve (12) months.
The cancellation of registration will be effective from the first day of
the following month. (as amended by RA No. 9337)
(G) Persons Required to Register for Value-added Tax. –
(1) Any person who, in the course of trade or business, sells, barters or
exchanges goods or properties, or engages in the sale or exchange
of services, shall be liable to register for Value-added tax if:
(a) His gross sales or receipts for the past twelve (12) months,
other than those that are exempt under section 109 (a) to (u),
have exceeded One million five hundred thousand pesos
(P1,500,000) Php 1,919,500.00; or
(b) There are reasonable grounds to believe that his gross sales or
receipts for the next twelve (12) months, other than those that
are exempt under Section 109 (A) to (U), will exceed one
million five hundred thousand pesos (P1,500,000) Php
1,919,500.00.
(2) Every person who becomes liable to be registered under paragraph
(1) of this Subsection shall register with the Revenue District Office
which has jurisdiction over the head office or branch of that person,
and shall pay the annual registration fee prescribed in Subsection
(B) hereof. If he fails to register, he shall be liable to pay the tax
under Title IV as if he were a VAT-registered person, but without the
benefit of input tax credits for the period in which he was not
properly registered. (as amended by RA No. 9337)
(H) Optional Registration for Value-added Tax of Exempt Person. -
(1) Any person who is not required to register for Value-added tax under
Subsection (G) hereof may elect to register for Value-added tax by
 registering with the Revenue District Office that has jurisdiction over
the head office of that person, and paying the annual registration fee
in Subsection (B) hereof.
(2) Any person who elects to register under this Subsection shall not be
entitled to cancel his registration under Subsection (F)(2) for the next
three (3) years.
For purposes of Title IV of this Code, any person who has registered value-
added tax as a tax type in accordance with the provisions of Subsection (C)
hereof shall be referred to as a "VAT-registered person" who shall be
assigned only one Taxpayer Identification Number (TIN).
(I) Supplying of Taxpayer Identification Number (TIN). - Any person
required under the authority of this Code to make, render or file a return,
statement or other document shall be supplied with or assigned a Taxpayer
Identification Number (TIN) which he shall indicate in such return,
statement or document filed with the Bureau of Internal Revenue for his
proper identification for tax purposes, and which he shall indicate in certain
documents, such as, but not limited to, the following:
(1) Sugar quedans, refined sugac release order or similar instruments;
(2) Domestic bills of lading;
(3) Documents to be registered with the Register of Deeds or Assessor's
Office;
(4) Registration certificate of transportation equipment by land, sea or
air;
(5) Documents to be registered with the Securities and Exchange
Commission;
(6) Building construction permits;
(7) Application for loan with banks, financial institutions, or other
financial intermedieries;
(8) Application for mayor's permit;
(9) Application for business license with the Department of Trade and
Industry; and
(10) Such other documents which may hereafter be required under rules
and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
In cases where a registered taxpayer dies the, the administrator or
executor shall register the estate of the decedent in accordance with
Subsection (A) hereof and a new Taxpayer Identification Number (TIN)
shall be supplied in accordance with the provisions of this Section.
In the case of a nonresident decedent, the executor or administrator of the
estate shall register the estate with the Revenue District Office where he
(executor or administrator) is registered: Provided, however; That in
case such executor or administrator is not registered, registration of the
estate shall be made with and the Taxpayer Identification Number (TIN)
supplied by the Revenue District Office having jurisdiction over his legal
residence.
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Only one Taxpayer Identification Number (TIN) shall be assigned to a
taxpayer. Any person who shall secure more than one Taxpayer
Identification Number shall be criminally liable under the provisions of
Section 275 on 'Violation of Other Provisions of this Code or Regulations in
General.
 The new TIN shall be used in the filing of the estate tax return (only
once) of the decedent, as well as in the filing o other tax returns if the
estate is under judicial settlement. In case the decedent is engaged in
business, the TIN of decedent shall only be cancelled upon submission of
notice of death and short-term income tax return covering the period
January 1 to the date of his death. The said return shall be filed within 60
days from the date of death, unless the heirs/authorized
representative/administrator/executor shall request for an extension to file
the same, but not to exceed 6 months or April 15 of the following year,
whichever is earlier.
Until the partition and actual distribution of the estate or properties of the
decedent the estate is required to file annual income tax return.
 Annual registration fee
Exemptions – the following shall be exempt from the imposition of annual
registration fee:
a. Cooperatives duly registered with the CDA;
b. Individuals earning purely compensation income
c. Overseas Workers
d. GAIs (Government Agencies and Institutions), in the discharge of
their governmental functions
e. Marginal Income Earners
f. LGUs, in the discharge of their governmental functions
g. Tax exempt persons
h. Non-stock/non-profit organizations not engaged in business
i. Persons subject to tax under one-time transactions “isolated
transactions”
j. Facility/ies where no sales transactions occur
SEC. 237. Issuance of Receipts or Sales or Commercial Invoices. - All persons
(engaged in business or trade or profession) subject to an internal revenue tax
shall, for each sale or transfer of merchandise or for services rendered valued at
Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or
commercial invoices, prepared at least in duplicate, showing the date of transaction,
quantity, unit cost selling price and description of merchandise or nature of service:
Provided, however, That where the receipt is issued to cover payment made as
rentals, commissions, compensation or fees, receipts or invoices shall be issued
which shall show the name, business style, if any, and address of the purchaser,
customer or client. (as amended by RA No. 9337)
The original of each receipt or invoice shall be issued to the purchaser, customer or
client at the time the transaction is effected, who, if engaged in business or in the
exercise of profession, shall keep and preserve the same in his place of business for
a period of three (3) years from the close of the taxable year in which such invoice
or receipt was issued, while the duplicate shall be kept and preserved by the issuer,
also in his place of business, for a like period.
The Commissioner may, in meritorious cases, exempt any person (such as market
vendors) subject to internal revenue tax from compliance with the provisions of this
Section.
 Persons required to issue BIR registered with the BIR receipts – they
are only those engaged in business and professionals subject to internal
revenue tax:
1. Those whose sales or transfers of merchandise or whose services
rendered are valued at Php 25.00 or more; and
2. Those who receive payment made as rentals, commissions,
compensations or fees, regardless of amount received
 Persons not required to issue receipts:
1. Those whose sales or transfers of merchandise or whose services
rendered are valued below Php 25.00
2. Those exempted by the CIR
 The following have been exempted from complying with the requirement of
issuing receipts or sales invoice:
1. Vendors/stallholders insider markets on their sales of domestic food
products, even if they also sell articles for which they are required to
issue sales receipts or invoices. On their sales of domestic non-food
products and imported products of whatever kind, including dry
goods, they are, however, required to issue receipts or sales invoices;
2. Eateries or “carinderias” located inside markets
 Market refers to what is traditionally known as “palengke” or to a place
designated as such by the local governments, where vendors sell their
wares in stalls and where the public buy and sell primarily domestic food
and non-food products and such other items as are necessary for
subsistence. It does not include stores, groceries, fast food centers, and
other similar establishment
 Retail trading establishments not otherwise subject to any percentage tax,
like supermarkets, department stores, drug stores, bookstores and
groceries, having voluminous transactions daily which render it extremely
difficult and inconvenient for them to comply with the requirement of
issuing sales invoices/receipts for every transaction may, upon previous
application with the Revenue District Officer of the place where the
business is located and approval thereof by the Regional Director having
jurisdiction, be allowed to use cash register machines with 2 roll tapes,
one to serve as customer‟s receipts in lieu of the regular sales invoices,
and the other to be kept by the establishment for audit and internal
revenue tax verification purposes
 Persons required to issue receipts or sales or commercial invoices are
required under Section 237 to register the same with the BIR
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Hence, the requirement that receipts/invoices shall be registered with and
stamped by the corresponding Revenue District Office before the same
may be used and issued to customers or clients is again in force.
 Marginal Income Earners – they refer to individuals not otherwise
deriving compensation as an employee under an employer-employee
relationship but who are self-employed and deriving gross sales/receipts
not exceeding Php 100,000.00 during any 12-month period
SEC. 238. Printing of Receipts or Sales or Commercial Invoices. - All persons who
are engaged in business shall secure from the Bureau of Internal Revenue an
authority to print receipts or sales or commercial invoices before a printer can print
the same.
No authority to print receipts or sales or commercial invoices shall be granted unless
the receipts or invoices to be printed are serially numbered and shall show, among
other things, the name, business style, Taxpayer Identification Number (TIN) and
business address of the person or entity to use the same, and such other
information that may be required by rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.
All persons who print receipt or sales or commercial invoices shall maintain a
logbook/register of taxpayers who availed of their printing services. The
logbook/register shall contain the following information:
(1) Names, Taxpayer Identification Numbers of the persons or entities for
whom the receipts or sales or commercial invoices were printed; and
(2) Number of booklets, number of sets per booklet, number of copies per set
and the serial numbers of the receipts or invoices in each booklet.
SEC. 239. Sign to be Exhibited by Distiller, Rectifier, Compounder, Repacker and
Wholesale Liquor Dealer. - Every person engaged in distilling or rectifying spirits,
compounding liquors, repacking wines or distilled spirits, and every wholesale liquor
dealer shall keep conspicuously on the outside of his place of business a sign
exhibiting, in letters not less than six centimeters (6 cms.) high, his name or firm
style, with the words 'Registered Distiller,' 'Rectifier of Spirits,' 'Compounder of
Liquors,' 'Repacker of Wines or Distilled Spirits,' or 'Wholesale Liquor Dealer,' as the
case may be, and his assessment number.
SEC. 240. Sign to be exhibited by manufacturer of Products of Tobacco. - Every
manufacturer of cigars, cigarettes or tobacco, and every wholesale dealer in leaf
tobacco or manufactured products of tobacco shall place and keep on outside of the
building wherein his business is carried on, so that it can be distinctly seen, a sign
stating his full name and business in letters not less than six centimeters (6 cms.)
high and also giving his assessment number.
SEC. 241. Exhibition of Certificate of Payment at Place of Business. - The certificate
or receipts showing payment of taxes issued to a person engaged in a business
subject to an annual registration fee shall be kept conspicuously exhibited in plain
view in or at the place where the business is conducted; and in case of a peddler or
other persons not having a fixed place of business, shall be kept in the possession
of the holder thereof, subject to production upon demand of any internal revenue
officer.
SEC. 242. Continuation of Business of Deceased Person. - When any individual who
has paid the annual registration fee dies, and the same business is continued by the
person or persons interested in his estate, no additional payment shall be required
for the residue of the term which the tax was paid: Provided, however, That the
person or persons interested in the estate should, within thirty (30) days from the
death of the decedent, submit to the Bureau of Internal Revenue or the regional or
revenue District Office inventories of goods or stocks had at the time of such death.
The requirement under this Section shall also be applicable in the case of transfer of
ownership or change of name of the business establishment.
SEC. 243. Removal of Business to Other Location. - Any business for which the
annual registration fee has been paid may, subject to the rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the Commissioner,
be removed and continued in any other place without the payment of additional tax
during the term for which the payment was made.
Chapter 3 – Rules and Regulations
Under the TCC, it is the commission of customs who promulgates rules and
regulations for the enforcement of the provisions of the said law, subject to the
approval of the Secretary of Finance.
SEC. 244. Authority of Secretary of Finance to Promulgate Rules and Regulations. -
The Secretary of Finance, upon recommendation of the Commissioner, shall
promulgate all needful rules and regulations for the effective enforcement of the
provisions of this Code.
 Regulations partake of administrative interpretations of tax laws. They are
entitled to great respect from the courts especially if followed for some
considerable period. But they are not conclusive upon the courts and will
be ignored if judicially found to be erroneous.
SEC. 245. Specific Provisions to be Contained in Rules and Regulations. - The rules
and regulations of the Bureau of Internal Revenue shall, among other things,
contain provisions specifying, prescribing or defining:
(a) The time and manner in which Revenue Regional Director shall canvass
their respective Revenue Regions for the purpose of discovering persons
and property liable to national internal revenue taxes, and the manner in
which their lists and records of taxable persons and taxable objects shall be
made and kept;
(b) The forms of labels, brands or marks to be required on goods subject to an
excise tax, and the manner in which the labelling, branding or marking
shall be effected;
(c) The conditions under which and the manner in which goods intended for
export, which if not exported would be subject to an excise tax, shall be
labelled, branded or marked;
54
(d) The conditions to be observed by revenue officers respecting the
institutions and conduct of legal actions and proceedings;
(e) The conditions under which goods intended for storage in bonded
warehouses shall be conveyed thither, their manner of storage and the
method of keeping the entries and records in connection therewith, also
the books to be kept by Revenue Inspectors and the reports to be made by
them in connection with their supervision of such houses;
(f) The conditions under which denatured alcohol may be removed and dealt
in, the character and quantity of the denaturing material to be used, the
manner in which the process of denaturing shall be effected, so as to
render the alcohol suitably denatured and unfit for oral intake, the bonds to
be given, the books and records to be kept, the entries to be made therein,
the reports to be made to the Commissioner, and the signs to be displayed
in the business ort by the person for whom such denaturing is done or by
whom, such alcohol is dealt in;
(g) The manner in which revenue shall be collected and paid, the instrument,
document or object to which revenue stamps shall be affixed, the mode of
cancellation of the same, the manner in which the proper books, records,
invoices and other papers shall be kept and entries therein made by the
person subject to the tax, as well as the manner in which licenses and
stamps shall be gathered up and returned after serving their purposes;
(h) The conditions to be observed by revenue officers respecting the
enforcement of Title III imposing a tax on estate of a decedent, and other
transfers mortis causa, as well as on gifts and such other rules and
regulations which the Commissioner may consider suitable for the
enforcement of the said Title III;
(i) The manner in which tax returns, information and reports shall be prepared
and reported and the tax collected and paid, as well as the conditions
under which evidence of payment shall be furnished the taxpayer, and the
preparation and publication of tax statistics;
(j) The manner in which internal revenue taxes, such as income tax, including
withholding tax, estate and donor's taxes, value-added tax, other
percentage taxes, excise taxes and documentary stamp taxes shall be paid
through the collection officers of the Bureau of Internal Revenue or through
duly authorized agent banks which are hereby deputized to receive
payments of such taxes and the returns, papers and statements that may
be filed by the taxpayers in connection with the payment of the tax:
Provided, however, That notwithstanding the other provisions of this Code
prescribing the place of filing of returns and payment of taxes, the
Commissioner may, by rules and regulations, require that the tax returns,
papers and statements that may be filed by the taxpayers in connection
with the payment of the tax. Provided, however, That notwithstanding the
other provisions of this Code prescribing the place of filing of returns and
payment of taxes, the Commissioner may, by rules and regulations require
 that the tax returns, papers and statements and taxes of large taxpayers
be filed and paid, respectively, through collection officers or through duly
authorized agent banks: Provided, further, That the Commissioner can
exercise this power within six (6) years from the approval of Republic Act
No. 7646 or the completion of its comprehensive computerization program,
whichever comes earlier: Provided, finally, That separate venues for the
Luzon, Visayas and Mindanao areas may be designated for the filing of tax
returns and payment of taxes by said large taxpayers.
For the purpose of this Section, 'large taxpayer' means a taxpayer who satisfies any
of the following criteria;
(1) Value-Added Tax (VAT) - Business establishment with VAT paid or payable
of at least One hundred thousand pesos (P100,000) for any quarter of the
preceding taxable year;
(2) Excise tax - Business establishment with excise tax paid or payable of at
least One million pesos (P1,000,000) for the preceding taxable year;
(3) Corporate Income Tax - Business establishment with annual income tax
paid or payable of at least One million pesos (P1,000,000) for the
preceding taxable year; and
(4) Withholding tax - Business establishment with withholding tax payment or
remittance of at least One million pesos (P1,000,000) for the preceding
taxable year.
Provided, however, That the Secretary of Finance, upon recommendation of the
Commissioner, may modify or add to the above criteria for determining a large
taxpayer after considering such factors as inflation, volume of business, wage and
employment levels, and similar economic factors.
The penalties prescribed under Section 248 of this Code shall be imposed on any
violation of the rules and regulations issued by the Secretary of Finance, upon
recommendation of the Commissioner, prescribing the place of filing of returns and
payments of taxes by large taxpayers.
 The interpretation of the provisions of the Tax Code and other tax laws are
made through the issuance of either what are known as “Revenue
Regulations” or “BIR Rulings.” Revenue regulations are the formal
interpretations by the Secretary of Finance upon the recommendation of
the Commissioner while BIR rulings are less formal interpretations of
provisions of tax laws and revenue regulations by the Commissioner. It is
essential that the procedure fixed for their promulgation is followed.
 Requisites of validity of revenue regulations are:
1. Necessary to the proper enforcement of the law
2. Are not contrary to law and the Constitution
3. Must be published in the Official Gazette
SEC. 246. Non- Retroactivity of Rulings. - Any revocation, modification or reversal
of any of the rules and regulations promulgated in accordance with the preceding
Sections or any of the rulings or circulars promulgated by the Commissioner shall
55
not be given retroactive application if the revocation, modification or reversal will be
prejudicial to the taxpayers, except in the following cases:
(a) Where the taxpayer deliberately misstates or omits material facts from his
return or any document required of him by the Bureau of Internal
Revenue;
(b) Where the facts subsequently gathered by the Bureau of Internal Revenue
are materially different from the facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith.
TITLE 10
[Impt!] Statutory Offenses and Penalties
Chapter 1 – Additions to the Basic Tax
1. Surcharge
2. Interest
3. Other Penalties such as Compromise penalty
SEC. 247. General Provisions. -
The additions to the tax or deficiency tax prescribed in this Chapter shall
apply to all taxes, fees and charges imposed in this Code. The Amount so
added to the tax shall be collected at the same time, in the same manner
and as part of the tax.
The following should have been paragraphs B & C under Section 251:
(b) If the withholding agent is the Government or any of its agencies, political
subdivisions or instrumentalities, or a government-owned or controlled
corporation, the employee (such as accountant or treasurer) thereof
responsible for the withholding and remittance of the tax shall be
personally liable for the additions to the tax prescribed herein.
(c) The term 'person', as used in this Chapter, includes an officer or employee
of a corporation who as such officer, or employee or member is under a
duty to perform the act in respect of which the violation occurs.
SEC. 248. Civil Penalties. -
(A) There shall be imposed, in addition to the tax required to be paid, a
penalty (surcharge) equivalent to twenty-five percent (25%) of the
amount due, in the following cases:
(1) Failure (unintended) to file any return and pay the tax due thereon as
required under the provisions of this Code or rules and regulations on
the date prescribed; or
(2) Unless otherwise authorized by the Commissioner, filing a return with
an internal revenue officer other than those with whom the return is
required to be filed; or
 (3) Failure to pay the deficiency tax within the time period or date
prescribed for its payment in the notice of assessment; or
(4) Failure to pay the full or part of the amount of tax shown on any
return required to be filed under the provisions of this Code or rules
and regulations, or the full amount of tax due for which no return is
required to be filed (deficiency tax assessed by the BIR), on or before
the date prescribed in the notice of assessment for its payment.
(B) In case of willful neglect failure to file the return within the period
prescribed by this Code or by rules and regulations, or in case a false or
fraudulent return is willfully made, the penalty (surcharge) to be imposed
shall be fifty percent (50%) of the tax or of the deficiency tax, in case, any
payment has been made on the basis of such return before the discovery
of the falsity or fraud: Provided, That a substantial underdeclaration of
taxable sales, receipts or income, or a substantial overstatement of
deductions, as determined by the Commissioner pursuant to the rules and
regulations to be promulgated by the Secretary of Finance, shall constitute
prima facie evidence of a false or fraudulent return: Provided, further, That
failure to report sales, receipts or income in an amount exceeding thirty
percent (30%) of that declared per return, and a claim of deductions in an
amount exceeding (30%) of actual deductions, shall render the taxpayer
liable for substantial underdeclaration of sales, receipts or income or for
overstatement of deductions, as mentioned herein.
 Surcharge – is an overcharge or exaction imposed by law as addition to
the main tax required to be paid
o The imposition of surcharge is mandatory. The CIR has no
authority to waive or dispense with the collection thereof. Even
the good faith of the taxpayer in failing to pay the tax upon advice
of counsel if not sufficient justification for seeking exemption from
the payment of surcharges. Bad faith is not essential of the
imposition of the 25% surcharge
 Basis of surcharge – “the penalty is equivalent to 25% of the amount
due, “the tax due”, or “the tax shown on any return,” or “the deficiency
tax” assessed.
 If the taxpayer filed his return on the date prescribed by law, but paid the
tax due after said date, the penalty is 25%. If he field the return and paid
the tax after said date, the total penalty imposable is also 25%. Both the
failure to file return and the failure to pay the ax shown on such return is
considered as a single offense. But if, in addition, he field his return with
the wrong internal revenue officer, the total penalty to be imposed is 50%.
 An example of a tax for which no return is required to be filed is deficiency
tax assessed by the BIR
 It is not enough that the taxpayer failed to file the required tax return or
that the return is false to justify the imposition of the 50% surcharge for
fraud. It must appear that the taxpayer had an intention to evade the
56
payment of tax in filing a false return (the false return becomes fraudulent
return).
SEC. 249. Interest. -
(A) In General. - There shall be assessed and collected on any unpaid amount
of tax (basic because surcharge is not included in computing interest as a
rule), interest at the rate of twenty percent (20%) per annum, or such
higher rate as may be prescribed by rules and regulations (this is an
example of undue delegation of legislative power because the maximum
rate that may be prescribed by the regulation is NOT fixed by law), from
the date prescribed for payment until the amount is fully paid.
(B) Deficiency Interest. - Any deficiency in the tax due, as the term is defined
in this Code, shall be subject to the interest prescribed in Subsection (A)
hereof, which interest shall be assessed and collected from the date
prescribed for its payment until the full payment thereof.
(C) Delinquency Interest. - In case of failure to pay:
(1) The amount of the tax due on any return to be filed, or
(2) The amount of the tax due for which no return is required, or
(3) A deficiency tax, or any surcharge or interest thereon on the due date
appearing in the notice and demand of the Commissioner, there shall
be assessed and collected on the unpaid amount, interest at the rate
prescribed in Subsection (A) hereof until the amount is fully paid,
which interest shall form part of the tax.
(D) Interest on Extended Payment. - If any person required to pay the tax is
qualified and elects to pay the tax on installment under the provisions of
this Code, but fails to pay the tax or any installment hereof, or any part of
such amount or installment on or before the date prescribed for its
payment, or where the Commissioner has authorized an extension of time
within which to pay a tax or a deficiency tax or any part thereof, there shall
be assessed and collected interest at the rate hereinabove prescribed on
the tax or deficiency tax or any part thereof unpaid from the date of notice
and demand until it is paid.
 Delinquency is the failure of the taxpayer to pay the tax due on the date
fixed by law or indicated in the assessment notice or letter of demand. It is
to be distinguished from deficiency which is the amount still due and
collectible from a taxpayer upon audit or investigation or examination by
the BIR examiner.
 Deficiency interest – Under Subsection (B), where the taxpayer paid a
tax of Php 10,000 and was assessed a deficiency tax of Php 4,000 with
50% penalty (or surcharge [Section 248, D]) for filing a fraudulent return,
if the deficiency is paid after 6 months from date prescribed by law for
payment of the tax, the total amount payable is computed as follows:
 Deficiency tax Php 4,000 supply any information required by this Code or by the Commissioner on the date
PLUS: 50% surcharge 2,000 prescribed therefor, unless it is shown that such failure is due to reasonable cause
Deficiency tax and surcharge Php 6,000 and not to willful neglect, there shall, upon notice and demand by the
Interest for 6 months Commisssioner, be paid by the person failing to file, keep or supply the same, One
(Php 4,000 x 20% x ½) 400 thousand pesos (1,000) for each failure: Provided, however, That the aggregate
Total amount payable Php 6,400 amount to be imposed for all such failures during a calendar year shall not exceed
Twenty-five thousand pesos (P25,000).
The basis of interest is Php 4,000 and not Php 6,000.
SEC. 251. Failure of a Withholding Agent to Collect and Remit Tax. –
 Delinquency interest in case of late filing and payment (a) Any person required to withhold, account for, and remit any tax imposed
Where the taxpayer filed his tax return and paid the tax due thereon in the by this Code or who willfully fails to withhold such tax, or account for and
amount of Php 10,000 6 months after the date prescribed by law, the total remit such tax, or aids or abets in any manner to evade any such tax or
amount payable is computed as follows: the payment thereof, shall, in addition to other penalties (surcharge and
interest) provided for under this Chapter, be liable upon conviction to a
Amount of tax due Php 10,000 penalty equal to the total amount of the tax not withheld, or not accounted
Interest for 6 months for and remitted.
(Php 10,000 x 20% x ½) 1,000
Surcharge for late filing and payment *to be followed by B & C from Section 247
(Php 10,000 x 25%) 2,500
Total amount payable Php 13,500 SEC. 252. Failure of a Withholding Agent to refund Excess Withholding Tax. - Any
employer/withholding agent who fails or refuses to refund excess withholding tax
Both failure to file return and the failure to pay the ax per such return shall, in addition to the penalties provided in this Title, be liable to a penalty to the
should be considered as a single offense for which only one 25% surcharge total amount of refunds which was not refunded to the employee resulting from any
may be assessed. excess of the amount withheld over the tax actually due on their return.

 Delinquency interest in case deficiency tax paid after notice and Chapter 2 – Crimes, Other Offenses and Forfeitures
demand
SEC. 253. General Provisions. -
Assuming that the taxpayer filed his tax return and paid tax on the (a) Any person convicted of a crime penalized by this Code shall, in addition to
prescribed date on April 15, and he received a notice (formal or final or being liable for the payment of the tax, be subject to the penalties imposed
official assessment notice) and demand for payment of Php 10,000 on June herein such as imprisonment and/or fine: Provided, That payment of the
15, to be paid on or before July 15. If the deficiency is paid on October 15, tax due after apprehension shall not constitute a valid defense in any
the total amount payable is computed as follows: prosecution for violation of any provision of this Code or in any action for
the forfeiture of untaxed articles.
Deficiency Tax Php 10,000
Interest for 3 months (4/16 – 7/15) (b) Any person who willfully aids or abets in the commission of a crime
(Php 10,000 x 20% x ¼) 500 penalized herein or who causes the commission of any such offense by
Surcharge (25% X Php 10,000) 2,500 another shall be liable in the same manner as the principal.
Basis of Interest Php 13,000
Interest for 3 months (7/16 – 10/15) (c) If the offender is not a citizen of the Philippines, he shall be deported
(Php 13,000 x 20% x ¼) 650 immediately after serving the sentence without further proceedings for
Total amount payable Php 13,500 deportation. If he is a public officer or employee, the maximum penalty
prescribed for the offense shall be imposed and, in addition, he shall be
The interest (7/16 – 10/15) in this case is based on the sum of the dismissed from the public service and perpetually disqualified from holding
deficiency tax, surcharge (for late payment), and interest up to July 15 any public office, to vote and to participate in any election. If the offender
because of the failure of the taxpayer to pay within the time shown in the is a Certified Public Accountant, his certificate as a Certified Public
notice and demand. Accountant shall, upon conviction, be automatically revoked or cancelled.

Example of a Charge (d) In the case of associations, partnerships or corporations, the penalty shall
SEC. 250. Failure to File Certain Information Returns. - In the case of each failure be imposed on the partner, president, general manager, branch manager,
to file an information return such as GPP, statement or list, or keep any record, or

57
 treasurer, officer-in-charge, and the employees responsible for
violation.
(e) The fines to be imposed for any violation of the provisions of this Code
shall not be lower than the fines imposed herein or twice the amount of
taxes, interest and surcharges due from the taxpayer, whichever is higher.
(As added by RA No. 7642).
SEC. 254. Attempt to Evade or Defeat Tax. - Any person who willfully attempts in
any manner to evade or defeat any tax imposed under this Code or the payment
thereof shall, in addition to other penalties provided by law, upon conviction
thereof, be punished by a fine not less than Thirty thousand (P30,000) but not more
than One hunderd thousand pesos (P100,000) and suffer imprisonment of not less
than two (2) years but not more than four (4) years: Provided, That the conviction
or acquittal obtained under this Section shall not be a bar to the filing of a civil suit
for the collection of taxes.
 An assessment of a tax deficiency is not necessary to a criminal
prosecution for tax evasion. The crime if complete when the taxpayer has
knowingly and willfully filed a fraudulent return with intent to evade and
defeat the tax. The perpetration of the crime is grounded upon knowledge
on the part of the taxpayer that he has made an inaccurate return and the
government‟s failure to discover the error and to promptly assess the same
has no connection with the commission of the crime
However, the SC qualified the Ungab ruling: “In plain words, for criminal
prosecution to proceed before assessment, there must be a prima facie
showing of willfull attempt to evade taxes. There was a willful attempt to
evade tax in Ungab because of the taxpayer‟s failure to declare in his
income tax return „his income derived from banana saplings.‟ In the mind
of the trial court and the CTA, Fortune‟s situation is quite apart factually
since the registered wholesale price of the goods approved by the BIR is
presumed to be the actual wholesale price, and therefore, not fraudulent
and unless and until the BIR has made final determination of what is
supposed to be the correct taxes, the taxpayer should not be placed in the
crucible (severe test) of criminal prosecution
While a precise computation and assessment is required for a civil action to
collect a tax deficiency, the NIRC Sections 222 and 254 does not require
such computation and assessment prior to criminal prosecution for
fraudulent tax evasion. In case at bar, the complaints filed before the DOJ
for investigation charge private respondents with fraudulent concealment
of the actual wholesale price of products sold through declaration of
registered wholesale prices lower than the actual wholesale prices,
resulting in underpayment of income, ad valorem and value-added taxes.
Both cases involve, therefore, fraudulent schemes to evade payment to the
Government of correct taxes.
SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax
Withhold and Remit Tax and Refund Excess Taxes Withheld on Compensation. - Any
person required under this Code or by rules and regulations promulgated
the thereunder to pay any tax make a return, keep any record, or supply correct the
accurate information, who willfully fails to pay such tax, make such return, keep
such record, or supply correct and accurate information, or withhold or remit taxes
withheld, or refund excess taxes withheld on compensation, at the time or times
required by law or rules and regulations shall, in addition to other penalties provided
by law, upon conviction thereof, be punished by a fine of not less than Ten thousand
pesos (P10,000) and suffer imprisonment of not less than one (1) year but not
more than ten (10) years.
Any person who attempts to make it appear for any reason that he or another has
in fact filed a return or statement, or actually files a return or statement and
subsequently withdraws the same return or statement after securing the official
receiving seal or stamp of receipt of internal revenue office wherein the same was
actually filed shall, upon conviction therefor, be punished by a fine of not less than
Ten thousand pesos (P10,000) but not more than Twenty thousand pesos (P20,000)
and suffer imprisonment of not less than one (1) year but not more than three (3)
years.
SEC. 256. Penal Liability of Corporations. - Any corporation, association or general
co-partnership liable for any of the acts or omissions penalized under this Code, in
addition to the penalties imposed herein upon the responsible corporate officers,
partners, or employees shall, upon conviction for each act or omission, be punished
by a fine of not less than Fifty thousand pesos (P50,000) but not more than One
hundred thousand pesos (P100,000).
SEC. 257. Penal Liability for Making False Entries, Records or Reports, or Using
Falsified or Fake Accountable Forms. -
(A) Any financial officer or independent Certified Public Accountant engaged to
examine and audit books of accounts of taxpayers under Section 232 (A)
and any person under his direction who:
(1) Willfully falsifies any report or statement bearing on any examination
or audit, or renders a report, including exhibits, statements, schedules
or other forms of accountancy work which has not been verified by him
personally or under his supervision or by a member of his firm or by a
member of his staff in accordance with sound auditing practices; or
(2) Certifies financial statements of a business enterprise containing an
essential misstatement of facts or omission in respect of the
transactions, taxable income, deduction and exemption of his client; or
(B) Any person who:
(1) Not being an independent Certified Public Accountant according to
Section 232(B) or a financial officer, examines and audits books of
accounts of taxpayers; or
(2) Offers to sign and certify financial statements without audit; or
(3) Offers any taxpayer the use of accounting bookkeeping records for
internal revenue purposes not in conformity with the requirements
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 prescribed in this Code or rules and regulations promulgated
thereunder; or
(4) Knowingly makes any false entry or enters any false or fictitious name
in the books of accounts or record mentioned in the preceding
paragraphs; or
(5) Keeps two (2) or more sets of such records or books of accounts; or
(6) In any way commits an act or omission, in violation of the provisions
of this Section; or
(7) Fails to keep the books of accounts or records mentioned in Section
232 in a native language, English or Spanish, or to make a true and
complete translation as required in Section 234 of this Code, or whose
books of accounts or records kept in a native language, English or
Spanish, and found to be at material variance with books or records
kept by him in another language; or
(8) Willfully attempts in any manner to evade or defeat any tax imposed
under this Code, or knowingly uses fake or falsified revenue official
receipts, Letters of Authority, certificates authorizing registration, Tax
Credit Certificates, Tax Debit Memoranda and other accountable forms
shall, upon conviction for each act or omission, be punished by a fine
not less than Fifty thousand pesos (P50,000) but not more than One
hundred pesos (P100,000) and suffer imprisonment of not less than
two (2) years but not more than six (6) years.
If the offender is a Certified Public Accountant, his certificate as a Certified Public
Accountant shall be automatically revoked or cancelled upon conviction.
In the case of foreigners, conviction under this Code shall result in his immediate
deportation after serving sentence, without further proceedings for deportation.
SEC. 258. Unlawful Pursuit of Business. - Any person who carries on any business
for which an annual registration fee is imposed without paying the tax as required
by law shall, upon conviction for each act or omission, be punished by a fine of not
less than Five thousand pesos (P5,000) but not more than Twenty thousand pesos
(P20,000) and suffer imprisonment of not less than six (6) months but not more
than two (2) years: Provided, That in the case of a person engaged in the business
of distilling, rectifying, repacking, compounding or manufacturing any article subject
to excise tax, he shall, upon conviction for each act or omission, be punished by a
fine of not less than Thirty thousand pesos (P30,000) but not more than Fifty
thousand pesos (P50,000) and suffer imprisonment of not less than two (2) years
but not more than four (4) years.
SEC. 259. Illegal Collection of Foreign Payments. - Any person who knowingly
undertakes the collection of foreign payments as provided under Section 67 of this
Code without having obtained a license therefor, or without complying with its
implementing rules and regulations, shall, upon conviction for each act or omission,
be punished by a fine of not less than Twenty thousand pesos (P20,000) but not
59
more than Fifty thousand pesos (P50,000) and suffer imprisonment of not less than
one (1) year but not more than two (2) years.
SEC. 260. Unlawful Possession of Cigarette Paper in Bobbins or Rolls, Etc. - It shall
be unlawful for any person to have in his possession cigarette paper in bobbins or
rolls, cigarette tipping paper or cigarette filter tips, without the corresponding
authority therefor issued by the Commissioner. Any person, importer, manufacturer
of cigar and cigarettes, who has been found guilty under this Section, shall, upon
conviction for each act or omission, be punished by a fine of not less than Twenty
thousand pesos (P20,000) but not more than One hundred thousand pesos
(P1000,000) and suffer imprisonment for a term of not less than six (6) years and
one (1) day but not more than twelve (12) years.
SEC. 261. Unlawful Use of Denatured Alcohol. - Any person who for the purpose of
manufacturing any beverage, uses denatured alcohol or alcohol specially denatured
to be used for motive power or withdrawn under bond for industrial uses or alcohol
knowingly misrepresented to be denatured to be unfit for oral intake or who
knowingly sells or offers for sale any beverage made in whole or in part from such
alcohol or who uses such alcohol for the manufacture of liquid medicinal
preparations taken internally, or knowingly sells or offers for sale such preparations
containing as an ingredient such alcohol, shall upon conviction for each act or
omission be punished by a fine of not less than Twenty thousand pesos (P20,000)
but not more than One hundred thousand pesos (P100,000) and suffer
imprisonment for a term of not less than six (6) years and one (1) day but not more
than twelve (12) years.
Any person who shall unlawfully recover or attempt to recover by distillation or
other process any denatured alcohol or who knowingly sells or offers for sale,
conceals or otherwise disposes of alcohol so recovered or redistilled shall be subject
to the same penalties imposed under this Section.
SEC. 262. Shipment or Removal of Liquor or Tobacco Products under False Name or
Brand or as an Imitation of any Existing or Otherwise Known Product Name or
Brand. - Any person who ships, transports or removes spirituous, compounded or
fermented liquors, wines or any manufactured products of tobacco under any other
than the proper name or brand known to the trade as designating the kind and
quality of the contents of the cask, bottle or package containing the same or as an
imitation of any existing or otherwise known product name or brand or causes such
act to be done, shall, upon conviction for each act or omission, be punished by a
fine of not less than Twenty thousand pesos (P20,000) but not more than One
hundred thousand pesos (P1000,000) and suffer imprisonment of not less than six
(6) years and one (1) day but not more than twelve (12) years.
SEC. 263. Unlawful Possession or Removal of Articles Subject to Excise Tax without
Payment of the Tax. - Any person who owns and/or is found in possession of
imported articles subject to excise tax, the tax on which has not been paid in
accordance with law, or any person who owns and/or is found in possession of
imported tax-exempt articles other than those to whom they are legally issued shall
be punished by:
(a) A fine of not less than One thousand pesos (P1,000) nor more than Two
thousand pesos (P2,000) and suffer imprisonment of not less than sixty
 (60) days but not more than one hundred (100) days, if the appraised
value, to be determined in the manner prescribed in the Tariff and Customs
Code, including duties and taxes, of the articles does not exceed One
thousand pesos (P1,000).
(b) A fine of not less than Ten thousand pesos (P10,000) but not more than
Twenty thousand pesos (P20,000) and suffer imprisonment of not less than
two (2) years but not more than four (4) years, if the appraised value, to
be determined in the manner prescribed in the Tariff and Customs Code,
including duties and taxes, of the articles exceeds One thousand pesos
(P1,000) but does not exceed Fifty thousand pesos (P50,000);
(c) A fine of not less than Thirty thousand pesos (P30,000) but not more than
Sixty thousand pesos (P60,000) and suffer imprisonment of not less than
four (4) years but not more than six (6) years, if the appraised value, to be
determined in the manner prescribed in the Tariff and Customs Code,
including duties and taxes of the articles is more than Fifty thousand pesos
(P50,000) but does not exceed One hundred fifty thousand pesos
(P150,000); or
(d) A fine of not less than Fifty thousand pesos (P50,000) but not more than
One hundred thousand pesos (P100,000) and suffer imprisonment of not
less than ten (10) years but not more than twelve (12) years, if the
appraised value, to be determined in the manner prescribed in the Tariff
and Customs Code, including duties and taxes, of the articles exceeds One
hundred fifty thousand pesos (P150,000).
Any person who is found in possession of locally manufactured articles subject to
excise tax, the tax on which has not been paid in accordance with law, or any
person who is found in possession of such articles which are exempt from excise tax
other than those to whom the same is lawfully issued shall be punished with a fine
of not less than (10) times the amount of excise tax due on the articles found but
not less than Five hundred pesos (P500) and suffer imprisonment of not less than
two (2) years but not more than four (4) years.
Any manufacturer, owner or person in charge of any article subject to excise tax
who removes or allows or causes the unlawful removal of any such articles from the
place of production or bonded warehouse, upon which the excise tax has not been
paid at the time and in the manner required, and any person who knowingly aids or
abets in the removal of such articles as aforesaid, or conceals the same after illegal
removal shall, for the first offense, be punished with a fine of not less than ten (10)
times the amount of excise tax due on the articles but not less than One thousand
pesos (P1,000) and suffer imprisonment of not less than one (1) year but not more
than two (2) years.
The mere unexplained possession of articles subject to excise tax, the tax on which
has not been paid in accordance with law, shall be punishable under this Section.
SEC. 264. Failure or refusal to Issue Receipts or Sales or Commercial Invoices,
Violations related to the Printing of such Receipts or Invoices and Other Violations. -
60
(a) Any person who, being required under Section 237 to issue receipts or
sales or commercial invoices, fails or refuses to issue such receipts of
invoices, issues receipts or invoices that do not truly reflect and/or contain
all the information required to be shown therein, or uses multiple or double
receipts or invoices, shall, upon conviction for each act or omission, be
punished by a fine of not less than One thousand pesos (P1,000) but not
more than Fifty thousand pesos (P50,000) and suffer imprisonment of not
less than two (2) years but not more than four (4) years.
(b) Any person who commits any of the acts enumerated hereunder shall be
penalized in the same manner and to the same extent as provided for in
this Section:
(1) Printing of receipts or sales or commercial invoices without authority
from the Bureau of Internal Revenue; or
(2) Printing of double or multiple sets of invoices or receipts; or
(3) Printing of unnumbered receipts or sales or commercial invoices, not
bearing the name, business style, Taxpayer Identification Number, and
business address of the person or entity.
SEC. 265. Offenses Relating to Stamps. - Any person who commits any of the acts
enumerated hereunder shall, upon conviction thereof, be punished by a fine of not
less than Twenty thousand pesos (P20,000) but not more than Fifty thousand pesos
(P50,000) and suffer imprisonment of not less than four (4) years but not more
than eight (8) years:
(a) making, importing, selling, using or possessing without express authority
from the Commissioner, any die for printing or making stamps, labels, tags
or playing cards;
(b) Erasing the cancellation marks of any stamp previously used, or altering
the written figures or letters or cancellation marks on internal revenue
stamps;
(c) Possessing false, counterfeit, restored or altered stamps, labels or tags or
causing the commission of any such offense by another;
(d) Selling or offering for sale any box or package containing articles subject to
excise tax with false, spurious or counterfeit stamps or labels or selling
from any such fraudulent box, package or container as aforementioned; or
(e) Giving away or accepting from another, or selling, buying or using
containers on which the stamps are not completely destroyed.
SEC. 266. Failure to Obey Summons. - Any person who, being duly summoned to
appear to testify, or to appear and produce books of accounts, records, memoranda
or other papers, or to furnish information as required under the pertinent provisions
of this Code, neglects to appear or to produce such books of accounts, records,
memoranda or other papers, or to furnish such information, shall, upon conviction,
be punished by a fine of not less than Five thousand pesos (P5,000) but not more
than ten thousand pesos (P10,000) and suffer imprisonment of not less than one
(1) year but not more than two (2) years.

SEC. 267. Declaration under Penalties of Perjury. - Any declaration, return and
other statement required under this Code, shall, in lieu of an oath, contain a written
statement that they are made under the penalties of perjury. Any person who
willfully files a declaration, return or statement containing information which is not
true and correct as to every material matter shall, upon conviction, be subject to
the penalties prescribed for perjury under the Revised Penal Code.
SEC. 268. Other Crimes and Offenses. -
(A) Misdeclaration or Misrepresentation of Manufacturers Subject to Excise Tax.
- Any manufacturer who, in violation of the provisions of Title VI of this
Code, misdeclares in the sworn statement required therein or in the sales
invoice, any pertinent data or information shall be punished by a summary
cancellation or withdrawal of the permit to engage in business as a
manufacturer of articles subject to excise tax.
(B) Forfeiture of Property Used in Unlicensed Business or Dies Used for Printing
False Stamps, Etc. - All chattels, machinery, and removable fixtures of any
sort used in the unlicensed production of articles subject to excise tax shall
be forfeited. Dies and other equipment used for the printing or making of
any internal revenue stamp, label or tag which is in imitation of or purports
to be a lawful stamp, label or tag shall also be forfeited.
(C) Forfeiture of Goods Illegally Stored or Removed. - Unless otherwise
specifically authorized by the Commissioner, all articles subject to excise
tax should not be stored or allowed to remain in the distillery warehouse,
bonded warehouse or other place where made, after the tax thereon has
been paid; otherwise, all such articles shall be forfeited. Articles withdrawn
from any such place or from customs custody or imported into the country
without the payment of the required tax shall likewise be forfeited.
Chapter 3 – Penalties Imposed on Public Officers
SEC. 269. Violations Committed by Government Enforcement Officers. - Every
official, agent, or employee of the Bureau of Internal Revenue or any other agency
of the Government charged with the enforcement of the provisions of this Code,
who is guilty of any of the offenses herein below specified shall, upon conviction for
each act or omission, be punished by a fine of not less than Fifty thousand pesos
(P50,000) but not more than One hundred thousand pesos (P100,000) and suffer
imprisonment of not less than ten (10) years but not more than fifteen (15) years
and shall likewise suffer an additional penalty of perpetual disqualification to hold
public office, to vote, and to participate in any public election:
(a) Extortion or willful oppression through the use of his office or willful
oppression and harassment of a taxpayer who refused, declined, turned
down or rejected any of his offers specified in paragraph (d) hereof;
(b) Knowingly demanding or receiving any fee, other or greater sums that are
authorized by law or receiving any fee, compensation or reward, except as
by law prescribed, for the performance of any duty;
61
(c) Willfully neglecting to give receipts, as by law required, for any sum
collected in the performance of duty or willfully neglecting to perform any
other duties enjoined by law;
(d) Offering or undertaking to accomplish, file or submit a report or
assessment on a taxpayer without the appropriate examination of the
books of accounts or tax liability, or offering or undertaking to submit a
report or assessment less than the amount due the Government for any
consideration or compensation, or conspiring or colluding with another or
others to defraud the revenues or otherwise violate the provisions of this
Code;
(e) Neglecting or by design permitting the violation of the law by any other
person;
(f) Making or signing any false entry or entries in any book, or making or
signing any false certificate or return;
(g) Allowing or conspiring or colluding with another to allow the unauthorized
retrieval, withdrawal or recall of any return, statement or declaration after
the same has been officially received by the Bureau of Internal Revenue;
(h) Having knowledge or information of any violation of this Code or of any
fraud committed on the revenues collectible by the Bureau of Internal
Revenue, failure to report such knowledge or information to their superior
officer, or failure to report as otherwise required by law; and
(i) Without the authority of law, demanding or accepting or attempting to
collect, directly or indirectly, as payment or otherwise any sum of money
or other thing of value for the compromise, adjustment or settlement of
any charge or complaint for any violation or alleged violation of this Code.
Provided, That the provisions of the foregoing paragraph notwithstanding, any
internal revenue officer for which a prima facie case of grave misconduct has been
established shall, after due notice and hearing of the administrative case and
subject to Civil Service Laws, be dismissed from the revenue service: Provided,
further, That the term 'grave misconduct', as defined in Civil Service Law, shall
include the issuance of fake letters of authority and receipts, forgery of signature,
unsurpation of authority and habitual issuance of unreasonable assessments.
SEC. 270. Unlawful Divulgence of Trade Secrets. - Except as provided in Section 71
of this Code and Section 26 of Republic Act No. 6388, any officer or employee of the
Bureau of Internal Revenue who divulges to any person or makes known in any
other manner than may be provided by law information regarding the business,
income or estate of any taxpayer, the secrets, operation, style or work, or
apparatus of any manufacturer or producer, or confidential information regarding
the business of any taxpayer, knowledge of which was acquired by him in the
discharge of his official duties, shall upon conviction for each act or omission, be
punished by a fine of not less than Fifty thousand pesos (P50,000) but not more
than One hundred thousand pesos (P100,000), or suffer imprisonment of not less
than two (2) years but not more than five (5) years, or both.
SEC. 271. Unlawful Interest of Revenue Law Enforcers in Business. - Any internal
revenue officer who is or shall become interested, directly or indirectly, in the
manufacture, sale or importation of any article subject to excise tax under Title VI
of this Code or in the manufacture or repair or sale, of any die for printing, or
making of stamps, or labels shall upon conviction for each act or omission, be
punished by a fine of not less than Five thousand pesos (P5,000) but not more than
Ten thousand pesos (P10,000), or suffer imprisonment of not less than two (2)
years and one (1) day but not more than four (4) years, or both.
SEC. 272. Violation of Withholding Tax Provision. - Every officer or employee of the
Government of the Republic of the Philippines or any of its agencies and
instrumentalities, its political subdivisions, as well as government-owned or
controlled corporations, including the Bangko Sentral ng Pilipinas (BSP), who, under
the provisions of this Code or rules and regulations promulgated thereunder, is
charged with the duty to deduct and withhold any internal revenue tax and to remit
the same in accordance with the provisions of this Code and other laws is guilty of
any offense herein below specified shall, upon conviction for each act or omission be
punished by a fine of not less than Five thousand pesos (P5,000) but not more than
Fifty thousand pesos (P50,000) or suffer imprisonment of not less than six (6)
months and one (1) day but not more than two (2) years, or both:
(a) Failing or causing the failure to deduct and withhold any internal revenue
tax under any of the withholding tax laws and implementing rules and
regulations;
(b) Failing or causing the failure to remit taxes deducted and withheld within
the time prescribed by law, and implementing rules and regulations; and
(c) Failing or causing the failure to file return or statement within the time
prescribed, or rendering or furnishing a false or fraudulent return or
statement required under the withholding tax laws and rules and
regulations.
SEC. 273. Penalty for Failure to Issue and Execute Warrant. - Any official who fails
to issue or execute the warrant of distraint or levy within thirty (30) days after the
expiration of the time prescribed in Section 207 or who is found guilty of abusing
the exercise thereof by competent authority shall be automatically dismissed from
the service after due notice and hearing.
Chapter 4 – Other Penal Provisions
SEC. 274. Penalty for Second and Subsequent Offenses. - In the case of
reincidence, the maximum of the penalty prescribed for the offense shall be
imposed.
SEC. 275. Violation of Other Provisions of this Code or Rules and Regulations in
General. - Any person who violates any provision of this Code or any rule or
regulation promulgated by the Department of Finance, for which no specific penalty
is provided by law, shall, upon conviction for each act or omission, be punished by a
fine of not more than One thousand pesos (P1,000) or suffer imprisonment of not
more than six (6) months, or both.
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SEC. 276. Penalty for Selling, Transferring, Encumbering or in any way Disposing of
Property Placed under Constructive Distraint. - Any taxpayer, whose property has
been placed under constructive distraint, who sells, transfers, encumbers or in any
way disposes of said property, or any part thereof, without the knowledge and
consent of the Commissioner, shall, upon conviction for each act or omission, be
punished by a fine of not less than twice the value of the property so sold,
encumbered or disposed of but not less than Five Thousand pesos (P5,000), or
suffer imprisonment of not less than two (2) years and one (1) day but not more
than four (4) years, of both.
SEC. 277. Failure to Surrender Property Placed under Distraint and Levy. - Any
person having in his possession or under his control any property or rights to
property, upon which a warrant of constructive distraint, or actual distraint and levy
has been issued shall, upon demand by the Commissioner or any of his deputies
executing such warrant, surrender such property or right to property to the
Commissioner or any of his deputies, unless such property or right is, at the time of
such demand, subject to an attachment or execution under any judicial process.
Any person who fails or refuses to surrender any of such property or right shall be
liable in his own person and estate to the Government in a sum equal to the value
of the property or rights not so surrendered but not exceeding the amount of the
taxes (including penalties and interest) for the collection of which such warrant had
been issued, together with cost and interest if any, from the date of such warrant.
In addition, such person shall, upon conviction for each act or omission, be
punished by a fine of not less than Five thousand pesos (P5,000), or suffer
imprisonment of not less than six (6) months and one (1) day but not more than
two (2) years, or both.
SEC. 278. Procuring Unlawful Divulgence of Trade Secrets. - Any person who
causes or procures an officer or employee of the Bureau of Internal Revenue to
divulge any confidential information regarding the business, income or inheritance
of any taxpayer, knowledge of which was acquired by him in the discharge of his
official duties, and which it is unlawful for him to reveal, and any person who
publishes or prints in any manner whatever, not provided by law, any income,
profit, loss or expenditure appearing in any income tax return, shall be punished by
a fine of not more than Two thousand pesos (P2,000), or suffer imprisonment of not
less than six (6) months nor more than five (5) years, or both.
SEC. 279. Confiscation and Forfeiture of the Proceeds or Instruments of Crime. - In
addition to the penalty Imposed for the violation of the provisions of Title X of this
Code, the same shall carry with it the confiscation and forfeiture in favor of the
government of the proceeds of the crime or value of the goods, and the instruments
or tools with which the crime was committed: Provided, however, That if in the
course of the proceedings, it is established that the instruments or tools used in the
illicit act belong to a third person, the same shall be confiscated and forfeited after
due notice and hearing in a separate proceeding in favor of the Government if such
third person leased, let, chartered or otherwise entrusted the same to the offender:
Provided, further, That in case the lessee subleased, or the borrower, charterer, or
trustee allowed the use of the instruments or tools to the offender, such
instruments or tools shall, likewise, be confiscated and forfeited: Provided, finally,
That property of common carriers shall not be subject to forfeiture when used in the
transaction of their business as such common carrier, unless the owner or operator
of said common carrier was, at the time of the illegal act, a consenting party or
privy thereto, without prejudice to the owner's right of recovery against the offender
in a civil or criminal action. Articles which are not subject of lawful commerce shall
be destroyed.
SEC. 280. Subsidiary Penalty. - If the person convicted for violation of any of the
provisions of this Code has no property with which to meet the fine imposed upon
him by the court, or is unable to pay such fine, he shall be subject to a subsidiary
personal liability at the rate of one (1) day for each Eight pesos and fifty centavos
(P8.50) subject to the rules established in Article 39 of the Revised Penal Code.
SEC. 281. Prescription for Violations of any Provision of this Code. - All violations of
any provision of this Code shall prescribe after five (5) years.
Prescription shall begin to run from the day of the commission of the violation of the
law, and if the same be not known at the time, from the discovery thereof and the
institution of judicial proceedings for its investigation and punishment.
The prescription shall be interrupted when proceedings are instituted against the
guilty persons and shall begin to run again if the proceedings are dismissed for
reasons not constituting jeopardy.
The term of prescription shall not run when the offender is absent from the
Philippines.
[BAR!] SEC. 282. Informer's Reward to Persons Instrumental in the Discovery of
Violations of the National Internal Revenue Code and in the Discovery and Seizure
of Smuggled Goods. –
(A) For Violations of the National Internal Revenue Code. Any person, except
an internal revenue official or employee, or other public official or
employee, or his relative within the sixth degree of consanguinity, who
voluntarily gives definite and sworn information, not yet in the possession
of the Bureau of Internal Revenue, leading to the discovery of frauds upon
the internal revenue laws or violations of any of the provisions thereof,
thereby resulting in the recovery of revenues, surcharges and fees and/or
the conviction of the guilty party and/or the imposition of any of the fine or
penalty, shall be rewarded in a sum equivalent to ten percent (10%) of
the revenues, surcharges or fees recovered and/or fine or penalty imposed
and collected or One Million Pesos (P1,000,000) per case, whichever is
lower. The same amount of reward shall also be given to an informer
where the offender has offered to compromise the violation of law
committed by him and his offer has been accepted by the Commissioner
and collected from the offender: Provided, That should no revenue,
surcharges or fees be actually recovered or collected, such person shall not
be entitled to a reward: Provided, further, That the information mentioned
herein shall not refer to a case already pending or previously investigated
or examined by the Commissioner or any of his deputies, agents or
examiners, or the Secretary of Finance or any of his deputies or agents:
Provided, finally, That the reward provided herein shall be paid under rules
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and regulations issued by the Secretary of Finance, upon recommendation
of the Commissioner.
(B) For Discovery and Seizure of Smuggled Goods. To encourage the public to
extend full cooperation in eradicating smuggling, a cash reward equivalent
to ten percent (10%) of the fair market value of the smuggled and
confiscated goods or One Million Pesos (P1,000,000) per case, whichever
is lower, shall be given to persons instrumental in the discovery and
seizure of such smuggled goods.
The cash rewards of informers shall be subject to income tax, collected as a final
withholding tax, at a rate of ten percent (10%).
The Provisions of the foregoing Subsections notwithstanding, all public officials,
whether incumbent or retired, who acquired the information in the course of the
performance of their duties during their incumbency, are prohibited from claiming
informer's reward.
TITLE 11
Allotment of Internal Revenue
Chapter 1 – Disposition and Allotment of National Internal Revenue
in General
SEC. 283. Disposition of National Internal Revenue. - National Internal revenue
collected and not applied as herein above provided or otherwise specially disposed
of by law shall accrue to the National Treasury and shall be available for the general
purposes of the Government, with the exception of the amounts set apart by way of
allotment as provided for under Republic Act No. 7160, otherwise known as the
Local Government Code of 1991.
In addition to the internal revenue allotment as provided for in the preceding
paragraph, fifty percent (50%) of the national taxes collected under Sections 106,
108 and 116 of this Code in excess of the increase in collections for the immediately
preceding year shall be distributed as follows:
(a) Twenty percent (20%) shall accrue to the city or municipality where such
taxes are collected and shall be allocated in accordance with Section 150 of
Republic Act No. 7160, otherwise known as the Local Government Code of
1991; and
(b) Eighty percent (80%) shall accrue to the National Government.
SEC. 284. Allotment for the Commission on Audit. - One-half of one percent (1/2 of
1%) of the collections from the national internal revenue taxes not otherwise
accruing to special accounts in the general fund of the national government shall
accrue to the Commission on Audit as a fee for auditing services rendered to local
government units, excluding maintenance, equipment, and other operating
expenses as provided for in Section 21 of Presidential Decree No. 898.
The Secretary of Finance is hereby authorized to deduct from the monthly internal wealth based on the following formula, whichever will produce a higher
revenue tax collections an amount equivalent to the percentage as herein fixed, and share for the local government unit:
to remit the same directly to the Commission on Audit under such rules and (1) One percent (1%) of the gross sales or receipts of the preceding
regulations as may be promulgated by the Secretary of Finance and the Chairman calendar year, or
of the Commission on Audit.
(2) Forty percent (40%) of the excise taxes on mineral products, royalties,
SEC. 285. Allotment for the Bureau of Internal Revenue. - An amount equivalent to and such other taxes, fees or charges, including related surcharges,
five percent (5%) of the excess of actual collections of national internal revenue interests or fines the government agency or government-owned or -
taxes over the collection goal shall accrue to the special fund of the Bureau of controlled corporations would have paid if it were not otherwise
Internal Revenue and shall be treated as receipts automatically appropriated. Said exempt.
amount shall be utilized as incentive bonus for revenue personnel, purchase of (C) Allocation of Shares. - The share in the preceding Section shall be
necessary equipment and facilities for the improvement of tax administration, as distributed in the following manner:
approved by the Commissioner: Provided, That the President may, upon
recommendation of the Commissioner, direct that the excess be credited to a (1) Where the natural resources are located in the province:
Special Account in the National Treasury to be held in the reserve available for
distribution as incentive bonus in the subsequent years. (a) Province - twenty percent (20%)
(b) Component city/municipality - forty-five percent (45%); and
The Secretary of Finance is hereby authorized to transfer from the Treasury an (c) Barangay - thirty-five percent (35%)
amount equivalent to the percentage as herein fixed and to remit the same directly
to the Bureau of Internal Revenue under such rules and regulations as may be Provided, however, That where the natural resources are located in
promulgated by the Secretary of Finance. two (2) or more cities, the allocation of shares shall be based on the
formula on population and land area as specified in subsection (C)(1)
Chapter 2 – Special Disposition of Certain National Internal hereof.
Revenue Taxes
(2) Where the natural resources are located in a highly urbanized or
independent component city:
SEC. 286. Disposition of Proceeds of insurance Premium Tax. - Twenty-five percent
(25%) of the premium tax collected under Section 123 of this Code shall accrue to
(a) City - sixty - five percent (65%); and
the Insurance Fund as contemplated in Section 418 of Presidential Decree No. 612
(b) Barangay - thirty - five percent (35%)
which shall be used for the purpose of defraying the expenses of the Insurance
Commission. The Commissioner shall turn over and deliver the said Insurance Fund
Provided, however, That where the natural resources are located in
to the Insurance Commissioner as soon as the collection is made.
two (2) or more cities, the allocation of shares shall be based on the
formula on population and land area as specified in subsection (c)(1)
SEC. 287. Shares of Local Government Units in the Proceeds from the Development
hereof.
and Utilization of the National Wealth. - Local Government units shall have an
equitable share in the proceeds derived from the utilization and development of the
SEC. 288. Disposition of Incremental Revenues. -
national wealth, within their respective areas, including sharing the same with the
(A) Incremental Revenues from Republic Act No. 7660. - The incremental
inhabitants by way of direct benefits.
revenues from the increase in the documentary stamp taxes under R.A.
(A) Amount of Share of Local Government Units. - Local government units
No. 7660 shall be set aside for the following purposes:
shall, in addition to the internal revenue allotment, have a share of forty
percent (40%) of the gross collection derived by the national government
(1) In 1994 and 1995, twenty-five percent (25%) thereof respectively,
from the preceding fiscal year from excise taxes on mineral products,
shall accrue to the Unified Home-Lending Program under Executive
royalties, and such other taxes, fees or charges, including related
Order No. 90 particularly for mass-socialized housing program to be
surcharges, interests or fines, and from its share in any co-production,
allocated as follows: fifty percent (50%) for mass-socialized housing;
joint venture or production sharing agreement in the utilization and
thirty percent (30%) for the community mortgage program; and
development of the national wealth within their territorial jurisdiction.
twenty percent (20%) for land banking and development to be
administered by the National Housing Authority: Provided, That not
(B) Share of the Local Governments from Any Government Agency or
more than one percent (1%) of the respective allocations hereof shall
Government-owned or - Controlled Corporation. - Local Government Units
be used for administrative expenses;
shall have a share, based on the preceding fiscal year, from the proceeds
derived by any government agency or government-owned or controlled
corporation engaged in the utilization and development of the national
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 (2) In 1996, twenty-five percent (25%) thereof to be utilized for the
National Health Insurance Program that hereafter may be mandated
by law;
(3) In 1994 and every year thereafter, twenty-five percent (25%) thereof
shall accrue to a Special Education Fund to be administered by the
Department of Education, Culture and Sports for the construction and
repair of school facilities, training of teachers, and procurement or
production of instructional materials and teaching aids; and
(4) In 1994 and every year thereafter, fifty percent (50%) thereof shall
accrue to a Special Infrastructure Fund for the construction and repair
of roads, bridges, dams and irrigation, seaports and hydroelectric and
other indigenous power projects: Provided, however, That for the
years 1994 and 1995, thirty percent (30%), and for the years 1996,
1997 and 1998, twenty percent (20%), of this fund-shall be allocated
for depressed provinces as declared by the President as of the time of
the effectivity of R.A. No. 7660: Provided, further, That availments
under this fund shall be determined by the President on the basis of
equity.
Provided, finally, That in paragraphs (2), (3) and (4) of this Section, not
more than one percent (1%) of the allocated funds thereof shall be used
for administrative expenses by the implementing agencies.
(B) Incremental Revenues from Republic Act No. 8240. - Fifteen percent (15%)
of the incremental revenue collected from the excise tax on tobacco
products under R.A. No. 8240 shall be allocated and divided among the
provinces producing burley and native tobacco in accordance with the
vo1ume of tobacco leaf production. The fund shall be exclusively utilized
for programs in pursuit of the following objectives:
(1) Cooperative projects that will enhance better quality of agricultural
products and increase income and productivity of farmers;
(2) Livelihood projects, particularly the development of alternative farming
system to enhance farmer's income; and
(3) Agro-industrial projects that will enable tobacco farmers to be involved
in the management and subsequent ownership of projects, such as
post-harvest and secondary processing like cigarette manufacturing
and by-product utilization.
The Department of Budget and Management, in consultation with the
Oversight Committee created under said R.A. No. 8240, shall issue the
corresponding rules and regulations governing the allocation and
disbursement of this fund.
(C) Incremental Revenues from the Excise Tax on Alcohol and Tobacco
Products. –
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(1) Two and a half percent (2.5%) of the incremental revenue from the
excise tax on alcohol and tobacco products starting January 2005 shall
be remitted directly to the Philippine Health Insurance Corporation for
the purpose of meeting and sustaining the goal of universal coverage
of the National Health Insurance Program; and
(2) Two and a half percent (2.5%) of the incremental revenue from the
excise tax on alcohol and tobacco products starting January 2005 shall
he credited to the account of the Department of Health and constituted
as a trust fund for its disease prevention program.
The earmarking provided under this provision shall be observed for five (5)
years starting from January 2005."
(D) Incremental Revenue from the Value-added Tax. - Fifty percent (50%) of
the local government unit's share from the incremental revenue from the
value-added tax shall be allocated and used exclusively for the following
purposes:
1. Fifteen percent (15%) for public elementary and secondary education,
to finance the construction of buildings, purchases of school furniture
and in-service teacher trainings;
2. Ten percent (10%) for health insurance premiums of enrolled indigents
as a counterpart contribution of the local government to sustain the
universal coverage of the national health insurance program;
3. Fifteen percent (15%) for environmental conservation to fully
implement a comprehensive national reforestation program; and
4. Ten percent (10%) for agricultural modernization to finance the
construction of farm-to-market roads and irrigation facilities.
Such allocations shall be segregated as separate trust funds by the
National Treasury and shall be over and above the annual appropriation for
similar purposes.
(E) The amount of fifteen million pesos (P15,000,000) shall be allocated for a
public information and education program to be administered by the
Bureau of Internal Revenue, explaining clearly to businesses their
registration, invoicing and reporting requirements under the Value-added
tax rules. Such program should include seminars and visits to taxpayers to
familiarize them with the tax, and the development and publication of
easy-to-read guides on the Value-added Tax.
SEC. 289. Special Financial Support to Beneficiary Provinces Producing Virginia
Tobacco. - The financial support given by the National Government for the
beneficiary provinces shall be constituted and collected from the proceeds of fifteen
percent (15%) of the excise taxes on locally manufactured Virginia-type of
cigarettes.
The funds allotted shall be divided among the beneficiary provinces pro-rata
according to the volume of Virginia tobacco production.
Production producing Virginia tobacco shall be the beneficiary provinces under
Republic Act No. 7171. Provided, however, that to qualify as beneficiary under R.A.
No. 7171, a province must have an average annual production of Virginia leaf
tobacco in an amount not less than one million kilos: Provided, further, that the
Department of Budget and Management (DBM) shall each year determine the
beneficiary provinces and their computed share of the funds under R.A. No. 7171,
referring to the National Tobacco Administration (NTA) records of tobacco
acceptances, at the tobacco trading centers for the immediate past year.
In furtherance of the hereinabove cited objectives, the Committee is empowered to
require of the Bureau of Internal Revenue, submission of all pertinent information,
including but not limited to: industry audits; collection performance data; status
report on criminal actions initiated against persons; and submission of taxpayer
returns: Provided, however, That any return or return information which can be
associated with, or otherwise identify, directly or indirectly, a particular taxpayer
shall be furnished the Committee only when sitting in Executive Session unless such
taxpayer otherwise consents in writing to such disclosure

The Secretary of Budget and Management is hereby directed to retain annually the
said funds equivalent to fifteen percent (15%) of excise taxes on locally
manufactured Virginia type cigarettes to be remitted to the beneficiary provinces
qualified under R.A. No. 7171.

The provision of existing laws to the contrary notwithstanding, the fifteen percent
(15%) share from government revenues mentioned in R.A. No. 7171 and due to the
Virginia tobacco-producing provinces shall be directly remitted to the provinces
concerned.

Provided, That this Section shall be implemented in accordance with the guidelines
of Memorandum Circular No. 61-A dated November 28, 1993, which amended
Memorandum Circular No. 61, entitled "Prescribing Guidelines for Implementing
Republic Act No. 7171", dated January 1, 1992.

Provided, further, That in addition to the local government units mentioned in the
above circular, the concerned officials in the province shall be consulted as regards
the identification of projects to be financed.

TITLE 12
Oversight Committee

SEC. 290. Congressional Oversight Committee. -

A Congressional Oversight Committee, hereinafter referred to as the Committee, is
hereby constituted in accordance with the provisions of this Code. The Committee
shall be composed of the Chairmen of the Committee on Ways and Means of the
Senate and House Representatives and four (4) additional members from each
house, to be designated by the Speaker of the House of Representatives and the
Senate President, respectively.

The Committee shall, among others, in aid of legislation:

(1) Monitor and ensure the proper implementation of Republic Act No. 8240;
(2) Determine that the power of the Commissioner to compromise and abate is
reasonably exercised;
(3) Review the collection performance of the Bureau of Internal Revenue; and
(4) Review the implementation of the programs of the Bureau of Internal
Revenue.

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