COVERAGE OF TAXATION LAW REVIEW
23 (C), 24
I. Basic Principles of Constitutional
Limitations
a) Due process clause which could be either
substantive due process and procedural due
process clause
b) Equal protection clause
Read:
 Ormoc Sugar Central
vs. City Treasurer 22 SCRA 603
 Tiu vs. CA 301 SCRA 178
c) Article III sec. 1 of the 1987 Constitution –
non-impairment clause
d) Article III sec. 5 – freedom of religion
e) Article III sec. 20 – non-payment of poll tax
f) Article VI sec. 28 par. 2 – flexible tariff
clause
g) Article VI sec. 28 par. 3 – exemption from
real property tax Read:
 Herrera vs. Quezon City 3 SCRA 186
 Abra vs. Hernando 107 SCRA 104
 Abra Valley vs. Aquino 52 SCRA 106
 Philippine Lung Center vs. Quezon
City 433 SCRA 119
h) Article VI sec. 28 par. 4 – qualified majority
in tax exemption
i) International double taxation
 CIR vs. Johnson 309 SCRA 87
j) Doctrine of equitable recoupment
k) Doctrine of Set-off or compensation in
taxation
 Republic vs. Mambulao 4 SCRA 622
 Domingo vs. Garlitos 8 SCRA 443
 Francia vs. IAC 162 SCRA 753
 Caltex vs. COA 208 SCRA 726
 Philex vs. CIR 294 SCRA 687
II. Income Tax Law
Section 22-26 of the National Internal Revenue
Code
a) Read in the commentaries or magic notes the
different kinds of:
1. Income Taxpayers
2. Income Taxes
3. Sources of Income sec. 42 of NIRC
- Income Taxpayers
a) Individuals
b) Corporation
c) Estates and Trusts –
-Individuals are classified
 Resident Citizens sec. 23 (A), sec 24 (A)
(a)
 Non-Resident Citizens sec 23 (B), 24 (A)
(b) 22 (E)
 Overseas Contract Workers Sec.
(A) (b)
 Resident Aliens Rev. Reg. sec 5, 23 (D), 24
(A) (c)
 Non-Resident Aliens Engaged in trade or
business sections 25 (A) (1)
 Non-Resident Aliens Not Engaged in trade
or business sec. 25 (B)
 Aliens Employed in Multi-National
Corporations sec. 25 (C) and Rev. Reg. 12-
2001
 Aliens Employed in Offshore Banking
Units sec 25 (D)
 Aliens Employed in petroleum Service
Contractors & Subcontractors sec. 25 (E)
-Corporate Income Taxpayers
 Domestic Corporations sec. 23 (E), and sec 27 of
NIRC
 Resident Foreign Corporations sec. 22 (H) and
(28)A
 Non-Resident Foreign Corporations sec. 22 (1)
and 28 (B)
-Estates and Trusts sec. 60-66 of NIRC
Different Kinds of Income Tax
1. Net Income Tax secs. 24 (A), 25 (A) (1), 26,
27 (A) (B) (C), 28 (A) up to 3rd par. 31 and
32 (A)
2. Gross Income Tax secs. 25 (B) first part and
28 (B) (1)
3. Final Income Taxes sec. 57 (A)
4. Minimum Corporate Income Tax of 2% of
the Gross Income secs. 27 (E), 28 (A) (2)
5. Improperly Accumulated Earnings Tax of
10% of its taxable income sec. 29 NIRC
Rev. Reg. 2-2001
 Optional Corporate Income Tax of 15% of
its gross income sections 27 (A) 4th to 10th
par. And 28 A(1) but only up to the 4th
paragraph
-Proceed to section 42 and 23 of the NIRC
 NDC vs. Comm 151 SCRA 472
 Comm. Vs. IAC 127 SCRA 9
-Then go to sec. 39 of NIRC
 Calazans vs. Comm. 144 SCRA 664 RR 7-
2003
-Then proceed to sec. 24 (A), 25 (A) (1), 25
B,C,D,E, 27 A,B,C; 28 (A) (1), 28 (A) (6) and
sec 51 (D)
-Then continue to sec 24 B 1, 25 B,C,D,E; 27
(D) (1)
-Then go to se. 24 (B) (2) sec. 73
 Comm. Vs. Manning 66 SCRA 14
 Anscor vs. Comm. 301 SCRA 152
Page 1 of 79
-Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D) (4); 28 (A) -Upon reading sec. 60-66, read Ona vs. Bautista 45
(7) (D); 32 B (7) (a) SCRA 74

- Then you go to sec. 24 C, 25A (3); 25 B, C, D, III. Estate Tax

E, 27 D (2); 28 (A) (7) (C); 28 B (5) (C) RA 7717 -Sections 84-97 see sec. 104
sec. 127 NIRC -Upon reading sec. 85 (B) read Vidal de Roces vs.
- Then you go to sec. 24 D (1); 25 (A) (3); 25 (B) Posadas 58 Phil. 108
last par. 27 (D) (5) Dizon vs. Posadas 57 Phil 465
 China Bank vs. Court of Appeals 336 SCRA ___; -Sec. 85 (G) compare with sec. 100
RR 7-2003 -sec. 85 (H) compare with sec. 86 (C)
-Upon reading sec. 24 (D) (2) read RR 13-1999 -Upon reading sec. 86 see RR 2-2003
-Upon reading sec. 94 see Marcos vs.
-Upon reading sec. 27 (A) go to sec. 22 (B) Sandiganbayan 273 SCRA 47
 Batangas vs. Collector 102 Phil. 822
 Evangelista vs. Collector 102 Phil 140 IV. Donors Tax Law
 Reyes vs. Comm. 24 SCRA 198 - Sections 98-104
 Ona vs. Bautista 45 SCRA 74 - G and Cumulative methods of filing donor’s tax
 Obillos vs. Comm 139 SCRA 436 returns sections 99 (A), 103 (A) (1) and RR 2-2003
 Pascua vs. Comm. 166 SCRA 560 - Sections 100 and 85 (9)
 Afisco vs. Comm. 302 SCRA 1
V. Value Added Tax
- Sections 105-115
-Upon reading sec. 27 (C) of NIRC see RA 9337 then go
-Read RA 9337
to sec. 32 (B) (7) (b) of NIRC, sec. 133 par (o) of LGC,
-Read ABAKADA vs Comm.
sec. 154 of the LGC.
GR 168056, Sept. 1, 2005
 Pagcor vs. Basco 197 SCRA 52
 Mactan vs. Cebu 261 SCRA 667 VI. Remedies Under the Internal Revenue Code
 LRT vs. City of Manila 342 SCRA 692 -Sections 202-229
-RR 12-99
-Proceed to sections 27 (D) (1), 27 (D) (2), 27 (D) (5)  Phoenix vs Comm 14 SCRA 52
read RA 9337, 28 (A) (7) (b), 28 (B) (5) (C), 27 (D) (4),
 Basilan vs. Comm. 21 SCRA 17
(28) (A) (7) (d), 28 (B) (5) (b)
 Yabut vs. Flojo 115 SCRA 278
 Marubeni vs. CIR 177 SCRA 500
 Union Shipping vs. Comm 185 SCRA 547
 Proctor & Gamble vs. Comm 160 SCRA 560
 Comm. vs. TMX 205 SCRA 184
 Same case Proctor and Gamble on the Motion for
 Comm. vs. Philamlife 244 SCRA
Reconsideration 204 SCRA 377
 Comm. vs. CA & BPI 301 SCRA 435
 Wonder vs. Comm 160 SCRA 573
 BPI vs. Comm. 363 SCRA 840
-Proceed to sec. 27(D) (5) -Prescription sections 203 and 222 of NIRC, sec.
then sections 27 (E) and 28 (A) (2) 194 of the LGC, sec. 270 of the LGC, sec. 1603 of
-Go to sec. 28 (A) (3) read RR 15-2002 Tariff and Customs Code
-Go to sec. 28 (A) (4) see RA 9337 -Protest sec. 228 of NIRC and RR 12-99 sec. 195 of
-Then see sec 28 (A) (5) see Marubeni vs. Comm 177 LGC, 252 LGC, sec. 2313 of Tariff & Customs
SCRA 500 Code and RA 7651
-Proceed to sec. 28(B) (5) (a) and sec 32 (B) (7) (a)
VII. Local Taxation
 Read Mitsubishi vs. Comm 181 SCRA 214
- Sections 128-196 of LGC
-Then go to sec. 29 and Rev. Reg. 2-2001
-Proceed 1st to sec. 186 read Bulacan vs. CA 299
-Upon reading sec. 32 (B) 1 and 2, read sec. 85 par (e),
SCRA 442
sec. 108A and sec. 123 of the NIRC
-Then proceed to 187
-Proceed to sec. 33 read Rev. Reg. 3-98
-Then to 151
-then go to sec. 34 (A) (1) (a) see Aguinaldo vs. Comm.
-128
112 SCRA 136, RR 10-2002
-Under sec. 133 (e) read Palma vs. Malangas 413
-Under Sec. 34 (B) read RR 13-2000
SCRA 572
-Upon reading sec. 49 read Banas vs. CA 325 SCRA 259
-Under 133 (h) read Pililia vs. Petron 198 SCRA
and Filipina vs. Comm. 316 SCRA 480
82

Page 2 of 79
 -Under 133 (i) read First Holdings Co. vs.
batangas City 300 SCRA 661
-Under 133 (l) read Butuan vs. LTO 322 SCRA
805
-Under 137 read sec. 193 of LGC
 Misamis vs. Cagayan de Oro 181 SCRA 38
 Reyes vs. San Pablo City 305 SCRA 353
 Meralco vs. Laguna 306 SCRA 750
 PLDT vs. Davao City 363 SCRA 522
- Co-relate sec. 139 and 147 of LGC
- Under sec. 140 of the LGC see sec. 125 of the
Internal Revenue Code
- Under sec. 150 of the LGC read the following:
 Phil. Match vs. Cebu 81 SCRA 99
 Allied Thread vs. Manila 133 SCRA 338
 Sipocat vs. Shell 105 Phil. 1263
 Iloilo Bottles vs. Iloilo City 164 SCRA 607
VIII. Real Property Tax
- Sections 197-294
- Sec. 235
 LRT vs. Manila 342
SCRA 692
 Cebu City vs. Mactan
261 SCRA 667
IX. Tariff & Customs Code
- Special Customs Duty sec. 301-304 of TCC
- Regukar Customs Duty sec. 104 of TCC
- RA 7631
X. Court of Tax Appeals
- RA 1125 as amended by RA 9282
Rules in the Classroom:
1. do not be absent
 if you are absent, you have to transcribe what
happened in class when you were out.
 The next meeting you attend class, consider
yourself a resident of balic-balic, babalikbalikan ka
sa recit.
 Exception: if you get married.
2. read the assignment. Wag zapote ang aral.
3. holiday – make up class probably on a Sunday
4. allowed to glance at your notes, wag lang
pahalata/garapal
5. materials:
 codal
 commentaries (any author will do)
 magic notes (Sababan Lecture and Q&A)
 Book stand
Coverage of Taxation Law Review:
1. Basic Principles including Constitutional Provisions
2. Income Tax
3. Estate Tax
4. Donor’s Tax
5. Remedies
6. Local Tax
7. Real Property Tax
8. Tariff and Customs Code
9. Court of Tax Appeals
10. VAT (although not part of the coverage of the Bar
Exams, questions have been asked since 1999)
 Title 5,6 and 7 are always included in the coverage
 No computations in the bar
 There are only 1 or 2 questions in the Bar about Basic
Principles
 What are the favorite topics in the Bar?
→ 12 questions on Income Tax
→ 8-10 questions on remedies
→ 8-10 questions allocated to the 7 topics
BASIC PRINCIPLES:
► Taxation is an inherent power of the State.
Q: What do you mean by INHERENT?
A: The power to tax is not provided for in the law,
statute or constitution; it depends on the existence of the
state. No law or legislation for the exercise of the power
to tax by the national government.
Q: Do local governments exercise this inherent power?
A: No. Only the National Government exercises the
inherent power to impose taxes.
Q: The taxing power of local governments is a
DELAGATED power. Delegated by whom?
A: Delegated by Congress through law in case of
autonomous regions, and delegated by the constitution in
case of LGUs not considered an autonomous region.
► Cities, provinces and municipalities → power granted
under Art. X Sec. 5&6 of the Constitution
► Autonomous Regions → power conferred by
Congress through law. Art. X Sec. 20 #2 of the
Constitution is a non-self-executing provision. Thus the
power is granted by Congress because said provision
requires an enabling law.
► Article X, Section 5 is self-executing thus the power
is granted by the constitution.
CONSTITUTIONAL LIMITATIONS
Due Process Clause
Page 3 of 79

Q: why is it a limitation to the power to tax?
A: The due process clause as a limitation to the power to
tax refers both to substantive and procedural due process.
Substantive due process requires that a tax statute must be
within the constitutional authority of Congress to pass and
that it be reasonable, fair and just.
Procedural due process, on the other hand, requires
notice and hearing or at least the opportunity to be heard.
Ex: On Substantive Due Process- when the Congress
passes a law exempting the 13th month pay from tax but
with the concurrence only of the majority of the quorum –
law would be invalid because the Constitution provides
that any grant of tax exemption shall be passed with the
concurrence of the majority of all the members of the
Congress.
Q: Does it follow that the adverse party must always be
notified?
A: No. As a rule, notice and hearing or the opportunity
to be heard is necessary only when expressly required by
law. Where there is no such requirement, notice and the
opportunity to be heard are dispensable.
Ex. Before Oct. 1, 1995, you can secure a TRO
without notifying the adverse party. If you are a suspect
in a criminal case, you have the right to have an
opportunity to be heard (if there is a law).
Before July 1, 1998, no notice need be given to a
party declared in default. After the amendment, the party
declared in default has to be notified of subsequent
proceedings albeit without the right to participate therein.
In the case of a search warrant, the person to be
searched was not notified. The person searched cannot
claim that there was a violation of due process because
there is no law requiring that the person to be searched
should be notified.
Regarding delinquent tax payers, before levy,
there must be notice.
REASON:
No provision of law requires notice to the adverse
party. If the adverse party is notified, he may abscond.
Thus, in adversarial proceedings, in connection with
procedural due process, the adverse party need not be
notified all the time.
Equal Protection Clause
► As a rule, taxpayers of the same footing are treated
alike, both as to privileges conferred and liabilities
imposed. Difference in treatment is allowed only when
based on substantial distinction. Difference in treatment
not based on substantial distinction is frowned upon as
“class legislation.” This is violated when taxpayers
belonging to the same classification are treated differently
form one another; and taxpayers belonging different
classifications are treated alike.
Requirements of Reasonable Classification:
1) There must be substantial distinctions that make
a real difference.
2) It must be germane or relevant to the purpose of
the law.
3) The distinction or classification must apply not
only to the present but also to future situations.
4) The distinction must apply to persons, things and
transactions belonging to the same class.
Ex: In one case, a tax ordinance was assailed on the
ground that the ordinance failed to distinguish a worker
form casual, permanent or temporary. The SC said that
the ordinance was invalid because of the failure to state
the said classification.
In PEOPLE v. CAYAT the Supreme Court mandated the
requisites for a valid classification.
TIU v. COURT OF APPEALS (301 SCRA 278)
Q: what happened in the city of Olonggapo?
A: The Congress, with the approval of the President,
passed RA 7227, an act creating the conversion of the
military bases into other productive uses.
Q: Who was the President at that time?
A: President Ramos
Q: What were signed?
A: RA 7227, EO 97 and EO 97-A
→ The first led to the creation of the Subic Special
Economic Zone (SSEZ). The latter set the limitations
and boundaries of the application of the incentives
(no taxes, local and national, shall be imposed within
SSEZ. In lieu thereof, 3% of the Gross Income shall
be remitted to the national gov’t) to those operating
their businesses within the said area.
Q: Who are the petitioners and what was their
contention?
A: The petitioners are Filipino businessmen who are
operating their business outside the secured area. The
petitioners contended that the law in question was
violative of their right to equal protection of laws
since they are also Filipino businessmen.
H: The Supreme Court ruled that there was no
violation since the classification was based on a
substantial distinction.
The element invoked here is element #1 that
there must be substantial distinction in the
classification of taxpayers on whom the tax will be
imposed.
The Court observed that those foreign
businessmen operating within the secured area have
to give a larger capital to operate in the secured area
Page 4 of 79
 (to spur economic growth and guarantee
employment).
ORMOC SUGAR CENTRAL vs. CIR
Q: What did the municipality of Ormoc do?
A: The City Council of Ormoc passed a Municipal
Ordinance No.4 imposing upon any and all
centrifugal sugar milled at the Ormoc Sugar Central a
municipal tax on the net sale of the same to the
United States and other foreign countries.
Q: Did the owner accept this imposition?
A: No. the tax due was paid under protest, then filed a
complaint against the City of Ormoc.
H: The Supreme Court said there was a violation of
the equal protection clause. The element invoked here
was element #3, that it must be applicable to both
present and future circumstances. The Supreme Court
said that one must go to the provision itself, in the
case at bar, there was a violation of element #3
because the law was worded in such a way that it
only applies to Ormoc Sugar Central alone and to the
exclusion of all other sugar centrals to be established
in the future.
TAKE NOTE: People vs. Cayat
Freedom of Religion
It Involves 3 Things:
1. freedom to choose religion
2. freedom to exercise one’s religion
3. prohibition upon the national government to
establish a national religion
Q: Which one limits the power to tax?
A: Prohibition upon the national government to establish
a national religion because this will require a special
appropriation of money coming from the national treasury
which is funded by the taxes paid by the people.
Non-impairment Clause
Q: What are the sources of obligation in the Civil Code?
A: Law, Contracts, Quasi-Contracts, Delict, Quasi-
Delict.
Q: What is the obligation contemplated in this
limitation?
A: Those obligations arising from contracts.
General Rule: The power to tax is pursuant to law,
therefore, the obligation to pay taxes is imposed by law,
thus the non-impairment clause does not apply.
► You have to determine first the source of obligation:
1. If the law merely provides for the fulfillment of
the obligation then the law is not the source of the
obligation.
2. When the law merely recognizes or
acknowledges the existence of an obligation created by an
act which may constitute a contract, quasi-contract, delict,
and quasi-delict, and its only purpose is to regulate such
obligation, then the act itself is the source of the
obligation, not the law.
When the law establishes the obligation and also
provides for its fulfillment, then the law itself is the
source of the obligation
Q: So, in what instance does the non-impairment of
contracts clause becomes a limitation to the power to tax?
A: it is when the taxpayer enters into a compromise
agreement with the government. In this instance, the
obligation to pay the tax is now based on the contract
between the taxpayer and the government pursuant to
their compromise agreement.
Take Note: the requirement for its application: the parties
are the government and private individual.
Poll Tax
Q: What is a poll tax?
A: It is a tax of a fixed amount on individuals residing
within a particular territory, whether citizens or not,
without regard to their property or to the occupation in
which they may be engaged.
It is a tax imposed on persons without any
qualifications. persons may be allowed to pay even if they
are not qualified as to age or property ownership.
Example of Poll Tax: Community Tax Certificate under
Section 162 of the Local Government Code.
Q: Why is it a limitation to the power to tax?
A: It is a limitation to the power to tax because Congress
is prohibited from passing a law penalizing with
imprisonment a person who does not pay poll tax. (funds
for sending a person to jail is taken from the national
treasury which is funded by the taxes paid by the people)
Exemption from payment of Real Estate Tax
Q: What is the requirement for exemption from payment
of real property tax under the 1935, 1973 and 1987
Constitution?
A: Art. 6, Sec 22 (3), 1935 Constitution – Cemeteries,
churches and parsonages or convents appurtenant thereto,
and all lands, buildings and improvements used
EXCLUSIVELY for RELIGIOUS, CHARITABLE or
EDUCATIONAL purposes shall be exempt for taxation.
Page 5 of 79
 Art. 8, Sec. 17 (3), 1973 Constitution – charitable
institutions, churches, parsonages or convents appurtenant
thereto, mosque, and non-profit cemeteries, and all lands,
buildings, and improvements ACTUALLY, DIRECTLY,
and EXCLUSIVELY used for RELIGIOUS and
CHARITABLE purposes shall be exempt from taxation.
Art. 6, Sec. 28 (3), 1987 Constitution – charitable
institutions, churches, and parsonages or convents
appurtenant thereto, mosque, non-profit cemeteries, and
all lands, buildings, and improvements ACTUALLY,
DIRECTLY and EXCLUSIVELY used for RELIGIOUS,
EDUCATIONAL and CHARITABLE purposes shall be
exempt from taxation.
HERRERA v. QC-BOARD OF ASSESSMENT
(1935 Constitution)
Q: What is involved in this case?
A: A charitable institution, St. Catherine’s Hospital.
The hospital was previously exempt from taxation
until it was reclassified and subsequently assessed for
the payment of real property tax.
The contention of the respondent is that the
hospital was no longer a charitable institution
because it accepts pay-patients, it also operates a
school for midwifery and nursing, and a dormitory.
Since it is not exclusively used for charitable
purposes it is not exempt from taxation.
H: The Court ruled that petitioner is not liable for
the payment of real estate taxes. It is a charitable
institution, thus exempt from the payment of such
tax.
The hospital, schools and dormitory are all
exempt fro taxation because they are incidental to the
primary purpose of the hospital.
NOTE: this arose during the 1935 Constitution.
“Exempted by virtue of incidental purpose” was
merely coined by the Supreme Court. Thus, it does not
apply to other taxes except Real Estate Tax.
PROVINCE OF ABRA v. HERNANDO
Q: What is involved in this case?
A A religious institution was involved in this case,
the Roman Catholic Bishop of Bangued, Inc. (bishop
filed declaratory relief after assessed for payment of
tax). The respondent judge granted the exemption
from taxes of said church based only on the
allegations of the complaint without conducting a
hearing/trial. The assistant prosecutor filed a
complaint contending that petitioner was deprived of
its right to due process.
SC: the Court ordered that the case be remanded to the
lower court for further proceedings. The Court observed
that the cause action arose under the 1973 Constitution,
not under the 1935 Constitution (note the difference). Tax
exemption is not presumed. It must be strictly construed
against the taxpayer and liberally construed in favor of the
government.
ABRA VALLEY COLLEGE INC. v. AQUINO
Q: What is involved in this case?
A: An educational institution is involved in this
case. The ground floor of the school was leased to
Northern Marketing Corp., a domestic corporation.
The 2nd floor thereof was used as the residence of the
school director and his family.
The Province of Abra now contends that since
the school is not exclusively used for educational
purposes, the school is now liable to pay real estate
tax.
H: The Court held that the school is PARTIALLY
liable for real estate tax.
1. Residence – exempt by virtue of incidental
purpose; justified because it is necessary.
2. Commercial – not exempt because it is not
pursuant to the primary purpose; not for
educational purposes.
Q: is the doctrine in the case of Herrera the same with this
case?
A: NO. in the Herrera case, the exemption was granted to
all the real property (hospital, school and dorm). But in
this case, the Supreme Court made a qualification. The
Supreme Court said it depends.
NOTE: both cases arose under the 1935 Constitution
despite having been decided in 1988.
Q: At present, do we still apply the exemption from tax
by virtue of the Doctrine of Incidental Purpose?
A: Not anymore. The cause of action in said case arose
under the 1935 Constitution and it does not apply to the
provisions of the 1987 Constitution.
PHILIPPINE LUNG CENTER v. QUEZON CITY
Q: What is involved in this case?
A: A charitable institution, a hospital. It is provided
in the charter of the Lung Center of the Philippines is
a charitable institution. However, part of its building
was leased to private individuals and the vacant
portion of its lot was rented out to Elliptical Orchids.
Respondent contends that since the hospital is not
used actually, directly, an d exclusively for charitable
purposes, it is liable to pay real estate taxes.
H: The Supreme Court held that the petitioner is
liable to pay tax for those parts leased to private
individuals for commercial purposes. For the part of
the hospital used for charitable purposes (whether for
pay or non-pay patients), petitioner is exempt from
payment of real estate tax.
Page 6 of 79
NOTE: petitioner contended that the profits derived from
the lease of its premises were used for the operation of the
hospital. The Court held that the use of the profits does
not determine exemption, rather it is the use of the
property that determines exemption.
The case of Herrera does not apply because said case
arose under the 1935 Constitution and the present case
arose under the 1987 Constitution. The requirements for
exemption are different. In the 1935 Constitution, the
property must be EXCLUSIVELY used for religious,
educational or charitable purposes. Under the 1987
Constitution, the property must be used ACTUALLY,
DIRECTLY, and EXCLUSIVELY for religious,
educational and charitable purposes.
Q: Was the doctrine laid down in Abra Valley affirmed
in the Lung Center case?
A: Yes. The Supreme Court unconsciously applied a
doctrine laid down by the 1935 Constitution. The
Supreme Court reiterated the ruling in the Abra Valley
case which arose under the 1935 Constitution. The
Supreme Court made a qualification, it held that it
depends on whether or not the use is incidental to the
primary purpose of the institution.
NOTE: at present, “exemption from tax by virtue of
incidental purpose” is not applicable to all taxes including
real estate tax.
COMM v. SC JOHNSON and SONS, INC.
Important :
1. international double taxation
2. importance of international tax treaty
3. implication of most favored nation clause
Q: What is the corporation involved in this case?
A: A domestic corporation (DC).
SC Johnson and Sons, Inc. entered into a license
agreement with SC Johnson and Sons U.S.A (Non-
Resident Foreign Corp, NRFC) whereby the former
was allowed to use the latter’s trademark and
facilities to manufacture its products. In return, the
DC will pay the NRFC royalties as well as payment
of withholding tax.
A case for refund of overpaid withholding tax
was filed. Apparently, the DC should have paid only
10% under the most favored nation clause.
H: The Supreme Court coined the term International
Double Taxation or International Juridical Double
Taxation.
Q: What prompted the SC to coin such term?
A: Because a single income (tax royalties paid by a
DC) was subjected to tax by two countries, the
Philippines income tax and the U.S. tax.
International Juridical Double Taxation applies
only to countries where the tax liabilities of its
nationals are imposed on income derived from
sources coming from within and without.
Q: Is there an instance where international double
taxation does not apply?
A: Yes. If it involves nationals of countries wherein
the tax liability is imposed only from income derive
from sources within and not including those derived
from sources without.
(Ex: Switzerland)
→ The controversy in the case at bar involves the
income tax paid in the Philippines.
After paying 25%, the US firm discovered that
they are entitled to 10% under the most favored
nation clause. The question is: was the tax paid under
similar circumstances with that of the RP-West
Germany Treaty?
The CTA and Court of Appeals ruled that it was
paid under similar circumstances. The phrase referred
to the royalties in payment of income tax. The
Supreme Court ruled that the lower courts’
interpretation of the phrase was erroneous. Rather,
the phrase applies to the application of matching
credit.
Q: What is matching tax credit?
A: RP-Germany Treaty provides for that 20% of the
tax paid in the Philippines shall be credited to their
tax due to be paid in Germany.
The 10% does not apply because there is no
matching credit. Thus, there is no similarity in the
circumstances.
EQUITABLE RECOUPMENT AND DOCTRINE OF
SET-OFF
Equitable Recoupment
This doctrine provides that a claim for refund barred
by prescription may be allowed to offset unsettled tax
liabilities. This is not allowed in this jurisdiction, because
of common law origin. If allowed, both the collecting
agency and the taxpayer might be tempted to delay and
neglect the pursuit of their respective claims within the
period prescribed by law.
Q: What is the doctrine of Equitable Recoupment?
A: When the claim for refund is barred by prescription,
the same is allowed to be credited to unsettled tax
liabilities.
(Sir gives an illustration found in page 3 of magic notes)
Q: Is the rule absolute? Reason
A: Yes, the rule is absolute. The rationale behind this is
to prevent the taxpayer and government official from
being negligent in the payment and collection of taxes.
Page 7 of 79
(furthermore, you have to be honest for this to work,
hence, the government is preventing corruption)
There is no exception at all otherwise, the BIR would
be flooded with so many claims.
Set-off
Presupposes mutual obligation between the parties.
In taxation, the concept of set-off arises where a taxpayer
is liable to pay tax but the government, for one reason or
another, is indebted to the said taxpayer.
Q: What do you mean by SET-OFF?
A: This presupposes mutual obligations between the
parties, and that they are mutual creditors and debtors of
each other. In taxation, the concept of taxation arises
where a taxpayer is liable to pay taxes but the
government, for one reason or another, is INDEBTED to
said taxpayer.
REPUBLIC v. MAMBULAO LUMBER CO.
Q: What is the liability of Mambulao?
A: They are liable to pay forest charges (under the
old tax code).
NOTE: under our present tax code, the NIRC, we do not
have forest charges as the same was abolished by
President Aquino.
Q: What did the lumber company do?
A: The lumber company claimed that since the
government did not use the reforestation charges it
paid for reforestation of the denuded land covered by
its license, the amount paid should be reimbursed to
them or at least compensated or applied to their
liability to pay forest charges.
H: The Court ruled that the reforestation charges
paid is in the nature of taxes.
The principle of compensation does not apply in
this case because the parties are not mutually
creditors and debtors of each other. A claim for taxes
is not a debt, demand, contract or judgment as is
allowed to be set-off under the statute of set-off
which is construed uniformly, in the light of public
policy, to exclude the remedy in connection or any
indebtedness of the State or any municipality to one
who is liable for taxes. Neither are they a proper
subject for recoupment since they do not arise out of
contract or the same transaction sued on.
General Rule: no set-off is admissible against demands
for taxes levied in general or local governmental
purposes.
Reason: Taxes are not in the nature of contracts or debts
between the taxpayer and the government, but arises out
of a duty to, and are positive acts of the government to the
making and enforcing of which, the consent of the
individual is not required.
Taxes cannot be the subject matter of compensation.
DOMINGO v. GARLITOS
Q: What is being collected in this case?
A: Estate and inheritance taxes.
NOTE: we do not have inheritance taxes anymore
because the same was abolished by Lolo Macoy.
Q: Who is the administratrix?
A: The surviving spouse.
Q: What did the surviving spouse do?
A: The surviving spouse suggested that the
compensation to which the decedent was entitled to
as an employee of the Bureau of Lands be set-off
from the estate and inheritance taxes imposed upon
the estate of the deceased.
H: Both the claim of the government for estate and
inheritance taxes and the claim of the (intestate) for
the services rendered have already become overdue
hence demandable as well as fully liquidated,
compensation therefore takes place by operation of
law, in accordance with Art. 1279 and 1290 of the
Civil Code and both debts are extinguished to the
concurrent amount.
Compelling Reason: Congress has enacted RA
2700, allocating a certain sum of money to the estate
of the deceased.
FRANCIA v. IAC
Q: This happened in what city?
A: Pasay City
Q: What is the tax being collected? Who is collecting the
same?
A: Payment for real estate taxes for the property of
Francia. It appears that petitioner was delinquent in
the payment of his real estate tax liability. The same
is being collected by the Treasurer of Pasay.
Q: What is the suggestion of petitioner?
A: Suggested that the just compensation for the
payment of his expropriated property be set-off from
his unpaid real estate taxes. (the other part of his
property was sold at a public auction)
H: The factual milieu of the case does not justify
legal compensation.
The Court has consistently ruled that there can
be no off-setting of taxes against the claims that the
taxpayer may have against the government. A
taxpayer cannot refuse to pay a tax on the ground that
the government owes him an amount.
Internal Revenue taxes cannot be the subject of
compensation because the government and the
taxpayer are not mutually creditors and debtors of
each other, and a claim for taxes is not a debt,
Page 8 of 79
 demand, contract or judgment as is allowed to be
compensated or set-off.
Furthermore, the payment of just compensation
was already deposited with PNB Pasay, and the taxes
were collected by a local government, the property
was expropriated by the national government. (diff
parties, not mutual creditors and debtors of each
other.)
CALTEX PHIL v. COA
Q: What is being collected?
A: Caltex’s contribution to the Oil Price
Stabilization Fund (OPSF).
COA sent a letter to Caltex asking the latter to
settle its unremitted collection stating that until the
same is paid, its claim for reimbursement from the
OPSF will be held in abeyance.
Q: Why is Caltex entitled to reimbursement?
A: Because of the fluctuation of the oil prices in the
Middle East and Europe. Caltex wanted to off-set its
unremitted collection from its reimbursements.
H: The Court did not allow the set-off, and
reiterated its ruling in the case of Mambulao and
Francia. Furthermore, RA 6952 expressly prohibits
set-off from the collection of contributions to the
OPSF. The Court likewise stated that Caltex merely
acted as agent of the government in collecting
contributions for the OPSF because such is being
shouldered by the consumers when they purchase
petroleum products of oil companies, such as Caltex.
Taxation is no longer envisioned as a measure
merely to raise revenues to support the existence of
the government. Taxes may be levied for regulatory
purposes such as to provide means for the
rehabilitation and stabilization of a threatened
industry which is vested with public interest, a
concern which is within the police power of the State
to address.
PHILEX MINING CORP v. COMM
The petitioner is liable for the payment of excise
taxes, which it wanted to be set-off from its pending claim
for a VAT Input credit/refund.
The Court did not allow set-off. Taxes cannot be the
subject of compensation for the simple reason that the
government and taxpayer are not mutual creditors and
debtors of each other. Taxes are not debts.
Furthermore, in the instant case, the claim for VAT
refund is still pending. The collection of a tax cannot
await the results of a lawsuit against the government.
DOUBLE TAXATION
Double taxation is allowed because there is no
prohibition in the Constitution or statute.
Obnoxious double taxation is the synonym of double
taxation.
Elements of Double Taxation:
1) Levied by the same taxing authority
2) For the same subject matter
3) For the same taxing period and
4) For the same purpose
There is no double taxation if the tax is levied by the
LGU and another by the national government. The two
(2) are different taxing authorities.
LGUs are expressly prohibited by the provisions of
RA 7160 or the LGC of 1991 from levying tax upon: (1)
the National Government; (2) its agencies and
instrumentalities; (3) LGUs (sec.113(o)).
The National Government, pursuant to the provisions
of RA 8424 of the Tax Reform Act of 1997, can levy tax
upon GOCCs, agencies and instrumentalities (Section 27
c)), although income received by the Government form:
1) any public utility or
2) the exercise of any essential governmental
function
is exempt from tax.
KINDS OF INCOME TAXPAYERS
Q: Generally, how many kinds of income taxpayers are
there?
A: Under section 22A of NIRC, there are three (3),
namely:
1. individual;
2. corporate;
3. estate and trust.
I. INDIVIDUAL TAXPAYER
Q: How many kinds of individual taxpayers are there?
A: There are seven (7). Namely:
1. Resident Citizen (§23A and 24A);
2. Nonresident Citizen (§23B and 24A);
3. OCW and Seaman (§23C and 24A);
4. Resident Alien (§22F, 23D and 24A);
5. Nonresident Alien Engaged in Trade or Business
(§22G, 23D and 25A)
6. Nonresident Alien NOT Engaged in Trade or
Business (§22G, 23D and 25B)
7. Aliens Engaged in Multinational Companies,
Offshore Banking Units, Petroleum Service
Contractors (§25C,D and E)
Resident Citizen (RC)
Q: How many types of RC?
A: There are two (2), namely:
Page 9 of 79
 1. RC residing in the Philippines; and
2. Filipino living abroad with no intention to reside
permanently therein.
Q: If you are abroad, and you have the intention to
permanently reside therein, can you still be considered a
RC?
A: Yes. If such intention to permanently reside therein
was not manifested to the Commissioner and the fact of
your physical presence therein, you may still be
considered a RC.
OCW and Seamen
OCW was used and not OFW in the CTRP, because
the classification shall cover only those Filipino citizens
working abroad with a contract. TNTs are not covered.
A Filipino seaman is deemed to be an OCW for
purposes of taxation if he receives compensation for
services rendered abroad as a member of the complement
of a vessel engaged exclusively in international trade.
Consequently, if he is not a member of the
complement or even if he is but the vessel where he
works is not exclusively engaged in international trade,
said seaman is not deemed to be an OCW. He is either a
RC or a NRC depending on where he stays most of the
time during the taxable year.
If he stays in the Philippines most of the time during
the taxable year, he is considered a RC, otherwise, a NCR.
If you are a seaman in the US Navy, you are not the
one being referred to.
The importance of ascertaining whether or not a
seaman is a RC or a NRC, is that if he is a RCm he is
taxable on ALL income derived from all sources within
and without. If he is a NRC, he is taxable only on income
derived form sources within the Philippines.
Q: What is the significance of using OCW?
A: It only covers Filipinos who works abroad with a
contract. It does not cover TNTs.
Q: What is the status of a TNT?
A: Since they are not covered by this classification, they
are considered RC because they work abroad without a
contract and they have not manifested their intention to
permanently reside abroad. (distinguish from an
immigrant)
Requirements for a seaman to be considered an OCW:
1. must be a member of the compliment of a vessel;
2. the vessel must be exclusively engaged in
international trade or commerce.
Resident Alien (RA)
An individual whose residence is within the
Philippines and who is not a citizen thereof.
Intention to reside permanently in the Philippines is
not a requirement on the part of the alien.
The requirement under RR#2 is that he is actually
present in the Philippines, neither a sojourner, a traveler,
not a tourist.
Whether he’s a transient or not is determined by his
intent as to the nature and length of his stay.
Q: Is the intention to permanently reside in the
Philippines necessary?
A: No, so long as he is not a sojourner, tourist or a
traveler.
Non-Resident Alien Engaged in Trade or Business
(NRAETB)
A foreigner not residing in the Philippines but who is
engaged in trade or business here.
RR 2-98 has expanded the coverage of the term,
“engaged in trade or business” to include the exercise of a
profession. Furthermore, by the express provision of the
law, a NRA who is neither a businessman nor a
professional but who come to and stays in the Philippines
for an aggregate period of more than 180 days during any
calendar year is deemed to a NRAETB in the Philippines.
Q: How many types?
A: There are three (3) types, namely:
1. NRA engaged in trade or business (25a1);
2. NRA who practices a profession (Revenue
Regulation 2-98);
3. foreigner who comes and stays in the Philippines
for an aggregate period of MORE THAN 180
days during any calendar year.
Q: What is the status of a Chinese who stays here for
200 days in 2001?
A: NRAETB
Q: Suppose he stayed here for 100 days in 2000 and
another 100 days in 2001?
A: He is not a NRAETB. To be considered as such, he
must stay for an aggregate period of more than 180 days
during a calendar year.
Q: What is the income tax applicable to said taxpayer?
A: Net Income Tax (NIT) on all its income derived form
sources within the Philippines.
Page 10 of 79

Non-Resident Alien Not Engaged in Trade or
Business
Q: How many kinds?
A: Only one.
The reason why the NRANETB are included in any
income tax law is because they may be deriving income
form sources within the Philippines.
They are subject to tax based on their GROSS
INCOME received form all sources within the
Philippines.
Aliens Employed by Regional or Area Headquarters
& Regional Operating Headquarters of
Multinational Companies/ Aliens Employed by
Offshore Banking Units (Aliens Employed by MOP)
► Status: either a RA or NRA depending on their stay
here in the Philippines.
► Their status may either be RA or NRA because
Section 25 C and D does not distinguish.
► Liable to pay 15% from Gross Income received from
their employer
► Income earned from all OTHER sources shall be
subject to the pertinent income tax, as the case may be.
Aliens Employed in Multinational and Offshore
Banking Units
Q: How are they classified?
A: If they derived income from other sources aside from
their employer, you may classify them either as RA,
NRAETB, or NRANETB.
Aliens Employed in Petroleum Service Contractors
and Subcontractors
► Status: ALWAYS NRA. If they derive income from
other sources, such income shall be subject to the
pertinent income tax, as the case may be.
► Income derived or coming from their employer shall
be subject to a tax of 15% of the gross.
II. CORPORATE TAXPAYER
1. Domestic Corporation (DC) – created or
organized under Philippine laws.
2. Resident Foreign Corporation (RFC) –
corporation created under foreign law, and
engaged in trade or business.
3. Nonresident Foreign Corporation (NRFC) –
created under foreign law, and NOT engaged in
trade or business.
Q: What are deemed corporations under the NIRC?
A: The term corporation shall include partnerships, no
matter how created or organized, joint stock companies,
joint accounts, associations, or insurance companies, but
DOES NOT includes general professional partnerships
and a joint venture or consortium formed of the purpose
of undertaking construction projects or operations
pursuant to or engaging in petroleum, coal, geothermal or
consortium agreement under a service contract with the
Government.
1. Partnerships and others no matter how created
2. Joint Stock Companies
3. Joint Accounts
4. Associations
5. Insurance Companies
CIR v. COURT OF APPEALS
The phrase no “matter how created or organized” was
interpreted.
Even if the partnership was pursuant to law or not,
whether nonstick, nonprofit, it is still deemed a
corporation.
Reason: because of the possibility of earning profits
form sources within the Philippines.
Q: Are partnerships always considered corporations? Is
there no exception?
A: General Rule: a partnership is a corporation.
Exception: General Professional Partnerships (GPP)
Q: What is a GPP?
A: It is a partnership formed by persons for the sole
purpose of exercising their profession, no part of the
income of which in derived from any trade or business.
(what if a partner has other businesses not related to the
GPP? > read section 26 quoted hereunder)
Two (2) Kinds of GPP formed for:
1) Exercise of a profession – not a corporation;
exempt from Corporate Income Tax (CIT)
2) Exercise of a profession and engaged in trade or
business – a corporation; subject to CIT
TAN v. DEL ROSARIO
general rule: a partnership is a corporation
exception: GPP
exception to the exception: if the GPP derives income
from other sources, it is considered a corporation, thus
liable to pay corporate income tax.
Page 11 of 79
Rule:
1. if the income is derived from other sources and
such income is subject to NET INCOME TAX, it is not
exempt and it is considered a corporation.
2. if the income is derived from other sources and
such income is subject to FINAL INCOME TAX, it is still
EXEMPT and it is not deemed a corporation. ( separate
return for this. It will not reflect in the GPP’s ITR)
» This is pursuant to the fact that FIT will not reflect in
the ITR of the GPP since the withholding agent is liable
for the payment of the FIT.
Q: What is the importance of knowing whether the
corporation is exempt or not?
A: To determine their tax liability. This is important to
determine the tax liability of the individual partners of the
GPP.
► Section 26 (1st paragraph) provides: “a GPP as such
shall not be subject to the Net Income Tax…” however,
“…persons engaging in business as partners in a GPP
shall be liable for income tax only in their separate and
individual capacities.”
In short, each partner will be paying NIT, and the
distributive shares they will be receiving from the net
income of the GPP will be included in the gross income of
the partner.
Q: If the GPP is deemed a corporation, will the partners
have to pay for the income tax?
A: No. as far as the share of the GPP is concerned, it is
considered a taxable dividend which is subject to FIT.
Q: Is a joint venture a corporation?
A: Generally, yes, it is a corporation.
Q: Corporation X and Corporation Y joined together.
How many corporations do we have?
A: Three, namely Corporation X, Y, and X+Y. the joint
venture has a separate and distinct personality from the
two corporations.
Q: When is a joint venture not considered a corporation?
A: It is not deemed a corporation when it is formed for
the purpose of undertaking a (“construction?) project or
engaging in petroleum, gas, and other energy operations
pursuant to “?” or consortium agreement under a service
contract with the government.
Domestic Corporation
Is one created or organized in the Philippines or
under its laws.
Taxable on all income derived from sources within or
without the Philippines.
Resident Foreign Corporation
Foreign corporations engaged in trade or business in
the Philippines.
Taxable for income derived within the Philippines.
Non-Resident Foreign Corporation
Foreign corporations not engaged in trade or business
in the Philippines.
Taxable for income derived within the Philippines.
Both DC and RFC are liable for the payment of the
following:
1) NIT – Net Income Tax
2) FIT – Final Income Tax
3) 10% income tax on corporations with properly
accumulated earnings.
4) MCIT (Minimum Corporate Income Tax) of 2%
of the Gross Income
5) Optional Corporate Income Tax of 15% of the
Gross Income
A NRFC is liable for payment of the ff:
1) GIT- Gross Income Tax
2) FIT – Final Income Tax
III. TRUST AND ESTATE
Q: How many for each?
A: Seven (7) kinds for each because the trust or estate
will be determined by the status of the trustor, grantor, or
creator, or of the decedent.
The status of the estate is determined by the status of
the decedent at the time of his death; so an estate, as an
income taxpayer can be a citizen or an alien.
When a person who owns property dies, the
following taxes are payable under the provision of income
tax law:
1) Income Tax for Individuals – to cover the period
beginning January to the time of death.
2) Estate Income Tax – if the property is transferred
to the heirs.
3) If no partition is made, Individual or Corporate
Income Tax, depending on whether there is
or there is no settlement of the estate. If
there is, depending on whether the
settlement is judicial or extrajudicial.
Judicial Settlement
Page 12 of 79
 1) During the pendency of the settlement, the estate 3. Final Income Tax (FIT);
through the executor, administrator, or heirs is 4. Minimum Corporate Income Tax of 2% of the
liable for the payment of ESTATE INCOME Gross Income (MCIT)
TAX (Sex, 60 (3)). 5. Income Tax on Improperly Accumulated
2) If upon the termination of the judicial settlement, Earnings subject to 10% of the Taxable Income;
when the decision of the court shall have become 6. Optional Corporate Income Tax of 15% on the
final and executory, the heirs still do not divide Gross Income
the property, the following possibilities may
arise: I. NET INCOME TAX
a) If the heirs contribute to the estate money,
property or industry with the intention to Q: what is the formula?
divide the profits between and among A: Gross Income – Deductions and Personal Exemptions
themselves, an UNREGISTERED = Taxable Income
PARTNERSHIP is created and the estate
becomes liable for payment of CIT Taxable Income x Tax Rate = Net Income
(Evangelista vs. Collector (102 Phil 140))
b) If the heirs without contributing money, Taxable Net Income – Tax Credit = Taxable Net
property or industry to improve the estate, Income Due
simply divide the fruits thereof between and
among themselves, a CO-OWNERSHIP is Net Income means Gross Income less deductions and
created and Individual Income Tax (IIC) is Formula:
imposed on the income derived by each of GI
the heirs, payable in their separate and - deductions
individual capacity (Pascual vs. COMM Net Income
(165 scra 560) and Obillos vs. COMM (139 x Tax Rate
SCRA 436)) Income Tax Due

Extrajudicial Settlement and if NO Settlement Q: What is the rate?

A: Individual: 32%
Some possibilities may arise. The income tax Corporation: 35%
liability depends on whether or not the unregistered
partnership or co-ownership is created. NOTE: the formula allows for deduction, personal
exemptions and tax credit.
Trust
Q: What are the other terms for NIT?
Trusts can be created by will, by contract or by A: NIRC:
agreement. The status of a trust depends upon the status a. taxable income
of the grantor or trustor or creator of the trust. Hence, a b. gross income (wlang kasunod)
trust can also be a citizen or an alien. → only income tax from improperly accumulated
earnings does not use this term.
Q: Where the trust earns income and such income is not
passive, who among the parties mentioned is liable for 1. CFA: “to be included in the gross income”
payment of income tax thereon? 2. Revenue Regulations and Statutes:
A: The TRUST itself, through the trustee or fiduciary a. ordinary way of paying income tax;
but only if the trust is irrevocable. b. normal way of paying income tax .
If it is revocable, or for the benefit of the grantor, the
liability for the payment of income tax devolves upon the Characteristics:
trustor himself in his capacity as individual taxpayer.
Q: Who are not liable to pay NIT?
A: 1. NRANETB (liable for GIT);
KINDS OF INCOME TAX 2. NRFC (GIT also);
3. With certain modifications, AEMOP, if they
Q: How many kinds of income tax? derive income from other sources;
A: There are Six (6), namely:
1. Net Income Tax (NIT); Q: Is the taxable net income subject to withholding tax?
2. Gross Income Tax (GIT); A: It is subject to withholding tax if the law says so.

Page 13 of 79
Q: What if the law is silent?
A: If the law is silent, it is not subject to withholding tax.
Q: What is another term for withholding tax?
A: It is also known as the creditable withholding tax
system under the income tax law.
Q: Do we have to determine if there is an actual gain or
loss?
A: Yes because the formula for deductions, etc.
Q: If you fail to pay, will you be held liable?
A: Yes, you will be held liable.
II. GROSS INCOME TAX (GIT)
Q: What is the formula?
A: Gross Income x Rate
Q: How many taxpayers pay by way of the gross?
A: There are two (2)
individual - NRANETB
corporation - NRFC
NOTE: the formula does not allow any deduction,
personal exemptions and tax credit.
Characteristics:
► NRANETB and NRFC, though not engaged in trade
or business, are liable to pay by way of the gross for any
income derived in the Philippines. While not engaged in
trade or business, there is a possibility that they may earn
income in the Philippines.
Q: Is this subject to withholding tax?
A: Yes, it is subject to withholding tax because the
persons liable are foreigners. This rule is ABSOLUTE
NOTE: there are two (2) ways of paying taxes depending
on which side of the bench you are.
III. FINAL INCOME TAX (FIT)
Q: What is the formula?
A: (Each Income) x (Particular Rate)
Unlike in the gross income tax where you add all the
income from all the sources and multiply the sum thereof
by the rate of 25% or 35%, as the case may be, in final
income tax, you cannot join all the income in one group
because each income has a particular rate.
Q: What is the rate?
A: 35% as the case may be.
NOTE: like GIT, the formula does not allow deductions,
personal exemptions, and tax credit.
Characteristics:
Q: Who are liable to pay FIT?
A: All taxpayers are liable to pay FIT provided the
requisites for its application are present.
Q: Do you still have to pay NIT?
A: No. if you are liable for FIT, no need to pay NIT or
else there will be double taxation.
NOTE: as time passed by, the number of FIT increased.
► before 1979 – proceeds from the sale of real property
not exempt, it is subject to NIT or GIT, as the case may
be.
after 1979 – capital gains tax. Proceeds from the sale
of real property is exempt.
Q: If you fail to pay, will you be liable?
A: No. the withholding agent is liable to pay FIT.
► Case of Juday, Richard and Regine
► For one to be liable for the payment of NIT, the
income must be derived on the basis of an employer –
employee relationship.
Employer – Employee Relationship
(3 Cs):
1. contract;
2. control;
3. compensation;
► However, in the case of celebrities, there is no
employer – employee relationship, they are merely
receiving royalties. Royalties are subject to final
withholding tax, thus the agent is liable to pay. (so,
distinguish nature of income, whether royalty or
compensation)
RULE:
1. for NIT, whether or not subject to Creditable
Withholding Tax (CWT), the taxpayer is always
liable if he fails to pay.
2. for GIT and FIT, absolute liability to pay is upon
the withholding agent.
Q: Why is it that the rate of withholding is always lower,
and why is it that the rate of GIT and FIT is always equal?
A:
1. NIT allows deductions;
2. GIT and FIT do not allow deductions.
Page 14 of 79
 A: Only four (4) kinds will apply out of the six (6)
Q: Do you have to determine whether there is an actual 1. NIT
loss or gain? 2. FIT
A: No need to determine because the formula does not 3. MCIT
allow deductions. Gain is presumed. No liability for final 4. Improperly Accumulated Earnings
withholding tax except for the sale of shares of stock. (?)
Q: May all of these be applied simultaneously?
IV. MINIMUM CORPORATE INCOME TAX A: No. only the NIT, FIT and Improperly Accumulated
(MCIT) Earnings be applied simultaneously. NIT and MCIT
cannot be applied simultaneously. Only one will apply,
Q: What is the formula? whichever is higher between the two.
A: Gross Income x 2%
Q: What kind of tax will apply to NRFC?
Q: Who pays this tax?
A: DC and RFC only. A: Out of the six (6) kinds, only two (2) will apply:
1. GIT
Q: May it be applied simultaneous with NIT? 2. FIT
A: No. there must be a computation of the NIT first then
apply which ever is higher. The MCIT is paid in lieu of Q: What is the significance of knowing the classification
the NIT. of these taxpayers?
A:
Reason: to discourage corporations from claiming too 1. to determine the kind of income tax applicable to
many deductions. them;
2. to determine their tax liability.
V. OPTIONAL CORPORATE INCOME TAX
Q: Under Section 23, who are liable for income within
Q: Under what section is this found? and income without?
A: Section 27A 4th paragraph and Section 28 A(1) 4th A: Only
paragraph. 1. RC
2. DC
Q: Is this applicable now?
A: No. this is not yet implemented. ► The rest of the taxpayers will be liable for income
coming from sources within.
Q: To what kind of taxpayer does this apply?
A: To DC and RFC. ► Income from sources without, no liability, therefore
exempt.
Q: What kind of taxes are applicable or imposed upon
the 1st five individual taxpayers? NOTE: The income taxpayer is not a RC or a DC.
A: Only two (2) kinds are applicable out of the six (6) Determine if the income came from sources within or
kinds of income taxes. without to know the taxpayer’s liability.
1. NIT;
2. FIT; ► If the facts are specific, do not qualify your answer.
Answers must be responsive to the question.
Q: What kind of income tax will apply to AEMOP?
A: Generally, only one kind, 15% FIT with respect to Q: Is section 42 relevant to all the taxpayers?
income derived from their employer. A: NO. SECTION 42 IS NOT MATERIAL TO ALL
taxpayers, particularly the RC and DC because these two
Income from other sources: are liable for both income within and without.
1. Determine the status of the AEMOP;
a. NIT ► Section 42 is applicable only to taxpayers who are
b. FIT liable for income within, the rest of the taxpayers are
2. NRANETB otherwise exempt.
a. GIT
b. FIT Q: Section 42(A)(1) provides for how many kinds of
interests?
Q: What kind of income tax applies to DC? A: It establishes two (2) kinds of interests, namely:

Page 15 of 79
 1. interest derived from sources within the
Philippines.
2. interest on bonds, notes or other interest bearing
obligations of residents, corporate or otherwise.
Q: What is the determining factor in order to know if the
income is from within?
A:
1. location if the bank is from within the
Philippines (pursuant to a Revenue Reg.)
2. residence of the obligor (whether an individual
or a corp.) – contract of loan with respect to the
interest earned thereon.
► For example the borrower is a NRAETB, he
borrowed money from a RA. The interest earned by the
loan will be considered as an income without. RA is not
liable to pay tax since RA is liable only for income within,
therefore exempt from paying the tax.
NATIONAL DEVELOPMENT CO. v. CIR
F: The National Development Company (NDC)
entered into a contract with several Japanese
shipbuilding companies for the construction of 12
ocean-going vessels. The contract was made and
executed in Tokyo.
The payments were initially in cash and
irrevocable letters of credit. Subsequently, four
promissory notes were signed by NDC guaranteed by
the Government.
Later on, since no tax was withheld from the
interest on the amount due, the BIR was collecting
the amount from NDC.
The NDC contended that the income was not
derived from sources within the Philippines, and thus
they are not liable to withhold anything. NDC said
that since the contract was entered into and was
executed in Japan, it is an income without.
H: The government’s right to levy and collect
income tax on interest received by a foreign
corporation not engaged in trade or business within
the Philippines is not planted upon the condition that
the activity or labor and the sale from which the
income flowed had its situs in the Philippines.
Nothing in the law (Section 42(1)) speaks of the act
or activity of nonresident corporations in the
Philippines, or place where the contract is signed.
The residence of the obligor who pays the interest
rather than the physical location of the securities,
bonds or notes or the place of payment is the
determining factor of the source of the income.
Accordingly, if the obligor is a resident of the
Philippines, the interest paid by him can have no
other source than within the Philippines.
Q: Suppose a NRFC, an Indonesian firm, becomes a
stockholder of two corporations, a DC and a RFC, and
both corporations declared dividends, what is the liability
of the Indonesian firm if the same received the dividends?
A:
1. Dividends received from DC: the Indonesian
firm is liable to pay taxes. NRFC, under the law,
is liable if the income is derived from sources
within. (Sec 42a)
2. Dividends received from RFC: the Indonesian
firm’s liability will depend on amount of gross
income from sources within the Philippines.
The NRFC will be liable to pay income tax if the
following requisites are present:
1. at least 50% is income from sources within;
2. the 1st requisite is for the three (3) preceding
taxable years from the time of declaration of the
dividends.
► In the absence of any or both requisites, the
income will be considered from sources without, thus
exempting the Indonesian firm from payment of income
tax.
Q: Same scenario, but this time the shares of stock of the
two corporations were being disposed off. What is the tax
liability of the Indonesian firm?
A:
1. sale of shares of stock of DC: the Indonesian
firm will be liable for the payment of taxes
because the income is from sources within.
2. sale of shares of stock of RFC: the liability will
depend on where the shares of stock were sold.
(mejo Malabo sa notes, please be guided
accordingly)
Q: Filipino Executive, assigned to Hong Kong, receiving
two salaries, one from the Philippines, the other from HK.
The performance of the job was in HK. Is he liable for
both salaries?
A: No, he is not liable for the two incomes.
His status is an OCW (note facts: working in HK under
contract). The compensation he received is not subject to
tax pursuant to Section 42(c). Compensation for labor or
personal services performed in the Philippines is
considered an income within. When it comes to services,
it is the place where the same is rendered which is
controlling. In the case at bar, the services were rendered
abroad, thus it is an income derived from sources without,
irrespective of the place of payment.
Q: Suppose a DC hired a NRFC to advertise its products
abroad. What is the liability of the NRFC? Will there be a
withholding tax imposed?
Page 16 of 79
A: The income is derived from sources without since the
services in this case were performed abroad. As such, the COMMISSIONER v. IAC
NRFC is not liable and therefore exempt from the Q: What is the issue here?
payment of tax. If the NRFC is not subject to NIT, then it A: They cannot determine if the business expense was
is not also subject to withholding tax. incurred in the Philippines.
Q: if you are the BIR, and the taxpayer is not sure, will
Q: What is the controlling factor? you disallow the deduction?
A: The controlling factor is the place where the services A: No. determine it pro rata.
were performed and not where the compensation Formula: GI from within
therefore was received. GI from without

RENTALS AND ROYALTIES Example: 100,000

►income from sources within 1,000,000
Q: Granted by who? = 10%
A: NRFC ► Hence, 10% is the ratable share in the deduction. If
the deduction being asked is 100,000 not all of it will
Q: Suppose you are the franchise holder, how much is the be allowed. Only 10,000 or 10% of 100,000 will be
withholding? allowed as deduction.
A: 35% (GIT)
CAPITAL GAINS AND LOSSES
Q: if the franchise is granted by RFC, how much is the Section 39
withholding?
A: 10% (NIT) and in some cases 15% Q: What is capital asset?
A: Capital asset is an asset held by a taxpayer which is
Section 42(4) MEMORIZE FOR RECIT not an ordinary asset.
(CEKSTTM)
The following are ordinary assets:
a. right of, or the right to use copyright, 1. stock in trade of the taxpayer or other property of
patents, etc a kind which would properly be included in the
b. industrial, commercial, scientific inventory of the taxpayer if on hand at the close
equipment of the taxable year;
c. supply of knowledge 2. property held by the taxpayer primarily for sale
d. supply of services by nonresident to customers in the ordinary course of trade or
e. supply of technical assistance business;
f. supply of technical advice 3. property used in trade or business of a character
g. right to use: motion picture films, etc. which is subject to the allowance for
depreciation provided in subsection 1.
Q: What is the rule as regards the sale of real property? 4. real property used in trade or business of the
A: Gains, profits, and income from the sale of real taxpayer.
property located within the Philippines considered income
within. All other property not mentioned in the foregoing are
considered capital assets.
Q: What about the sale of personal property, what is the
rule? Q: What is a capital gain? What is a capital loss?
A: Determine first if the property is produced or merely A: Capital gains are gains incurred or received from
purchased. transactions involving property which are capital assets.
Capital losses are losses incurred from transactions
1. it the property is manufactured in the Philippines involving capital assets.
and sold abroad, or vice-versa, it is an income
partly within and partly without. Q: What is ordinary gain? Ordinary loss?
2. if the property is purchased, considered derived A: Ordinary gains are those received from transactions
entirely from the sources within the country involving ordinary assets. Capital losses are losses
where it is sold. incurred in transactions involving ordinary assets.

EXCEPTION: shares of stock of domestic corporation, it Q: What is the relevance of making a distinction?
is an income within wherever it is sold.

Page 17 of 79
A: It is relevant because Section 39B,C, and D apply to
capital assets only.
1. time when property was held (39B) (holding
period applies only to individuals);
2. limitations on capital losses (39C);
3. Net Capital Carry-Over (39D)
I. CAPITAL ASSETS
Q: What is the holding period?
A: If capital asset is sold or exchanged by an individual
taxpayer, only a certain percentage of the gain is subject
to income tax.
It is the length of time or the duration of the period
by which the taxpayer held the asset.
Q: What is the requirement?
A:
1. the taxpayer must be an individual. Section 39B
states “in case of a taxpayer, other than a
corporation..”
2. property is capital in nature.
Q: What is the term?
A: 100% if the capital asset has been held for not more
than 12 months; (short term)
50% if the capital asset has been held for more than
12 months. (long term)
NOTE: the holding period applies to both gains and
losses.
Q: Do you include capital gains in your ITR?
A: General rule: yes, include in ITR.
EXCEPT:
1. gains in sales of shares of stock not traded in
stock exchange(section 24);
2. capital gains from sale of real property(section
24).
Q: When will the holding period not apply?
A:
1. property is an ordinary asset
2. taxpayer is a corporation
3. sale of real property considered as ordinary asset
II. LIMITATION ON CAPITAL LOSSES
►synonymous to 34D & loss capital rule
► this applies to individual and corporate taxpayer
Q: What is the loss limitation rule?
A: Pursuant to Section 39 C, losses from sales or
exchange of capital assets may be deducted only from
capital gains, but losses from the sale or exchange of
ordinary assets may be deducted from capital or ordinary
gains. (applies to individual and corporation)
Q: In connection with 34 D, Losses in Allowable
Deduction, what is the rationale behind this rule?
A: If it is otherwise, it will run counter with the rule that
the loss should always be connected with the trade or
business, capital losses are losses not connected to the
trade or business, thus it is not deductible
Q: what is your remedy?
A: 39 D, net capital loss carry-over
Q: What is the rationale in allowing ordinary loss to be
deducted from either the capital gains or ordinary
gains?
A: It is already included in ITR, the gross income less
deductions hence it already carries with it the
deduction
TAKE NOTE: Normally if the loss is an ordinary loss
there is no carry over.
Except: a. 34D3
b. if the loss is more than GI
III. NET CAPITAL LOSS CARRY-OVER
Q: What are the requirements?
A:
1. taxpayer is an individual;
2. paid in the immediately succeeding year;
3. applies only to short term capital gain;
4. capital loss should not exceed net income in the
year that it was incurred.
Q: How does net capital loss carry-over differ from net
operating loss carry-over under Section 34 D (3)?
A: Under the net capital loss carry-over rule, the capital
loss can be carried over in the immediate succeeding year.
In net operating loss carry-over rule, capital loss can be
carried over to the next three (3) succeeding calendar year
following the year when the loss was incurred.
NOTE: only 15% of the loss will be carried over, if the
loss is greater than the gains.
► In net operating loss carry-over there is an exception
to the 3 year carry-over period. In case of mines other
than oil and gas wells, the period is up to 5 years.
Q: What is a short sale?
A: Sale of property by which the taxpayer cannot come
into the possession of the property. EX: shares
CALAZANS v. CIR
F: The taxpayer inherited the property fro her father
and at the tie of the inheritance it was considered a
capital asset. In order to liquidate the inheritance, the
Page 18 of 79
 taxpayer decided to develop the land to facilitate the
sale of the lots.
I: Was the property converted to ordinary asset?
H: The conversion from capital asset to ordinary
asset is allowed because Section 39 is silent.
Q: Are you allowed to convert ordinary asset to capital
asset?
A: General rule: it is not allowed. Read Revenue
Regulation 7-2003
The case at bar still applies despite of the issuance of
said Revenue Regulation.
Q: What is the conversion prohibited in the Revenue
Regulation?
A: Conversion of real estate property.
Q: What is the rationale?
A: Section 24 D – final income tax of 6% if the real
estate is capital asset. If it is an ordinary asset, it will be
subject to income tax of 32% for individual taxpayer, and
35% if the taxpayer is a corporation.
3. OCW
4. RA
► Additionally, under Section 25, NRAETB
Q: What is the tax liability of NRAETB?
A: Section 25(1) NRAETB is subject to income tax
in the same manner as those individuals mentioned in
Section 24.
Q: What about Domestic Corporations?
A:
1. Sec. 27 A,B, and C
2. Sec. 26- GPP is not subject to income tax.
Q: What about Resident Foreign Corporations?
A: Sec 28(l) it is subject to 35% Net Income Tax
Q: What about Non Resident foreign Corporation and
Non Resident Alien not engaged in Trade or Business?
A: Not Subject to Net Income Tax but they are liable for
Gross Income tax.

Q: What are the properties involve in the RR 7-2003? Q: Do legally married husband and wife need to file
A: 1. those property for sale by the realtors separately or jointly?
2. real property use in trade or business not necessary A: It depends if:
realtors 1. Pure compensation income- separate
2. Not Pure compensation income- joint
Q: That is the conversion allowed by the Revenue
Regulation? Is there an instance when an ordinary asset Passive Income
may be converted to capital asset? Interest, Royalties, prizes and Other winnings
A: Yes, provided that the property is an asset other the
real property, and it has been idle for two (2) years. Interest

SECTION 24 Q: Bank Interest, what is the requirement?

TAX ON INDIVIDUALS A: The bank must be located in the Phils. because the
income must be derived from sources w/in.
Q: What is the tax mentioned in section 24?
A: NIT Q: Do you include this in your ITR?
A: No! because it is subject already to FIT. The bank is
Q: What is taxable income? the one liable for the payment of this.
A: (memorize section 31) it is the pertinent items of
gross income specified in the NIRC, less the deductions NOTE: Liability for NIT, GIT, and MCIT will depend on
and/or personal and additional exemptions, if any, the elements present.
authorized for such types of income by the NIRC or other
laws. It refers to NIT because it allows deductions. Q: Who are liable for bank interest?
A:
Q: What do you mean by the phrase “other than B, C, 1. RC }
and D”? 2. NRC} Sec. 24 B1
A: It means that if the elements of passive income are 3. RA }
present, the taxpayer has to pay FIT. 4. NRAETB
5. NRANETB Sec. 25 (25%)
Q: Who are the taxpayers mentioned in section 24? 6. AEMOP
A: 7. DC
1. RC 8. RFC
2. NRC 9. NRFC

Page 19 of 79
Q: What is the rate of interest? Not Liable
A: FIT of 20% 1. NRANETB- liable for GIT at 25 %
2. AEMPOP (NRANETB- GIT)
Q: Is there a lower rate? 3. DC- NIT 27 D is silent
A: 7 ½ % if under EFCDS 4. RFC NIT law is silent 28A7a
5. NRFC subject to GIT
Q: What if the depositor is non resident alien?
A: Q: When can we apply NIT in Prizes?
-W/in – FIT A: 1. When the taxpayer is RC, RFC and DC
- W/out- exempt 2. For DC and RC it must be derived from income
abroad RFC it must be derived from income w/in
Q: What is the rule on pre- termination? 3. amount is more than P10,000
A: If it is pre terminated before 5th year a FIT shall be
imposed on the entire income and shall be deducted and NOTE: If the prize is derived from sources w/in but it is
withheld by the depositary bank from the proceeds of the below P 10,000 it is not subject to tax. If derived from
long term deposit based on the remaining maturity thereof sources abroad, most of them are exempt except for RC
a. 4 yrs to less than 5 yrs – 5% and DC who are liable w/in and w/out.
b. 3 yrs to less than 4 yrs- 12%
c. Less than 3 yrs- 20% Q; Is it possible for RC and DC to pay MCIT?
A: Yes if MCIT is higher than NIT.
Q: Does it apply to all individuals?
A: No! It does not apply to 10 NRFC and NRA and Winnings
NRAETB because they are liable to GIT.
Q: Do we apply the P10, 000 req.?
NOTE: if the depositary is a Non resident it is exempt A: No, we do not apply it only applies to prizes. It must
not pertain to illegal gambling.
► Resident citizen is liable to pay tax for bank interest
earned abroad (NIT) ► Thus, the only requirement is it must be derived from
income w/in.
Q: If the money earns interest in abroad who is liable?
A: RC and DC only by NIT, the rest are exempt. No FIT Q: Who are liable? (FIT)
abroad because we do not have withholding agent abroad. A:
1. RC
Q: MCIT applies to DC and RFC in relation to bank 2. NRC
interest? 3. OCW
A: If the bank interest is derived abroad, RFC is exempt 4. RA
but DC is liable. 5. NRAETB
Impose NIT if it is higher than the MCIT, otherwise 6. AEMOP (RA, NRAETB)
apply MCIT if it’s higher than the NIT
Not liable to FIT?
Prizes 1 NRANETB- GIT
2 AEMOP (NRANETB- GIT)
Requirements: 3 DC- law is silent NIT
1. Prizes must be derived from sources w/in the 4 RFC- law is silent
Phils. 5 NRFC- GIT
2. it must be more than P 10,000
Q: When does NIT apply to winnings?
Q: Who are liable? (FIT) A:
A: 1. If Taxpayer is DC or RC
1. RC 2. Income is derived abroad
2. NRC 3. Taxpayer is RFC and income w/in.
3. OCW
4. RA NOTE: If income abroad, most TP are exempt except DC
5. NRAETB and RC
6. AEMOP (RC, NRAETB)

Page 20 of 79
Q: MCIT applies when? A: shares come from another shareholder
A: It is higher than the NIT Q: What are the dividends included?
A: Sec. 24 refers to cash or property dividend
Royalties H: For stock Dividends to be exempt it must come from
the profit of the corporation.
Requirement:
► The income is from w/in Stock Dividends → it is the transfer of the surplus profit
from the authorized capital stocks.
► Rate? 20%. Lower rate? 10% on books, literary
works and musical compositions. Q: Assuming that there are 5 Incorporators, the
Corporation has a P5 M Authorized Capital stock. It
Q: You are a writer for Snoop Dogg are you liable for distributed 1 M stock dividends, is it taxable?
FIT? What if for April Boy? A: NO, the dividends did not go to the Stock holder but
A: Liable for NIT if Income abroad like a writer for to the Auth Capital Stock. Only cash and Prop Stock go to
Snoop. While FIT if for April Boy. the Stock holder.

Q: Who are liable (FIT)? ► Sec 24 B does not mention stock dividends because it
A: is not subject to FIT but it is subject to NIT under Section
1. RC 73.
2. NRC
3. OCW Q: Is there an exception when stock dividends are not
4. RA taxable?
5. NRAETB A: YES, if the shares of stocks are cancelled and
6. AEMOP (RC, NRAETB) redeemed meaning it was reacquired by the corp.

Not Liable? ANSCOR CASE

1. NRANETB →the stockholders cannot escape the payment of taxes
2. AEMOP
3. DC Requirement:
4. RFC Gen Rule- the dividends must be distributed by a DC.
5. NRFC Except- Regular operating- always a foreign corp.

NOTE: Lower rate of 10% applies to all except ► What rate: 10% FIT
NRANETB
Q: Who are liable?
Q: When do we apply NIT to Royalties? A:
A: 1. RC
1. TP is RC or DC 2. NRC
2. Income is from w/out 3. OCW
3. TP is RF and income is w/in 4. RA
5. NRAETB
► If income is from sources abroad all are exempt 6. AEMOP (RC, NRAETB)
except RC and DC
Not liable?
Dividends 1. NRANETB
2. AEMOP
► Confined with cash and/or property dividends. 3. DC
4. RFC
Q: What are dividends? 5. NRFC
A: Any distribution made by Corporation to its
stockholders outside of its earnings or profits and payable ► Shares of association and partnership is taxable
to its stockholders whether in money or in property (Sec.
73) Q: Determine the tax liability of the following?
A:
COMM. vs. MANNING 1. DC a Stockholder of DC= Exempt
Q: Where did it come from? 2. RFC stockholder of DC= Exempt also

Page 21 of 79
 3. DC stockholder of RF= Liable for NIT.
Capital Gains From Sale of Shares of Stock Not Traded
(§24C)
1. Subj to FIT
2. Determine whether there is a loss or a gain
because the tax is impose upon the net capital
gains realized from the sale, barter, or exchange
or other disposition of the shares of stock in a
domestic corp.
3. It is uniformly imposed on all taxpayer
4. not subj to w/holding tax.
Requirements:
1. Shares of stock of a DC
2. It must be capital asset
3. must not be traded in the stock market
► 25 R last part: Capital Gains realized by NRANETB
in the Phils. from the sale of shares of stock in any DC
and real prop shall be subj. to the income tax prescribed
under Sub sec (c) and (d) of Sec. 24.
► SEC. 24 B 1&2: If the elements are present
NRANETB and NRFC are liable to pay GIT.
Except: under 24 C for NRANETB. What do you mean
by the phrase “ the provisions of 39 notwithstanding”?
► It refers to the holding period. When it comes to
capital gains from sale of shares of stock not traded and
capital gains from the sale of real prop. The holding
period does not apply because the basis will be those
provided in 24 C & D and not under 39B (GSP or FMV)
ELEMENT #1 The share is a share in DC
Q: What if the share is from foreign corp?
A: Determine the income considered. If income w/in
read Sec. 42 (E)
► If the shares sold are that of a foreign corp it is subj
to the ff rules:
a. sold in the Phils= its income w/in
b. sold in abroad= w/out
c. Shares of stock in a Dc is always considered an
income w/in regardless where it was sold.
Q: Shares of Foreign Corp sold in Phils. Who’s liable?
What tax?
A: Not subj to FIT because one of the elements is not
present . Shares not being that of a DC.
Hence: a) RC, NRC, OCW, NRAETB, AEMOP (RA,
NRAETB) will pay NIT. DC and RFC
b) NRANETB and NRFC will pay GIT
Q: Shares of Foreign Corporation sold abroad?
A: It will be considered an income w/out.
Thus:
most of them will be exempt
except RC and DC liable to pay NIT
ELEMENT # 2 NOT TRADED OR SOLD IN THE
STOCK MARKET
► if sold in the stock market- it is not subj to FIT
► if sold in the stock market, it will be subj to
percentage tax, in lieu of NIT.
ELEMENT # 3 It must be a capital asset.
Q: When is it considered an ordinary asset?
A: 1. When the broker or dealer
a. used it in trade or business
b. held for sale in the ordinary course of
trade or business
2. to all other assets, it will be considered a capital
asset
NOTE: if all elements are present it will be subj to FIT
If the shares are ordinary asset
1. Ordinary shares in DC- income w/in
a. Most of the taxpayer will pay NIT except
NRFC and NRANETB
2. Ordinary assets of foreign corporations
a. Income within if sold in the Phils: most will
pay except NRANETB and NRFC
b. Income w/out if sold abroad: most will be
exempt except RC and DC
MCIT
Q: When is a RFC subj to NIT?
A:
1. Sale of shares of stock of a Foreign corp in the
Phil.
2. sale of shares of stock of DC which are ordinary
asset
► DC and RFC are subj to MCIT which may be
imposed if the NIT is lower than the MCIT2% MCIT will
be imposed if MCIT is higher than NIT.
Capital Gains From Sale of Real Property (§24D)
► In 39 B the holding period does not apply because the
basis of income tax is the gross selling price (GSP) or the
Fair market value (FMV) whichever is higher- 6% FIT
Page 22 of 79
Requirements: w/in 1 yr period FIT will not apply because there’s no
1. The real prop must be sold w/in the Phils and change of ownership.
located in the Phils. If the mortgagee is an individual the FIT is imposed
2. It must be a capital asset whether or not there is a transfer of ownership.
3. The seller must be an individual, estate or trust
or a DC Exceptions (§24(D2))

► RFC not liable for FIT but liable to pay NIT if all the
elements are present.
► NRFC liable to pay GIT and not FIT
► NRANETB liable to pay FIT are all elements are
present.
ELEMENT # 3 The real prop must be a capital asset
Q: When considered a capital asset?
A: Read R.R. 7- 2003
Q: Ordinary asset- shall refer to all real property
specifically excluded from the definition of capital asset
under Sec. 39
A: Other property not mentioned are capital asset.
Q: What if all the elements are not present?
A:
most will be liable to pay NIT
Except NRANETB and NRFC liable for GIT
Q: May a RC be liable to pay NIT even if all the
elements are present?
A: YES, disposition made to the Govt. Thus, the
taxpayer has the option of paying 32% NIT or 6% FIT
Q: Which is more advantageous?
A: It depends determine first if there’s a loss or a gain.
If there’s a gain choose to be taxed at 6% FIT. In this
case the gain is always presumed.
If there’s a loss choose to be taxed at 32% because
losses may be considered an allowable deduction .
Other transactions are covered:
1. sale
2. barter
3. exchange
4. other disposition
Q: What if the prop being sold was a movie house, can
he claim for the exception?
A: the prop covered by the exemption is a residential lot
Q: Who can claim the exemption?
A: Only the taxpayer mentioned in Sec. 24
Requirements:
1. The purpose of the seller is to acquire new
residential real prop
2. the privilege must be availed of w/in 18 mos.
From the sale
3. Comm. must be informed w/in 30 days from the
date of sale with the intention to avail of the
exemption
4. the adjusted basis or historical cost of the
residence sold shall be carried over to the new
residence.
5. the privilege must be availed only once every 10
yrs
6. Certification of the brgy. Capt where the
taxpayer resides that indeed the prop sold is the
principal residence of the tax payer (RR 13- 99)
Q: What if the property is worth 10 M and it was sold
only for 2M, what will happen to the unused portion or
profit?
A: If the proceeds are not fully utilized, the portions of
the gain is subj to FIT
SEC. 27A RATES OF INCOME TAX
Q: How many income taxes are paid by a DC?
A:
1. NIT
2. MCIT
3. FIT
4. 10%Improperly Accumulated Earnings
5. Optional corporate income tax of 15% of the
gross

NOTE: If the prop is under mortgage contract and the ► DC liable for five, but the optional is not yet
mortgagee is a bank or financial inst, the FIT does not applicable so only 4.
apply because the property is not yet transferred because
there’s a period of redemption Q: How many can be applied simultaneously? A:
If after a year the mortgagor failed to redeem the ONLY 3
property that is the only time that the FIT will apply 1. NIT, FIT and 10% IAE
because there’s now a change of ownership. If redeemed 2. MCIT, FIT, 10% IAE

Page 23 of 79
SEC. 27 (B) PROPRIETARY EDUCATIONAL INST.
& HOSP.
Who are the taxpayers?
1. Non- Profit Proprietary Educl. Inst and
2. Non Profit Proprietary Hospital
Q: What if the school or hospital is non profit only, is it
exempt?
A: No, subject to 10% on their taxable income except
those covered by subsection (D)
PROVIDED that gross income from unrelated
business, trade or activity must not exceed 50% of its total
gross income derived by such educational inst or hospital
from all sources
Requirements:
1. It is a private school or hospital
2. it is stock corp
3. it is non profit
4. that gross income from unrelated business, trade
or activity must not exceed50% of its total gross
income derived by such educational inst or
hospital from all sources
5. has permit to operate from DECS, TESDA, or
CHED
Q: What do you mean by unrelated trade business or
activity?
A: It means any trade, Business, or activity which is not
substantially related to the exercise or performance by
such entity of its primary purpose or performance
Q: May a school or hospital be exempt from paying tax?
What are the req?
A:
1. It must be non- stock and non- profit
2. the assets property and revenues must be used
actually, directly, and exclusively fro the primary
purpose
Q: Under what law? Is it the constitution or the NIRC
which provides fro the exemption?
A: It is under Sec. 30 of NIRC and not under Sec.4
Art. 14 of the Constitution. The provision of the NIRC is
the specific law which prevails over the Constitution
which is the general law.
→ exempt from all taxes and custom duties
Q: What about exemption from real property tax?
A: Art. 6 Sec. 28 of the Constitution: charitable
institution churches, ….and all lands buildings, actually
directly and exclusively used for religious, charitable, and
educational purposes shall be exempt from taxation.
→ Not Sec. 4 of Art. 14 of the Constitution.
Q: You donated a property to a school will you be liable
for donor’s tax?
A: not liable if it falls under Sec. 101 (3) of the NIRC
REQ. FOR EXEMPTION TO DONORS TAX:
1. it must be non-stock, non-profit educational inst.
2. not more than 30% of the prop donated shall be used
by such donee for admin purposes.
3. paying no dividends
4. governed by trustees who don’t receive any
compensation
5. devoting all its income to the accomplishment and
promotion of the purposes stated in its Articles of
Incorporation
Q: What about exemption from VAT?
A: Sec. 109 (m) of R-VAT
Q: What about exemption fro Loc Gov Code?
A: If its non-stock, non-profit educational inst. It may be
exempted from local taxation.
Q: Is Art 14 Sec. 4 of the Consti obsolete?
A: NO, if the law is silent apply the Consti.
SEC. 23: GOCC, AGENCIES, INST of the GOVT.
GEN RULE: Subj to tax.
EXCEPTIONS:
1. GSIS
2. SSS
3. PHIC
4. PCSO
► PAGCOR no longer included.
Q: If the GOCC is not one of those enumerated does it
follow all of its income is automatically subject to tax?
A: NO. Under Sec 32. B (7) income derived from any
public utility or from the exercise of essential government
function accruing to the Govt of the Phils or to any
political subd. Are therefore exempt from income tax.
Therefore, even if the GOCC is one of those
enumerated under Sec. 27 it may still be exempt under
Sec. 32 b7b if its performing governmental function
NOTE: Pagcor vs. Basco case
Q: What is the difference between Sec. 27 C and 32
b7b?
A:
1. Sec 27 C exempts those enumerated without any
qualification.
Page 24 of 79
 2. Sec. 32b7b qualification must concur before it Q: What is the expanded foreign currency?
may be exempted. A: It is a bank authorized by the BSP to transact
business in the Philippine Currency as well as acceptable
Q: Can the government impose tax on itself? foreign currency or both.
A: It depends on who the taxing authority is. If the
taxing authority is the National Govt. as a rule, YES. Q: What is the tax to be paid?
Exceptions A: Normally it is NIT because it is subj under Sec 27 D3
1. those entities enumerated under §27 C and 28 A
2. those GOCC falling under §32b7b
Q: Who is the income earner?
If the taxing authority is the local government units, A: Depositary banks
as a rule NO. LGU’s are expressly prohibited from
levying tax against: (Sec 133(o) Q: Exempt from what kind of transaction?
1. National Govt. A: From foreign currency transaction. If it involves
2. Its agencies and instrumentalities foreign currency transaction it is not exempt but subject to
3. local government units 35 % NIT
Exception: Sec 154 of LGC says that LGU’s may fix
rate for the operation of public utilities owned and Q: Who are the other parties?
maintained by the within their jurisdiction. A:
1. Off shore banking units
PAL CASE July 20 2006 2. branches of foreign banks
H: The SC used 133 (o)an exception to pay tax, real 3. local commercial bank
estate tax, imposed by City of PAranaque on NAIA. 4. Other depositary banks under EFCDS
The SC said that the airport is not an agency or 5. Non- residents
GOCC but mere instrumentality of the Govt.
This is Gross ignorance of the law Sec. 133 (o) is ► if the above enumeration are the parties, then
for local taxation not real property taxation which is depositary bank will be exempt from paying the NIT
the one involved in the present case.
Foreign Currency Loan
NOTE: Mactan- Cebu Airport case
Q: Who is the lender? Borrower?
SEC. 27 D(1) A: Lender- EFCDS
Borrower- RC
Q: How many possible incomes were mentioned?
A: Two (2): bank interest and royalties EXEMPT
Offshore banking units
REQ: Other depositary banks under EFCDS
1. Bank interest must be received by a Domestic Corp
2. Royalties derived from sources within ► exemption of NR from EFCDS:

Q: When it comes to bank interest, what is the difference Q: Who is the income earner?
if the taxpayer is an individual or corporation? A: Non Residents whether individual or Corporations
A: If individual, they may be exempt from the payment
of interest in case of long term deposit except NRANETB Q: Derived from whom?
If DC, they are not exempt from long tem deposit. A: Depositary Bank under EFCDS

Q: What about royalties? NOTE: Sec. 24 B Nonresident exempt from bank interest
A: If individual, have a lower rate of 10%on books, under EFCDS
other literary and musical compositions. DC have no
lower preferential rate. Q: What is the difference between 24 b1 from 27 D3
A: In 24 B1, NR is exempt only from bank interst
SEC 27 D2: CAPITAL GAINS FROM SALE OF derived from EFCDS while 27D3 exempts NR from any
SHARES NOT TRADED income from transactions with depositary bank under
EFCDS
SEC 27 D3: EFCDS
SEC. 27 D(4)- Inter-corporate dividends- exempt

Page 25 of 79

27 D5 Capital Gains from sale of Real Prop.
Q: What is the tax?
A: 6% FIT
Q: What is the difference if the seller is an individual
and a DC?
A: Individual can sell all kinds of real property
DC can only dispose land and/or buildings.
SEC 27 (E) MCIT
Q: Applicable to whom?
A: DC and RFC
Q: Can it be applied simultaneously with NIT?
A: NO, imposed in lieu of the NIT, whichever is higher.
A: It is the general rule because it is under 28 A3
► GPB is in the nature of FIT, applies only if all the
requirements are present.
► RFC will be liable for NIT, hence a RFC engaged in
common carriage does not pay GPB but NIT
► Income without: EXEMPT
International Carrier:
► GPB refers to the amount of revenue derived from:
carriage of persons, excess baggage, cargo and mail
originating from the Phils in a continuous and
uninterrupted flight, irrespective of the place of sale or
issue and the place of payment of the tickets or passage
document.

Q: What is the Rationale? REQ:

A: to prevent corporations from claiming too many 1. Originating from the Phils.
deductions 2. Continuous and uninterrupted flight;
3. Irrespective of the place of sale or issue and the
Q: When will it be imposed? place of the payment of tickets or passage
A: document.
1. On the 4th year immediately ff the year in
which such corp commenced its business. Q: Do you consider landing rights to determine liability?
2. When the MCIT is higher than the NIT (RR 15-2002)
A:
Q: What is the carry over rule? 1. If originates from the Phils and has landing rights-
A: Sec 27 E2 states the carry over rule. ONLINE- RFC
2. No landing rights- OFFLINE- NRFC
► In order to avail: only in the year where the MCIT is
greater than the NIT. Q: If there are stopovers, is it still uninterrupted?
A: YES, provided that the stopover does not exceed 48
Sec 28 A1 hrs.

Q: What Kinds of taxes are paid by the RFC? Q: When will the place of sale of tickets matter as to the
A: NIT taxpayers liability?
MCIT A: The place of tickets is material only if the two other
elements are not present to be able to know if its subj to
NIT or exempt.
Sec. 28 B2 MCIT on RFC
Revalidated, exchanged or indorsed tickets
► same with Sec. 27
REQ:
Sec. 28 A3- INTL CARRIER 1. The passenger boards a plane in a port or point in
the Phils.
Kind: 2. The tickets must be revalidated, exchanged, or
1. Air carrier indorsed to another airline.
2. ships
Q: What if it’s the same airline but different plane?
► An intl. carrier doing business in the Phils. shall pay A: GPB does not apply, it must be to another airline
2 ½ % on its Gross Phil Billings (GPB)
Q: What if it did not originate from the Phils.?
Q: Is 28 A3 the Gen. rule or the Exception? A: Determine if its income within or without.

Page 26 of 79
 if ticket was purchased in the Phils. it is income 3. Exempt if income derived by DC or RFC from
within hence apply NIT EFCDS
if purchased outside, it is income without, hence 4. Parties:
exempt a) local commercial banks
b) Foreign bank branch
Transshipment c) Non Residents
d) OBU in the Phils
REQ: e) Other banks under EFCDS
flight originates from the Phils
transshipment of passenger takes place at any port FOREIGN CURRENCY LOAN
outside the Phils.
the passenger transferred on another airline ► 10% FIT
If: Lender- OBU
Q: How do you apply GPB? Borrower- Resident Citizen
A: Only the aliquot portion of the cost of the ticket EXCEPT:
corresponding to the leg flown from the Phils to the point 1. OBU
of transshipment shall from part of the GPB. 2. Local Commercial Banks

Q: Is it liable for the whole flight? Transactions of Non Residents:

A: 1. Income earner: Non- Residents
From the Phils to the point of transshipment, it is 2. Lender: OBU’s
income w/in
From transshipment to final destination, its income NOTE: Non resident exempt from transactions with
w/out- EXEMPT OBU’s and EFCDS

International Shipping SEC. 28 A5 TAX ON BRANCH PROFITS,

REMITTANCES
► GPB means gross revenue whether from passenger, ► profits based on the total profits applied or earmarked
cargo, mail fro remittance remitted by a branch to its head office
► Subj to 15% tax

REQ: Except: those activities which are registered with PEZA

it must originate from the Phils.
up to final destination NOTE: Interests, Dividends, Rents, Royalties including
- regardless of the place of sale or payments of remuneration for technical sevices, salaries, wages,
passenger or freight documents premiums, annuities, emoluments, or casual gains,
profits, income and capital gains received by a
Sec28 A(4) OFF SHORE BANKING UNITS foreign corporation during each taxable year from all
sources within shall not be treated as branch profits
OBU’s UNLESS the same are effectively connected with the
1. only acceptable foreign currencies conduct of its trade or business.
2. always a foreign corporation (subj to NIT)
except #3 Branch Profit Remittance
3. Exempt if income is derived by the OBU from
EFCDS Two ways to receive income (FC)
4. Parties: 1. Branch
a) local commercial banks 2. Subsidiaries
b) Foreign bank branch
c) Non Residents NOTE:
d) OBU in the Phils. 1. When a FC establishes branch, it is always a FC
2. When a FC establishes DC, it is a RFC
Difference with EFCDS:
EFCDS Q; It is in addition to NIT- Why?
1. Acceptable foreign currency, Phil. Currency or A: NIT because it is RFC
both
2. Can be a domestic or foreign corporation

Page 27 of 79
Q; What kind of tax is imposed under 28 A5? A: ► Regional Operating HQ is a branch established in the
15% FIT Phils by a multinational company engaged in any of the
services:
Q: How do you apply the rate? 1. Gen. Administration and Planning
A: multiplied to the total profit applied or earmarked for 2. Business Planning and Coordination
remittance w/o deductions 3. Sourcing and procurement of Raw materials and
components.
It applies for branches that are: 4. Corporate Finance and Advisory Services
1. the profit remitted is effectively connected with 5. Marketing Control and sales promotion
the conduct of its trade or business in the Phils. 6. Training and personal management
2. One not registered with PEZA 7. logistic services
8. research and development services and product
MARUBENI CASE development
F: A branch was established with AG&P, there was 9. technical support and maintenance
investment with AG&P 10. data processing and communication and business
Q: Did the petitioner participate with the negotiation? development
A: NO
Q: What did the petitioner pay? Rationale: Why liable? Because the claim for exemption
A: 15% Branch Profit Remittance Tax (BPRT) of resident airlines shall be minimized
10% Intercorporate Dividends
Q: What’s the issue? SEC. 28A7a Interests and Royalties:
A: Petitioner maintains that there was overpayment of
taxes, thus the same was asking for a refund of tax ► 20%FIT
erroneously paid.
► Interests under EFCDS= 7 ½ %
Q: Is is subj to FIT?
A: NO, exempt if petitioner is RFC Sec. 28A7b Income derived under EFCDS
H: -not correct to pay 15%
1. Income derived from foreign currency transactions
To be liable for BPRT with:
1. It is a RFC a) Non Residents
2. Branch did not participate in negotiations b) OBU
c) Local commercial bank
d) Foreign bank branches
e) Other depository bank under the EFCDS

SEC. 28 A6a ► As a Gen Rule: the above transaction is Exempt

► Regional or area headquarters (Sec. 22 DD) shall not
be subject to tax exempt from income tax if the requisites
are present.
Q: What are the requisites?
A:
1. the HQ do not earn or derive income from the
Phils.
2. Acts only as supervisory, communications,
coordinating centre for their affiliates, subsidiary
or branches in the Asia- Pacific Region and other
foreign markets.
SEC. 28 A6b
► Regional Operating HQ are taxable and liable to pay
10% taxable income.
EXCEPTION: Income from such transaction as may be
specified by the secretary of Finance, upon
recommendation by the Monetary Board to be subject to
regular income tax payable by any banks.
2. Interest income from foreign currency loans
► granted by depository bank under said EFCDS to
others shall be subject to 10% FIT
Exempt if granted to:
1. Other OBU in the Phils, and
2. Other depository bank under the EFCDS
» SEC. 28 A7c: Capital Gains from Shares of
Stocks not Traded in the Stock exchange
» 5% or 10% as the case maybe

SEC 28A7d: INTERCORPORATE DIVIDENDS

Page 28 of 79

► DC- RFC= EXEMPT, not subj to tax
SEC 28 B1
Q: What kind of tax?
A: 35% GIT on the ff income
1. Interest
2. Dividends
3. Rents
4. Royalties
5. Salaries
6. Premiums( except reinsurance premiums)
7. annuities
8. emoluments
9. Other fixed and determinable Gains, profits and
income.
SEC 28 B2 Non Resident Cinematographic film owner,
lessor or distributor
► liable for 25% GIT
SEC 28 B3 Non Resident owner or lessor of Vessels
chartered by Philippine Nationals.
► liable for 4 ½ GIT
Elements:
1. Chartered to Filipino Citizens or Corporations
2. Approved by MARINA
SEC. B(4) Non Resident Owner or Lessor of Aircraft,
Machiniries, and other Equipments.
► liable for 7 1/2 % GIT
SEC 28 b5a Interest on Foreign Loans
► Must be read with Sec. 32 B7a
Interest on Foreign Loans, if the lender is
1. NRFC liable to 20% FIT
2. Foreign Govt. Exempt because it is an exclusion
(Sec 32 b7a: income derived by a foreign gov’t
from investments in the Phils on loans, stocks,
bond, and other domestic securities or from
interest on deposits in banks by:
a) Foreign govt.
b) Financing inst owned controlled or enjoying,
refinancing from foreign govt; and
c) Inter nation or Regional financial inst
established by foreign govt.
COMMISIONER OF INTERNAL REV. vs. MITSUBISHI
METAL CORP. (180 SCRA 214)
F: Atlas Mining entered into a Loan and Sales Contract
with Mitsubishi Metal Corp. ( A Japanese Corp.) for
the purposes of projected expansion of the
productivity capacity of the former’s mines in Cebu.
The contract provides that Mitsibushi will extend a
loan to Atlas in the amount 20 M dollar, so that Atlas
will be able install a new concentrator for copper
production.
-Mitsubishi to comply with its obligation,
applied for a loan from Export- Import Bank of Japan
(Exim Bank) and from consortium of Japanese banks.
Pursuant to the contract Atlas paid interst to
Mitsubishi where the corresponding 15% tax thereon
was withheld and only remitted to the Govt.
Subsequently Mitsubishi filed a claim for tax
credit requesting that the same be used as payment
for its existing liabilities despite having executed a
waiver and disclaimer of its interest in favor of Atlas
earlier on. It is the contention of Mitsubishi that it
was the mere agent of Exim Bank which is a
financing inst owned and controlled by the Japanese
Govt.
The status of Eximbank as a government
controlled inst became the basis of the claim fro
exemption by Mitsubishi for the payment of interest
on loans.
I: WON Mitsubishi is a mere agent of Eximbank
H: NO. The contract between the parties does not contain
any direct reference to Exim Bank, it is strictly
between Mitsubishi as creditor and Atlas as the seller
of copper. The bank has nothing to do with the sale of
copper to Mitsubishi. Atlas and Mitsubishi had
reciprocal obligations- Mitsubishi in order to fulfill
its obligations had to obtain a loan, in its independent
capacity with Exim bank. Laws granting exemption
from tax are construed strictly against the taxpayer
and liberally in favor of the taxing authority.
SEC. 28 D5 b INTERCORPORATE DIVIDENDS:
► FIT 15% imposed on the amount of cash and or prop
dividends received from a domestic corporation.
SUBJ TO THE CONDITION: the country where the
NRFC is domiciled allows a credit against the tax due
from the NRFC taxes deemed paid or deemed to have
been paid in the Phils.
Gen rule: 35 % FIT
Exception: 15% under the “tax deemed paid rule/
reciprocity rule/ tax sparring rule”
JHONSONS CASE
2 Kinds of Categories:
1st : Japan, US, Germany, Phils liable for income within
and income without
Page 29 of 79

2nd : countries liable only for income within.
MARUBENI Case: 2 Issues
1. Is the payment of 10% FIT correct?
- No because it was a branch and RFC but still Marubeni
was NRFC under the old law which is liable to pay 35%,
but SC said liable only to 25% because of the tax treaty
► You cannot refund right away → 15% BPRT and
10% Inter-corporate Dividends tax has different basis
In P&G who are involved
- DC (P&G Phil) and NRFC (P&G US)
- DC declares dividends to NRFC
- 35% was withheld and remitted to the BIR
What did they discover? (after paying)
- they discovered that they are liable only for 15% so
they have a refund of 20%
Q: In the 1st case did the SC allowed the refund?
A: NO, denial anchored on 2 grounds:
1. One claiming for refund was not the proper party
2. There was a showing or proof as to the existence
of the “tax deemed paid” rule
Q: In 2nd case was there a refund?
A: YES, the SC reversed itself
1. Income tax is FIT: the withholding agent is the
proper party because he is liable to pay said
taxes
2. actual proof of payment not necessary, what is
necessary is the law of the domicile of the
country providing fro tax credit equal to 20% of
the tax deemed paid.
Q: What is the rate if the law is silent?
A: 35% FIT
► The rate will only be 15% if there’s a law recognizing
the same but this refers to the case of those belonging to
the first category.
WANDER CASE
Q: Who are the parties?
A: DC(Wander) and FC (Glaxo)- they belong to
different categories
The BIR tried to collect 35% because the law is
totally silent about the tax credit
H: The SC said that the tax should be 15% which applies
2 instances:
1. Foreign law do not provide for tax credit- 35%
2. law provides but the law is silent- 15%
3. law is silent because there is no law- 15%
4. law is silent because there’s no law because the
subj matter is not taxable- 15%
SEC. 29 IAET
Q: What is the rate?
A: 10% of the gross income (taxable income)
► It is imposed upon the improperly accumulated
taxable income of the corporation
Q: Applies to what Corp?
A: to DC only under RR 2- 2001( classified as closely
held corporations)
Q: Is it in the nature of sanction?
A: Yes, it is imposed to compel the corporation to
declare dividends.
Q: Why?
A: because if profits are distributed to the shareholders,
they will be liable for the payment of Dividends tax. Now,
if the profits are undistributed the shareholders will not
incur liability on taxes with respect to the undistributed
profits of the Corp.
- In a way it is in the form of deterrent to the avoidance
of tax upon shareholders who are supposed to pay
dividends tax on the earnings distributed to them.
Q: What is taxable income?
A: SEC. 31 defines taxable income as the pertinent items
of gross income specified in this Code, less the deductions
and/or personal and additional exemptions, if any,
authorized for such types of income by this Code or other
special law
Q: When not liable to pay IAET?
A: There are 2 groups of DC exempt from payment of
IAET (RR2-2001)
A) Corporations failure to declare dividends because of
reasonable needs of business
► reasonable needs means are construed to mean
immediate needs of the business including reasonable
anticipated needs
Q: What constitutes reasonable accumulation of the
corporation’s earnings? Examples?
A:
1. allowance for the increase in the accumulation of
earnings up to 100% of the paid- up capital of
the corporation.
Page 30 of 79
 2. earnings reserved for the definite corporate
expansion projects or programs approved by the
Board
3. Earnings reserved fro buildings, plants, or
equipment, acquisition approved by the Board
4. Earnings reserved for compliance with any loan
agreement or pre- existing obligations
5. Earnings required by law or other applicable
statutes to be retained.
6. In case of subsidiaries of foreign corporation, all
undistributed earnings or profits intended or
reserved for investments
NOTE: the corporations belonging in the 1st group are
normally liable but they can show that the accumulation
of earnings is justified for reasonable needs of business,
they incur no liability and exempt from payments of the
same.
B) Corporations which are exempt whether or not it is for
reasonable needs of the business:
1. Banks, and other non- bank financial
intermediaries.
2. Insurance companies
3. Publicly- held corporations
4. Taxable partnerships
5. General Professional Partnerships
6. Non- taxable joint- ventures
7. Enterprises registered with
a) PEZA
b) Bases Conversion Devt Act of 1992 (RA 9227)
c) Special Economic Zone declared by law
Q: What is a closely- held corporations?
A: Those corporation at least 50% in value of the
outstanding capital stock or at least 50% of the total
combined voting power all classes of stock entitled to
vote is owned directly, or indirectly by or for not more
than 20 individuals
NOTE: Publicly held Corp. has more than 20
shareholders
Q: What is the time for paying this tax?
A: Calendar Year: Jan 25, 2005- Dec 31, 2005. Today is
2006. You have 1 year to declare after the close of the
taxable year. 2006 is the grace period. You will pay on
January 2007.
Q: If you’re not mentioned to be exempted, will you still
be liable?
A: No, if you invoke adjustments
SEC 30. EXEEMPTIONS FROM TAX ON
CORPORATIONS
► Determine the Corporations’ exemptions under Sec.
30 27 C and 22B.
1. Sec 30, the corporations shall not be taxed under
this title (tax on income) in respect to income
receive by them as such.
2. Sec 27, the corporations enumerated are always
exempt. Thus exemption is unconditional
3. Sec 22B GPP, as a general rule is not a
corporation
4. except if it earns income from other business
► Joint Venture w/ service contract w/ government not a
corporation, otherwise, it is liable.
Assignment: Sec. 35
August 21, 2006 – Midterms
August 14, 2006
Q: What is the reason for not including the corporations
exempt under section 27C and Section 22B under Section
30?
A: Because there is an exemption which does not apply
to all exempt corporation.
The exemption under Section 30 is not absolute while
the exemption under Section 27 C is absolute and without
any conditions. In addition, Section 22B provides that a
joint venture is generally taxable unless it has a service
contract with the government, a generally taxable
corporation cannot be joined with the group as generally
not taxable corporation. General Professional Partnership
is exempt but the exemption is not the same as provided
by Section 30.
TAKE NOTE: Las Paragraph of Section 30.
► exemption to the exemption: income of whatever
kind and character of the foregoing organizations from:
1. any of their properties, real or personal;
2. any activities conducted for profit
► regardless of the disposition of said income, shall be
subject to tax.
Q: Enumerate the exempt corporations under Section 30;
What is the requirement?
A:
1. Labor, agricultural or horticultural organization not
organized principally for profit;
2. Mutual savings bank not having a capital stock
represented by shares, and cooperative bank
without capital stock organized and operated for
mutual purpose and without profit;
3. a beneficiary society, order or association,
operating for the exclusive benefit of the
Page 31 of 79
 members such as fraternal organization
operating under lodge system. (lodge system:
operating world wide) or a mutual old
association or a non-stock corporation:
a. organized by employees;
b. providing for the payment of life, sickness,
accident or other exclusive benefits to its
employees and their dependents;
4. Cemetery (a) company owned and (b) operated
exclusively for the benefit of its members;
5. Non-stock corporation or association organized
and operated exclusively for Religious,
Charitable, Scientific, Artistic or Cultural
purposes, or for the Rehabilitation of Veterans
(RCSACR), no part of its net income or asset
shall belong ot or inure to the benefit of any
member, organizer, officer, or any specific
person;
6. Business league, chamber of commerce, or
Board of trade, (a) not organized for profit and
(b) no part of the net income of which inures to
the benefit of any stock holder or individual;
7. Civil league or organization not organized for
profit but operated exclusively for the promotion
of social welfare.
CIR vs. YMCA
Q: What is the basis of Manila BIR for the imposition of
the tax?
A: last paragraph of Section 30, because YMCA was
conducting an activity for profit.
F: the CTA and the CA invoked the doctrine laid down
in Herrera and Abra Valley case which involves an
exemption from the payment of Real property Tax.
H: The SC revised the ruling. YMCVA is liable to pay
income tax applying the last paragraph of Section 30.
YMCA Is exempt from the payment of property
tax, but not to income tax on rentals from its property.
The tax code specifically mandates that the
income of exempt organizations (under section 30)
from any of their properties, real or personal, shall be
subject to tax, including the rent income of the
YMCA from its real prop.
8. a non-stock and non profit educational institution;
9. gov’t educational institution;
10. Farmer’s or other mutual typhoon or fire
insurance company, mutual ditch or irrigation
company, or like organization of a purely local
character, the income of which consists solely of
assessment, dues and fees, collected from
members for the sole purpose of meeting its
expenses;
11. Farmer’s, fruit grower’s or like association
organized and operated as a sales agent for the
purpose of marketing the products of its
members and turning back to them the proceeds
of sales, less the necessary selling expenses on
the basis of the quantity of produce finished by
them.
TAKE NOTE: income of sales agent is exempt.
Section 31: TAXABLE INCOME
CHAPTER VI: COMPUTATION OF GROSS
INCOME
SECTION 32: GROSS INCOME
Q: What is the tax treatment? Are these taxable income?
Are these included in the gross income? Is it included in
the ITR? Is it subject to NIT?
A: Sec. 32 A answers the questions.
Q: What is the income tax referred to here?
A: NIT. The section refers only to the payment of NIT.
It speaks of the NIT.
Q: If the is mentioned under Section 32 A, does it follow
that it is automatically included in the GIT?
A: No, Section 32 A states “Except when otherwise
provided in this title”
Q: What are the income that are not included, not
subject to NIT?
A:
1. Income that are subject to FIT.
2. Income that are considered an exclusion; and
3. Income that are exempt.
Q: When do you not apply Sec. 32 A?
A: it applies to all except:
1. NRANETB
2. NRFC
» they do not pay NIT, they pay by way of GIT.
Q: What are included in the Gross income?
A:
1. Compensation for services in whatever form paid
including but nor limited to fees, salaries, wages,
commissions, and similar items. [Sec. 32 A (1)]
Q: What is compensation?
A: all remuneration for services performed by an
employee for his employer under an employer-employee
relationship.
Page 32 of 79
TAKE NOTE: compensation is included in the ITR if the
taxpayer is not liable for NIT. Thus, if subject to NIT,
included in the ITR.
Q: Is there an instance where the salaries of a RC is not
included in the ITR?
A: Yes, if the salary is subject to FIT, like when the RC
is employed in Multinational, offshore banking, and
petroleum companies.
2. Gross Income derived from the conduct of trade
or business or the exercise of a profession; [Sec. 32 A
(2)]
Q: What is the income tax here?
A: NIT, included in the ITR.
A: interest which is included in the computation of gross
income is interest earned from lending money and interest
from bank deposit which does not constitute passive
income.
Bank interest from sources, without or abroad.
Q: Bank interest from Solid Bank, is it included in the
ITR?
A: No, because it is included or considered an income
within, thus subject to FIT. Thus, not included in the ITR.
5. Rents. [Sec. 32 A (5)]
► subject to NIT, included in the ITR.
6. Royalties; [Sec. 32 A (6)]

3. Gains derived from dealings in property. [Sec. 32 Q: What is being referred to here?
A (3)] A: royalties which does not constitute passive income.
Royalties derived from income without. – subject to NIT.
Q: Did the law distinguished? Thus not included in the ITR.
A: No, the law did not distinguished between real and
personal property. Q: Who are the taxpayers?
A: Liable from income w/in and w/out and the rest are
TAKE NOTE: exempt.
1. Sale of real property 1. RC
2. Sale of shares of stock (personal prop.) 2. DC

► if the elements are present, subject to FIT. Thus, it is 7. Dividends. [Sec. 32 A (7)]
not included in the ITR, the withholding agent will be
responsible for this. Q: What kind of dividends?
A: one that does not constitute a passive income.
Q: Income form the sale of property, do you include this
in the ITR? TAKE NOTE:
A: it depends 1. DC individual taxpayer = FIT
a. if subject to FIT, not included. Withholding agent 2. DC – DC & RFC = EXEMPT
accomplish the forms 3. DC – NRFC = FWT
→ subject to FIT if the following elements are
present: ► only dividends issued by a FC to an individual
1. it is a capital asset; taxpayer (RC OR RA) is included in the computation of
2. located in the Phil.: and the gross income. Thus, included in the ITR.
3. sold by individual, trust, estate, DC.
b. if subject to NIT, included in the ITR. 8. Annuities. [Sec. 32 A (8)]
→ Elements are not present, like when the real
prop. is an ordinary asset or when it is capital asset if the Q: What kind of annuities?
taxpayer is RFC. A: annuities which are not exempt from tax are included
in the computation of the gross income. (included in the
TAKE NOTE: R-R 17-2003 ITR)

► Real property sale subject to FWT, the buyer

accomplishes the ITR. 9. Prizes and Winnings [Sec. 32 A (9)]

4. interest; [Sec. 32 A (4)] Q: What kind of prizes and winnings?

A:
Q: What interest is being referred to here? a. those that does not constitute passive income;
and

Page 33 of 79
 b. those that are not considered as an exclusion.
Thus, exempt.
Passive Income
1. Prizes – derived from sources within and over
10,000.00
2. Winnings – derived from sources within.
Exempt:
a. winnings: PCSO and Lotto winnings.
b. prizes:
► those primarily for recognition of (1)religious,
(2)charitable, (3)scientific, (4)educational, (5)artistic,
(6)literary, (7)civic achievement are exempt PROVIDED:
1. the recipient was selected without any action on
his part to enter the contest or proceedings; and
2. the recipient is not required to render substantial
future services as a condition to receiving the
prize or award.
► prizes and awards granted to athletes are also
exempted provided:
1. local or international sports competition or
tournament;
2. held in the Philippines or abroad; and
3. sanctioned by the national sports association.
Q: When is a prize subject to NIT?
A: 1. when derived from income without;
2. when less than 10,000.00;
3. when the income earner is a DC or RC.
Q: When is winning subject to NIT?
A: 1. When derived from income without;
2. when the income earner is a DC or RC.
10. Pensions [Sec. 32 A (10)]
Q: What kind of pension?
A: Included in the gross income if not exempt
» never subject to fit (?)
11. Partner’s distributive share from the net income
of the general professional partnership (GPP).
Q: What is being referred to?
A: GPP exempt from payment of corporate income tax
► shares of partners subject to NIT – Sec. 26
SEC 32 B EXCLUSIONS FROM GROSS INCOME
Q: What do you mean by exclusions? Are these exempt
from income tax?
A: these are not included in the gross income, THUS,
exempt.
TAKE NOTE: Exemptions, exclusions, deductions, have
the same characteristics → all tax do not apply.
1. Life insurance [Sec. 31 B (1)]
Q: What is the requirement?
A: only one requirement for exemption: that the
proceeds of the life insurance be payable upon the death
of the insured.
Q: Does it matter who the beneficiary is or paid in a
lump sun or single sum?
A: No. it does not matter.
Exception: amounts held by the insurer under an
agreement to pay interest thereon, the interest payment
shall be included in the gross income.
2. Amount received by insured as return of
premium [Sec. 32 B (2)]
Q: if the insurance is payable within a certain time, say
10 years and thereafter the insured did not die, how much
will be excluded?
A: only the amount received by the insured as a return of
the premiums.
Ex. 1 M – 100 thousand = capital
It is exempt (100K)
900K is taxable.
Q: Why is it excluded?
A: because the amount received merely represents a
return of capital.
Q: is this subject to Estate Tax under Sec. 85 E? do we
have the same requirement?
A: no, the requirement for exemption is not the same
under Section 85 E.
3. Proceeds of life insurance: decedent insured
himself, inclusion or exclusion will depend on who
the beneficiary is.
a. the beneficiary is the estate.
» subject to Estate tax, included in the gross estate
regardless of whether or not the designation of the
beneficiary is revocable or irrevocable.
b. the beneficiary is a third person other than the estate.
b.1 Revocable Designation → subject to estate tax,
included in the gross estate.
Page 34 of 79
 Reason: because of the insured’s power to modify or
change the beneficiary.
b.2 Irrevocable Designation → not subject to Estate
tax, not included in the gross estate.
Reason: the insured loses the power to control,
modify and change the beneficiary.
Q: Is it subject to VAT?
A: 1. Non-life insurance – yes, subject to VAT under 108
(A).
2. Life insurance – NO, subject to percentage tax
under Sec. 123 of the Tax Code.
4. Gifts, Bequest and Devises [Sec. 32 B (3)]
Q: Why is the donee exempt from income tax?
A: Because the law classify it as an exclusion, not
important to know whether property is real or personal.
What is exempted is the “value of property acquired
by gift, bequest or devise”
TAKE NOTE:
A. GIFTS are excluded because they are subject to
donor’s tax.
B. BEQUEST and DEVISE are excluded because
they are subject to ESTATE tax.
Q: what is included in the gross income?
A: income from such property.
► gift, bequest, devise or descent of income from any
property in case of transfers of divided interest.
5. Compensation for injuries or sickness [Sec. 32
B (4)]
Q: is this the same as those provided under the
workmen’s compensation act (wca)?
A: YES. There are 3 groups:
a. Health or accident insurance or those under
workmen’s compensation.
b. personal injuries and sickness; and
c. Damages to prevent injuries and sickness.
Q: What does injury include?
A: The term injury includes death, even if not injured, if
the person dies this will be available.
Q: when will the damages recovered be exempt?
A: General Rule: all damages awarded are tax exempt.
Exception: damages representing loss of income.
Q: Why is it considered an exclusion?
A: because this is just an indemnification for the injuries
or damages suffered.
6. Income exempt under a treaty [Sec. 32 B (5)]
Q: What is excluded?
A: income of any kind required by treaty binding upon
the Phil. Government.
7. Retirement benefits, pensions, gratuities [Sec. 32
B (6)]
Q: Why do we need to distinguish retirement pay,
separation pay and terminal leave pay?
A: because they have different requirements for
exemption.
Q: What is retirement pay?
A: the sum of money received upon reaching the
maximum age of employment.
a. Under RA4917 (with Retirement Plan)
1. the private benefit plan is approved by the BIR
(RR2-98);
2. the retiring official or employee has been in the
service of the same employer for the last 10
years;
3. he is at least 50 years old at the time of retirement;
and
4. the official or employee avails himself/herself of
the benefit only once.
b. Under RA7641 (without retirement plan)
1. the retiring official employee is at least 60 years
old but not more than 65 years old;
2. the employee or official must have served the
company for at least 5 years;
» entitled to 15 days salary and ½ of the 13th month
pay for every year of service.
TAKE NOTE: the retirement benefits under RA4917 and
RA7641 are exempt from income tax provided the
requirements are present.
SEC. 32 B(6)(c)
► retirement benefits given by foreign government,
foreign corporation, public as well as private to RC, NRC,
RA residing permanently in the Philippines - exempt
without further qualifications – automatic exclusions.
SEC. 32 B(6)(d,e,f)
► retirement benefits given by the Philippine Gov’t
through the GSIS, SSS and PVAO are exempt without
further qualifications = automatic exclusions.
August 21, 2006.
- midterms 6-8 pm until sec 32 B(6) NIRC.
Page 35 of 79
 b. Accumulated vacation leave: if more than 10
August 28, 2006. days (meaning 11 pataas) – subject to
income tax;
ANSWERS = MIDTERMS »If 10 days or less – exempt.
2. Gov’t Employee:
► Gross Income include both capital and ordinary » governing law: EO 291 of Pres. Estrada, RMC 16-
gains, Sec. 31 says gross income-deductions, that which is 2000.
ordinary loss.
- may be deducted from capital gains and ordinary gains. Rule: Gov’t workers (both officers or non-officers)
granted TLP on a yearly basis → exempt from income
Q: What is separation pay? tax.
A: on given when one is terminated from the service → there is no qualification as to vacation or sick leave.
because of (1) illness, (2)death, (3) physical incapacity or
injury, or (4) causes beyond the control of the employee. ► Take Note of 3 cases.
» be reminded of EO 291, Sec. 2. 78.2 par. 97,
Q: Are there any requirement for separation pay granted RR2-98, RR16-200 (3).
by foreign gov’t or corp?
A: None, the separation pay granted by the Case of Zialcita
aforementioned institutions are exempt without further ► retired from DOJ, contention: TLP should be exempt
qualifications (“other similar benefits”). from income tax pursuant to the old law.
SC: on a different ground – TLP is exempt because it is
Q: is separation pay an exclusion, therefore, exempt? similar to Retirement pay, thus exempt but the ruling’s
A: No. application is limited only to DOJ employees.
GENERAL RULE: Separation pay not exempt (?)
Exception: Borromeo case:
1. Automatic exclusions, thus exempt if due to: ► Same as the Zialcita case
a. illness Issues: WON the TLP is subject to income tax and WON
b. death COLA and RATA are included?
c. physical incapacity or injury. SC: RULED TLP is Exempt!
Modified: the rule applies not only to DOJ officers but
2. Conditional exclusion also to CSC commissioners.
a. causes beyond the control of the employee-
excluded COMMISSIONER v. CASTAÑEDA
b. within employee’s control – included. - Castañeda –DFA officer in Phil. Embassy in England.
1. TLP is exempt.
Examples: 2. Ruling applies to DFA officers.
1. registration – CBA provides separation pay,
within the control = included. Q: Does the rule or decision applies to Gov’t officials
2. installation of labor saving devises or bankruptcy only?
– beyond the control = excluded. A: No. PD220: Exemption applies to both private and
public sectors(?)
Q: What is terminal leave pay? it does not matter if TLP is vacation or sick leave.
A: the accumulated vacation leave and sick leave
benefits converted to cash or money to be given either RR2-98, Sec. 2.78.1 par. (a)(7)
every year or upon retirement or separation. » JAN, 1998 – the rule applies to both private and
public sectors.
Terminal Leave Pay granted upon retirement or
separation: EO291 (SEPT., 2000)
» uder PD220, TLP in the Gov’t or in the Private » Officer in gov’t receiving TLP is always exempt
Sector shall be exempt from income tax if given or whether or not vacation or sick leave is granted.
granted upon retirement or separation.
TLP granted on a yearly basis: Modified RR2-98:
1. employee in the private sector: » TLP will only apply to private sectors
a. accumulated sick leave – subject to income » if granted on a yearly basis – may be subject to tax:
tax. VACATION LEAVE
1. MORE THAN 10 DAYS = TAXABLE

Page 36 of 79
2. LESS THAN 10 DAYS = EXEMPT
8. Miscellaneous items (Sec. 32 B (7)
(a) income derived by foreign Gov’t [Sec. 32 B (7)
(a)]
Q: What kind of income?
A:
1. investments in:
a. loans
b. stocks
c. bonds
d. other domestic securities
2. interest from deposits in Banks in the Philippines.
Q: Who are income earners?
A:
1. foreign government
2. financing institutions owned, controlled or
enjoying re-financing from foreign gov’ts; and
3. int’l or regional financial institutions established
by foreign gov’ts (established in the Philippines)
TAKE NOTE: if plain foreign corp., subject to FIT 20%.
EXAMPLES of exclusions:
a. Brunei Gov’t earns interest by depositing money in
Makati Bank – Exclusion.
b. SMC- Stock dividends to 3. Brunei Gov’t. exclusion
c. Income derived by the Gov’t or its political
subdivisions (Sec. 32 B (7) (b)
a. exercise of public utility
b. exercise of any essential gov’t function.
» accruing to the gov’t.
d prizes and awards (Sec. 32 B 7 c)
» primarily for religious, charitable, scientific,
educational, artistic, literary or civic achievements:
1. recipient was selected without any action on his
part to enter the contest or proceedings;
2. the recipient was not required to render substantial
future services as a condition to receive the prize
or award.
D. prizes and awards in sports (Sec. 32B 7 d)
1. granted to athletes;
2. local or int’l competitions;
3. held here or abroad;
4. sanctioned by the nat’l sports associations.
E. 13th month pay and other benefits (Sec. 32B 7 e)
Q: Do you include Christmas bonus in your ITR?
A: No, because the law says 13 th month pay and “other
benefits”/”similar benefits” – xmas bonus is included in
the category.
Q: Who can increase the 30,000 limit?
A: The Sec. of Finance.
Q: Applicable to whom?
A:
1. gov’t; and
2. Private institutions.
F. GSIS, SSS, Medicare and other contributions (Sec. 32
B 7 f)
► must be deducted from the GI not NIT because it is an
exclusion.
-creditable withholding tax is an exclusion- must be
deducted first from the GI before you compute the NIT.
Otherwise, you are including in the GI something that is
excluded from the same.
G. Gains from the Sale of bonds, debentures, or other
Certificate of indebtedness. (Sec. 32 B 7 g)
Q: Why 5 years?
A: certificate of indebtedness is similar to Bank Interest
in a long term deposit.
- Sec. 32 B 7 g is similar or the same as 24 B in long term
deposit.
H. Gains from redemption of shares in mutual fund (Sec.
32 B 7 h)
1. Fiscal Year – means an accounting period of 12 months
ending on the last day of any month other than December.
2. Calendar year – a period of 12 months beginning on
January and ending on December.
Q: Business expense incurred in February 2006, is it
possible to include it for April 2006?
A: yes, it is possible or it is possible if fiscal year is
employed, if it falls under the fiscal year and all the
elements are present.
- related to trade or business.
REASON: Capital loss has no connection to the trade or
business.
TAKE NOTE:
► for taxpayers liable for income within and without
(RC & DC)), they can claim deduction for expenses
incurred within and without.
► for taxpayers who are liable only for income within,
they can claim a deduction for expenses incurred
within the Philippines.
Sec. 34 A EXPENSES
Page 37 of 79
 1. required as a condition for the continued
1. For those business expenses not enumerated under A. use or possession, for the purpose of the trade, business
You need to prove that it is an ordinary and necessary or possession of the property.
expense. 2. taxpayer has not taken any title or no equity other
than a lessor.
2. For those enumerated under A, all you have to prove is
that it is incurred during the taxable year. Q: Reasonable allowance for entertainment, amusement
and recreation expenses, what is the requirement?
Feb. 12, 2007 (Sec. 34 A, Expenses) A:
1. connected with the development, management,
Q: Did the law define what is reasonable? and operation of the trade (DOM);
A: No. for salaries and wages all that is required by law is 2. Does not exceed the limits or ceiling set by the
for it to be reasonable. Secretary of Finance; and
3. Not contrary to law, morals, good customs,
- for other forms of compensation, there must be services public policy or public order.
actually rendered.
Q: How about bribe, kickbacks, and other similar
AGUINLDO Case payments
A: even without this provisions, kickbacks will not pass
F: involves a corporation engaged in selling fish nets, and the requirement of (i) ordinary and (ii) necessary hence
the corporation have a land sold through a broker. not deductible
►there was substantial profits gained from the sale of a
land which was sold by a broker. The profit was in turn EXPENSES ALLOWABLE TO PRIVATE
given to the workers as special bonus. EDUCATIONAL INSTITUTION
►the corporation claimed the bonus as a deduction.
Q: Why only private educational institution is mentioned
ISSUE: Should the deduction be allowed? and no other taxpayers?
A: it refers to section 27 for Private Educational
H: The SC did not allow the deduction, for other forms of Institution given to the educational institution.
compensation, it must be made or given for services
actually rendered. GENERAL RULE: 36 A (2) and 36 A (3) expenditures for
capital outlays not deductible as business expense
►in this case, it was proven that the sale was not made by
the employees, no effort or services actually rendered by EXCEPTION: Private Educ. Institution can claim it under
them because the sale was made through a broker. Sec. 34 A (2)
►
BUSINESS EXPENSE vs. ALLOWANCE FOR
Q: Reasonable Travel Expenses, What is the requirement? DEPRECIATION
A:
1. Travel must be in pursuit of business, BUSINESS EXPENSE
trade or profession. 1. No carry-over
2. Travel expense while away from home. 2. can be claimed for one year only.
3. if the amount of capital outlay is substantial, it cannot
Q: Is there a travel expense which was not in pursuit of accommodate all of the expenses incurred.
business?
A: yes, those which are considered as fringe benefits ALLOWANCE FOR DEPRECIATION
(FB), expenses for foreign travel is considered a FB only 1. There is carry over
if it is not in pursuit of the trade or business. 2. you can claim it for a longer period depending on the
life span of the property.
Q: can you claim it under Sec. 34 A (1)(a)(ii)? 3. it can accommodate all of the expenses incurred.
A: No, you can claim it under Sec. 34 A (1)(a)(i) last
paragraph.  taxpayer’s allowable deduction for interest expense
shall be deducted by an amount equal to 42% (RR 10-
Q: Reasonable Allowances for rentals for meralco bills, 2000) of the interest income subject to FIT.
requirements?
A: Q: Who claims this deduction?

Page 38 of 79
A: the debtor claims this deduction.
Q: What kind of interest is this?
A: interest on loan.
►interest on debt - when one borrows money to finance
his business interest in connection with the taxpayer’s
profession trade or business.
REDISCOUNTING OF PAPERS : (Sec. 34 B 2 a)
►a borrower or taxpayer can claim the interest paid in
advance as itemized deduction when he filed his income
tax return (ITR) depending on whether or not the
principal obligation has been paid.
1. if the entire amount or entire principal obligation has
been paid – the entire amount of interest can be claimed
as itemized deduction.
2. if only ½ of the obligation had been paid, then the
entire amount of ½ of that interest can be claimed as a
deduction.
3. if no payment had been paid on the principal
obligation, the advance interest paid cannot be claimed as
a deduction on the years that it was paid.
REQUIREMENTS FOR REDISCOUNTING OF
PAPERS:
1. incurred within the taxable year.
2. individual taxpayer reporting income on a cash basis.
 No deduction shall be allowed in respect to the
following interest:
1. if within the taxable year an individual taxpayer
reporting income on the cash basis incurs an indebtedness
on which an interest is paid in advance or through
discount or otherwise.
2. if both taxpayer and the person to whom the payments
has been made or is to be made are persons specified
under Sec. 36 (B):
a. member of a family
b. bet. an individual and a corp., more than 50% in
advance of the outstanding stock of which is owned
directly or indirectly by or for such individual;
c. Bet. 2 corp., more than 50% in value of the outstanding
stock of each of which is owned, directly or indirectly, by
or for the same individual.
d. bet. the grantor and a fiduciary of any trust;
e. bet. the fiduciary of a trust and the fiduciary of another
trust if the same person is a grantor with respect to each
trust; or
f. bet. a fiduciary of trust and a beneficiary of such trust.
Q: Who are not allowed to claim interest under sec 36 B?
A: interest incurred between related parties.
Q: What if half-brother?
A: not allowed to claim deduction for interest.
TAKE NOTE: interest incurred from the exploration of
petroleum refers not just in interest incurred on loan of
money but also interest incurred for installment payments.
Q: Who are related parties?
A: individuals and corporations.
OPTIONAL TREATMENT OF INTEREST EXPENSE:
1. interest incurred to acquire property used in trade,
business or exercise of profession can be claimed a an
itemize deduction…
a. on interest; or
b. depreciation (as capital expenditure?)
Q: What is this interest income?
A: the money borrowed was deposited in a bank so that it
will warn interest. (RR13-2000)
ILLUSTRATION:
1. loan of 1M from a bank with an interest of 20%
2. 20% of 1M is Php200,000 but you cannot claim this
whole amount as a deduction.
3. when you deposited the 1M in the bank, it earned a
bank interest subject to FIT worth Php10,000.00.
4. 42% (RR) of 10,000 = 4,200 (RR 9337)
5. Php200K-4,200= Php195,800/ this is the amount you
can claim as a deduction.
34 C TAXES:
REQUISITES:
1. taxes must paid or incurred within the taxable year
2. it must be incurred in connection with trade or
business.
3. can be claimed as:
a. a deduction; or 34 C 1&2
b. tax credit 34 C 3&7
Q: Where should it be deducted?
A:
1. if claimed as a deduction, it should be
deducted from the gross income;
2. if claimed as a tax credit, it should be
deducted from the Net Income Tax due (bottom of
the formula)
MERCURY DRUG CASE
Page 39 of 79
- Discount of senior citizens
SC: discount claimed by senior citizens shall create a tax
credit and must be deducted at the bottom of the formula.
Q: What is a tax deduction? Example?
A: example is business tax.
►tax deduction is allowed if the taxes were paid or
incurred within the taxable year and it must be connected
to the trade, business or profession of the tax payer.
Q: Who are entitled to claim it?
A: those liable to pay NIT. (Tax credit only for NIT)
Q: What is a tax credit?
A: refers to the taxpayer’s right to deduct from the
income tax due the amount of tax the taxpayer paid
to foreign country, subject to limitations.
Q: What is the tax credit being referred to under 34 C (3)?
A: credit against taxes for taxes of foreign country.
Q: What are the other tax credit under the code?
A:
1. RA 6452 – selling goods and commodities to senior
citizens, the discount claimed is treated as a tax credit.
2. income tax paid to foreign country.
3. Input tax on Vat
4. Creditable w/holding tax system under NIT
5. Tax credit certificate.
Q: Who are allowed to claim it?
A: RC and DC only.
Q: suppose you paid the 100K NIT to US, can you claim
as a deduction the whole 100K? what is the formula?
►same procedure for (1) income tax paid to foreign
country; (2) estate tax paid to foreign country; and (3)
Donor’s tax paid to foreign country.
A: Formula:
STEP 1
GI from sources w/in
NIT: _____________________
GI from entire world
STEP 2
Quotient x RATE = amount w/c can be claimed as a
deduction
A: you cannot claim the whole 100K, you can only claim
the product of the quotient times the rate
TAKE NOTE: deduct at the bottom of the formula ( sa
computation ng GI)
Q: Suppose you are a RC, you pay NIT to US, will you be
able to claim it as a tax deduction?
A: 1. generally, you can claim it as tax credit.
2. you can claim under Sec. 34 C (1) b
►if the taxpayer did not signify in his return his intention
to avail himself of the benefit of tax credit for taxes paid
to foreign country.
►taxes incurred not related to the trade or business, you
have the option to:
a. claim it as tax credit; or
b. claim it as a deduction
►law gives you this privilege.
Q: When is taxes not allowed as a deduction?
A: Sec. 34 C (1)
1. Income tax;
2. Income tax imposed by authority of any foreign
country;
3. Estate and Donor’ tax; and
4. taxes assessed against local benefits of a
kind tending to increase the value of the property.
Q: Who are not allowed to claim deductions?
A: Under 34 C (3) - NRC, NRA; and N/RFC
TAKE NOTE:
1. NRAE and NFC – allowed deduction only if and to the
extent that they are connected with income from sources
within the Phils.
2. Taxes that had been allowed as deduction but are later
in refunded should be treated as part of the gross income
during the year that it is received (34 1 last paragraph)
Q: Which would you choose? Tax credit or deduction?
A: tax credit because it is deducted from the taxable
income while deductions are deducted from the GI.
FORMULA: GI-DEDUCTION = NET INCOME x RATE
= TAXABLE NET INCOME – TAX CREDIT)
34 D LOSSES
Q: Is always a requirement that it is incurred in pursuit of
trade, bus. or profession?
A: No. Sec. 34 D(1) provides for 2 kinds of losses:
a. incurred in pursuit of trade, bus. or profession;
b. property connected with t,b,p, if the loss arises
from fire, storms, shipwrecks or other casualties or
Page 40 of 79
from robbery, theft or embezzlement (arising from 1. taxpayers is an 1. taxpayer may be an
natural calamity). individual only not individual or corp;
corporation.
2. losses incurred or
Q: What is the requirement? 2. involves net capital connected with T or B;
A: loss
1. Loss actually sustained during the taxable year 3. Business losses not
2. Not compensated for by insurance or other forms previously off-set as a
of indemnity. 3. carry-over as loss from deduction from the GI
3. Not claimed as a deduction for estate tax purposes. sale of capital asset in the carried over as such for
next succeeding year the next 3 consecutive
Q: This is your itemized deduction which can be years;
claimed as a deduction from? 4. can be deducted from
A: Gross income capital gains and/or
4. can only be deducted ordinary gains.
TAKE NOTE: from capital gains.
► The itemized deduction of losses, however, is not
confined to section 34B. it is also found under section
86A (1) (e) which also pertains to deductions available
under the estate tax law.
►Losses within six (6) months after the death of the
decedent can be claimed as itemized deduction of losses
under Section 34B. However, may be claimed as NET OPERATING LOSS CARRY REQUIREMENTS:
deduction under estate tax return provided that the same 1.Net operating loss of the business or enterprise incurred
are not claimed as itemized deduction of losses under w/in the taxable year
Section 34B. 2. not previously off-set as a deduction from the GI
3. carried over as a deduction from the GI for the next 3
Q: How many carry-overs do we have under the Code? consecutive taxable years immediately following the year
A: 3. Namely: of such loss.
1. Section 27 E (32) Carry forward of excess
minimum Tax Q: Can the period be extended?
2. Section 39 D Net Capital Loss Carry- over A: yes, for mines other than oil and gas well.
3. Section 39 D 3 Net Operating Loss Carry-Over. 1. net operating loss w/out the benefit incentives
provided by law;
KINDS OF LOSSES AND THEIR CARRY-OVERS: 2. incurred in any of the first 10 years of
operation.
A. ORDINARY LOSS – NOLCO ( #3 above) 3. carried over as a deduction from the GI for
the next 5 years following such loss.
Q: Why is there a need for a carry over under Sec. 34 D # 4. no substantial change in the ownership of
when you can claim the loss from both capital and the business or enterprise.
ordinary loss?
A: if the loss exceeds the income for the taxable year, you Q: What is the limit?
cannot deduct the entire amount of loss from your income A: 75% of the nominal value of outstanding shares is
for that year so the excess may be deducted for the held by or on behalf of the same persons/ corporation
taxable year following the loss.
► individual no problem, problem lies with corporations
B. CAPITAL LOSS – NET CAPITAL LOSS CARRY or enterprises.
OVER ( # 2 above)

ABANDONMENT LOSSES
NET CAPITAL LOSS NET OPERATING
CARRY-OVER LOSS CARRY-OVER 1. contract area where petroleum operations are
undertaken is partially or wholly abandoned;
► all (1) accumulated exploration and (2) development
expenditures pertaining thereto shall be allowed as a
deduction.

Page 41 of 79

2. a producing well is subsequently abandoned:
►unamortized cost and undepreciated cost of equipment
directly used therein shall be allowed as a deduction in the
years it was abandoned.
TAKE NOTE:
1. if abandoned well is reentered and production is
resumed; or
2. if equipment or facilities are restored into service in the
year of resumption or restoration and shall amortized or
depreciated.
Q: What is the Tax benefit rule?
A: Last Par. of Sec. 34 E (1): recovery of bad debts
previously allowed as deduction in the preceding year
shall be included as part of the gross income in the year of
recovery to the extent of the income tax benefits of said
deduction.
Q: What is a Bad Debt?
A: Bad debts shall refer to those debts resulting from the
worthlessness or incollectibility in whole or in part of
amounts due the taxpayer by others, arising from money
lent or from uncollectible amounts of income from goods
sold and services rendered.
CHINA BANK VS. CA
► bad debts can only be claimed if pursuant to a contract
of loan
- no bad debts for loss of instruments.
Q: Who claims it?
A: a. creditor
c. money lender
Q: What year can it be claimed?
A: can be claimed in the year it was actually sit
ascertained to be worthless and charged off, meaning
cancelled in the books of account.
Q: Do you need to file an action before you can claim?
A: No, all you have to do is prove that you did exert effort
to claim or recover the same.
Q: What cannot be deducted as bad debts?
A:
1. debts not incurred in connection with the trade,
business and profession of taxpayer.
2. transactions, mered into between parties
mentioned under Section 36 (B) namely.
a) between members of the family
b) between an individual who owns more than
30% of outstanding capital stock of a corporation
and that corporation
c) between two (2) corporations more that 50% of
the outstanding capital stock of which is
owned by or for the same individual
d) between a grantor and fiduciary of any trust
e) between two (2) fiduciaries of two (2)
trusts who has the same grantor
f) between a fiduciary of a trust and above
fiduciary of such trust
SECURITIES BECOMING WORTHLESS
1. ascertained to be worthless and charged off
within the taxable year
2. capital asset
3. taxpayer, other than a Bank or trust company
incorporated under Phil. Laws
4. substantial part of business is the receipt of
deposit
5. considered as a loss from the sale of capital
assets on the last day of such taxable year
34 F DEPRECIATION
Q: What is depreciation?
A: It is the gradual dimension in the service or useful
value of tangible property due from exhaustion, wear and
tear and normal obsolescence.
Q: What kind of property is involved?
A: 1. Real property except parcel of land
2. Personal Property
REQUISITES:
1. depreciation deduction must be reasonable
2. for the exhaustion, wear and tear, including
reasonable allowance for obsolescence
3. property used in the trade of business
Q: What do you mean by “reasonable allowance”?
A: it shall include, but not limited to, an allowance
computed in accordance with rules and regulations
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, under any of the
following methods:
1.Straight-line method
2.Declining balance method
3.Sum-of-the-year-digital method; and
4.any other method which may be prescribed by the
Secretary of Finance upon recommendation of the
Commissioner
DEPRECIATION OF PROPERTIES USED IN
PETROLEUM OPERATIONS
1. properties directly related to production of
petroleum
Page 42 of 79
 2. allowed under (1) straight line or (2) ►Equipment used in mining operation is deductible in
declining balance method depreciation
3. useful life of properties used or related to
production of petroleum shall be ten (10) Q: Method for computing depletion?
years or such shorter life as may be permitted by A: cost depletion method
the Commissioner.
4. for property not used directly in the production Q: to whom allowed?
of petroleum (1) depreciated under the straight line A: only mining entities owning economic interest in
method, and useful life is only five (5) years mineral deposits
►Economic interest: capital investments in mineral
DEPRECIATION OF PROPERTIES USED IN deposits
MINING OPERATIONS

ALLOWANCE FOR DEPRECIATION: 34H CHARITABLE & OTHER CONTRIBUTIONS

1.all properties used in mining operations other than
petroleum operations shall be computed as follows:
a. if the expected life is ten (10) years or less – normal
rate of depreciation
TAKE NOTE:
1.unique because deducted from the taxable net income
and not from the gross income
►second step of the formula deduction

b. if the expected life is more than ten (10) years – Q: Who is claiming the deduction?
depreciated over any number of years between five (5) A: the donor
years and the expected life.
Q: Who are the Donees?
REQUIREMENTS: A: 1.Government of the Philippines or any of its
1. depreciation is allowed as a deduction from 61; and agencies or any political subdivision thereof
2. contractor notifies the Commissioner at the exclusively for public purpose
beginning of the depreciation period which 2. Accredited Domestic corporation or association
depreciation rate shall be used. organized and operated exclusively for religions, lion,
charitable, scientific, youth and sports
DEPRECIATION DEDUCTIBLE BY NRAETB OR RFC development, cultural or educational purposes or for
► reasonable allowance for the deterioration of property the rehabilitation of veterans, or to social
welfare institution, or to non government
1. arising out of its use or employment organization and no part of its net income inures
2. or non-use in the business, trade or to the benefit of any private stock holder or individual
profession
3. property is located in the Philippines Q: How many kinds of deduction?
A: Two (2) kinds:
34 G DEPLETION OF OIL and GAS WELLS and 1.partial deduction
MINES ►10% of taxable income in case of an
► only deduction which is a not self executing deduction individual
►5% of taxable income in case of
Q: What is depletion? corporations
A: the exhaustion wear and tear of natural resources as in 2. full /total deduction
mines, oil, and gas wells
►the natural resources called “wasting assets” Q: Which of the two kinds is the General Rule?
A: General Rule: Partial deduction
DEPRECIATION vs DEPLETION Exception: Total /Full deduction

1.involves property 1. involves natural Q: Suppose Mr. A made a cash donation of P1M. How
resources much can he claim as a deduction?
2. ordinary wear and 2. ordinary wear and A: First determine the taxable income of Mr A since he is
tear of equipments tear of natural an individual, he can only deduct 10% of his taxable
resources income.

TAKE NOTE:

Page 43 of 79
Q: What if the Donee is not one of those mentioned under
the law, can he claim a deduction?
A: No.
TAKE NOTE: Donee is never an individual.
Q: If the Donor is a pure compensation income earner and
he donates P100,000 to the church, can he claim it as a
deduction?
A: No. pure compensation income earner can only claim a
deduction under Sec 34 M
Q: If Donee is the Philippine Government, what is the
requirement?
A: it must be made exclusively for public purposes
Q: What if the Donee is a province?
A: there must be a qualification that it is for public
purpose
Q: If the Donee is a Domestic Corporation, what is the
requirement?
A: no part of its income inures to the benefit of any
private shareholder or individual
Q: What are those contributions which can be
deductible in full?
A: 1.Donations to the Government – no conflict with
partial (different requirement)
►Partial donated for exclusively public
purposes
►Full, used in undertaking priority activities of
NEDA
2.Donations to certain Foreign Institutions or
International Organizations
►in compliance with agreement, treaties or
commitment entered into by the Philippine
Government and such donees
3.Donations to Accredited Non government
organizations Non government organization, non
profit domestic corporation
REQUIREMENTS:
1. organized and operated exclusively for scientific,
research, educational, character building and youth and
sport development, health, social welfare, cultural or
charitable purposes or a combination thereof
2. no part of the net income of which inures to the benefit
of any private individual
3. uses the contributions directly for the active conduct of
the activities constituting the purpose or function for
which it is organized and operated
4. annual administrative expense does not exceed 30%
of the total expenses and
5. in case of dissolution, the assets of which would be
distributed to:
a) another non profit domestic corporation organized
for similar purpose or purposes
b) to the state for public purpose
c) distributed by the court to another organization to
be used in such a manner which would accomplish
the general purpose for within the dissolve
organization was organized
34I RESEARCH AND DEVELOPMENT
►In the old law, this is not allowed as a deduction. To
remedy this, they felt that those should be a separate
deduction for research and development.
REQUISITES:
►tax payer may treat research and development
expenditures as ordinary and necessary expenses
provided:
1. it is paid or incurred during the taxable year
2. incurred in connection with trade, business or
profession; and
3. not chargeable to capital account.
Q: Treated as such when?
A: during the taxable year it is paid or incurred
AMORTIZATION OF CERTAIN RESEARCH AND
DEVELOPMENT EXPENDITURES
►at the election of the taxpayer, the following shall or
may be treated as deferred expenses:
a. paid or incurred by the taxpayer in connection with
his trade, business or profession;
b. not treated as expenses under par 1 and
c. chargeable to capital account but not chargeable to
property of a character which is subject to depreciation
or depletion
Q: How to compute taxable income:
A: deferred expenses shall be allowed as deduction
ratably distributed over a period of not less than 10
months as may be elected by the taxpayer (beginning with
the month the
taxpayer first realizes benefits from expenditures.)
►the election or option may be exercised for any taxable
year after the effectivity of the code but not later than the
time prescribed by law for filing the return for such
taxable year.
Page 44 of 79
LIMITATION ON DEDUCTION ►can be availed of by an individual who may elect a
Q: When not deductible? standard deduction in an amount not exceeding 10% of
A: 1.Any expenditure for the his gross income
(1) acquisition or improvement of land or (2) ► may apply in lieu of the other deductions under
for the improvement of property to be used in Section 34
connection with research and development of a ►the taxpayer must signify in his return his intention to
character which is subject to depreciation and elect the optional standard deduction, otherwise, he shall
depletion and office site be considered as having availed of the itemized
deduction.
2. Any expenditure paid or incurred for the purpose
of undermining the existence, location, extent or Q: Who can claim this deduction?
quality of any deposit of one or other mineral A: all individual taxpayers except non resident alien not
including oil or gas. engaged in trade or business (NRANETB)
► not for mineral exploration Reason: he is not liable to pay by way of the NIT, thus,
follows he cannot claim this deduction because he is
34 J PENSION TRUST liable to pay by way of GIT.

Q: Claimed by Whom? TAKE NOTE:

A: the employer ►can co-exist with personal and / or additional
exemption
Q; What is a Pension Trust contribution?
A: a deduction applicable only to employer on account of 34 M PREMIUM PAYMENTS ON HEALTH AND
its contribution to a private pension plan for the benefit of /OR HOSPITALIZATION INSURANCE OF AN
its employee deduction is purely business in character. INDIVIDUAL TAXPAYER
► for (1) Health and /insurance
Q: Requisites? (2) Hospitalization
A:
1.the employer must have established a pension or REQUIREMENTS:
retirement plan to provide for the payment or reasonable 1. amount of premiums, paid by taxpayer for himself
pension of his employees and members of his family,
2. pension plan must be reasonable and actually sound; 2. amount of premiums should not exceed (1) P2,400
3. it must be funded by the employer per family or (2) P200 a month
4. the amount contributed must no longer be subject to his 3. gross income of the family for the taxable year
control or disposition is not more than P250,000
5. the amount has not yet been allowed as a deduction and
6. the amount has or is apportioned in equal parts over a
period of 10 consecutive years beginning with the year in
which the transfer or payment is made. Q: Who can avail of this deduction?
A: 1.individual taxpayer earning purely compensation
34 K ADDITIONAL REQUIREMENTS FOR income during the year;
DEDUCTIBILITY OF CERTAIN PAYMENTS 2. individual taxpayer availing itemized or optional
standard deduction; and
►allowed as a deduction only if shown that the tax 3. individual taxpayer earning both compensation
required to be deducted and withheld there from has been income and income from business
paid to the BIR in accordance with Section 58 and Section
81 SECTION 35 ALLOWANCE FOR PERSONAL
EXEMPTION FOR INDIVIDUAL TAXPAYER
34 L OPTIONAL STANDARD DEDUCTION
Q: When do we apply this?
KINDS OF DEDUCTIONS: A: apply if individual taxpayer is paying by way of NIT
1.Itemized deduction
2.Optional Standard Deduction Q; Who are taxpayer?
3.Personal /Additional Deduction A: those mentioned under Section 24 (A)
1. RC
OPTIONAL STANDARD DEDUCTION: 2. NRC
3. OCW

Page 45 of 79
 4. RA ►R.A. 7432 and RR 2-98: a senior citizen can also be a
►all can claim both personal and additional exemption dependent.

Q: Why not include NRAETB? Can the latter claim Q: Can a widower claim exemptions?
any exemption? A: exemptions must be strictly construed, widower not
A: NRAETB is not included because Section 35 A refers included in the list under Section 35 A – but can claim
to Section 24 A under sec 35B
►NRAETB can claim personal deductions but not ►widower, married or used to be married
additional exemptions pursuant to Sec 35 D
MARRIED INDIVIDUALS
REQUIREMENTS: ►each legally married individual can claim the personal
1.NRAETB should file a true and accurate return exemption. Husband and wife = P64,000
2. the amount to be claimed as personal exemptions
should not exceed the amount provided for under Q: Who are allowed to claim?
Philippine Laws A: Normally , it is the husband who claims unless he
executes a waiver that the wife will claim the same
TAKE NOTE: (RR2-98)
AEMOP: can be a RA or NRAETB
Additional Exemptions: (35B)
BASIC PERSONAL EXEMPTIONS:
-additional exemption of P8,000 for each dependent not
1. Single individual; or individual judicially decreed as execeeding four (4)
legally separated with no qualified dependents.
► 20, 000 Q: Who can claim the same?
A: 1.Married couples: only one of the spouses can
2. For head of the family – can be single or legally claim it;
separated with qualified dependents. 2.legally separated individuals: can be claimed by the
► 25, 000 spouse who has custody of the child or children
►the additional exemption claimed by both shall not
3. For each married individual – if only one of the exceed the maximum additional exemption herein
spouse, earns or derives gross income, only such spouse allowed.
can claim the personal exemption.
►32, 000 Q: Define “dependents”
A: legitimate, illegitimate or legally adopted child chiefly
Q: Who is the “head of the family”? dependent upon and living with the taxpayer if such
A: 1.unmarried or legally separated man or woman dependent is (1) not more than 21 years of age, (2)
2. With (1) one or both parties or unmarried, and (3) not gainfully employed or (4) if such
(2) With one or more brothers and sisters dependent, regardless of age is incapable of self support
(3) with one or more legitimate, recognized, because of mental or physical defect.
natural or legally adopted children
3. living with and dependents upon him for their Q: What if widower has illegitimate children, can claim
chief support additional exemption?
4. whose such brother or sisters or children are A: can claim, can be considered as head of the
(1) not more than 11 years old and family w/ dependent
(2) not gainfully employed,
(3) unmarried Q: What if the children are temporarily away
5. OR, regardless of age, the same are incapable of from the parents?
self support because of mental or physical defect. A: still considered living with parents, can claim
exemption
Q: Why do we have to determine who the head of the
family is? CHANGE OF STATUS: (SEC 35 C)
A: only legally separated individuals can claim Q: Reckoning Period?
additional exemptions if they have qualified dependents. A: end of the year or close of such year when such
change of status occurred.
TAKE NOTE:
TAKE NOTE:

Page 46 of 79
►always choose the higher amount of exemption if you ►Amount paid for new buildings, can be deducted if it
are filing a return covering the period within which the involves intangible drilling and development cost incurred
change of status occurred in petroleum operations (Sec 34 6 (A)

1. if the taxpayer should (1) marry or (2) have additional PREMIUMS PAID ON LIFE INSURANCE
dependents during the taxable year, he may claim the POLICY :
corresponding exemption in full for the year.
1. covering the life of any officer or employee or
Illustration: any person financially invested in any trade of
1.Single Jan 1, 2005 business carried on by the taxpayer.
2.Married June 1, 2005 – on April 15, 2006 – status: 2. taxpayer is directly or indirectly the beneficiary
legally married can claim P 32,000 under such policy.

2. if the taxpayer should die during the taxable year, estate LOSSES FROM SALES OR EXCHANGES OF
can claim personal exemption. PROPERTY (between related parties)

Illustration 1) between family members

1.Jan. 25, 2005 taxpayer married w/ one child
can claim on April 15, 2006 Q: Who is considered the “family of the taxpayer?”
P32,000+ A: a. brothers and sister (whole is ½ blood)
P8,000 } P40,000 b. spouses
c. ancestors
► In this case, as if the change of status occurred at the d. lineal descendants
close of taxable year. If taxpayer’s spouse or child dies Q: are uncles or nieces included?
within the taxable year or the dependent’s became (1) A: no
gainfully employed (2) got married or (3) became 21 as if
the change as status occurred at the close of taxable year.
Illustration:
1. Taxpayer’s tragic story wife died Jan. 25, 2005 and IN DONOR’S TAX
child died the next day then another child eloped and get ►Relatives includes relatives by consanguinity within the
married. 4th civil code. Nephew is a stranger and relative ang
2. Taxpayer despite the tragedy can claim ton of money nephew.
on April 15, 2006.
P 32,000 2) individual and corporations
P 16,000 (8,000 per child) Gen. Rule: NO DEDUCTION
48,000 Except: distribution in liquidation or less than
50% of the outstanding capital stock
Section 36. Items not Deductible
3) Two corporations
36 A. General Rule: In computing net income, no 4) Grantor or Fiduciary
deduction shall be allowed: 5) Two fiduciaries of two trust
(1) Personal, living or family expenses – not related to 6) Fiduciary and beneficiary of trust
trade or business
(2) Section 36 A (2) and Section 36 A (3) General Rule: Sec. 37 Special provisions regarding deductions of
No deductions allowed for insurance companies.
1. Any amount paid out for new buildings or for
permanent improvements, or betterments, made to Codal Provisions
increase the value of any property or estate Section 38: Losses From Wash Sales of Stock or
2. Any amount expanded in restoring property or in Securities
making good the exhaustion thereof for which an
allowance is or has been made. Q: What is a wash sale?
Exceptions: A: It is a sales or other disposition of stock securities
1. Option granted to Private Educational Institution where substantially identical securities are purchased
to deduct the same as capital outlays. within 61 days, beginning 30 days before the sale and
TAKE NOTE: ending 30 days after the sale.

Page 47 of 79
Q: What period?
A: 61 day period beginning 30 days before and ending 30
days after the sale
Q: Jan 20 you purchased share of stock, and disposed of
the same on Feb 5, 2005. Is this a wash sale?
A: No
Q: If it is a loss in wash sale, happens?
A: General Rule: (Sec 131 RR No. 2)
gains from wash sale are taxable but
losses are non-deductible
Exception:
►unless claim is made by a dealer in stock or securities
and with respect to a transaction made in the ordinary
course of the business of such dealer
Q: Reason why losses in wash sale cannot be deducted?
A: 1. to avoid too much speculation in
the market
2. taxpayer not telling the truth, because he
may say he incurred a loss instead of a gain
Section 40. Determination of Amount and Recognition
of Gain or Loss
GENERAL RULE: This is totally irrelevant if the
income is subject to fit. In fit gain is presumed.
EXCEPT: sale of shares of stock where you have to
determine actual gain or loss
Q: When is there a gain?
A: excess of the amount realized over the basis or
adjusted basis for determining gain. (amount realized
from the sale or other disposition of property)
Q: When is there a loss?
A: the amount realized is not in excess of B or AB
Illustration: 1987 Bar (Juan dela Cruz sold jewelry
for 300,000 ) contract of sale
►amount realized is 300,000
Q: What will be the basis of the gain?
A: Sec. 40 B (1), property was acquired by purchase
►Cost: purchase price + expenses
Q: If there is a gain, is the whole gain subject to income
tax?
A: it depends
►if ordinary asset = 100% is subject to income tax
►if capital assets
a. short term(less than 12 months) : 100% taxable
b. long term (more than 12 months): 50% taxable
Q: suppose property sold is a parcel of land will the rule
be the same?
A: No, and it depends
►ordinary asset: apply the cost
►capital asset: 6% FMV or selling price which ever
is higher
Q: Do we apply the holding period?
A: No, holding period does not apply to the sale of real
property. This is an absolute rule:
►If realty is ordinary – holding period does not
apply.
►If realty is capital asset – 6% FMV or selling price
applies.
►Holding period applies only to sale of personal property
which is a capital asset except sale of shares of stocks.
►Holding period also do not apply to corporations.
Q: If the property is acquired through inheritance,
what is the basis?
A: Sec 40 B (2) fair market value or price as of the date
of acquisition.
Q: Suppose it was a sale of personal property, do we
apply the same principles?
A: No.
Q: What if it involves a sale of real property?
A: Apply the same principles
Suppose it was a result of swindling, theft, robbery or
estafa, do we apply the same principles?
A: Law is silent, take note of the old CIA ruling on this
one
Q: Feb 14, 2006, your GG gave you a jewelry in Sept
your GG breaks up with you. GG request the jewelry
be returned but you already sold it for P200,000.
Will the entire P200,000 be included in gross
income?
A: Basis: (1) same as if it would be in the hands of the
Donor (FMV as of date of acquisition); or (2) last
owner who did not acquire the same by gift (cost)
Q: If it involves a parcel of land?
A: apply the same rules Section 40 B (4) what is the
basis?
1. Property was acquired for less than an
adequate consideration in money or moneys
worth: the basis would be the amount paid
by the transferee for the property.
Q: Section 40 B (5) what is the basis? A: 40 C (5)
Page 48 of 79
► if the property was acquired in a transaction where
gain or loss is not recognized (pursuant to a merger or
consolidation plan)
a. corporation, party to a merger or consolidation,
exchanges property solely for stocks in another
corporation, also a party to the merger or
consolidation
b. is a party to the merger or consolidation, solely
for the stocks of another corporation also a
party to the merger or consolidation, or
c. Security holder of a corporation, party to a
merger or consolidation, exchanges his
securities solely for stock or security in another
corporation, also a party to the merger or
consolidation. – person transfers property to
corporation to gain control
40 C EXCHANGE OF PROPERTY
GENERAL RULE: In sale or exchange of property, the
control amount of gain or loss shall be recognized.
1. gain is taxable
2. losses are deductible
Exception: If permanent to a merger or consolidation
plan, no gain or loss shall be recognized
1. gain is exempt
2. losses are not deductible
REQUISITES:
1. the transaction involves a contract of exchange
2. the parties are members of the merger or
consolidation
3. the subject matter is only limited or confined
with the one provided for by law
►Merger and Consolidation in corporation code and tax
code are not the same.
►Sec 40 (2) (a)
►a corporation which is a party to a merger or
consolidation, exchanges property solely for stock in
a corporation which is a party to the merger or
consolidation
Illustration:
Transferor gives 1M
Transferee gives 700,000 = not taxble gain
P300,000
►If other property received by transferee (40 C (3) (a)
TRANSFEREE
►if the party receives not just the subject matter
permitted to be received: lie if the party receives
money and /or property, the gain, if any, but not the
loss, shall be recognized (meaning taxable) but in an
amount not in excess of the sum of the money and the
FMV of such other property received.
(40 C (3) (b) TRANSFEROR
1.Transferor corporation receives money and / or
property, distributes it pursuant to the merger or
consolidation plan
►no gain to the corporation shall be recognized
2. Transferor corporation receives money and / or
property, does not distribute it pursuant to the merger or
consolidation plan
►the gain shall be recognized but in an amount not in
excess of the sum of such money and the FMV of such
other property so received.
Q: What is the rule?
A: 40 C (3) (a)
1. gain taxable
2. loss not deductible
►40 C (3) (b)
It depends on how distributed:
1. pursuant to the merger or consolidation plan:
►gain exempt
►loss not deductible
2. not pursuant to merger or consolidation plan:
►gain taxable
►loss not deductible.
Sec 40 C (1) (b)
►a shareholder exchanges stock in a corporation
which is a party to a merger or consolidation, solely
for the stock of another corporation which is a party
to the merger or consolidation
Sec 40 C (2) (c)
► a security holder of a corporation which is a party
to the merger or consolidation, exchanges his
securities in such corporation, solely for stock
securities in another corporation.
►The rule is similar in 40 C (3), (a), (b) and (c) although
different property are involve, that is why the last
paragraph of 40 C is a separate paragraph.
►Therefore, Sec 40 C (3) (a,b,c) the rule is
1. gain exempt
2. loss not deductible
40c last paragraph
► the transferee becomes a stockholder, parties are
not members of the merger
►the individual wants to be a shareholder but does
not want to purchase shares but willing to give up
property as a result of the exchange , the person gains
control of the corporation
Page 49 of 79

►The rule is:
a. gain is exempt
b. loss not deductible
Requisites:
1. There is A contract of exchange where
property was transferred by the person in
exchange of stock or unit of participation in
a corporation.
2. As a result, the person alone or together
with others (not exceeding of 4 persons)
gains control of the corporation.
Q: What is control?
A: ownership of stocks in a corporation possessing at
least 51% of total voting power.
Sec 40 B (5)
►non applicability of income tax is only temporary
Reason : Basis will be 40 C (5)
1. 40 C (5) (a) Transferor
►basis of stock or securities received by the
transferor: same as the basis of the property, stock or
securities exchanged:
►decreased by the (1) money and (2) FMV of the
property received; and
►increased by (a) amount treated as dividend and (b)
amount of gain recognized
2. 40 C (5) (b) Transferee
►as it would be in the hands of transferor increased
by the amount of gain recognized.
Sec 40 (c) (4) Assumption of Liability
1. Taxpayer, in connection with the exchanges
described – receives securities or stocks
permitted (no gains recognized) – it is sole
consideration of the same – the other party
assumes liability of the same – the acquisition of
liability not treated as money and / or other
property – the exchange still falls within the
exceptions.
2. If amount of liabilities assumed + amount of
liabilities to which property is subjected to
exceeds - adjusted basis of the property
transferred – the excess shall be considered a
gain from the sale of a capital asset or of
property which is not a capital asset, as the case
may be.
SECTION 41 INVENTORIES
Purpose: Change of inventory to determine clearly the
income of any taxpayer/ to reflect the true income.
Limitation:
1. once every 3 years
2. approval of the secretary of finance
Section 43 Accounting Periods
1. Fiscal year
2. use of calendar year
a. no annual accounting
b. does not keep books of account
c. individuals
►Use of method as in the opinion of the commissioner
clearly reflects the income:
1. no accounting method has been employed
2. the method does not clearly reflect the income
Sec 44 Period in which items of Gross Income included
and Sec 45 Period for which Deductions and Credit
Taken
►Under Sec 44 amount of all items of gross income
shall be included in the gross income for the taxable
year in which they are received by the taxpayer
►Under Sec 45 deductions shall be taken for the
taxable year in which “paid or accrued” or “paid or
incurred.”
►Sec 44 and Sec 45 are mentioned in the code because
of the death of the person.
Illustration:
Facts: taxpayer dies in the middle of the year
January 1, 2006 – June 15, 2006
►June 26, 2006 to Dec 31, 2006 the estate is the
taxpayer
►So the income and deductions from Jan 1 to June
25,, included in the computation
Section 46 Change of Accounting Period
Q: Who is the taxpayer?
A: corporation (taxpayer other than individual)
Q: What kinds of accounting period?
A: 1.fiscal year
2. calendar year
Q: Changes contemplated?
A: 1. fiscal to calendar
2. calendar to fiscal
3. fiscal to another fiscal
►with the approval of the Commissioner, net income
shall be computed on the basis of the new accounting
period.
Q: Calendar to calendar, correct?
Page 50 of 79
A: not correct statement Requirement: The initial payments do not exceed 25% of
the selling price.
Section 47 (A)
Taxpayer: Corporation Q: If the initial payment exceeds 25% what do you call
1. Fiscal to calendar it?
► separate final or adjusted return shall be made for A: called deferred sale
the period between the so close of the last fiscal year
for which the return was made and (2) the following Q: Consequence?
Dec 31. A: you must pay the whole amount of the tax

2. Calendar to Fiscal Q: Sale of Personal Property, is it important to know if it

►separate final or adjusted return shall be made for is a casual or regular sale?
the period between the close of the last calendar year A: Yes
and the date designated as the close of the fiscal year.
Casual Sale has Requirements:
3. Fiscal to fiscal 1. selling price exceeds P1,000
►separate final or adjusted return shall be made for 2. initial payment not exceeding 25%
the period between the close of the former fiscal year selling price
and the date designated as the close of the new fiscal
year. ►Regular sale no requirements
►File return indicating the change in accounting Case of Bañas
method 1. subject matter
2. sold by way
Section 48 Accounting for Long Term Contracts 3. agreement
4. cash deposit
Q: Who are the professionals involved? 5. post dated promissory notes (installments)
A: applies to architects and engineers 3. 1st installment promissory note was disconnected
4. 2nd installment exchanged with cash - these two
Q: What is a long term contract? exceeds the selling price
A: it means building, installation or construction contracts 5. you only compute cash
covering a period in excess of one (1) year.
H: Initial payment exceeds 25% installment basis is not
Q: Basis of income? applicable
A: a. persons whose gross income is derived in whole or
in part from such contract shall report such income RR 2; Section 175: In payment by way of installment
upon the basis of percentage of consumption. promissory note, bills of exchange and checks will not be
considered in computing the 25% initial downpayment.
b. the return shall be accompanied by a certificate of
architects or engineers showing the percentage of
completion Section 50 Allocation of Income and Deductions
►tremendous power of the Commissioner to allocate
c. deduction of expenditures made during the taxable the income and deduction of several corporations
year, on account of the contract is allowed having the same interest.
Q: Same interest?
Section 49 Installment Basis A: stockholders substantially the same
►contemplates a seller of the property
Q: Limitations?
Q: Is it important to know if the property is personal or A: None
real? ►That is why it is a great source of corruption
A: Yes
Section 51 Individual Returns
Q: Sale of Real Property is it important to know if it is a Who are required to file? (ITR)
casual sale or regular sale? 1. RC
A: No 2. NRC
3. RA
4. NRAETB – sources within

Page 51 of 79
 Fiscal year: 15th day of the 4th month following the close
Q: Who is not mentioned in Sec 51 but liable to pay by of the fiscal year.
way of NIT?
A: OCW/ seaman 51 C (2) individuals subject to tax on capital gains
Exception: General Rules Sec 58
Exception: 1. Sale of shares of stocks
RC OR ALIENS: engaged in trade or practice of ►return filed within 30 days after each transaction and
profession in Phil. Shall file ITR regardless of the amount ►Final consolidated return on or before April 15
of gross income. 2.Sale of Real Property
►return filed within 30 days following each sale
Q: If OFW is exempt from filing a return, what is he
required to file? 51 D Husband and Wife
A: Information Return 1. Pure compensation income earner – separate return RR
3-2000 – pure compensation income earner regardless of
Q: who are not required to file a return? amount of income not file ITR.
A: 2. Not pure compensation: joint return
a. an individual whose gross income does not
exceed his total personal and additional 51 E. Return of Parent to Include Income of Children
exemptions for dependents
b. worker (compensation income earners) ► unmarried minor receives income from property
regardless of the amount of compensation shall received from living parent – included in the parent’s ITR.
not required to file ITR because the management Exception:
files it. (RR 3-2002) 1.Donor’s tax has been paid
c. individuals whose sole income is subject to FIT 2.Property exempt from donor’s tax
d. individuals who are exempt from income tax
51 F. Persons Under Disability
Exception: IT
1. the management files an incorrect return Q: Who makes the return?
2. the employee has two or more employer A:
1.duly authorized agent
51 A (3) 2. duly authorized representatives
3. guardians
A: not required to file ITR may be required to file 4.other persons charged with the care of his person
information return or property
►both incapacitated taxpayer and agent will be liable
51 B - Where to file? for:
1. authorized agent bank 1.erroneous return
2. revenue district officer 2. false or fraudulent return
3. collection agent
4. duly authorized treasurer of the city or 51 G Signature Presumed Correct
municipality where taxpayer resides or has principal ► prima facie evidence the return was actually signed by
place of business the taxpayer
5. office of commissioner – if no legal residence or
place of business in Phil Section 52 Corporation Return
►go back to Sec 51 A (2)
51 C
Q: When to file? General Rule: Sec 58 Final Income
A: filed on or before the 15th day of April each year Tax
►return and creditable withholding tax return is filed
51 C (1) – NIT Payers using CY monthly
►two days provided (calendar)
1. on April 15; or Exception: Sale of Shares of Stocks
2. before April 15 (January, Feb or March) (Sec 51 A (2)) Sale of Real Property
► not December because the calendar year is not yet over ►RR -17-2003: Sale of Real Property subject to final
withholding tax, the buyer is deemed the agent.

Page 52 of 79
Sale of Shares of Stocks C. Return of Corporation Contemplatory Dissolution or
Q: Reasons for filing Final Income tax or Final Recognition
Consolidated Return? 1.Within 30 days after:
A: Reasons: a. the adoption by the corporation of a resolution or
1. FIT whose actual determination of gain or loss plan for its dissolution; or
2. in connection with Sec 24 C the basis of the b. liquidation of the whole or any part of its capital
tax is not the gross income but the net capital stock, including a corporation which has been
gains realized. notified of possible involuntary dissolution by the
SEC; or
In connection with Sec 40: c. for its reorganization
►actual determination of loss or gain
►file a return within 30 days from date of transaction 2.Render a correct return verified under oath setting form:
a. forms of the resolution or plan;
TAKE NOTE: In all other income subject to FIT, the b. such other information prescribed
gains are presumed
3.Secure a tax clearance from the BIR and file it with the
INCOME OF MINORS SEC
Q: Minor below 18: Will it be included in the Minor’s
ITR?
A: it depends 4.Thereafter, SEC issued a Certificate of Dissolution or
1. income from property received from parents ► Reorganization.
included in parent’s ITR
Except: D. Sale of Stocks – ITR
a.Donor’s tax paid look at the previous notes about it
b.Property exempt from donor’s tax
Section 53 Extension of Time to File Returns
2. income from minor’s own industry
►Minor’s ITR accomplished by guardian or parents Q: To whom granted?
A: Corporations
Q: if the individual is exempt from income tax, can be Grounds: Meritorious case
required to file a return? ►subject to the provisions of Sec 56 Time Extension
A: General Rule: No
Exceptions: Section 54 Returns or Receivers, Trustees in
1.engaged in trade or business; or Bankruptcy or Assignees
2.exercise of profession – Sec 51 A (2) ►the aforementioned persons shall make returns of
net income as and for such corporation in the same
SEC 52 CORPORATION RETURNS manner and form as such organization is required to
A.Requirements make.
Taxpayer: DC or RFC (except NRFC)
ITR Filed: 1. TRUE AND ACCURATE Section 55 Returns of General Professional
a. quarterly income tax return Partnership
b. final or adjusted income tax return ► file a return of its income setting forth
1. items of gross income and of deductions allowed
Filed by: by this title (Title II – Tax on Income)
1.President; 2. Names of partners
2.Vice President 3. Taxpayer identification number (TIN)
3. Other principal officer 4. address of partners
►ITR must be sworn by such officer and the treasurer or 5. shares of each partners
assistant treasurer
►GPP is exempt from corporate income tax
B. Taxable Year
1. fiscal; or 2. calendar Q: Why is the GPP obliged to file a return?
► corporation cannot change accounting method A: to determine the shares of each partners
employed without the approval or prior approval of the
commissioner (Sec 47) Section 56 Payment and Assessment of Income Tax for
Individuals and Corporations

Page 53 of 79

A. Payment of Tax
Q: Who pays the tax of tramp vessels?
A: 1.the shipping agents and or the husbanding agent
2.in their absence, the captains thereof
►those people are required to file a return and pay the tax
due before departure
Q: What is the effect of failure to file the return and pay
the tax due?
A: 1.Bureau of Customs may hold the vessel and prevent
its departure until:
a. proof of payment of tax is presented; or
b. a sufficient bond is filed to answer for the tax
due.
Installment Payments
Tax due: more than P2,000
Taxpayer: individuals only (other than corporation)
Elect to pay the tax in two (2) equal installments
a. 1st installment: paid at the time the return is filed
b. 2nd installment on or before July 15 following the
close of the calendar year
Q: What is the effect of non payment on the date fixed?
A: The whole amount of tax unpaid becomes due and
demandable together with the delinquency penalties.
Payment of capital gains tax :
Q: Paid when?
A: on the date the return is filed
Avail exemption for capital gains:
a. no payments shall be required;
b. if you fail to qualify for exemption – tax due shall
immediately become due and payable and
subject to penalties
c. seller pays tax – submit intention or proof of intent
within six (6) months from the registration of
document transferring
Q: when is the real property entitled to refund?
A: upon verification of compliance with the
requirements for exemption.
►Report gains on installments under Sec 49 – tax
due from each installment payment shall be paid
within 30 days from the receipt of such payments.
►No registration of document transferring real
property
1. without a certification from commissioner or his
duly authorize representative that
a. transfer has been reported
b. tax has been paid
B. Assessment and Payment of Deficiency Tax
► Return is filed, the commissioner examiner and assess
the correct amount of tax
►tax deficiency discovered shall be paid upon notice and
demand from the commissioner.
3 INSTANCES CONTEMPLATED
1. file the return and pay the tax
2. file the return but not pay the tax
3. not file the return and not pay the tax
Section 57 Withholding of Tax at Source
A. Withholding of Taxes
►subject to the Rules and Regulations the Section of
Finance may promulgate, upon recommendation of
commissioner: Require the filing up of certain income
tax return by certain income payees.
Q: Enumeration is all about what?
A; Enumer ation about Final Income Tax
Except: Gross Income Tax
1. 25 B (NRANETB)
2. 28 B (NRFC)
B. Withholding of Creditable Tax at Source
►The Sec. of Finance, upon recommendation of
the commissioner require the withholding of a tax
on the items of income payable to natural or
juridical persons, residing in the Phil, by payor-
corporation/ person… the same shall be credited
against the income tax liability of the taxpayer for
the taxable year. At the rate of not less than 1% but
not more than 32% thereof.
Q: What is the maximum?
A: Maximum: now 35% pursuant to RA 9337
Q: When will you allow withholding beyond 15%?
A:
For NIT 15% is the maximum
1. FIT – the amount of withholding is totally
2. GIT - equal to the amount of tax
Tax Free Covenant Bond
►the bonds, mortgages, deeds of trust or other similar
obligations of
DC or RFC
►contains a contract or provision where the obligor
(debtor) agrees to pay the tax imposed herein
►normally between the creditor and debtor
Q: Who pays the tax?
A: Creditor pays the tax by virtue of an agreement the
debtor assumes the liability and the creditor is now free
from payment of tax before it can transfer the property to
the buyer.
Page 54 of 79
 ►Withholding agent shall submit to the commissioner an
Section 58 Returns and Payment of Taxes Withheld at annual information return containing :
Source 1. the list of payees and income required
2. amount of taxes withheld from each payees
A. Quarterly Returns and Payment of Taxes Withheld at 3. other pertinent information required
Source
1. covered by a return and paid to: Final Withholding Tax: AIR
a. authorized agent bank
b. revenue district officer
c. collection agent ►filed on or before January 31 of the succeeding
d. duly authorized treasurer of city or municipality year
where withholding agent has:
1. his legal residence; or Creditable withholding tax: AIR
2. principal place of business; or ►not later than March 1 of the year following the year
3. if corporation , where principal office is for which the annual report is being submitted
located ►Commissioner may grant WHA reasonable extension of
time to furnish and submit the return required herein.
2.Tax deducted and withheld
►held as a special fund in trust for the government until D. Income of Recipient
paid to the collecting officers. 1. Income upon which any creditable tax is
required to be withheld at source shall be
3.Return for final withholding tax included in the return of its recipient.
►filed and paid within 25 days from the close of each 2. the excess of the amount of tax so withheld over
calendar quarter the tax due on his return shall be refunded
3. income tax collected at source is less than the tax
4.Return for Creditable withholding taxes due on his return – difference shall be paid
►filed and paid not later than last day of the month 4. all taxes withheld
following the close of the quarter during which 1. considered trust fund
withholding was made 2. maintained in separate account
3. not commingled with other funds of WHA
5. Commissioner, with approval of Sec Finance
► require withholding agents to pay or deposit taxes at E. Registration with Register of Deeds
more frequent intervals where necessary to protect the ►No registration of any document transferring real
interest of the government property shall be effected by the Register of Deeds
unless the commissioner or his duly authorize
B. Statement of Income Payments Made and Taxes representative has certified that the transfer (1) has
Withheld been reported and (2) tax due has been paid
►Withholding agent shall furnish payee a written ►Register of Deeds requires payment of tax before
statement showing: transfer of property
1. income or other payments made by WHA during
such quarter or year and Section 59 Tax on Profits Collectible from Owner of
2. amount of tax deducted and withheld other Persons
► statement given simultaneously upon payment at the
request of the payee. ►Tax imposed under this title upon gains, profits and
income not falling under the foregoing and not returned
Creditable withholding taxes and paid by virtue of the foregoing
1. corporate payee – not later than the 20 th day shall be assessed by personal return
following the close of the quarter
2. individuals payee – not later than March 1 of the Intent and Purpose of this Title
following year 1. All gains, profits and income of a taxable class
shall be charged and assessed with the
Final Withholding taxes corresponding tax.
►the statement should be given to the payee on or 2. Said tax be paid by the owner of the gains, profit
before January 31 of the succeeding year. or income or the person having the receipt,
custody, control or disposal of the same
C. Annual Information Return

Page 55 of 79
Determination of Ownership:
►determined as of the year for which a return is
required to be filed
CHAPTER X: ESTATES AND TRUSTS
Section 60: Imposition of Tax
1. Estate ► property of the decedent created by an
agreement, trust or by last will and testament
2. Trust ►agreement, contract or last will and
testament
Status:
1. Estate: same status as decedent
2. Trust: same status as the grantor
Income taxpayer is the Estate:
►income of the estate pending partition or no
partition at all:
Three kinds of partition:
1. judicial
2. extra judicial partition
3. or no partition at all
During partition Estate earns income:
1. individual – income tax
2. corporation – corporate income
tax
3. estate (Taxpayer = TP)
a.Impose Income as if TP is individual
b.Impose income as if TP is corporation
c.Impose income as if estate itself
►depends whether there is a (1) judicial (2)extra judicial
partition or (3) no partition at all
When there is a judicial settlement which is final and
executory but no partition:
Two possibilities:
1.Creation of unregistered partnership
►Income of the Estate: corporate income tax
Section 62: Applies during Pendency of Extra Judicial
Settlement
Personal Exemption (P20,000)
Individual ► it will depend whether he/she is
classified as single, head of the family or married
Estate ►regardless
Special deductions:Income distributed to the heirs
►if you distribute nothing you cannot claim this
special deductions
►if there is a distribution, the heir shall be liable to
pay whether individual capacity
►if there is no distribution, heirs are not liable to pay
anything
►Special deduction not apply if individual tax is paid by
the Estate itself.
Payment: made by executor, administrator, to creditor to
preserve the estate
Sec. 61 and Sec 62
►does not apply if estate is subject to income or
corporate income tax
►it applies if the estate pays itself during the
pendency of the judicial settlement
Basis: Sec 60 C
“during the period of administration or settlement of the
estate.”
Taxpayer is a Trust:
Q; When liable to pay income tax?
A: If the trust is revocable (if revocable, Sec 61 and 62
also apply)
Parties:
1.Grantor /creator /trustor
2.fiduciary / trustee
3.beneficiary / Les Qui trust

2.Creation of Co-ownership Q: Who is liable to pay tax:

►Income of the Estate: Income tax on individual A: If trust revocable:
-co-owner liable in their individual company ► obligation of the trustee
►liability of trust itself and not personal
Ponce Case:
H: After finality heirs did not divide the property, the Liability of trustee:
applicable income tax is corporate income tax because If trust irrevocable
they contributed money to engage in real estate. ►obligation of the grantor
►personal liability of the grantor as an individual
SECTION 61 TAXABLE INCOME (Important)
“Taxable income of the estate or trust shall be computed TWO WAYS OF REPORTING INCOME:
in the same manner and on the same basis as ill the use of PURSUANT TO RR2 – (1949)
an individual.” 1. report only once
(building paid once)
2. after the span of 25 years

Page 56 of 79
 (payment of building divided per year)
ESTATE TAX:
1.Sec 60
2.Real Estate Tax
3. Estate Tax
►transfer tax impose on the Net Estate for the
transfer of property to the heirs or beneficiary
whether real, personal, tangible or intangible
3 KINDS OF TRANSFER TAX:
1.Estate Tax
2. Donor’s Tax
3. Sec 135 of LGU Transfer of Real Property
Q: We don’t have inheritance tax and donees tax, why?
A: 1973 Marcos issued P.D. 69
Explain: Sec 84, rate is max of 20% of net before the rate
is 60% plus additional amount.
►resulted to many gimiks through tax avoidance scheme,
like creating a family corporation (only taxable is the
stockholders which is exempt)
►Congress enacted RA 7449 decreased 60% to 35% and
then RA 8424 – 35% to 20%
Q: Now is it safe to create a family corporation?
A: No more.
Q: Now: Iba na ang scheme – which is better sale or
donation?
A:
1.Sale of RP considered capital assets
►6% to 1.5% doc. Tax 7.5 % better
2.Sale of RP considered ordinary asset
►5% to 52% as per use may be
3.Donation if given to all compulsory heir
► relative lower than 20% which is 15%
► stranger: 30% so go with 20%
1. NRA and Estate
2. NRA and FC Donors = property outside Phil
exempt
3. all, other than these 3 – taxable w in and w/out
Q: Is Section 104 relevant to all taxpayers?
A: No, material only to NRA and FC
Section 104 speaks of intangible personal property
located in the Philippines.
1.Franchise which must be exercised in the
Philippines;
2.S.O.B. issued by a Domestic corporation;
3.S.O.B. issued by foreign corporation at least 85%
of the business of which is located in the Philippines.
– do not confuse with 42 (2nd par)
4.S.O.B. of foreign corporation which acquired a
business situs in Phil
5.S.R. in business, partnership or industry established
in the Phils
Q: NRA, German donates SOS of FG to Filipina gf, is it
subject to donor’s tax?
A: it depends (you must qualify)
1.Subject to donor’s tax if:
1.S.O.B. FG at least 85% of business located in the
Phil
2.S.O.B. FG which acquired a business situs in Phil
2.Exempt
1.personal property outside of Phil; or
2.intangible personal property net taxable if following
requisites concern:
A decedent at the time of his death or the donor at the
time of donation was a citizen and resident.
1.of a foreign country which at the time of his death or
donation did not impose a transfer tax of any manner, in
respect of intangible personal property of citizens of
Philippines not residing in that foreign country; or

Q: Who are the taxpayers? 2. the laws of the foreign country allows a similar
A: Sec 104 Estate and Donors exemption from transfer or death taxes of every
1.Estate character or description in respect of intangible
a. RC personal property owned by citizens of the
b.NRC Philippines not residing in that foreign country.
c. RA
d. NRA Q: What if citizen of one country and resident of another
2. Donor’s Tax country will the exemption apply?
a. RC A: No, law requires that he must be a citizen and resident
b.NRC of the foreign country.
c. RA
d. NRA Campos Rueda Case:
e. DC F: NRA died – married to Moroccan man, so she was a
f. FC Moroccan resident.

►A corporation cannot die of a natural death. Donated SS in DC – administrator claims exemption,

Q: What is the reason for classifying the taxpayers? ground: In Morocco, intangible personal property of
A:

Page 57 of 79
 Filipinos not residing therein is exempt from transfer Q: Why definition of gross estate is longer than definition
tax. of gross gift?
BIR contends: Morocco is not a country but a colony A: transfer occurring after death. estate tax absolute
of Spain.
H: claim granted – even if it is not a full pledged state, or Transfer during the life time
it’s a mere colony, what matter is that the foreign law ►Normally Donor’s tax
provides for an exception. However there are exceptions:
1.transfer in contemplation of death (85B)
SECTION 84 RATES OF ESTATE TAX 2.revocable transfer (85 C)
3.transfer for insufficient consideration
Q: What is the formula for Estate tax?
A: Gross Estate (Sec 85) B. Transfer in contemplation of death
- Deductions (Sec 86) Roces case:
-------------- F: during lifetime, the following document were
Net Estate instituted or executed simultaneously
x Rate 1.will and 2. donation
------------- The heirs insisted to pay Donor’s tax, Posados the
Taxable net income collector tried to collect inheritance tax.
- Tax credit unique thing: Donees were also the heirs in the last will
--------------------- and testament
Tax due Donees wanted to pay donor’s tax because it is always
Gross estate (define) – Sec 104 lower than the estate tax except when the donee is a
►gross estate include real and personal property, stranger
whether tangible or intangible, or mixed, wherever H: this is a transfer in contemplation of death
situated
NRA: Decedent / Donor – property situated outside Dizon Case:
of Philippines not included on the gross estate F: Deed of Donation was executed
Dizon died several days thereafter
Section 85 Gross Estate (inclusion) son claims Donor’s tax
A.Decedent’s interest H:Transfers in contemplation of death

►includes property (1) owned at the time of death and (2) Q: What are transfers deemed in contemplation of death?
property not owned at the time of death A: 1.Property was transferred during the lifetime but the
Classic example: Usufruct decedent:
a. retains possession or receive income or fruits of
Q: if terminated by the death of usufructuary, is it subject property; or
to estate tax? b.retains the right to designate persons who will
A: Not subject to estate tax possess the property or the right to receive fruits or
income
Reason: Exempt Transmission under Sec 87 (a) c.Revocable Transfers
►merger of the usufruct in the owner of the naked title 1.revocable transfers are included in the gross estate
Reason: the decedent retains tremendous power and
Q: is there a conflict between Sec 88 a and Sec 87 a? control over the property
How do you reconcile? 2.Irrevocable transfers are not included in the gross
A: No conflict estate: exempt
1.Section 87 a contemplates a situation where the Reason: the decedent losses control over the property
usufruct is terminated.
2.Section 88a contemplates a usufruct for a fixed Notice Not Required because the person has the control
period. Ex contract of lease over the property

Q: How do you determine the value of usufruct? D. Property passing under general power of appointment
A: Sec. 88 a provides to determine the value of the right ► same with fidel commissary substitution
of usufruct, take into account the probable life of the 3 parties:
beneficiary. 1.testator / decedent
2.1st heir
3.2nd heir

Page 58 of 79

TAKE NOTE: To determine whether included in Estate or
not, know who has the choice to designate the 2nd heir:
►if decedent instructs the 1st heir that he can transfer the
property to whomever he wants included in gross estate
►1st heir choice – included in gross estate
E. Proceed of Life Insurance
1.Beneficiary is the estate
►included in gross estate whether designation is
revocable or not
2.Beneficiary is 3rd person
► revocable included
►irrevocable not included
F. Prior Interest
►important only due to the codification of the tax code
B,C,E, included whether before or after the effectivity
of the code
G. Transfer for insufficient consideration
Q: Similar provision in Sec 100 (Donor’s tax) can you
apply the two (2) provisions simultaneously?
A: No, alternative application, one or the other but not
both.
The application will depend on the time of transfer or
motive:
1.If transferred because of impending death
► estate tax
2.If transfer because of generosity
►Donor’s tax
Q: Parcel of land was sold for less than adequate
consideration (adequate) to relative for P600,000
when FMV is 1 million pesos. Is this subject to
transfer tax? Is it subject to Donor’s tax?
A: No, Sec 100 provides the property should be other
than real property referred to in Section 24 (D)
►Not subject to Donor’s tax, the applicable tax is 6%
FIT
Q: Will your answer be the same if SOS are sold?
A: No, answer not the same, SOS not property
contemplated in Sec 24 D (1)
►in this case, the amount by which the FMV of prop
exceeds the value of the consideration shall be
deemed a gift and included in the computation of the
gross gift: subject to Donor’s Tax
Q: What is the subject matter in 85 G?
A: paragraphs 85 B, 85 C, 85 D
Sale in good faith as a defense:
1.under Section 100 is not a defense
2. under Section 85 G, it is a defense
H. Capital of Surviving Spouse
►correlate with Sec 86 C
►both speak of legally married individual
►pertains to the separate property of spouse who
survived
►capital used in its generic sense
►surviving spouse may be man or woman
Section 86 (c)
►to determine the limitations of
1. Funeral Expense
2. Whether written notice is required
3. to determine whether gross value is at least
P200,000 (Sec 90)
4.to determine if gross value is at least 42 M
Q: Who are the taxpayers under 86 A?
A: 1.RC
2.NRC
3.RA
Q: Who is the taxpayer under 86 B?
A: NRA
Q: Why do we need to know this?
A: NRA cannot avail of the following deductions:
1.family income
2.standard deduction
3.hospitalization
4.retirement pay under RA 4917
A. Deductions Allowed to the Estate of a Citizen or
Resident
1.ELIT (expenses, losses, indebtedness and taxes)
a) 1.Actual Funeral Expenses; or
2.amount equal to 5% of gross estate
►apply whichever is lower
Limitation:
a)amount equal to 5% of gross estate should not
exceed P200,000 (basis is the gross value)
b) Judicial Expenses
►no limitation
Pajonar vs Commissioner
I: Whether or not extra-judicial expenses may be
allowed as a deduction
H: This law has been copied from U.S. In US, expenses
to be claimed as a deduction both judicial and extra
judicial expenses.
Claims against the estate
Page 59 of 79
 ►Estate is the debtor
Requirements:
1.at the time the indebtedness was incurred the debt
instrument was duly notarized;
2.loan contracted within 3 days before death;
3.the administrator or executor shall submit a
statement showing the disposition of the proceeds of
the loan
Claims of the deceased against insolvent person
►Estate is the creditor
Requirement:
►the only requirement is that the (only) amount of loan
is included in the gross estate
►notarization and certification not required
Unpaid Mortgage, taxes and losses
Q: In unpaid mortgage who is the mortgagor?
►decedent mortgagor
1. Unpaid mortgage
1.value of the decedent’s interest in the property is
undiminished by such mortgage;
2.included in the value of the gross estate;
Illustration:
1 million FMV but mortgage is only 600,000 you
include 1 million
2.Estate tax
3.Losses
Requirements:
1.losses incurred during the settlement of the estate;
2.arising from fire, storms, shipwreck or other
casualties, or from robbery, theft or unbezzlement
3.losses not compensated by insurance
4.losses not been claimed as a deduction for income
as purpose
5. losses incurred not better than the last day for the
payment of the estate tax
Property Previously Taxed
►Vanishing Deduction Return
Requirement:
1.person acquires the property by virtue of donation or
inheritance
Q: What if acquired through purchase?
A: Not apply, the property must be acquired by
inheritance or donation
2.Estate tax or Donor’s tax already paid by the Estate of
the Decedent (1st par)
3.Any person who died within five (5) years prior to the
death of the decedent
Q: What are the amounts?
A: Prior Decedent died within:
1.5years – 20%
2.4years – 40%
3.3 years -60%
4. 2years – 80%
5. 1 year -100%
Q: Suppose the person died within 1 year and it was
inherited by son, suppose the son also died within 1
year or may be 2 years, should we apply the
vanishing deductions?
A: No more (last par Sec 86 A2)
Transfer for Public Use
►amount of all bequest, legacies, devises or transfers
Recipient:government or any political subdivision
►exclusively for public purpose
Take Note: 30% of which not used for administrative
purpose is not a requirement
FAMILY HOME
►amount equivalent to the current FMV of the Family
Home of decedent.
Limit: FMV should not exceeds 1 million otherwise the
excess will be subject to estate tax.
Requirements: (RR 2-2003)
1.Person is legally married
GR: if single not allowed to claim
Except: if head of the family
2.Family Home actual residence of the decedent
3.Certification of Barangay Captain of locality
STANDARD DEDUCTIONS
►automatic: RR 2-2003 no requirement provided the
decedent is the one in 86 (A) (RC, NRC, RA)
MEDICAL EXPENSES
Requirements:
1.amount not exceeding P500,000
2.medical expenses incurred by the decedent within
one (1) year prior to his death.
►must be duly substantiated with receipt
RETIREMENT PAY UNDER RA 4917
(RETIREMENT PAY WITH PRIVATE PLAN)
Requirements:
1.plan duly approved by the BIR
2.person at least 50 years old
3. 10 years in service
4. avail only once
TAKE NOTE: This is a deduction in the nature of
exemption, all other retirement plan is excluded
B. Deductions Allowed to Non resident Estates
1.ELIT
Page 60 of 79
 2.Property Previously taxed 1. after decedent’s death
3.Transfers for public use 2.same period after qualifying as executor or
administrator
►give a written notice
C. Shares in the Conjugal Property
Q: If the Net Estate is at least P16,000 will you in form
D. Miscellaneous Provisions the commissioner?
For NRA: No deduction allowed unless include in the A: yes, the gross is at least 3-4 million
return the value at the time of his death that part of his
gross estate not situated in the Philippines. For proper SECTION 90 ESTATES TAX RETURNS
deduction must include E. below Q: When required to file return?
A: 1.all cases of transfer subject to tax
E. Tax Credit for Estate Tax Paid to Foreign Country 2.even though exempt, gross value of the estate
exceeds P200,000
SECTION 87 EXEMPTION OF CERTAIN 3.regardless of gross value of the estate, when the
ACQUISITION AND TRANSMISSIONS same consists of registered or registrable prop such
1. Merger of usufruct in the owner of the naked title; as:
2. transmission or delivery of the inheritance or legacy a.real property
by the fiduciary heir or legatee to the b.motor vehicle
fideicommissary; c. shares of stocks
3. transmission from the first heir, legatee or legacy d. other similar property where clearance from
donee in favor of another beneficiary, in accordance BIR necessary for transfer of ownership in the
with the desire of the predecessor; name of the transferee
4. All bequest, devises, legacies or transfers to (1) social
welfare (2) cultural and (3) charitable institution ►return must set forth the following:
1.value of the gross estate at time of death
Requirements: 2.deductions allowed
1.no part of the net income insures to the benefit of any 3.information necessary to establish correct taxes
individual;
2.not more than 30% of donation (BDL) shall be used Q: What if Estate is exempt, is it required to file a
by such institutions for administration purposes. return?
A: General Rule: No
SECTION 88 DETERMINATION OF THE VALUE Exception:
OF THE ESTATE a. gross value exceeds P200,000
A.Usufruct b.estate contains registrable property
1.Determine value of right of usufruct:
►consider the probable life of the beneficiary based on Q: if the estate or gross estate exceeds 2 million, what is
the latest Basic Standard Mortality Table the requirement?
B.Properties A: return must be duly certified by a CPA
►fair market value of the Estate at the time of death
1.FMV determined by Commissioner
2.FMV schedule of values fixed by the Provincial or B. Time of Filing
City Assessors
►filed within 6 months from decedent’s death
SECTION 89 NOTICE OF DEATH TO BE FILED ►within 30 days for filing the return
►within 30 days after promulgation of such order
Q: What is the Basis? 1.certified copy of the schedule of partition and
A: the gross estate of the person 2.order of court approving the same

Q:When is the notice required to be filed? C. Extension of Time

A: 1.all cases of transfer subject to tax Time: 30 days
2.although exempt, when gross values of the estate Grounds: meritorious cases
exceeds P200,000 Who grants: Commissioner

Q: When filed? D. Place of filing:

A: within two (2) months ►return shall be filed with:

Page 61 of 79
 1.authorized agent bank » In most of these provisions, it always say: one-half if
2.revenue district officer the town or municipality shall collect a tax of not
3. collection officer exceeding 1% of the gross receipt.
4. duly authorized treasurer TAKE NOTE: There is no exact amount; hence, it is the
►city or municipality in which decedent was domiciled tax ordinance which will fix the exact amount.
at the time of his death
Q: What if non resident?
A: NR with no legal residence here, with the office of the
commissioner.
public hearing
Q: Let us say there are 3 compulsory heirs, namely A, B,
and C. A renounces his inheritance coming from the In Congress, the requirement is not absolute (by
parents, but A renounces his inheritance in favor of his 2 discretion only). Under local taxation (last phrase of
siblings, brother and sister B and C. Is this subject to §186), the requirement is ABSOLUTE.
donor’s tax?
A: NO. It is exempt. REYES vs. SECRETARY (320 SCRA 486)
F: In the municipality of San Juan (just beside
Q: But if in the given example, A said “I am renouncing Mandaluyong) there was a tax ordinance passed.
my inheritance, but I am giving it to my sister B”, is this Reyes, a resident, claims that there was no public
subject to donor’s tax? hearing conducted, he maintains that under §186 last
A: YES. Renunciation is to the disadvantage of the phrase, there should always be a public hearing.
brother. H: The SC said: “yes, that requirement is an absolute
one, but since the petitioner failed to produce
TAXATION UNDER THE LOCAL GOVERNMENT evidence to support his allegation, if there is no proof
CODE: presented other than his own statement, we hereby
1. Local Tax rule that the ordinance was passed in accordance to
2. Real Property Tax the procedure mandated by law”. While it is true that
a public hearing is an absolute requirement, he who
LOCAL TAXATION (§186, 187, then go to §151, 128 alleges, must prove the same.
down)
Q: If you don’t agree with the validity or the
Q: Mayor Binay of Makati ordered the collection of constitutionality of the tax ordinance, what will be your
elevator tax (for elevator in the city hall). Is the order of remedy?
Mayor Binay legally tenable? A: Within 30 days from the effectivity of the ordinance,
A: NO. There should always be a tax ordinance after the taxpayer should file an appeal with the office of the
conducting a public hearing. (§186) Secretary of the DOJ (§187)

tax ordinance REYES vs. SECRETARY (320 SCRA 486)

Q: Can BIR collect the tax even in the absence of a
revenue regulation?
A: YES.
Q: Can a province, city, municipality or barangay collect
the tax if there is no tax ordinance?
A: NO.
Q: Why is it that there should be a tax ordinance as
required by §186?
A: The rationale is not mentioned in §186, but if you
read the other provisions of the LGC, you will come to set
of conclusions of the reason why there must be a tax
ordinance.
F: Reyes asserted the validity and constitutionality of
the tax ordinance only after the lapse of thirty (30)
days (perhaps his lawyer was thinking that an
ordinary statute may be contested anytime with the
RTC, CA or SC).
H: With regard to a tax ordinance, w have a specific
rule, failure to assail the validity with the specific
period of time, is fatal to the taxpayer. Since it was
filed beyond the 30day period, we do not disturb the
validity of the ordinance.
Q: Within what period should the Sec. of Justice decide?
A: Within 60 days from the time the appeal was filed.
Failure to decide within this time, the taxpayer has the
remedy to file an action with the regular courts.

» If the decision was made within the 60 day period,

and receives the decision, his remedy is to file an appeal

Page 62 of 79
within 30days form the receipt of the decision to court of
competent jurisdiction → RTC.
» Beginning April 23, 2004, from the ruling of the
RTC, pursuant to RA 9282 (the law uplifting the standards
of the CTA), the ruling of RTC on local tax cases, is
appealable to the CTA en banc.
TWO APPEALS DECIDED BY THE CTA EN BANC:
1. decisions of RTC involving local tax cases
2. decision of the Central Board of Assessment
Appeals.
» From CTA en banc, the appeal must be file with the
SC within 15days.
» Go to §151:
The city could impose the tax already imposed by the
province of by the municipality.
Q: What are the numerous taxes imposable by the
province which a city now allowed to impose?
A: Those enumerated in §135 to §141 of the LGC
Reasons why a municipality wanted to be converted into a
city:
1. §151
2. §233 (real estate tax)
» In addition, the law says that the city could increase
the rate of the tax by not more than 50% of the maximum
EXCEPT those enumerated in §139:
a) professional tax
b) amusement tax
A. General Principles (§128-130)
► reiteration of the constitutional tax provisions
► notice that the constitutional limitations on taxation
do not only apply to the national government but also to
local government units.
B. Definitions (§132)
Local Taxing Authority (§132)
 for a province, it is the provincial board or the
provincial council (sangguniang panlalawigan)
 for a city, we have the city council (sangguniang
panlusod)
 for the municipality, we have the municipal
council (sangguniang pangbayan)
 for the barangay or barrio, we have the barangay
council.
C. Common limitations on the taxing power of the
LGU’s (§133)
» Under the old law this was §5 of the Local Tax Code.
Q: Why common?
A: Because the limitations or prohibitions apply to all
LGUs, the provinces, cities, municipalities and barangays.
Two Common Crimes (under §133)
1. absolute prohibition
2. relative prohibition
It shall be unlawful for the LGUs to collect:
I. Income Tax EXCEPT when levied on banks and other
financing institutions (§133(A))
» the term “other financing institution shall include
money changer, lending investor, pawnshop
(§131(E))
» rate of tax: does not mention rate of tax, so
long as it is “fair, just and reasonable”
» It cannot be “prohibited taxation, because the
element of “imposed by the same taxing power” is
not present. One is imposed by the national
government and the other is by the LGU.
II. Documentary Stamp Tax (§133(B))
» absolute prohibition
III. Estate tax, inheritance, donations inter vivos,
donations mortis causa EXCEPT in §135 (§133(C))
» transfer tax on the transfer of realty to be
imposed by provinces and cities (§135)
NOTE: this is not a real estate tax, this is a local
tax.
IV. Custom duties, charges or fees for the registration of
vessels or ships, wharfages fees and wharage dues
EXCEPT if the wharf had been established, maintained
and operated by the locality (§133(D))
» wharfage due – is a custom fee imposed on the
weight of the cargoes.
» wharf – a pier
» special levy on public works (§240)
» allows provinces cities and municipalities to
impose a special real estate tax known as “special
levy or public works”
» let us say the municipality established a pier for a
minimal value of P10M; out of P10M, under §240,
60% of this may be recovered; the other 40% may be
recovered by warfage due.
v. Tax, fee or charge for goods or commodities coming
out or passing through the territorial jurisdiction even if
in the guise of a toll or a fee (§133(E))
» an absolute prohibition
» commodities marketed in a public market, let’s
say in the city of Pasig, where the commodities came
from Laguna then to Tanay, Cainta, Taytay; just
imagine if each of the towns will impse 1peso for
Page 63 of 79
 every head of a chicken or 50cents for every bundle
of vegetable.
PALMA DEV’T CORP v. MALANGAS ZAMBOANGA
DEL SUR (113 SCRA 572)
F: Municipal council passed a tax ordinance entitled
“police surveillance fee” which provide that ALL
motor vehicle passing through a particular street in
the town proper of Malangas which will lead to the
pier or wharf will pay a certain sum of money
whether it is camote, copra, palay,or rice. One of the
owners of the motor vehicle is Palma Dev’t Corp.
carrying copra, banana and coconut to be loaded in a
ship docked at pier of Malangas. The lawyer of
petitioner assailed the validity of the ordinance
stating that it is a clear violation of §133(E).
H: It is not the title of the ordinance which is controlling
but it is the essence of the substance of the tax
ordinance. The tax ordinance clearly violated
§133(E), therefore, the SC had no option but to
declare the tax ordinance null and void for being in
violation of the law.
VI. Taxes, fees or charges on agricultural and aquatic
products when sold by marginal farmers or fishermen
(§133(F))
Q: Don Antonio Florendo, a person coming from
Pampanga who settled in Davao City, employed
thousands of workers in the different banana
plantation. Can the LGU impose tax on the
agricultural product which is a banana?
A: YES. The LGU can impose because Don
Antonio is not a marginal farmer. It is only prohibited
if it is sold by a marginal farmer.
» Marginal Farmer – a farmer or a fisherman for
subsistence only, whose immediate members are the
immediate members of the family (§131(P))
VII. Tax, fee or charge on pioneer and non-pioneer
enterprise duly registered with the board of investments
for a period of 6yrs and 4yrs respectively (133(G))
» relative prohibition because after the period, the
LGU concerned may now impose the tax.
VIII. Excise tax on articles and tax, fees and charges on
petroleum products (§133(G))
» relative prohibition since under §143(H), it says
there that taxes which are prohibited such as excise
tax, percentage tax and value added tax nonetheless,
the LGU may impose a tax not exceeding 2% of the
gross receipt (for cities 3%).
» My former student an assistant in the city legal
attorney in a city in Metro Manila, received a
summon from the RTC (on complaint of a
supermarket in Metro Manila) questioning the
validity of the tax ordinance under §143(H) since the
rate imposed was 3%
I said, “ineng, una file kayo ng motion to
dismiss. Nak ng puta, absent ka na naman ata eh, you
invoke §151 stating that a city can impose a tax
higher than the rate provided for by law not more
than 50% of the maximum (50% of the maximum of
2% is 1, therefore, 2+1 is 3%)”
BULACAN v. CA (299 SCRA 442)
*first case decide by the SC which interpreted both the
LGC and the NIRC.
F: The then governor, Obet Panganiban together with
his provincial council passed an ordinance imposing
tax on quarrying under the provision of §138 of the
LGC. The problem is that the ordinance applies to
ALL entities quarrying in the province. One of the
taxpayers, Republic Cement obliged to pay the tax,
argued that under §138 of the LGC, the tax on
quarrying on which the province may be allowed
shall only be with regard to quarrying private land,
and not only that but under §133(H), there is a
prohibition to impose excise tax and tax on quarrying
under the IRC is an excise tax.
H: The tax on quarrying allowed to provincial
governments shall only be with regard to lands which
are public lands, and since this is a private tax on
quarrying refers to a lot without any distinction.
Hence, if the LGC made a qualification as to the kind
of land (where it says it should be public land), by
implication, it should refer to private land under §151
(although the law did not distinguish); and since it is
a tax by the national government, it should be
collected by the BIR (not the LGU), and also the SC
agreed that it is an excise tax where LGU’s are
prohibited from collecting; thus, the SC declared the
tax ordinance null and void for being contrary to law.
» Sir, why is it a problem when the law is clear that
under §138, it shall only apply to public land?
Perhaps the provincial council thought that the
subject matter of the tax ordinance may be a subject
matter provided in any book including the IRC, or
worse, that it may impose a tax on a subject matter
not mentioned in any book.
Moral lesson: although a tax ordinance may
be passed even if the subject matter is not provided
for in any law, it has to comply with the limitations.
PETRON v. PENILLA (198 SCRA 86)
* The facts here arose under the old law under §5 (now
§133) of the local tax code (PD 231)
F: Petron has a factory/plant in Penilla where the raw
materials petroleum products are being converted
into refined petroleum products. The municipal
council of Penilla imposed a tax by way of a tax
ordinance saying that they are invoking the old §19
(now §143(A)) stating that municipalities are
authorized to impose tax of the manufacture of any
commodity, hence, since it is manufacture of a
petroleum product, the LGU must e authorized.
However, Petron objected since under §5 (now
§133(H)), the prohibition includes the prohibition to
impose excise tax and not only that, under this par.,
Page 64 of 79
 the tax on petroleum products is an excise tax. Under
this par., the law is clear it does not only prohibit the
imposition of tax, fee or charge over petroleum
products.
H: The controlling provision here the old §19 (now
§143(A)) that LGUs are authorized to impose the
business tax for the manufacturing over any kind of
commodity by and petroleum product is “any kind of
commodity”.
Q: What do you think?
A: I don’t agree with this ruling because between
§133(H) and §143(A), it is the former which is more
specific.
IX. Value added tax and percentage (§133(I) EXCEPT
§143(H)
» Relative prohibition.
X. Tax, fee or charge on common carriers whether by
land, water or air (§133(J))
FIRST HOLDING CO. v.BATANGAS CITY (300 SCRA
661)
* 2nd SC ruling discussing both the IRC and LGC.
F: This revealed to the public the existence of 2 very big
oil pipelines coming form Batangas City with a
distance of more than 100km, one going to Pandacan
Oil Depot and the other one is going to Brgy.
Bicutan, Taguig. The Batangas City council deemed
it necessary to impose a tax on the gross receipt of
the 1st holding company for the operation of the oil
pipeline, but the operator argued that the oil pipeline
is not a common carrier.
H: The SC reasoned out like in the case of Pajunar v.
Comm (328SCRA666), saying that “we have copied
the code of carrier law form the US where the
definition of a common carrier is one habitually
carrying not only individuals or passengers but also
goods or commodities, and since the oil pipelines is
habitually carrying petroleum products which is a
commodity, we rule this as a common carrier which
is under §133(J), LGU is prohibited from imposing
tax on common carriers, and not only that but under
§170 of the LGC, the law is very explicit, that ALL
LGUs are prohibited to impose percentage tax on
common carriers”. With that, the tax ordinance
passed was declared null and void for being contrary
to law.
XI. Premiums on re-insurance (§133(K))
» absolute prohibition.
XII. Tax, fee or charge on registration of motor vehicles
and for the issuance of license and permit for driving
thereof EXCEPT tricycles. (§133(L))
BATUAN CITY v. LTO (322 SCRA 805)
I: Which function was delegated to the LGU? The LTO
registering motor vehicles “or” the LTFRB granting
franchise and regulation of common carriers?
H: Under §133(L), the function of the LTO is prohibited,
an therefore what may be delegated to the LGU is the
function of LTFRB.
XIII. Tax, fee or charge on exportation of products
and is actually exported EXCEPT under §143(C) where
the LGU is authorized to impose business tax on
exportation (§133(M))
XIV. Tax, fee or charge on cooperatives duly
registered under the cooperative cod (RA 6938) and
Business Kalakalan (RA 6810) (§133(N))
» A cooperative is exempt from local tax, provided
it is duly registered with the cooperative code and the
cooperative development authority “or” Business
Kalakalan (not kalkalan)
XV. Tax, fee or charge over the national government,
political subdivisions and agencies and instrumentalities
of the government (§133(O))
» Relative prohibition since it admits of an
exception under §154 of the LGC where it says that a
LGU may be authorized to impose a fee or charge for
the operation of a public utility provided it is owned,
maintained and operated by such LGU.
NAIA v. PARANAQUE (JULY 2006)
H: SC ruled in favor of the airport. Paranaque being a
LGU can’t impose tax on a government
instrumentality. Airport owned by the government is
not an agency, it being an instrumentality.
Q: May the government tax itself it the taxing
power is the local government?
A: NO. The local government cannot impose tax on
the national government, and with more reason that it
cannot impose a tax with equal LGU.
D. Taxes that can either be imposed by Provinces or
Cities
I. tax on transfer of realty (§135)
► Note that this is not a real estate tax, this is a local tax
for the simple reason that it is not provide for under the
topic of real estate tax (§198-280)
► Law says “it should not exceed ½ of 1% of the
consideration” (NOTE: do not use zonal value since this
is used only under the IRC, not the LGC.
Q: Since all the provinces and cities must follow the
limitation of the rate (not exceeding ½ of 1%), is it
violative of the equal protection clause?
A: NO, because the sangguninan had to determine the
actual rate considering the status of the province.
Q: Why is that Makati fix the rate of 75% or 3/4 of 1%?
A: Because cities are authorized to increase the rate of
50% of the maximum, that is 50% of ½ is 25% (50+25 is
75%).
Page 65 of 79

NOTE: Do not apply transfer of realty pursuant to RA
6657 (CARP) → this is the Comprehensive Agrarian
Reform Program → this is exempt.
II. tax on printing an publication (§136)
► Normally, a province cannot impose this because the
tax on business can only be imposed by a city or
municipality EXCEPT this one, on printing and
publication of magazines and periodicals.
III. franchise tax (§137)
► The old national franchise tax under the old tax code
was already abolished.
► We still have franchise tax other than this one, known
as national franchise tax → provided for in the republic
act granting franchise.
Two kinds of Franchise Tax:
1. local franchise tax (under LGC §137)
2. national franchise tax (provided for in the statute
or republic act authorizing the franchise)
Q: May LGUs impose local franchise tax?
A: We have to consider here many supreme court
decisions and also §193 of the LGC.
Under §193, it says there “unless especially provided
for in this code, exemptions granted to natural juridical
persons are hereby withdrawn (abolished) EXCEPT:
1. local water districts
2. cooperatives registered under the cooperative
code (RA 6938)
3. non-profit and non-stock educational institution.
BASCO v. PAGCOR (197 SCRA 52)
F: The city council passed a tax ordinance imposing tax
on PAGCOR, an agency of the government.
PAGCOR objected saying that the local city is
prohibited under the old local authority act to impose
tax on an agency of the government.
H: The SC declared null and void the tax ordinance
saying Manila cannot do that.
CEBU v. MACTAN (261 SCRA 667)
F: Cebu government was trying to collect real estate tax
from the Mactan airport (note: real property tax is a
territorial tax, meaning it should only be collected
within its territorial jurisdiction). Lawyers of Mactan
airport argued that under §13(O), Cebu, a LGU,
cannot impose tax on an agency of the government,
and they also invoked the ruling in BASCO.
H: The lawyer of Mactan airport is devoid of any merit
at all, it is 100% erroneous since the real estate tax is
not a local tax, hence, why invoke a SC ruling and
codal provision which can only be applied to local
tax. Therefore, Mactan airport should pay Real
Property Tax.
► Before the codification in 1991 (to take effect
January 1, 1992), local taxation was embodied in a
separate book known as Local Tax Code (PD 231) while
real property tax was provided for in a separate book
known as Real Property Tax Code (PD 464)
LRT v. CITY OF MANILA (342 SCRA 692)
F: The Manila city government tried to collect real
property tax but the management of the LRT said “no
you cannot do that to us since it is exclusively for
public use”.
H: NO, you are not exclusively for public use since
every time a person wants to use the LRT he has to
pay.
Q: Why not use the defense that it is owned by the
government?
A: Because in real estate tax, the defense that it is owned
by the government is not a defense.
The LGC in §199(B) and in §217, both provisions
says that the basis for the imposition of real estate tax is
the ACTUAL USE of anybody who is using that (maybe
in the concept of usufructuary or in the concept of a
lessee, or in the concept of an owner); the basis is not
ownership.
► in §134, the taxes here must not only be imposed by
provinces, it may also be imposed by cities in line with
§151 → those enumerated in §135 to 141.
CAGAYAN DE ORO ELECTRIC CO. v. MISAMIS
OCCIDENTAL (181 SCRA 38)
* This was the prevailing rule for more than 10years from
1988
H: In the franchise or the republic act, there are only two
(2) kinds of franchise, one is a franchise which
provide for a condition that this tax (referring to the
franchise tax) shall be in lieu of all other taxes, and
the other franchise is the one which do not provide
for such provision; the province or the city can
impose local franchise tax if the franchise belong to
the second example.
REYES v. SAN PABLO CITY (305 SCRA 353)
* Here the SC uniformly ruled
H: A provision on exemption under §193 don’t only
refer to exemptions provided for by different statutes,
but it includes those which claim exemptions by
virtue of the case of Cagayan de Oro (because SC
decisions are also laws).
Page 66 of 79
PLDT v. DAVAO (363 SCRA 750)
F: The franchise holders of Smart and Globe are
claiming exemptions from the local franchise tax
because they are saying that they are holding a
franchise which says that it is a franchise enacted by
the house of Congress in 1995 which carries with it
an exemption form local franchise tax.
H: By the very explicit provision of §193, the removal
of exemptions granted by different statutes and also
by SC decisions applies only to statutes and decided
by the SC on or before Jan. 1, 1992, because §193
says “upon effectivity of this law”. For exemptions
covered by §193 therefore, Smart and Globe are
authorized to claim exemptions because the statue
(RA 7082) was enacted on 1995.
IV. tax on sand, gravel and other quarry resources
(§138)
► We are through with that in the case of Bulacan
the PBA (in Araneta, Cubao); but PBA and “no, we
are already paying amusement tax to the national
government through the BIR because of §125 of the
IRC”
H: QC government can no longer collect on the ground
that it is already being collected by the national
government and secondly, in the enumerations of
amusement under §140, you will never see
professional basketball. Most of all, it is the intention
of the author that it is only the national government.
*nak ng putang katangahan yan.. the local tax code PD
231 was enacted in 1974 when we don’t have any
professional basketball.. since professional basketball was
born May 1975.
* ano ba dapt tama diyan? → both the national
government and the QC government can collect. There is
no violation of the prohibited double taxation, because the
taxing powers are different, and not only that §140 speaks
of amusement tax on admission fee but under §125, it is
abut gross receipts.

V. professional tax (§139) VII. delivery van (§141)

► this must be correlated with the tax under §147.
Q: What if not a delivery van, but “sako” lang?
► NOTE that this is an exemption to the rule that a city
may increase the rate of the tax → under §151 of the
LGC, the increase is not allowed.
A: The applicable tax is under §143(G) (peddler’s tax,
► both §139 and §147 are taxes imposed on persons one imposed by municipalities and cities.
exercising professional calling. If may dalang sasakyan, yari siya ng province sa tax.

Section 139 Section 147 NOTE: §135-141, these are taxes that can be imposed by
are to be imposed by are to be imposed by PROVINCES and CITIES.
provinces and cities municipalities and §143-150 are taxes to be imposed by
cities MUNICIPALITIES, which can also be imposed by
are applicable to are applicable to CITIES.
workers who must persons who are
pass a government working but are not E. Taxes that can either be imposed by Municipalities
examination (e.g. required to take or Cities
engineers, physicians, government
etc) examinations I. Business Tax (§143(A-H))
there is a maximum It does not provide for a. manufacturing, repacking, processing, including
(P300) any amount, the only the manufacturer of permitted liquor and also its
NOTE: it is not always requirement is that it dealer
300, since the exact must be reasonable b. wholesaling
amt must be fixed by c. exportation
the ordinance. d. retailing
e. contractor’s tax
VI. amusement tax (§140) f. tax on banking institution and financing
institution
► under the IRC, there is also amusement tax under g. peddler’s tax
§125. h. the exemption under §133(i)

PBA v. QUEZON CITY (137 SCRA 358) Q: If you have two branches, how many business taxes
F: The city government enacted a tax ordinance trying do you have to pay?
to collect amusement tax including amusement tax on A: You pay only one business tax (§146)

Page 67 of 79
ILO-ILO BOTTLERS v. ILO-ILO CITY (164 SCRA 607)
F: Ilo-ilo Bottlers was already paying a business tax on
manufacturing under §143(A) to the city government
by virtue of a tax ordinance. Later on, they are
obliged to pay by virtue of another tax ordinance
imposing business tax on wholesaling. Naturally, Ilo-
ilo Bottlers argued, “how could it be, if you
manufacture, it necessary follows that you sell the
commodity so, with the payment of the business tax
on manufacturing, it carries with it the business of
wholesaling”.
H: NO, you have to determine the marketing system of
the company. If wholesaling is also being done in the
place of manufacture, the business tax on
wholesaling should no longer be paid it should only
be the business tax on manufacturing. But if the
marketing system of the company provides that
wholesaling shall be done in a separate place (maybe
several kilometers away), the manufacturer must still
pay the business tax on wholesale because now it
could be argued that they have the separate business
of wholesaling.
Q: On the business of retailing, should the business tax
of retailing be imposed by the city or by the municipality
“OR” by the barangay in the city or the barrio in the
municipality?
A: §143(D) must be correlated with §152, the tax to be
imposed by the barangay.
It depends:
a. city
» if the gross receipt of the retailer exceeds
P50T in a minimum of one year, it is the
right and privilege of a city to impose the
business tax on retailing.
b. barangay
» if the gross receipt of the retailer did not
exceed P50T, it is the barangay council
where the business of retailing is located.
c. municipality
» if the gross receipt of the retailer did not
exceed P30T within a period of one year.
d. barrio
» if the gross receipt of the retailer did not
exceed P30T within a period of one year.
NOTE: These distinctions do not apply in wholesaling.
These are only for retailing.
► Paragraph H:for the imposition of excise tax,
percentage tax and value added tax, the municipality may
impose a tax not exceeding 2% of the gross receipt (with
regard to a city, it may go as far as 3%)
II. Municipalities in Metro Manila who can increase
their rate (§144)
► Right now there are only two municipalities:
1. San Juan
2. Pateros
III. Professional Tax (§147)
► we are through with that
IV. Fees for sealing and licensing of weights and
measures (§148)
V. Fishery rentals, fees and charges (§149)
F. Situs of Tax (§150)
► The tax referred to in here is the business tax on
wholesaling and retailing.
Q: RFM is manufacturing commodities, one of them is
Swift hotdogs, this is being sold not only in
Mandaluyong, Metro Manila, but also to the inter country
from Batanes to Tawi-tawi. Where should the business tax
of wholesaling or the business tax of retailing be paid?
Should it be in the principal office (Mandaluyong) “or”
the place where the commodities are sold?
A: It will be paid in the place where it had been sold
PROVIDED there is a branch office or a sales outlet
(§150(A)).
► If it so happens that the company has a factory
different from the place where the principal office is
located → 30% should be pain in the principal office and
70% in the municipality or city where the branch is
located.
PHIL MATCHES v. CEBU (81 SCRA 99)
F: Phil Matches were produced in Nagtahan, Manila. In
Cebu city, there was a warehouse where the matches
were stored. Many of the customers, by way of
wholesale in the warehouse in Cebu City, they came
from different towns of the Visayan Region. May the
business tax ordinance of Cebu be imposed on those
transactions even if the buyers did not come from the
territorial jurisdiction of Cebu?
H: Since in this case the contract booked and paid,
meaning, it was negotiated perfected and
consummated in the warehouse where it was located
in Cebu City, the Cebu City government has the right
to collect business tax.
Q: What if there is an agreement that commodities
would be delivered and that the buyer would be waiting in
some other town, is the answer still the same?
Page 68 of 79
A: YES, the answer is still the same because delivery to
the carrier is delivery to the buyer where delivery has
been termed within the territorial jurisdiction of Cebu.
SHELL v. CEBUCOT, CAMARINES SUR (105 PHIL
1063)
F: The petroleum products were purchased at the motor
vehicle traversing the neighboring towns of Cebucot
like Bason, Dimalaon, all towns in Camarines Norte.
The contract of sale was negotiated and perfected in
different municipalities where the motor vehicle of
Shell was traveling.
H: Although the oil depot was located in Cebucot, the
said municipality cannot impose tax on that because
the contract of sale was negotiated and perfected in
the different nearby towns of Camarines.
Q: Is there a conflict with the case of Shell and Phil
Matches?
A: NONE. As a matter of fact, these two decisions
complement each other.
G. Taxing Powers of the Barangay (§152)
► Only a minimal sum (fair and reasonable)
Power to impose tax:
1. On commercial breeding of fighting cocks,
cockfights and cockpits
» must be for commercial purposes
2. On places of recreation which charge administration
fee
3. On billboards, signboards, neon signs and outdoor
advertisements
» especially for the barrios and barangays along
the highway
4. For barangay clearance
» if you want to engage in the business of retailing
or wholesaling → if barangay captain will not
approve that → within 7days go to the municipal
hall or city hall for approval
5. For the use of barangay property
» for instance the barangay has a plaza.
H. Common Revenue Raising Powers (§153-155)
Q: Why common?
A: All the LGU could impose the same. But it does not
follow that all the provinces, cities, municipalities could
impose the same. Only the LGU which operate, establish,
maintain the entity
If established by the province, it should only be the
province.
These are:
1. service fee and charges
» for services rendered
2. public utility charges
» provided owned, operate and maintained by
them
3. toll fees and charges
» tax or toll for the use of a bridge or a street
► Padua filed a civil action in the MakatI RTC
trying to stop the government form collecting a toll free in
the South Express including the North expressway
alleging that he is affected as a taxpayer because he is
from Paranaque. He argued that if you use the property of
the government like a street or a public plaza, you do not
pay. He made the analogy, that if you go to Luneta, you
do not pay the city government of Manila.
The Makati RTC, the CA and SC had a uniform
ruling that the operator should be prohibited from
collecting further toll fess because if the operator had
already recovered his investment and earned an income
already, he should be stopped. As argue by the SC, it
copied the argument of the lawyer (re: Luneta).
» NOTE: that Res Judicata do not apply here.
When the ruling became final an executory in
1993, the North and South Express were totally
dismantled and totally destroyed by the DPWH to give
way to the final and executory ruling of the Court, that It
should no longer be collected.
After several months, the government announced
in the radio that the party in the case of Padua, mutually
agreed that the collection shall be resumed in order to
have money for the maintenance and repair of the
highway.
Exceptions to §155 (collection of toll fees)
1. members of AFP
2. members of the PMP
3. post office personnel delivering mail
4. physically handicapped
5. disabled citizens 65 years and older.
I. Community Tax (§156)
► In the old days, known as “residence tax certificate.
Q: If the Filipino is a resident of a foreign country
(NRC), is he liable to pay the community tax certificate?
A: NO, because the basis of imposition of this tax is
whether or not you are an inhabitant of the Philippines.
Meaning you are a resident of the Philippines.
Q: What about a foreigner residing in the Philippines
(RA)?
A: YES. You have to pay unless the foreigner is a trans-
investor for not more than 3months.
► This is applied to both natural and juridical persons.
Page 69 of 79
 1. Assessment
Requirements: 2. Collection
1. for a natural person → at least 18 years of age
2. for corporations → upon registration with the Under the NIRC, assessment and collection have 2 kinds:
SEC
1. Normal/Ordinary assessment and collection –
Q: What if you become 18 in the month of January or Sec. 203, NIRC
November or December? 2. Abnormal/Extraordinary assessment and
A: For those who celebrated their birthday before July 1 collection – Sec. 222, NIRC
(that is up to June 30), they are liable to pay the tax, for
this year. I. Normal/Ordinary assessment and collection
For those who celebrated their birthday on or after ► There was a return filed and it is not
July 1, they are not yet liable to pay this year, but have to fraudulent and not false
wait until next year.
II. Abnormal/Extraordinary assessment and
Q: Is there a difference for those who reached 18 in the collection
months of Jan-Feb-March and those who reached 18 in ► There was:
the months of April-May-June? 1. an omission or failure to file the return;
A: YES. For those who celebrated birthdays in the 2. if there was a return filed, it was
months of Jan-Feb-March, they have a grace period of fraudulent, or;
20days within which to pay. Those who celebrated their 3. the return was false
18th birthday in the month of April-May-June, they do not
have any grace period at all, they have to pay the tax Q: Is a false and fraudulent return presumed?
immediately. A: NO, false and fraudulent return is not presumed. The
burden of proof to prove that the return was false and
Q: If you have a community tax certificate for this year fraudulent lies against the government through the BIR.
(2006), can it be used only until December 31, 2006? The mere fact that the return is erroneous will not
A: NO. It shall be valid up to April 15, 2007. (§163(C)) make the return fraudulent, it must be proven by the BIR.

J. Accrual of the Tax (§166) Q: Why is it important to know whether the assessment
is under normal or abnormal condition?
► January 1 A: It is important to know because the prescriptive
period between normal and abnormal assessment differ.
Q: What if the tax was only approved in the month of
May 2006, do you have to wait until January 2007? Prescriptive Period for Assessment
A: NO. You have the right to collect that in July 1, 1. Normal/Ordinary Assessment – 3 years from the time
because the law is saying that “it should be collected in the return has been filed (not the payment of the tax)
the next succeeding quarter” (§167) (Sec. 203, NIRC)
► 3 Ways of filing the return under Sec. 203, NIRC:
► Mayor Binay had a tax ordinance in May, sabi ng 1. filed before the deadline (for any tax under
mga bata niya: “bosing, collect na tayo ng June”. NIRC)
Binay: “hindi nga pupwede, maghintay pa tayo ng 2. filed on the date of deadline
July 1”. 3. filed after the deadline
► 2 Ways of counting the 3 year period of Assessment:
Q: What if the tax ordinance had been existing for 1. if return is filed before or on the day of the
several years already? deadline, the prescriptive period starts on the
A: The time of accrual will always be January 1. date of the deadline;
2. if return is filed after the deadline, the
REMEDIES UNDER THE INTERNAL REVENUE prescriptive period starts on the date the return
CODE has been filed.
» For the calendar year of 2004, a return must be filed
1. Remedies of the Government and paid for Net Income Tax on or before April 15, 2005.
2. Remedies of the Taxpayer Since he was not able to meet the deadline, the taxpayer is
now being assessed for tax due for 2004. To minimize
Remedies of the government: interest and surcharges, it has been suggested by the BIR
that the taxpayer file a late return. Supposed he filed his

Page 70 of 79
return covering 2004 on April 1, 2006. In this example,
the reckoning point is the deadline of April 15, 2005. The
starting point of the counting the 3 yr. period is on the
date the return is filed which is April 1, 2006.
» Suppose it is not a late filing of return, the counting
of the period is on the date of the deadline which is April
15.
2. Abnormal/Extraordinary Assessment
► the government has 2 options:
a. Assess and Collect
» the prescriptive period for “assessment”
shall be 10 years from the discovery of none
filing or false or fraudulent return (Sec. 222, par.
o, NIRC)
» the prescriptive period for “collection”
shall be 5 years from the date of final assessment
(Sec. 222, par c, NIRC)
b. Collect Without Assessment through Judicial
Action
» since there is “no assessment” there is no
prescriptive period for assessment
» prescriptive period for “collection” shall be
10 years from the date of discovery of none
filing of return or false or fraudulent return.
► These options are available only if the
Assessment is under the Abnormal/Extraordinary
Conditions.
These are not available under Normal/Ordinary
Assessment
Prescriptive Period for Collection
1. Normal/Ordinary Collection – Sec. 203 did not
provide for the prescriptive period for the collection
- Intention of the author: 5 years from the date
of final assessment
Reasons: (Sababan agrees with the 5 year prescriptive
period)
Prescriptive period of collection under 1st option
on Abnormal Assessment is 5 years from final
assessment (Sec. 222, par c, NIRC)
1. under the old code of 1939, 1977, and 1985,
if the prescriptive period for collection under
abnormal is 3 years, then the prescriptive
period for collection under normal is also 3
years. If now a days, it is 5 years in
abnormal, the prescriptive period for normal
should also be 5 years.
2. to say that there is a prescriptive period for
collection under Abnormal and there is none
under Normal is too abnormal. It should be
the other way around.
2. Abnormal/Extraordinary Collection
a. assess and collect – 5 years from the final
assessment
b. collect without assessment through judicial
action – 10 years from date of discovery of
none filing, or false, or fraudulent return.
Q: How to apply these periods?
A: Annual net income tax return filed by individual
using a calendar year. The return should be filed on or
before April 15, 2000. It was filed on April 15, 2000.
Q Without stating the date of final assessment, can it be
collected in 2007?
A: Under normal condition, first determine the date of
final assessment. If the BIR finally assessed the tax in
November 2001, then 2007 is way beyond the 5year
period to collect. Count the prescriptive period for
collection from the date of final assessment.
Q: (same facts) Supposed it was finally assed on March
2003, can it be collected in 2007?
A: Yes, because it is within the prescriptive period of
5years.
BASILAN v. COMMISSIONER (21 SCRA 17)
F: Supposed the notice of assessment was given within
the period but it was received by the taxpayer outside
the period.
I: Whether or not the assessment is within the period of 3
years.
H: Yes. It is within the period. If the notice is sent
through registered mail, the running of the
prescriptive period is “stopped”. What matters is the
sending of the notice is made within the period of
prescription.
► It is the sending of the notice and not the receipt that
tolls the prescriptive period.
Q: What if the return has been amended, how would you
compute the period of assessment?
A: NIRC is silent.
PHOENIX v. COMMISIONER (14 SCRA 52)
If the amendment of the return is substantial as
distinguished from superficial, the counting of the
prescriptive period is also amended. The prescriptive
period shall be reckoned on the date the substantial
amendment was made. If the amendment is superficial,
the counting of the prescriptive period is still the original
period.
Procedure for Assessment (Sec. 228, NIRC; RR 12-99)
Steps of assessment
Page 71 of 79
 1. Sec. 228, NIRC (2 steps)
2. RR 12-99 (3 steps)
2 Steps under Sec. 228, NIRC
1. Pre-assessment notice
2. Final assessment notice
3 Steps under RR 12-99
1. Notice of Informal Conference
2. Preliminary Assessment Notice
3. Formal Letter of Demand and Notice to Pay the
Tax
PROCEDURE (Sec. 228, NIRC; RR 12-99)
1. Upon receipt of the notice of informal
conference, file a reply within 15 days from
receipt of notice;
2. Failure to file a reply, 2 things may happen:
a. BIR will send again the Notice of Informal
Conference or
b. BIR will send a Preliminary Notice of
Assessment
3. Upon receipt of Preliminary Assessment Notice
(PAN), file a reply within 15 days from receipt
4. Failure to file a reply will result in either:
a. BIR will repeat PAN
b. Declare the taxpayer in default, and send
you a Final Assessment Notice (FAN)
5. Upon receipt of FAN, taxpayer may file a protest
within 30 days.
Q: Is FAN the one appealable to the Court of Tax
Appeals (CTA)?
A: NO. This is because §228, NIRC and RR 12-99
requires the exhaustion of administrative remedy of
protest. After the receipt of FAN or formal demand within
30days must file a protest before the office of the
commissioner of internal revenue.
FORMS OF PROTEST
1. Local Tax (Sec. 125, Local Government Code
(LGC))
2. Real Property Tax (Sec. 252, LGC)
3. Tariff and Customs Code (Sec. 2313, RA 7651)
► In all protest under the different codes, payment
under protest is only necessary under the “Real Estate
Tax”.
RR 12-99
► If the taxpayer receives 2 final assessments, one
under the Net Income Tax (NIT) and the other in VAT. If
the taxpayer don’t want to file protest under VAT but want
to file a protest under NIT. The taxpayer in order to be
allowed to file a protest under the NIT must first pay the
VAT where he does not intend to file a protest.
► This is not “payment under protest” because,
payment under protest is the one mentioned in Real
Property Tax under Sec. 252, LGC.
Under NIRC, Protest is referred to as:
1. disputing of final assessment or
2. file a motion for reconsideration or
reinvestigation
Q: What should be done after filing a protest?
A: Count 60days is the period to file the necessary
documents and receipts in support of the protest.
Q: What is the effect of failure to file the supporting
documents?
A: Failure to file the necessary and supporting
documents within the 60day period, to be counted on the
day the protest is filed, the final assessment shall become
final and executory.
► On the 51st day you filed the necessary document,
you have to count another period, which is 180 days from
the day you filed the necessary documents.
Relevance of the 180 Days: 180 days is the
time given to the BIR to decide the case
Q: Supposed it did not decide the case within 180days?
A: Do not invoke the Lascano case because it was
rejected by RA 9282
In the Lascano case, before you file an appeal
although the 180 days have lapsed, you have to wait for
the BIR to take positive action.
The case was ruled only by the CTA, hence it is not a
law. The jurisdiction of the CTA has been amended by RA
9282.
RA 9282 provides that in case of inaction of the
commissioner after the lapse of 180days, remedy is to file
an appeal.
RR 12-99 says that after lapse of 180days but within
30days after 180days, that is the time to file an appeal.
Q: Supposed the BIR rule within 180?
A: Within 30days from receipt of the decision file an
appeal to the CTA sitting in division.
Q: Supposed the CTA decided not in your favor?
A: File a motion for reconsideration within 15days to the
same division deciding the case.
Q: Supposed the CTA, in division decided not in you
favor?
A: File an appeal to the CTA sitting en banc.
Page 72 of 79
Q: Supposed the CTA en banc decided not in your
favor?
A: File an appeal within 15days from receipt of decision
to Supreme Court.
Q: During the pendency of the protest in the office of the
Commissioner, supposed you receive a notice of
collection, levy and/ or distraint, what is your remedy?
A:
1. YABES v. COMMISSIONER (150 SCRA 278)
2. UNION SHIPPING LINES v. COMMISSIONER
(185 SCRA 547)
YABES v. COMMISSIONER (150 SCRA 278)
F: The taxpayer receives a notice of collection while
waiting for the decision of his protest. He then filed
an “appeal” with the CTA contending his protest has
been denied because he did not receive a decision but
receive a notice of collection. Simultaneously, the
BIR filed before the CFI an “ordinary civil action”
for the collection of sum of money. When the judge
of the CFI, was about to conduct the hearing of the
case, the taxpayer filed an injunction with the SC to
prohibit the judge of the CFI contending that a single
cause of action is pending in two courts, one in the
CTA and another in CFI.
H: Injunction was granted prohibiting the Judge of the
CFI and requiring the Judge to transfer the records to
the CTA saying that the remedy made by the taxpayer
was the correct remedy.
Q: Was the appeal made on time?
A: Yes, when the BIR filed an ordinary action, the
protest is deemed denied. Hence an appeal is a proper
remedy.
UNION SHIPPING LINES v. COMMISSIONER
F: The taxpayer was waiting for the decision of his
protest. But instead, he received a notice of
collection. Immediately, he filed a Motion for
Reconsideration and Clarification asking whether his
protest has been denied. The BIR did not reply or
answer but instead filed an Ordinary Civil Action
before the CFI. When the taxpayer received
summons, he did not answer but instead filed an
Appeal before the CTA.
I: Whether or not the remedy of Appeal was the correct
remedy and Whether or not it was filed on time.
H: Yes. The remedy of appeal is the correct remedy and
the appeal was filed on time. The reckoning period
within which to file an appeal is the time the taxpayer
received the summons.
While an Appeal is pending before the CTA, the CTA will
determine:
1. If the decision was made within 180 days,
whether the appeal was made within 30 days
from the receipt of the said decision, or
2. if there was no decision after the lapse of 180
days, whether the appeal was made within 30
days upon the expiration or the lapse of the 180-
day period.
Q: Pending appeal with the CTA, can the BIR amend the
final assessment?
A: 2 SCHOOLS OF THOUGHT:
1. GUERRERO v. COMMISSIONER (19 SCRA
25)
2. BATANGAS v. COLLECTOR (102 PHIL
822)
GUERRERO v. COMMISSIONER (19 SCRA 25)
H: No. Because it is no longer the disputed assessment.
BATANGAS v. COLLECTOR (102 PHIL 822)
H: Yes. In order to avoid multiplicity of suits
► ACCORDING TO JUSTICE VITUG:
BATANGAS v. COLLECTOR (102 PHIL 822) is the better
ruling
PROTEST UNDER LOCAL TAX (Sec. 195, LGC)
► Under NIRC, protest is filed in the Office of the
Commissioner
► Under LGC, protest is filed with the same City or
Provincial or Municipal Treasurer who issued the
assessment
Period to file Protest
 60 days from receipt of assessment
Q: If the treasurer did not decide within a 60day period,
remedy?
A: Go to the court of competent jurisdiction (RTC)
Q: If the RTC decided not in you favor?
A: File an appeal with CTA en banc (beginning April 23,
2004)
Q: If the CTA decided not in your favor?
A: Appeal to the SC.
NOTE:
Pursuant to RA 9282, direct appeal to CTA en banc can be
made from:
1. Decision of the RTC involving local taxation
exercising appellate jurisdiction
2. Decision of the Central Board of Assessment
Appeal exercising appellate jurisdiction.
Page 73 of 79
PROTEST UNDER REAL PROPERTY TAX (Secs.
226, 230, and 252)
 Remedy shall be the same
Sec. 252, LGC
 If the taxpayer receives a Notice of Assessment
from municipal, city, or provincial treasurer, the
remedy is to file a protest but there must be first
Payment Under Protest.
- This is the only instance where payment
under protest is necessary
Q: How is payment under protest made?
A: At the back of the receipt there will be an annotation
that there was a payment under protest within 60days
from receipt of the notice of assessment within the same
treasurer who issued the assessment.
Q: If the treasurer rules against the taxpayer, remedy?
A: The remedy is to file an appeal to the Local Board of
Assessment within 30days from the receipt of the
decision.
Q: From the decision of the Local Board of Assessment?
A: Appeal should be made to the Central Board of
Assessment Appeal.
► Beginning April 23, 2004, the ruling of the Central
Board of Assessment Appeal is no longer final. It can
now be appealed to the CTA, sitting en banc.
PROTEST UNDER THE TARIFF AND CUSTOMS
CODE (TCC) (Sec. 2313, as amended by RA 7651)
► Formerly, the automatic appeal under the TCC
applied only to protest; but now a days, the automatic
appeal applies to both protest and forfeiture.
For Forfeiture Under the Tariff and Customs Code
► Refers to the Order of the Collector confiscating the
imported goods or commodities
Doctrine of Primary Jurisdiction
If the Collector ordered the forfeiture of the imported
commodities the order of the Collector shall be to the
exclusion of all government offices and authority.
Importer of Chemical, under the TCC, the custom
duties is only P27 but the collector says it should be P52.
The importer will then file a protest with the Office of the
Collector.
In the old days, there is an automatic appeal from the
decision of the collector under protest. But under RA
7651, the remedy of automatic appeal is applicable to
both protest and forfeiture.
I. In both cases of protest and forfeiture, if the importer
lose the case and the government wins, the remedy is to
file an appeal within 15 days before the Office of the
Commissioner.
 From the ruling of the Commissioner, the
importer should file an appeal within 30 days
before the CTA, sitting in division.
 From the ruling of the CTA in division, the
importer should file an MR within 15 days
before the same division hearing the case.
 From the ruling of the CTA in division, deciding
on the MR, the importer should file an appeal
within 15 days before the CTA sitting en banc.
 From the CTA en banc, appeal to SC within 15
days.
II. If the importer-taxpayer wins the case, the
government lose the case, Sec. 2313 of TCC as amended
by RA 7651, there shall be an automatic review within 15
days.
Q: Where should the automatic review be made?
A: It depends. Publish the value of the commodity.
1. IF P5 MILLION OR MORE – AUTOMATIC
REVIEW SHALL BE BEFORE THE
SECRETARY OF THE DEPT. OF FINANCE.
2. IF LESS THAN P5 MILLION – AUTOMATIC
REVIEW SHALL BE BEFORE THE OFFICE
OF THE COMMISSIONER
Q: Suppose the commissioner decide or did not decide
within 30days, what happens?
A: If the commissioner reverses the ruling of the
collector, the ruling is final and executory.
If the commissioner affirms or did not decide within
30days, there shall be an automatic appeal before the sec.
of finance.
Q: Between the two which will be appealed to the CTA?
A: The decision of the secretary which passes through
the office of the commissioner (RA 9282)
But not all the decision of the secretary which passes
the office of the commissioner affirms or did not decide
within 30days and appealed before the secretary of
finance will appeal to the CTA be allowed.
There are 3 instances when the Secretary of Finance
renders a decision appealable to the CTA:
1. decision of the Secretary by virtue of automatic
review passing through the Commissioner
2. cases of anti-dumping duty, where the anti-
dumping duty was ordered by the Secretary
3. decision of the Secretary of Finance on
countervening duty.
COMPROMISE (Sec. 204, NIRC)
Page 74 of 79

3 Questions asked in 2004 BAR:
1. May the Government compromise criminal cases
and civil cases?
2. Supposed the corporation is already dissolved,
can the stockholder be obliged to pay?
3. Suppose the civil case filed by the BIR is final
and executor, can it be subject to compromise?
CAN THERE BE COMPROMISE IN:
1. CIVIL CASES?
- YES, IN ANY STAGE OF THE
PROCEEDING
- EXCEPT WHEN THE CIVIL CASE IS
ALREADY FINAL AND EXECUTORY
BECAUSE IT WILL BE VIOLATIVE OF
THE SEPARATION OF POWERS
2. CRIMINAL CASES?
- YES, EXCEPT:
a. IF ALREADY FILED IN COURT
(RTC) OR;
b. IF IT INVOLVES FRAUD
3. IF THE CORPORATION IS ALREADY
DISSOLVED, CAN THE STOCKHOLDER BE
HELD LIABLE TO PAY TAX?
- GENERAL RULE: NO
- EXCEPT:
a. IF IT IS PROVEN THAT THE
ASSETS OF THE COPORATION IS
TAKEN BY ONE STOCKHOLDER
OR;
b. IF THE STOCKHOLDER DID NOT
PAY HIS UNPAID SUBSCRIPTION
Minimum Amount to be Compromised (Sec. 204)
1. If the ground is financial incapacity of the
taxpayer, the minimum shall not be less than
10% of the original assessment.
2. If based on other grounds, the minimum amount
shall not be lower than 40% of the original
assessment.
Q: Can it be lower than that prescribed by law?
A: As a rule, no. EXCEPT, if allowed by the evaluation
board consisting of the:
a) commissioner; and
b) deputy commissioner.
Instances when the Final Assessment becomes final and
executor:
1. If the taxpayer did not file the protest on time
2. Failure to submit the supporting documents
within the 60-day period
3. After the lapse of the 180-day period, you did
not file an appeal within the 30-day period to the
CTA
4. An appeal was filed but made beyond the
reglementary period to appeal
METHODS OF COLLECTION (SEC. 205)
1. Judicial Action
a. Civil
b. Criminal
2. Administrative Action
a. Distraint
b. Levy
c. Tax lien
Q: Why is it important to know whether the final
assessment is under normal or abnormal conditions?
A: It is important because of the requirement under
§222. If the final assessment becomes final and
executory, the government (BIR) can exercise the
remedies under §205 in any order or simultaneously
(§207). But it is not always the case, because the right of
the government to collect is limited in case of abnormal
assessment/collection under §222. Under the second
option, the right of the government is limited to judicial
action either civil or criminal. Administrative remedies
such as distraint, levy, or tax lien is not available under
such condition.
Q: In distraint, levy or tax lien, is the 10 year period of
collection applicable?
A: No, only the 5year period should apply.
Distraint
Kinds:
1. Constructive (Sec. 206)
2. Distraint of Intangible (Sec. 208)
3. Actual (Sec. 207, par. a, and Sec. 209)
1. Constructive Distraint
► The distraining officer shall make a list of the
personal property of the property to be distraint in the
presence of the owner of the property or the person in
possession of the property.
► The owner shall be requested to sign the receipt.
Q: What if the owner refuses to sign the receipt?
A: Sec. 206: The distraining officer shall require 2
individuals within the neighborhood with the warning that
they should not allow the taxpayer to dispose, transfer, or
sell the property subject of distraint.
Grounds for Constructive Distraint (Sec. 206):
1. The taxpayer intends to leave the Philippines
Page 75 of 79
 2. The taxpayer leaves the Philippines
3. The taxpayer ceases or retires from business
4. The taxpayer obstructs the collection of the tax.
► THESE GROUNDS ALSO ANSWER THE
QUESTION: WHAT ARE THE TAXABLE PERIOD
LESSER THAN 12 MONTHS?
2. Distraint of Intangible Property
Limited to 3 Intangible Properties:
1. Shares of stocks
2. Bank accounts
3. Credits and debits
Share of stocks
► Warrant of distraint furnished to the taxpayer or
the officer of the corporation with the warning that
the property is subject of distraint and it should not
dispose of it.
Bank Accounts
► Warrant of distraint furnished to the taxpayer or
the officer of the bank with the warning that the
taxpayer should not be allowed to withdraw.
Debits and Credits
► Warrant of distraint furnished to the debtor and
creditor
3. Actual Distraint
► Personal property shall be physically taken by
the distraining officer.
► Within 10 days from the receipt of the warrant, a
report of the distraint shall be submitted to the BIR
(Sec. 207, par a last par.)
► The property subject of distraint shall be sold at
a public auction EXCEPT bank accounts and debits
and credits.
» Notice of sale shall be by posting in 2
conspicuous place, stating the date and the place
of the sale (No publication requirement)
► Sec. 211: after the sale and within 2 days, a
report shall be made to the BIR
Q: If the property sold is a personal property, is there a
right of redemption?
A: NO. The rule is absolute.
Q: If the property is a personal property, is there a right
of preemption?
A: SEC. 210: Before the scheduled sale, the taxpayer is
allowed to recover the property by paying all the property
by paying all the proper charges as well as the interest,
cost and penalties.
During the Scheduled Auction Sale, 2 Things may
happen:
1. There is bidder and the bid is enough
2. There is no bidder or there is a bidder but the bid
is not enough
Q: What is the relevance of knowing the difference?
A: 1. If there is a bidder and the bid is enough
» In case of insufficiency, there shall be further
distraint to cover the liability. (§217)
» In case of excess, the excess shall be returned to
the taxpayer.
2. If there is no bidder or the bid is not enough.
» It will be purchase by the government and the
later sold in a public auction again (§212)
» In case of insufficiency, no further distraint, §217
applies only if there was a bidder.
» In case of excess, the excess shall not be returned
to the taxpayer but shall be remitted to the national
treasury.
Levy
► Other than the delinquent taxpayer, warrant of
levy is served to the register of deeds having
jurisdiction over the real property (Sec. 213)
► Within 10 days from the receipt of the warrant, a
report of the levy shall be submitted to the BIR (Sec.
207 (b) last par)
Notice of Sale in Public Auction:
1. Posting in 2 conspicuous places
2. Publication in newspaper of general circulation
once a week for 3 consecutive weeks.
Q: Is there a right of pre emption?
A: Yes, §213.
Q: Is there a right of redemption?
A: Yes.
2 Things may happen in a Public Auction:
1. There is a bidder and the bid is enough
2. There is no bidder or the bid is not enough
Q: What if there is no bidder or the bid is not enough?
A: Forfeiture shall be made (§215)
3 Definitions of Forfeiture under the Internal Revenue
Code
1. Violation of Excise Tax Law (Sec. 224)
2. If there is no bidder or the bid is not enough
(Sec. 215)
Page 76 of 79
 3. The order of the Collector to confiscate imported
commodities (Sec. 2313, TCC)
Relevance of the Choice of Words:
► Under sec. 212, the law says “purchase”
► Under sec. 215, the law says “forfeiture”
» under 215: the real property shall be
automatically registered in the name of the
Government (forfeiture)
» under 212: the real property is not
automatically registered in the name of the
Government (purchase)
Q: If sold at a private sale, what is the requirement?
A: There must be an approval of the Secretary of
Finance (§216)
Q: After sale, if there was deficiency?
A: There shall be no further levy, because §215 says that
it shall be to the total satisfaction of the taxpayer.
Q: After sale, if there was an excess?
A: It shall not be returned to the taxpayer but shall be
remitted to the national treasury.
Sec. 217: this is only true if there was no bidder or the
bid was not enough because of the provisions of the Secs.
212, 215, and 216
Sec. 218: no court shall issue an injunction to restrain the
collection of tax under this code
Determine what kind of injunction is referred to here:
1. Prohibitory – referred in Sec. 218 because it
restrains the collection of tax.
2. Mandatory
Q: Is the provision limited to “tax under this code”?
A: Limited to internal revenue taxes. EXCEPT: CTA
(Regular Court) → RA 1125 and 9282: CTA is authorized
to issue injunction to restrain the collection of taxes or
fees collected under other code.
Q: Is the rule of distraint or levy the same under local
taxation?
A: Yes, local tax.
» §175 for DISTRAINT
» §176 for LEVY
Q: How about real property tax?
A: No, distraint is not authorized (§256, LGC), because
the remedy is only Judicial Action and Levy.
Tax Lien
► Non payment of tax, the government has the right to
claim a lien over the property of the taxpayer
1. NIRC – Sec. 219, NIRC
2. Local Tax – Sec. 173, NIRC
3. Real Property Tax – Sec. 257, NIRC
Q: Supposed a parcel of land is about to be levied by the
government, but the same is being foreclosed by the
mortgagee, which of the 2 obligee, the government or the
mortgagee shall be preferred?
A: §219, last portion: The government is the
preferred one if the lien is annotated and recorded in the
registry of deed. In the absence of annotation in the
registry of deeds, the mortgagee is preferred.
Q: Do we have the same rule under Local Tax and Real
Property Tax?
A: NO. Both §173 and §257, the government is always
the preferred one. The lien can only be removed by
payment of tax, interest and penalty.
Sec. 220: approving of filing an ordinary civil action for
violation of the internal revenue code
► The approval must be made by the Commissioner of
Internal Revenue
HIZON v. REPUBLIC (320 SCRA 574)
F: An ordinary civil action for violation of the tax code
was filed in the city of San Fernando. But the filing
was only approved by the Revenue Regional Director
of Central Luzon. The plaintiff opposed the filing in
the court on the ground that it should be approved by
the Commissioner and the Revenue RD.
H: Sec. 220 should be read with Sec. 7 of the NIRC
» General Rule: powers and functions of the
Commissioner may be delegated but not to a
position lower than a Division Chief
» Under Sec. 7, there are powers which can
not be delegated
a) Power to recommend to the Secretary of
Finance to issue rules and regulation
b) Power to decide a case of fist
impression
c) Power to enter into a compromise
agreement
d) Power to assign BIR officer in the place
of production subject to income tax
» Since the case does not fall under the
prohibited delegation, the filing of the case is
legal and tenable.
► Decision of the Commissioner of Internal Revenue
(CIR) is appealable to CTA.
Page 77 of 79
Q: When is a decision of the cir appealable to the
Secretary of Finance?
A: §4, on matters of interpretation of tax laws.
SEC. 223: SUSPENSION OF THE RUNNING OF
PRESCRIPTIVE PERIOD
Q: A Filipino taxpayer went to Canada, after 15years he
went back, he is being assessed by the BIR under normal
assessment. Has the right of the government to asses the
tax already prescribed?
A: NO. When he went to Canada, the running of the
prescribed period is suspended.
Q: What if the change of address is within the
Philippines, say only from manila to Pasay City, is the
running of the prescriptive period suspended?
A: In order that the running of the prescriptive period
will not be suspended, especially if the change is district
office, §223 provides that the taxpayer must send a
written notice of change of address to the BIR.
In the absence of the written notice, the period will be
suspended.
Q: Change of address is from Philippines to abroad?
A: The period will be suspended.
Other Grounds for Suspension:
1. During collection if there is no property found,
the period is suspended
2. If the BIR is prohibited from making assessment
such when the subject property is under litigation
3. In distraint of levy, the BIR officer can’t locate
the property
CLAIM FOR REFUND (SEC 229)
Written claim for refund:
1. Sec. 229, NIRC
2. Sec. 112, VAT
3. Sec. 136, Local Tax
4. Sec. 253, Real Property Tax
5. None except sec. 1603, Tariff and Custom
Written claim for refund under the input tax (Sec. 112)
► Period is also 2 years from the close of the taxable
quarter when the transaction was made
Q: Can we apply §229 to VAT?
A: Yes, because there is no conflict. §112 is refund
under input tax system.
§229 is refund for:
1. errors in payment or;
2. collected without authority; or
3. assessment without authority.
► The period to claim refund is 2years.
Doctrine of Equitable Recoupment
► If a taxpayer is entitled to a written claim for refund
but the prescriptive period to claim has lapsed, the
taxpayer is allowed to credit his written claim for refund
which he failed to recover to his existing tax liability.
Computed from;
a. Individual – counted on the day the tax has been
paid
1. paying by way of withholding tax system,
the reckoning point is the end of the taxable
year.
2. paying by way of installment, reckoning
point is the date the last installment is paid.
3. if sold to public auction through distraint or
levy, the date the proceeds is applied to the
satisfaction of the tax liability.
b. Corporation
1. Existing
- 1992, *** v. Commissioner (205 SCRA 184)
- 1995, Commissioner v. Philam life (244
SCRA 446)
- 1998, Commissioner v. CTA (301 SCRA
435)
2. Non-existing
- 2001, BPI v. Commissioner (363 SCRA
840)
1. Existing – the counting of the prescriptive period
is 2 years on the day the annual adjusted return is
filed, because it is at that day that the tax liability
is known.
2. Non-existing – the counting of the prescriptive
period should also be reckoned on the day the
annual return is filed. But the corporation is no
longer required to wait till the taxable period is
over to file the return. Upon receipt of a notice
from the SEC to dissolve the corporation, within
30 days thereafter, a return should be filed.
Q: Suppose there is a supervening event, and the
taxpayer was not able to file a written claim of refund
within the period?
A: Regardless of supervening event, a written claim for
refund must be filed within 2years.
Q: Suppose the 2 year period is about to expire and there
is no decision yet as to your refund?
A: Remedy is to file an appeal before the CTA (deemed
a denial)
Page 78 of 79
Q: Suppose the BIR decided within 2 years against the
refund?
A: Appeal within 30days from the decision, provided it
is still within the 2 year period.

Q: Suppose there is only 21days remaining after

receiving the decision, when to file an appeal?
A: Within 21days before the end of the 2 year period.

► A written claim for refund should be filed within 2

years

► Sec 204 (c) last phrase: in case of over payment a

written claim is not necessary because a return constitutes
a written claim for refund.

Q: May the commissioner of internal revenue open the

bank account of a taxpayer?
A: General Rule: NO. EXCEPT:
1. To determine the gross value of the estate; and
2. To enter into a compromise agreement. (under
§204(A))

► The written claim for refund to determine the gross

value of the estate because the taxpayer is already dead
In case of compromise, there must be consent.

Page 79 of 79