2018 BAR EXAMINATIONS

TAXATION LAW

I. GENERAL PRINCIPLES OF TAXATION

A. DEFINITION, CONCEPT AND PURPOSE OF TAXATION

It is an inherent power by which the sovereign through its law-making body raises income to defray
the necessary expenses of government by apportioning the cost among those who, in some measure
are privileged to enjoy its benefits and, therefore, must bear its burdens. (51 Am.Jur. 34)

B. NATURE AND CHARACTERISTICS OF TAXATION

Two-Fold Nature of the Power of Taxation

1. It is an inherent attribute of sovereignty

It is inherent in character because its exercise is guaranteed by the mere existence of the state. It
could be exercised even in the absence of a constitutional grant. The power to tax proceeds upon
the theory that the existence of a government is a necessity and this power is an essential and
inherent attribute of sovereignty, belonging as a matter of right to every independent state or
government (Pepsi-Cola Bottling Co. of the Philippines V. Municipality of Tanauan, G.R. No. L-
31156, February 27, 1976).

No sovereign state can continue to exist without the means to pay its expenses; and that for
those means, it has the right to compel all citizens and property within its limits to contribute,
hence, the emergence of the power to tax. (51 Am. Jur. 42)

The moment a state exists, the power to tax automatically exists.

2. It is legislative in character
It is legislative in nature since it involves promulgation of laws. It is the Legislature which
determines the coverage, object, nature, extent and situs of the tax to be imposed.

C. POWER OF TAXATION AS DISTINGUISHED FROM POLICE POWER AND POWER OF

EMINENT DOMAIN

TAXATION POWER OF EMINENT POLICE POWER

It is an inherent power by which
the sovereign through its law-
making body raises income to
defray the necessary expenses of
government by apportioning the
cost among those who, in some
DOMAIN
Definition
The power of the nation or a
sovereign state to take, or to
authorize the taking of,
private property for a public
use without the owner's
consent, conditioned upon
State authority to enact
legislation that may
interfere with personal
liberty or property in
order to promote the
general welfare.

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measure are privileged to enjoy payment of just
its benefits and, therefore, must compensation.
bear its burdens.
Elements
1. Situs or territoriality 1. The expropriator must 1. An imposition of
2. Public purpose enter a private property restraint upon liberty or
3. International comity 2. The entrance into private property,
4. Non-delegability of the property must be for more 2. In order to foster the
taxing power itself than a momentary period common good.
5. Exemption of the 3. the entry into the property
Government should be under warrant or
color of legal authority;
4. The property must be
devoted to a public use or
otherwise informally
appropriated or injuriously
affected; and
5. The utilization of the
property for public use
must be in such a way as
to oust the owner and
deprive him of all
beneficial enjoyment of
the property.
Purpose
To raise revenue in order to To facilitate the taking of Promotion of general
support of the Government private property for public welfare through
purpose regulations
Persons Affected
Upon the community or class of On an individual as the Upon the community or
individuals. owner of a particular class of individuals.
property
Amount of Monetary Imposition
No ceiling except inherent No imposition, the owner is Limited to the cost of
limitations paid the fair market value of regulation, issuance of
his property license or surveillance.
Benefits Received
Protection of a secured organized The person receives the fair Maintenance of healthy
society, benefits received from market value of the property economic standard of
government/ No direct benefit taken from him/ direct society/ No direct benefit
benefit
Non-Impairment of Contracts
Tax laws generally do not impair Contracts may be impaired Contracts may be
contracts, unless: government is impaired
party to contract granting
exemption for a consideration
Transfer of Property Rights
Taxes paid become part of public Transfer is effected in favor No transfer but only
funds. of the State. restraint in its exercise.
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D. THEORY AND BASIS OF TAXATION

Life Blood Doctrine

Without taxes, the government would be paralyzed for lack of motive power to activate and operate
it. Hence, despite the natural reluctance to surrender part of one’s earned income to the taxing
authorities, every person who is able must contribute his share in the running of the government.
(CIR v. Algue, G.R. No. L-28896, February 17, 1988)

Necessity Theory

The power to tax is an attribute of sovereignty emanating from necessity. It is a necessary burden to
preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a
navy to defend its shores from invasion, a corps of civil servants to serve, public improvements
designed for the enjoyment of the citizenry and those which come within the State's territory and
facilities and protection which a government is supposed to provide. (Phil. Guaranty Co., Inc. v.
CIR, G.R. No. L-22074 April 30, 1965)

Benefits-Protection / Reciprocity Theory Taxation

Benefits-Protection / Reciprocity Theory Taxation is described as a symbiotic relationship whereby

in exchange of the benefits and protection that the citizens get from the Government, taxes are paid.

It involves the power of the State to demand and receive taxes based on the reciprocal duties of
support and protection between the State and its citizen.

Every person who is able must contribute his share in the burden of running the government. The
government for its part is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their material and moral values. (CIR v.
Algue, G.R. No. L-28896, February 17, 1988)

E. PRINCIPLES OF A SOUND TAX SYSTEM

1. Fiscal adequacy
a. Revenue raised must be sufficient to meet government/public expenditures and other public
needs. (Chavez v. Ongpin, G.R. No. 76778, June 6, 1990)

2. Administrative feasibility
a. Tax laws must be clear and concise.
b. Capable of effective and efficient enforcement.
c. Convenient as to time and manner of payment; must not obstruct business growth and economic
development.

3. Theoretical justice
a. Must take into consideration the taxpayer’s ability to pay (Ability to Pay Theory).
b. Art. VI, Sec. 28(1), 1987 Constitution mandates that the rule on taxation must be uniform and
equitable and that the State must evolve a progressive system of taxation

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F. SCOPE AND LIMITATIONS OF TAXATION

1. Inherent limitations

Proceeds from the very nature of the taxing power itself. They are otherwise known as “elements or
characteristics of taxation”.

a. Situs or territoriality
b. Public purpose
c. International comity
d. Non-delegability of the taxing power itself
e. Exemption of the Government
Note: A violation of the inherent limitations constitutes taking without due process of law. (Pepsi
Cola vs. Municipality of Tanauan, 69 SCRA 460)

2. Constitutional limitations

Restrictions imposed by the Constitution.

a. General or Indirect
1. Due process clause [Sec. 1, Art. III, Constitution]
2. Equal protection clause [Sec. 1, Art. III, Constitution]
3. Freedom of the press [Sec. 4, Art. III, Constitution]
4. Religious freedom [Sec. 5, Art. III, Constitution]
5. Eminent domain [Sec. 9, Art. III, Constitution]
6. Non-impairment clause [Sec. 10, Art. III, Constitution]
7. Law-making process [Sec. 26, Art. VI, Art. III, Constitution]
8. Presidential power to grant reprieves, commutations, pardons and remit fines and forfeitures
after conviction by final judgment. [Sec.19, Art. VII, Constitution]

b. Specific or Direct
1. Non-imprisonment for non-payment of poll tax [Sec. 20, Art. III, Constitution]
2. Taxation shall be uniform and equitable [Sec. 28(1), Art. VI, Constitution]
3. Progressive system of taxation [Sec. 28(1), Art. VI, Constitution]
4. Origin of revenue and tariff bills [Sec. 24, Art VI, Constitution]
5. Veto power of the President [Sec. 27(2), Art. VI, Constitution]
6. Delegated authority of the President to impose tariff rates, import and export quotas, tonnage
and wharfage dues [Par. 2, Sec. 28, Art. VI, Constitution]
7. Tax exemption of charitable institutions, churches, parsonages, convents, all lands, buildings
and improvements actually, directly or exclusively used. [Par. 3, Sec. 28, Art. VI, Constitution]
8. Voting requirement for tax exemption [Par. 4, Sec. 28, Art. VI, Constitution]
9. No use of public money or property for religious purposes [Par. 3, Sec. 28, Art. VI,
Constitution]
10. Special assessments [Par. 3, Sec. 29, Art. VI, Constitution]
11. Supreme Court’s power to review judgments or orders of lower courts [Sec. 5(b), Art. VIII,
Constitution]
12. Grant of autonomy to local government units [Secs.5 & 6, Art. X, Constitution]

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 13. Tax exemption granted to non-stock, non- profit educational institutions, proprietary or
cooperative educational institutions [Sec. 4, Art XIV, Constitution]
14. Tax exemption of grants, endowments, donations or contributions used actually, exclusively and
directly for educational purposes. [Sec. 4, Art XIV, Constitution]
G. SITUS OF TAXATION

It is the place or authority that has the right to impose and collect taxes. (Commissioner v.
Marubeni, G.R. No. 137377, Dec.18, 2001)

The power to tax is limited only to persons, property or businesses within the jurisdiction or
territory of the taxing power.

Factors that Determine the Situs:

a. Kind or classification of the tax being levied

b. Situs of the thing or property taxed
c. Citizenship of the taxpayer
d. Residence of the taxpayer
e. Source of the income taxed
f. Situs of the excise, privilege, business or occupation being taxed

Application of Situs of Taxation

Kinds of Tax Situs

Personal or Community tax Residence or domicile of the taxpayer
Real property tax Location of property (Lex rei sitae)
Tangible: Where it is physically located or
Personal property tax permanently kept (Lex rei sitae) Intangible:
subject to Sec. 104 of the NIRC and the
principle of mobilia sequuntur personam
Business tax Place of business
Sales tax Where the sale is consummated
Consider
Income Tax (1) citizenship,
(2) residence, and
(3) source of income (Sec. 42, 1997 NIRC)
Transfer tax Residence or citizenship of the taxpayer or
location of property
Franchise Tax State which granted the franchise

Situs of Taxation of Intangible Personal Property

General Rule: Domicile of the owner pursuant to the principle of the mobilia sequuntur personam or
movables follow the person.

Exceptions:

1. When the property has acquired a business situs in another jurisdiction;

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 2. When an express provision of the statute provides for another rule.
Illustration: For purposes of estate and donor’s taxes, the following intangible properties are deemed
with a situs in the Philippines:

1. Franchise which must be exercised in the Philippines;

2. Shares, obligations or bonds issued by any corporation organized or constituted in the
Philippines in accordance with its laws;
3. Shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the
business of which is located in the Philippines;
4. Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or
bonds have acquired a business situs in the Philippines; and
5. Shares or rights in any partnership, business or industry established in the Philippines. (Sec.
104, 1997 NIRC).
H. STAGES OR ASPECTS OF TAXATION

The stages/aspects of a system of taxation are as follows:

1. Tax Legislation (Levy or Imposition) – This refers to the enactment of a law by Congress
authorizing the imposition of tax. It further contemplates the determination of the subject of
taxation, purpose for which the tax shall be levied, fixing the rate of taxation and the rules
of taxation in general.
2. Tax Administration (Assessment and Collection) – This is the act of administration and
implementation of the tax law by executive through its administrative agencies.
The act of assessing and collecting taxes is administrative in character, and therefore can be
delegated. (Dimaampao, Tax Principles and Remedies 3rd Ed. 2008, p.21)
3. Payment – The act of compliance by the taxpayer, including such options, schemes or
remedies as may be legally available.
4. Refund – The recovery of any tax alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority, or of any sum
alleged to have been excessively, or in any manner wrongfully collected.
I. DEFINITION, NATURE AND CHARACTERISTICS OF TAXES

Definition

These are enforced proportional contributions from persons and properties, levied by the State by
virtue of its sovereignty for the support of the government and for all its public needs.

Characteristics of Taxes

1. Comprehensive - It covers persons, businesses, activities, professions, rights and privileges.

2. Unlimited - It is so unlimited in force and searching in extent that courts scarcely venture to
declare that it is subject to any restrictions, except those that such rests in the discretion of the
authority which exercises it. (Tio v. Videogram Regulatory Board, G.R. No. 75697, June 18,
1987)
3. Plenary - It is complete. Under the NIRC, the BIR may avail of certain remedies to ensure the
collection of taxes.

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 4. Supreme - It is supreme insofar as the selection of the subject of taxation is concerned.

J. REQUISITES OF A VALID TAX

1. Should be for a public purpose

2. The rule of taxation shall be uniform
3. That either the person or property taxed be within the jurisdiction of the taxing authority
4. That the assessment and collection of certain kinds of taxes guarantees against injustice to
individuals, especially by way of notice and opportunity for hearing be provided
5. The tax must not impinge on the inherent and constitutional limitations on the power of taxation
K. TAX AS DISTINGUISHED FROM OTHER FORMS OF EXACTIONS

TAX CUSTOMS DUTY

Coverage
More comprehensive than Only a kind of tax therefore limited
customs duty coverage
Object
Persons, property, etc. Goods imported or exported

TAX TOLL
Definition
An enforced proportional contribution from A consideration paid for the use
persons and property for public purpose/s. of a road, bridge or the like, of a
public nature.
Basis
Demand of sovereignty Demand of proprietorship
Amount
Generally the amount is unlimited Amount is limited to the cost
and maintenance of public
improvement
Purpose
For the support of the government For the use of another’s
property
Authority
May be imposed by the State only May be imposed by private
individuals or entities

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 TAX DEBT
Basis
Obligation created by law Obligation based on contract, express or
implied
Assignability
Not assignable Assignable
Mode of Payment

Payable in money or in kind Payable in kind or in money

Set-off
Not subject to set-off Subject to set-off
Effect of non-payment
May result to No imprisonment (except when debt arises
imprisonment from crime)
Interest
Bears interest only if delinquent Interest depends upon the written
stipulation of the parties
Prescription
Governed by the special prescriptive Governed by the ordinary periods of
periods provided for in the NIRC prescription

TAX PENALTY
Definition
An enforced proportional contribution from Sanction imposed as a punishment for a
persons and property for public purpose/s. violation of the law or acts deemed
injurious; violation of tax laws may give
rise to imposition of penalty.
Purpose
To raise revenue To regulate conduct
Authority
Maybe imposed by the State only Maybe imposed by private entities

L. KINDS OF TAXES

1. As to object / subject matter

a. Personal/Poll or Capitation tax – A fixed amount imposed upon all persons, or upon all persons
of a certain class, residents within a specified territory, without regard to their property or
occupation. E.g. Community tax
b. Property tax – Tax imposed on property, whether real or personal, in proportion either to its
value, or in accordance with some other reasonable method of apportionment. E.g. Real
Property tax
c. Excise / Privilege tax – a charge upon the performance of an act, the enjoyment of a privilege, or
the engaging in an occupation. An excise tax is a tax that does not fall as personal or property.
E.g. Income tax, Estate tax, Donor’s tax, VAT

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Note: This is different from the excise tax under the NIRC which is a business tax imposed on items
such as cigars, cigarettes, wines, liquors, frameworks, mineral products, etc.

2. As to who bears the burden:

a. Direct – one that is demanded from the person who also shoulders the burden of tax. E.g.
Income tax, Estate tax and Donor’s tax
b. Indirect – one which is shifted by the taxpayer to someone else. E.g. VAT and Other percentage
taxes

3. As to determination of the amount / tax rates:

a. Specific – tax of a fixed amount imposed by the head or number, or by some standard of weight
or measurement. E.g. Excise tax on cigar, cigarettes and liquors
b. Ad valorem – tax based on the value of the property with respect to which the tax is assessed. It
requires the intervention of assessors or appraisers to estimate the value of such property before
the amount due can be determined. E.g. VAT, Income tax, Donor’s tax and Estate tax
4. As to purpose:

a. General/Fiscal or Revenue – tax imposed solely for the general purpose of the government. E.g.
Income tax and Donor’s tax
b. Special / Regulatory or Sumptuary – tax levied for specific purpose, i.e. to achieve some social
or economic ends. E.g. Tariff and certain duties on imports
5. As to scope/ or authority to impose:

a. National tax – Tax levied by the National Government. E.g. Income tax, Estate tax, Donor’s tax,
Value added tax, Other Percentage taxes and Documentary Stamp taxes
b. Local or Municipal – A tax levied by a local government. E.g. Real Estate tax and Community
tax
6. As to proportionality or graduation:

a. Progressive – A tax rate which increases as the tax base or bracket increases. E.g. Income tax,
Estate tax and Donor’s tax
b. Regressive – The tax rate decreases as the tax base or bracket increases.
c. Proportional – A tax of a fixed percentage of amount of the base (value of the property, or
amount of gross receipts etc.) E.g. VAT and Other Percentage taxes
7. As to Tax Base:

a. Gross Taxation – does not admit of any deductions.

b. Net Taxation – admits of deductions in arriving at the taxable base.

M. SOURCES OF TAX LAWS

1. Statutes
2. Presidential Decrees

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 3. Executive Orders
4. Constitution 5. Court Decisions
5. Tax Codes
6. Revenue Regulations
7. Administrative Issuances 9. BIR Rulings
8. Local Tax Ordinance
9. Tax Treaties and Conventions

N. CONSTRUCTION AND INTERPRETATION OF

1. Tax Laws

Nature of Tax Laws

Tax laws are:

1. Not political
2. Civil in nature
3. Not penal in character

How are tax laws construed?

1. Generally, no person or property is subject to tax unless within the terms or plain import of a
taxing statute.
2. Tax laws are generally prospective in nature.
3. Where the language is clear and categorical, the words employed are to be given their
ordinary meaning.
4. When there is doubt, tax laws are strictly construed against the Government and liberally in
favor of the taxpayer.
Note: Taxes, being burdens, are not to be presumed beyond what the statute expressly and
clearly provides.
5. Provisions of the taxing act are not to be extended by implication.
6. Tax laws are special laws and prevail over general laws.

2. TAX EXEMPTIONS AND EXCLUSIONS

General Rule: Strict construction of tax exemptions against grantee.

Exception:

1. If the statute granting exemption expressly provides for liberal interpretation;

2. In case of exemptions of public property;
3. Those granted to traditional exemptees;
4. Exemptions in favor of the government;
5. Exemption by clear legislative intent.
6. In case of special taxes (relating to special cases affecting special persons).

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 Note: The intent of the legislature to grant tax exemption must be in clear and unmistakable
terms. Exemptions are never presumed. The burden of establishing right to an exemption is upon
the claimant.

It is a recognized principle that the rule on strict interpretation does not apply in the case of
exemptions in favor of a government political subdivision or instrumentality. The reason for the
strict interpretation does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such a case, the practical effect of an exemption is merely to
reduce the amount that has to be handled by government in the course of its operations. For these
reasons, provisions granting exemptions to government agencies may be construed liberally, in
favor of non-taxability of such agencies. (Maceda vs. Macaraig, 197 SCRA 771)

3. Tax Rules and Regulations

The construction placed by the office charged with implementing and enforcing the provisions of
a Code should be given controlling weight unless such interpretation is clearly erroneous.

Note: Administrative regulations must always be in harmony with the provisions of the law. In
case of discrepancy between the basic law and the implementing rule or regulation, the former
prevails.

4. Penal provisions of Tax Laws

Penal provisions are given strict construction so as not to extend the plain terms thereof that
might create offenses by mere implication not so intended by the legislative body. (RP v. Martin,
G.R. No. L-38019, May 16, 1980)

5. Non-retroactive application to Taxpayers

O. DOCTRINES IN TAXATION

1. Prospectivity of Tax Laws

General Rule: Taxes must only be imposed prospectively.

Exception: If the law expressly provides for retroactive imposition. Retroactive application of
revenue laws may be allowed if it will not amount to denial of due process.

Note: The prohibition against ex post facto laws applies only to criminal matters and not to laws
which are civil in nature. When it comes to civil penalties like fines and forfeiture (except interest),
tax laws may be applied retroactively unless it produces harsh and oppressive consequences which
violate the taxpayer’s constitutional rights regarding equity and due process. But criminal penalties
may arising from tax violations may not be given retroactive effect.

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2. Imprescriptibility of Taxes

Taxes are imprescriptible as they are the lifeblood of the government. However, tax statutes may
provide for statute of limitations.

Note: Although the NIRC provides for the limitation in the assessment and collection of taxes
imposed, such prescriptive period will only be applicable to those taxes that were returnable. The
prescriptive period shall start from the time the taxpayer files the tax return and declares his
liability. (Collector v. Bisaya Land Transportaion Co., 1958)

3. Double Taxation

Otherwise described as “direct duplicate taxation”, the two taxes must be imposed on the same
subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction,
during the same taxing period; and the taxes must be of the same kind or character. (City of
Manila v. Coca Cola Bottlers Philippines, G.R. No. 181845, Aug. 4, 2009)

Kinds of Double Taxation

1. As to validity:

a. Direct Double Taxation (Obnoxious) - Double taxation in the objectionable or prohibited

sense since it violates the equal protection clause of the Constitution.

Elements:
1. The same property or subject matter is taxed twice when it should be taxed only
once.
2. Both taxes are levied for the same purpose
3. Imposed by the same taxing authority
4. Within the same jurisdiction
5. During the same taxing period
6. Covering the same kind or character of tax. (Villanueva vs. City of Iloilo)

b. Indirect Double Taxation - Not repugnant to the Constitution.

1. This is allowed if the taxes are of different nature or character imposed by
different taxing authorities.
2. Generally, it extends to all cases when one or more elements of direct
taxation are not present.

2. As to scope:

a. Domestic Double Taxation - When the taxes are imposed by the local and national
government within the same State.
b. International Double Taxation - occurs when there is an imposition of comparable taxes in
two or more states on the same taxpayer in respect of the same subject matter and for
identical periods.

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4. Power to Tax involves Power to Destroy

“Power to tax is the power to destroy” (Marshall Dictum) – refers to the unlimitedness and the
degree or vigor with which the taxing power may be employed to raise revenue. - the financial
needs of the State may outrun any human calculation, so the power to meet those needs by taxation
must not be limited even though taxes become burdensome or confiscatory.

The power to tax includes the power to destroy. Taxation is a destructive power which interferes
with the personal and property rights of the people and takes from them a portion of their property
for the support of the government. (McCulloch vs. Maryland, 4 Wheat, 316 4 L ed. 579, 607)

Note: It is more reasonable to say that the maxim “the power to tax is the power to destroy” is to
describe not the purposes for which the taxing power may be used but the degree of vigor with
which the taxing power may be empoloyed in order to raise revenue. (Cooley).

5. Escape from Taxation

a) Shifting of Tax Burden

The process by which the tax burden is transferred from the statutory taxpayer (impact of
taxation) to another (incident of taxation) without violating the law.

Impact of Taxation – point on which tax is originally imposed.

Incidence of Taxation – point on which the tax burden finally rests or settles down. Illustration:
Value added tax. The seller is required by law to pay tax, but the burden is actually shifted or
passed on to the buyer.

Kinds of Shifting

1. Forward shifting- when burden of tax is transferred from a factor of production through
the factors of distribution until it finally settles on the ultimate purchaser or consumer
2. Backward shifting- when burden is transferred from consumer through factors of
distribution to the factors of production
3. Onward shifting- when the tax is shifted 2 or more times either forward or backward

b) Tax Avoidance

The exploitation by the taxpayer of legally permissible alternative tax rates or methods of
assessing taxable property or income, in order to avoid or reduce tax liability. Example: “estate
planning” (conveyance of property to a family corporation for shares) (Delpher Trades Corp. vs.
IAC, 157 SCRA 349)

c) Tax Evasion

Use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of the tax.

Factors in Tax Evasion

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 1. The end to be achieved, i.e. Payment of less than that known by the taxpayer to be legally
due, or paying no tax when it is shown that the tax is due;
2. An accompanying state of mind which is described as being evil, in bad faith, willful, or
deliberate and not coincidental; and
3. A course of action which is unlawful.
Indicia of Fraud in Tax Evasion

1. Failure to declare for taxation purposes true and actual income derived from business for
2 consecutive years (Republic vs Gonzales, L-17962)
2. Substantial under-declaration of income tax returns of the taxpayer for 4 consecutive
years coupled with intentional overstatement of deductions (CIR vs Reyes, 104 PHIL
1061)
6. Exemption from Taxation

A grant of immunity to particular persons or corporations from the obligation to pay taxes.

No law granting any tax exemption shall be passed without the concurrence of a majority of all the
members of Congress (Art VI Sec 28(4) of the 1987 Constitution)

Kinds of Tax Exemption

1. As to source

a. Constitutional – immunities from taxation that originate from the constitution.

b. Statutory – those which emanate from legislation
c. Contractual- agreed to by the taxing authority in contracts lawfully entered into by them
under enabling laws
d. Treaty
e. Licensing Ordinance
2. As to form

a. Express – expressly granted by organic or statute law

b. Implied – when particular persons, property or excises are deemed exempt as they fall
outside the scope of the taxing provision itself.
3. As to extent

a. Total – absolute immunity

b. Partial – one where a collection of a part of the tax is dispensed with
4. As to object

a. Personal – granted directly in favor of certain persons

b. Impersonal – granted directly in favor of a certain class of property
Principles Governing Tax Exemption

1. Exemptions from taxation are highly disfavored in law and are not presumed

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 2. He who claims as exemption must be able to justify his claim by the clearest grant of organic
or statute law by words too plain to be mistaken. If ambiguous, there is no exemption.
3. He who claims exemption should prove by convincing proof that he is exempted.
4. Taxation is the rule; tax exemption is the exception
5. Tax exemption must be strictly construed against the taxpayer and liberally in favor of the
taxing authority.
6. Tax exemptions are not presumed
7. Constitutional grants of tax exemption are self-executing.
8. Tax exemptions are personal.
Nature of Tax Exemption

1. Deductions for income tax purposes

2. Claims for refund
3. Tax amnesty
4. Condonation of unpaid tax liabilities
Note: Must be strictly construed against the taxpayer

When exemptions are construed liberally in favor of grantee

1. When the law so provides for such liberal construction.

2. Exemptions from certain taxes, granted under special circumstances to special classes of
persons.
3. Exemptions in favor of the government, its political subdivisions or instrumentalities.
4. Exemptions to traditional exemptees, such as those in favor of religious and charitable
institutions.
5. If exemptions refer to the public property

Revocation of Exemption

It is an act of liberality which could be taken back by the government unless there are
restrictions. Since taxation is the rule and exemption therefrom is the exception, the
exemption may be withdrawn by the taxing authority. (Mactan Cebu International Airport
Authority vs. Marcos, 261 SCRA 667)

Restrictions on Revocation of Tax Exemptions

1. Non-impairment clause. Where the exemption was granted to private parties based on
material consideration of a mutual nature, which then becomes contractual and is covered by
the non-impairment clause of the Constitution.
2. Adherence to form- if the tax exemption is granted by the Constitution, its revocation may
be effected through Constitutional amendment only
3. Where the tax exemption grant is in the form of a special law and not by a general law even
if the terms of the general act are broad enough to include the codes in the general law unless
there is manifest intent to repeal or alter the special law (Province of Misamis Oriental vs
Cagayan Electric Power and Light Co. Inc)

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7. Doctrine of Equitable Recoupment

It is a principle which allows a taxpayer, whose claim for refund has been barred due to
prescription, to recover said tax by setting off the prescribed refund against a tax that may be due
and collectible from him. Under this doctrine, the taxpayer is allowed to credit such refund to his
existing tax liability.

Note: The Supreme Court, rejected this doctrine in Collector v. UST (G.R. No. L-11274, Nov. 28,
1958), since it may work to tempt both parties to delay and neglect their respective pursuits of
legal action within the period set by law.

8. Compensation and Set-off

General Rule: Taxes cannot be the subject of compensation or set-off.

Reasons:

1. Lifeblood theory
2. Taxes are not contractual obligation but arise out of duty to the government
3. The government and the taxpayer are not mutually creditors and debtors of each other.
(Francia v. IAC)
Exception: When both obligations are due and demandable as well as fully liquidated and all the
requisites for a valid compensation are present, compensation takes place by operation of law.
(Domingo v. Garlitos)

9. Compromise and Tax Amnesty

Tax Amnesty

Nature of Tax Amnesty

1. General or intentional overlooking by the state of its authority to impose penalties on

persons otherwise guilty of evasion or violation of a revenue or tax law
2. Partakes of an absolute forgiveness of waiver of the government of its right to collect.
3. To give tax evaders, who wish to relent and are willing to reform a chance to do so.
Rules on Tax Amnesty

1. Tax amnesty
a. Like tax exemption, it is never favored nor presumed
b. Construed strictly against the taxpayer (must show complete compliance with the law)

2. Government not estopped from questioning the tax liability even if amnesty tax payments
were already received.

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 Reason: Erroneous application and enforcement of the law by public officers do not block
subsequent correct application of the statute. The government is never estopped by mistakes
or errors of its agents.

Basis: Lifeblood Theory

3. Defense of tax amnesty, like insanity, is a personal defense.

Reason: Relates to the circumstances of a particular accused and not the character of the acts
charged in the information

10. Taxpayer’s Suit

a) Nature and Concept

It is a case where the act complained of directly involves the illegal disbursement of public
funds collected through taxation.

b) As distinguished from a citizen’s suit

c) Requisites of a taxpayer’s suit challenging the constitutionality of a tax measure or act of a

taxing authority; concept of locus standi, doctrine of transcendental importance and ripeness for
judicial determination

II. NATIONAL TAXATION (NATIONAL INTERNAL REVENUE CODE OF 1997, as amended.

EXCLUDE amendments introduced by R.A. No. 10963 or the Tax Reform for Acceleration and
Inclusion Law)

A. Organization and Functions of the Bureau of Internal Revenue

1. Rule-making authority of the Secretary of Finance

a) Authority of the Secretary of Finance to promulgate rules and regulations

Section 244. Authority of Secretary of Finance to Promulgate Rules and Regulations. - The
Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all
needful rules and regulations for the effective enforcement of the provisions of this Code.

b) Specific provisions to be contained in rules and regulations

Section 245. Specific Provisions to be Contained in Rules and Regulations. - The rules and
regulations of the Bureau of Internal Revenue shall, among other thins, contain provisions
specifying, prescribing or defining:
(a) The time and manner in which Revenue Regional Director shall canvass their respective
Revenue Regions for the purpose of discovering persons and property liable to national
internal revenue taxes, and the manner in which their lists and records of taxable persons
and taxable objects shall be made and kept;

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(b) The forms of labels, brands or marks to be required on goods subject to an excise tax, and
the manner in which the labelling, branding or marking shall be effected;
(c) The conditions under which and the manner in which goods intended for export, which if
not exported would be subject to an excise tax, shall be labelled, branded or marked;
(d) The conditions to be observed by revenue officers respecting the institutions and conduct
of legal actions and proceedings;
(e) The conditions under which goods intended for storage in bonded warehouses shall be
conveyed thither, their manner of storage and the method of keeping the entries and
records in connection therewith, also the books to be kept by Revenue Inspectors and the
reports to be made by them in connection with their supervision of such houses;
(f) The conditions under which denatured alcohol may be removed and dealt in, the
character and quantity of the denaturing material to be used, the manner in which the
process of denaturing shall be effected, so as to render the alcohol suitably denatured and
unfit for oral intake, the bonds to be given, the books and records to be kept, the entries
to be made therein, the reports to be made to the Commissioner, and the signs to be
displayed in the business ort by the person for whom such denaturing is done or by
whom, such alcohol is dealt in;
(g) The manner in which revenue shall be collected and paid, the instrument, document or
object to which revenue stamps shall be affixed, the mode of cancellation of the same,
the manner in which the proper books, records, invoices and other papers shall be kept
and entries therein made by the person subject to the tax, as well as the manner in which
licenses and stamps shall be gathered up and returned after serving their purposes;
(h) The conditions to be observed by revenue officers respecting the enforcement of Title III
imposing a tax on estate of a decedent, and other transfers mortis causa, as well as on
gifts and such other rules and regulations which the Commissioner may consider suitable
for the enforcement of the said Title III;
(i) The manner in which tax returns, information and reports shall be prepared and reported
and the tax collected and paid, as well as the conditions under which evidence of
payment shall be furnished the taxpayer, and the preparation and publication of tax
statistics;
(j) The manner in which internal revenue taxes, such as income tax, including withholding
tax, estate and donor's taxes, value-added tax, other percentage taxes, excise taxes and
documentary stamp taxes shall be paid through the collection officers of the Bureau of
Internal Revenue or through duly authorized agent banks which are hereby deputized to
receive payments of such taxes and the returns, papers and statements that may be filed
by the taxpayers in connection with the payment of the tax: Provided, however, That
notwithstanding the other provisions of this Code prescribing the place of filing of
returns and payment of taxes, the Commissioner may, by rules and regulations, require
that the tax returns, papers and statements that may be filed by the taxpayers in
connection with the payment of the tax. Provided, however, That notwithstanding the
other provisions of this Code prescribing the place of filing of returns and payment of
taxes, the Commissioner may, by rules and regulations require that the tax returns, papers
and statements and taxes of large taxpayers be filed and paid, respectively, through
collection officers or through duly authorized agent banks: Provided, further, That the
Commissioner can exercise this power within six (6) years from the approval of Republic
Act No. 7646 or the completion of its comprehensive computerization program,
whichever comes earlier: Provided, finally, That separate venues for the Luzon, Visayas
and Mindanao areas may be designated for the filing of tax returns and payment of taxes
by said large taxpayers.

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 For the purpose of this Section, 'large taxpayer' means a taxpayer who satisfies any of the
following criteria;

(1) Value-Added Tax (VAT) - Business establishment with VAT paid or payable of at least
One hundred thousand pesos (P100,000) for any quarter of the preceding taxable year;
(2) Excise tax - Business establishment with excise tax paid or payable of at least One
million pesos (P1,000,000) for the preceding taxable year;
(3) Corporate Income Tax - Business establishment with annual income tax paid or payable
of at least One million pesos (P1,000,000) for the preceding taxable year; and
(4) Withholding tax - Business establishment with withholding tax payment or remittance of
at least One million pesos (P1,000,000) for the preceding taxable year.
Provided, however, That the Secretary of Finance, upon recommendation of the
Commissioner, may modify or add to the above criteria for determining a large taxpayer
after considering such factors as inflation, volume of business, wage and employment
levels, and similar economic factors.

The penalties prescribed under Section 248 of this Code shall be imposed on any
violation of the rules and regulations issued by the Secretary of Finance, upon
recommendation of the Commissioner, prescribing the place of filing of returns and
payments of taxes by large taxpayers.

2. Jurisdiction, Power and Functions of the Commissioner of Internal Revenue

a) Powers and duties of the Bureau of Internal Revenue

Section 2. Powers and duties of the Bureau of Internal Revenue. - The Bureau of Internal
Revenue shall be under the supervision and control of the Department of Finance and its
powers and duties shall comprehend the assessment and collection of all national internal
revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines
connected therewith, including the execution of judgments in all cases decided in its favor by
the Court of Tax Appeals and the ordinary courts. The Bureau shall give effect to and
administer the supervisory and police powers conferred to it by this Code or other laws.

b) Power of the Commissioner to interpret tax laws and to decide tax cases

Section 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The
power to interpret the provisions of this Code and other tax laws shall be under the exclusive
and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Code or
other laws or portions thereof administered by the Bureau of Internal Revenue is vested in
the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax
Appeals.

c) Non-retroactivity of rulings

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 Section 246. Non- Retroactivity of Rulings. - Any revocation, modification or reversal of any
of the rules and regulations promulgated in accordance with the preceding Sections or any of
the rulings or circulars promulgated by the Commissioner shall not be given retroactive
application if the revocation, modification or reversal will be prejudicial to the taxpayers,
except in the following cases:

(a) Where the taxpayer deliberately misstates or omits material facts from his return or any
document required of him by the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith

B. Income Tax

1. Definition, Nature and General Principles

a) Income Tax Systems – Global, Schedular and Semi-schedular or Semi-Global
Taxpayer’s Income

Global Tax System

Under a global tax system, it did not matter whether the income received by the taxpayer is
classified as compensation income, business or professional income, passive investment
income, capital gain, or other income. All items of gross income, deductions, and personal
and additional exemptions, if any, are reported in one income tax return, and one set of tax
rates are applied on the tax base.

Schedular Tax System

Different types of incomes are subject to different sets of graduated or flat income tax rates.
The applicable tax rate(s) will depend on the classification of the taxable income and the
basis could be gross income or net income. Separate income tax returns (or other types of
return applicable) are filed by the recipient of income for the particular types of income
received.

Semi-Schedular or Semi-Global Tax System

All compensation income, business or professional income, capital gain and passive income
not subject to final tax, and other income are added together to arrive at the gross income,
and after deducting the sum of allowable deductions, the taxable income is subjected to one
set of graduated tax rates or normal corporate income tax. With respect to such income the
computation is global. For those other income not mentioned above, they remain subject to
different sets of tax rates and covered by different returns.

Note: The Philippines, under EO 37 (1986) and RA 8424 (1998), follows a semi-schedular
and semiglobal tax system.

b) Features of the Philippine Income Tax Law

Direct Tax
The tax burden is borne by the income recipient upon whom the tax is imposed.

Progressive

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 The tax rate increases as the tax base increases. It is founded on the ability to pay principle
and is consistent with Sec. 28, Art. VI, 1987 Constitution.

Comprehensive
The Philippines has adopted the most comprehensive system of imposing income tax by
adopting the citizenship principle, the residence principle, and the source principle. Any of
the three principles is enough to justify the imposition of income tax on the income of a
resident citizen and domestic corporation that are taxed on a worldwide income.

Semi-Schedular Or Semi-Global Tax System

The Philippines follows the semi-schedular or semiglobal system of income taxation,
although certain passive investment incomes and capital gains from sale of capital assets,
namely: (a) shares of stock of domestic corporations and (b) real property are subject to final
taxes at preferential tax rates.

National Tax
It is imposed and collected by the National Government throughout the country.

Excise Tax
It is imposed on the right or privilege of a person to receive or earn income. It is not a
personal tax or a property tax.

c) Criteria in imposing Philippine income tax.

Citizenship or Nationality Principle

A citizen of the Philippines is subject to Philippine income tax (a) on his worldwide income,
if he resides in the Philippines; or (b) only on his income from sources within the
Philippines, if he qualifies as a non-resident citizen.

Residence Principle
A resident alien is liable to pay Philippine income tax on his income from sources within the
Philippines but is exempt from tax on his income from sources outside the Philippines.

Source of Income Principle

An alien is subject to Philippine income tax because he derives income from sources within
the Philippines. Thus, a non-resident alien or nonresident foreign corporation is liable to pay
Philippine income tax on income from sources within the Philippines, such as dividend
interest, rent, or royalty, despite the fact that he has not set foot in the Philippines.

The income tax law adopts the most comprehensive tax situs of nationality and residence of
resident citizens and domestic corporations that subject them to income tax liability on their
income from all sources within and without the Philippines, while the law adopts the source
rule with respect to income received by taxpayers, other than resident citizens and domestic
corporations. (Tan v. Del Rosario, 237 SCRA 324)

d) Types of Philippine income taxes

1. Graduated income tax on individuals

2. Normal corporate income tax on corporations

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 3. Minimum corporate income tax on corporations
4. Special income tax on certain corporations
5. Capital gains tax on sale or exchange of shares of stock of a domestic corp. classified as
capital assets
6. Capital gains tax on sale or exchange of real property classified as capital asset
7. Final withholding tax on certain passive investment income paid to residents
8. Final withholding tax on income payments made to non-residents
9. Fringe benefits tax on fringe benefits of supervisory or managerial employees
10. Branch profit remittance tax
11. Tax on improperly accumulated earnings of corporations

e) Taxable period

The accounting periods used in determining the taxable income of taxpayers are:
a. Calendar Year - Accounting period of 12 months ending on the last day of December
b. Fiscal Year - Accounting period of 12 months ending on the last day of any month other
than December (Sec. 22(Q), NIRC).
c. Short Period- Accounting period which starts after the first month of the tax year or ends
before the last month of the tax year (less than 12 months)

Instances Whereby Short Accounting Period Arises

a. When a corporation is newly organized.
b. When a corporation is dissolved.
c. When a corporation changes accounting period.
d. When the taxpayer dies.

"Taxable year" means the calendar year, or the fiscal year ending during such calendar year,
upon the basis of which the net income is computed under Title II (Tax on Income).

Taxable year includes, in the case of return made for a fractional part of a year under the
provisions of Title II, the period for which such return is made (Sec. 22 (P), NIRC).

When Calendar Year Shall Be Used in Computing Taxable Income:

a. If the taxpayer's annual accounting period is other than a fiscal year; or
b. If the taxpayer has no annual accounting period; or
c. If the taxpayer does not keep books of accounts; or
d. If the taxpayer is an individual (Sec. 43, NIRC).

f) Kinds of taxpayers

Individual Taxpayers Citizens

1. Resident Citizens (RC)
2. Non-resident Citizens (NRC)
a. Citizen of the Philippines who establishes to the satisfaction of the Commissioner the
fact of his physical presence abroad with a definite intention to reside therein.
b. Citizen who leaves the Philippines during the taxable year to reside abroad, either as
an immigrant or for employment on a permanent basis.

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 c. Citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time
during the taxable year.
d. Citizen previously considered as non-resident citizen and who arrives in the
Philippines at any time during the taxable year to reside permanently in the
Philippines-Treated as NRC with respect to his income derived from sources abroad
until the date of his arrival in the Philippines
Aliens
1. Resident Alien
An alien actually presents in the Philippines who is not a mere transient or sojourner is a
resident for income tax purposes.

No/Indefinite Intention = RESIDENT: If he lives in the Philippines and has no definite

intention as to his stay, he is a resident. A mere floating intention indefinite as to time, to
return to another country is not sufficient to constitute him a transient.

Definite Intention = TRANSIENT: One who comes to the Philippines for a definite
purpose, which in its nature may be promptly accomplished, is a transient.

Exception: Definite Intention but such cannot be promptly accomplished; If his purpose
is of such nature that an extended stay may be necessary for its accomplishment, and thus
the alien makes his home temporarily in the Philippines, then he becomes a resident.

2. Non-resident Alien
Engaged in trade or business within the Philippines - If the aggregate period of his stay in
the Philippines is more than 180 days during any calendar year.

Not engaged in trade or business within the Philippines - If the aggregate period of his
stay in the Philippines does not exceed 180 days.

Special class of individual employees Minimum Wage Earner

a. A worker in the private sector paid the statutory minimum wage;
b. An employee in the public sector with compensation income of not more than the
statutory minimum wage in the non-agricultural sector where he/she is assigned.

Corporations
Corporations Includes all types of corporations, partnerships (no matter how created or
organized), joint stock companies, joint accounts, associations, or insurance companies,
whether or not registered with the SEC.

Excludes general professional partnerships (GPP), joint venture or consortium formed for the
purpose of undertaking construction projects, joint venture or consortium engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract with the government.

(1) Domestic corporations – A corporation created and organized under its laws (the law of
incorporation test).

(2) Foreign corporations – A corporation which is not domestic.

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 a. Resident foreign corporations – Foreign corporation engaged in trade or business
within the Philippines.
b. Doing business – The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or
the exercise of some of the functions normally incident to, and in progressive
prosecution of commercial gain or for the purpose and object of the business
organization. (RA 7042, Foreign Investments Act)

In order that a foreign corporation may be regarded as doing business within a State,
there must be continuity of conduct and intention to establish a continuous business,
such as the appointment of a local agent, and not one of a temporary character (CIR
v. BOAC)

c. Non-resident foreign corporations – Foreign corporation not engaged in trade or

business within the Philippines

d. Joint venture and consortium – Essential factors of a joint venture or consortium: (a)
Each party must make a contribution, not necessarily of capital but by way of
services, skill, knowledge, material or money; (b) Profits must be shared among the
parties; (c) There must be a joint proprietary interest and right of mutual control over
the subject matter of the enterprise; (d) There is a single business transaction.

(3) Partnership - The Tax Code mandates that every other type of business partnership is
subject to income tax in the same manner and at the same rate as an ordinary corporation.

(4) General Professional Partnerships (GPP) - A general professional partnership is a

partnership formed by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging in any trade or
business.

Not considered as a taxable entity for income tax purposes. The partners themselves are
liable, not the partnership, are liable for the payment of income tax in their individual
capacities.

(5) Estates and Trusts - Taxable estates and trusts are taxed in the same manner and on the
same basis as an individual.

(6) Co-ownership - For income tax purposes, the co-owners in a co-ownership report their
share of the income from the property owned in common by them in their individual tax
returns for the year and the co-ownership is not considered as a separate taxable entity or
a corporation.

2. Income Tax

a) Definition, Nature and General Principles

Definition

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 Income Tax is defined as a tax on all yearly profits arising from property, professions, trades,
or offices, or as a tax on the person’s income, emoluments, profits and the like (Fisher v.
Trinidad).

Nature
Income tax is generally classified as an excise tax. It is not levied upon persons, property,
funds or profits but upon the right of a person to receive income or profits.

General Principles
a. A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines
b. A non-resident citizen is taxable only on income derived from sources within the
Philippines;
c. An individual citizen of the Philippines who is working and deriving income from abroad
as an overseas contract worker is taxable only on income derived from sources within the
Philippines:

Provided, that a seaman shall be treated as an overseas contract worker if he is a: (1)

citizen of the Philippines; and (2) receives compensation for services rendered abroad as
a member of the complement of a vessel engaged exclusively in international trade

d. An alien individual, whether a resident or not of the Philippines, is taxable only on

income derived from sources within the Philippines;

e. A domestic corporation is taxable on all income derived from sources within and without
the Philippines; and (f) A foreign corporation, whether engaged or not in trade or
business in the Philippines, is taxable only on income derived from sources within the
Philippines. (Sec. 23)

b) Income

(1) Definition and nature

Definition
Income means all wealth which flows to the taxpayer other than a mere return of capital.
It includes gain derived from the sale or other disposition of capital assets. Income is a
gain derived from labor or capital, or both labor and capital; and includes the gain
derived from the sale or exchange of capital assets.

Conwi v. CTA: It is an amount of money coming to a person within a specified time,

whether as payment for services, interest or profit from investment. Unless otherwise
specified, it means cash or its equivalent. Income can also be thought of as a flow of the
fruits of one's labor.

Nature
Income includes earnings, lawfully or unlawfully acquired, without consensual
recognition, express or implied, of an obligation to repay and without restriction as their
disposition. (James v. US, 366 US 213)

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(2) When income is taxable

i. Existence of income

a. There is INCOME, gain or profit

b. RECEIVED or REALIZED during the taxable year
c. NOT EXEMPT from income tax

Madrigal vs. Rafferty (1918): "The fact is that property is a tree, income is the fruit;
labor is a tree, income the fruit; capital is a tree, income the fruit." A tax on income is
not a tax on property. "Income," as here used, can be defined as "profits or gains."

A mere increase in the value of property is not income, but merely unrealized
increase in capital.(1 Mertens, Sec. 5.06) The increase in the value of property is also
known as appraisal surplus or revaluation increment.

ii. Realization of income

When is income received or realized?

Actual vis-à-vis Constructive receipt

Actual receipt – Income is actually reduced to possession. The realization of gain
may take the form of actual receipt of cash.

Constructive receipt– An income is considered constructively received when it is

credited to the account of, or segregated in favor of a person. The person may
withdraw the said account credited in his favor anytime without any substantial
limitations or conditions upon which payment or enjoyment is to be made or
exercised.

Examples of constructive receipt of income are:

a. Interest credited on savings bank deposit
b. Matured interest coupons not yet collected by the taxpayer
c. Dividends applied by the corporation against the indebtedness of a stockholder
d. Share in the profit of a partner in a general professional partnership, although not
yet distributed, is regarded as constructively received; or
e. Intended payment deposited in court (consignation). The doctrine of constructive
receipt is designed to prevent the taxpayer using the cash basis from deferring or
postponing the actual receipt of taxable income. Without the rule, the taxpayer
can conveniently select the year in which he will report the income.
(DIMAAMPAO)

For a taxpayer using the accrual method, the determinative question is, when do the
facts present themselves in such a manner that the taxpayer must recognize income
or expense? The accrual of income and expense is permitted when the all-events test
has been met. This test requires: (1) fixing of a right to income or liability to pay; and
(2) the availability of the reasonable accurate determination of such income or
liability [CIR v. Isabela Cultural Corporation].

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 Conditions in the realization of income
A: Under the realization principle, revenue is generally recognized when both of the
following conditions are met:
1. The earning process is complete or virtually complete
2. An exchange has taken place (Manila Mandarin Hotels, Inc. v. CIR)

iii. Recognition of income

iv. Cash method of accounting versus Accrual method of accounting

Cash method generally reports income upon cash collection and reports expenses
upon payment. If earned from rendering of services, income is to be reported in the
year when collected, whether earned or unearned. (Sec. 108, NIRC).

Accrual method generally reports income when earned and reports expense when
incurred. If earned from sale of goods, income is to be reported in the year of sale,
irrespective of collection. (Sec. 106, NIRC).

Income realized pertains to the accrual basis of accounting, when recognition of

income in the books is when it is realized and expenses are recognized when
incurred. It is the right to receive and not the actual receipt that determines the
inclusion of the amount in gross income

Examples:
1. Interest or rent income earned but not yet received
2. Rent expense accrued but not yet paid (3) wages due to workers but remaining
unpaid

Generally, trade and manufacturing businesses use accrual method while servicing
businesses use cash method. If the service business opted to report on accrual basis,
such method can only be applied when it comes to reporting of expense. To prevent
tax evasion, individual taxpayers whose business consists of the sale of inventories
cannot use cash method. (Valencia)

(3) Tests in determining whether income is earned for tax purposes

i. Realization test

No taxable income until there is a separation from capital of something of

exchangeable value, thereby supplying the realization or transmutation which would
result in the receipt of income (Eisner v Macomber). Thus, stock dividends are not
income subject to income tax on the part of the stockholder when he merely holds
more shares representing the same equity interest in the corporation that declared
stock dividends (Fisher v Trinidad).

Page 27
 ii. Claim of right doctrine or doctrine of ownership, command or control

A taxable gain is conditioned upon the presence of a claim of right to the alleged
gain and the absence of a definite unconditional obligation to return or repay that
which would otherwise constitute a gain. To collect a tax would give the government
an unjustified preference as to the part of the money that rightfully and completely
belongs to the victim. The embezzler’s title is void.

iii. Economic benefit test, doctrine of proprietary interest

Any economic benefit to the employee that increases his net worth, whatever may
have been the mode by which it is effected, is taxable. Thus, in stock options, the
difference between the fair market value of the shares at the time the option is
exercised and the option price constitutes additional compensation income to the
employee at the time of exercise (not upon the grant or vesting of the right).

iv. Severance test

Under the doctrine of severance test of income, in order that income may exist, is
necessary that there be a separation from capital of something of exchangeable value.
The income required a realization of gain.

v. All events test

“All –events test” states that under the accrual method of accounting, expenses are
deductible in the taxable year in which: (1) all events have occurred which determine
the liability; and (2) the amount of liability can be determined with reasonable
accuracy.

c) Classification of income

d) Situs of Income Taxation

Income Situs
Interest Residence of the debtor
Dividends Residence of the corporation
Services Place of performance
Rentals Location of the property
Royalties Place of exercise
Sale of Real Property (a) Tangible

(1) Purchase and sale: Location of Sale

(2) Manufactured w/in and sold w/o: Partly w/in and
(3) Manufactured w/o and sold w/in: Partly w/in and
partly w/o

Page 28
 (b) Intangible

General Rule: Place of Sale

Exception: Shares of stock of domestic corporations:

Place of incorporation
Sale of Personal Place of incorporation
Property
Shares of Stock of
Domestic Corporation

3. Gross Income

a) Definition

Section 32. Gross Income. -(A) General Definition. - Except when otherwise provided in this
Title, gross income means all income derived from whatever source, including (but not
limited to) the following items:

1. Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items;
2. Gross income derived from the conduct of trade or business or the exercise of a
profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and
11. Partner's distributive share from the net income of the general professional partnership.

b) Concept of income from whatever source derived

“income derived from whatever source” means inclusion of all income not expressly
exempted within the class of taxable income under the laws irrespective of the voluntary or
involuntary action of the taxpayer in producing the gains, and whether derived from legal or
illegal sources (i.e. gambling, extortion, smuggling, etc.).

c) Gross income vis-à-vis net income vis-à-vis taxable income

Gross income – means income, gain or profit subject to tax.

Net income – means gross income less statutory deductions and/or exemptions (Sec. 31,
NIRC)

Page 29
 Taxable income – means the pertinent items of gross income specified in the Tax Code, less
the deductions and/or personal and additional exemptions, if any, authorized for such types
of income by the Tax Code or other special laws (Sec. 31, NIRC).

d) Sources of income subject to tax

e) Classification of income subject to tax

(1) Compensation income

Income arising from an employer-employee (ER-EE) relationship. It means all

remuneration for services performed by an EE for his ER, including the cash value of all
remuneration paid in any medium other than cash [Sec. 78(A)], unless specifically
excluded by the Tax Code.

It includes, but is not limited to, salaries and wages, honoraria and emoluments,
allowances (e.g., transportation, representation, entertainment), commissions, fees
(including directors’ fees, if the director is, at the same time, an employee of the payor-
corporation), tips, taxable bonuses, fringe benefits except those subject to Fringe Benefit
Tax (FBT) under Section 33 of the Tax Code, and taxable pensions and retirement pay
(e.g. retirement benefits earned without meeting the conditions for exemption thereof –
e.g. retirement of less than 50 years of age.

General Rule: Every form of compensation income is taxable regardless of how it is

earned, by whom it is paid, the label by which it is designated, the basis upon which it is
determined, or the form in which it is received. The basis upon which remuneration is
paid is immaterial. It may be paid on the basis of piece of work, percentage of profits,
hourly, weekly, monthly, or annually.

Exception: The term wages does NOT include remuneration paid:

a. For agricultural labor paid entirely in products of the farm where the labor is
performed, or
b. For domestic service in a private home, or
c. For casual labor not in the course of the employer's trade or business, or
d. For services by a citizen or resident of the Philippines for a foreign government or
an int’l organization. [Sec. 78(A)]

Note: The term “agricultural labor” does not include services performed in connection
with forestry, lumbering or landscaping.

The term “remuneration for domestic services” refers to remuneration paid for services
of a household nature performed by an employee in or about the private home of the
person whom he is employed. The services of household personnel furnished to an
employee (except rank and file employees) by an employer shall be subject to the fringe
benefits tax pursuant to Sec. 33 of the Tax Code. A private home is the fixed place of
abode of an individual or family. If the home is utilized primarily for the purpose of

Page 30
supplying board or lodging to the public as a business enterprise, it ceases to be a private
home and remuneration paid for services performed therein is not exempted. Services of
the household nature in or about a private home include services rendered by cooks,
maids, butlers, valets, laundresses, gardeners, chauffeurs of automobiles for family use.
The remuneration paid for the services which are performed in or about rooming or
lodging houses, boarding houses, clubs, hotels, hospitals or commercial officer or
establishments is considered as compensation. Remuneration paid for services performed
as a private secretary, even if they are performed in the employer’s home is considered as
compensation.

The term “casual labor” includes labor which is occasional, incidental or regular. “Not in
the course of the employer’s trade or business” includes labor that does not promote or
advance the trade or business of the employer.

The term “remuneration paid for services performed as an employee of a foreign

government or an international organization” includes not only remuneration paid for
services performed by ambassadors, ministers and other diplomatic officers and
employees but also remuneration paid for services performed as consular or other officer
or employee of a foreign government or as a non-diplomatic representative of such
government.

Compensation income including overtime pay, holiday pay, night shift differential pay,
and hazard pay, earned by MINIMUM WAGE EARNERS (MWE) who has no other
returnable income are NOT taxable and not subject to withholding tax on wages [RA
9504]Provided, however, that an employee shall not enjoy the privilege of being a MWE
and, therefore, his/her entire earning are not exempt from income tax and, consequently,
from withholding tax if he receives/earns additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable statutory amount of
P30,000, taxable allowance, and other taxable income other than the statutory minimum
wage (SMW), holiday pay, overtime pay, hazard pay and night shift differential pay.

MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their income earned during the taxable
year.

This rule, notwithstanding, the SMW, Holiday Pay, overtime pay, night differential pay
and hazard pay shall still exempt from withholding tax.

Forms of compensation and how they are assessed

a. Cash – If compensation is paid in cash, the full amount received is the measure of the
income subject to tax.
b. Medium other than money – If services are paid for in a medium other than money
(e.g. shares of stock, bonds, and other forms of property), the fair market value
(FMV) of the thing taken in payment is the amount to be included as compensation
subject to tax. If the services are rendered at a stipulated price, in the absence of
evidence to the contrary, such price will be presumed to be the FMV of the
remuneration received.
c. Living quarters or meals –

Page 31
 General Rule: The value to the employee of the living quarters and meals given by
the employer shall be added to his compensation subject to withholding.
Exception: If living quarters/meals are furnished to an employee for the convenience
of the employer the value needed NOT be included as part of compensation income
d. Facilities and privileges of a relatively small value – Facilities and privileges (such
an entertainment, medical services, or so called “courtesy” discounts on purchases),
otherwise known as “de minimis benefits” furnished or offered by an employer to
his employees generally, are NOT considered as compensation subject to income tax
and therefore withholding tax if such facilities are offered or furnished by the
employer merely as means of promoting the health, goodwill, contentment, or
efficiency of his employees. (See RR 5-2011, as amended by RR 8-2012 for ceilings
of de minimis benefits.)

The amount of “de minimis” benefits confirming to the ceiling prescribed shall not be
considered in determining the P30,000 ceiling of “other benefits” excluded from gross
income under Section 32 (b)(7)(e) of the Tax Code, Provided, that the excess of the ‘de
minimis’ benefits over their respective ceilings prescribed by these regulations shall be
considered as part of “other benefits” and the employee receiving it will be subject to tax
only on the excess over the P30,000 ceiling, Provided, further, that MWEs receiving,
‘other benefits’ exceeding the P30,000 limit shall be taxable on the excess benefits, as
well as on his salaries, wages, and allowances, just like an employee receiving
compensation income beyond the SMW. Any amount given by the employer as benefits
to its employees, whether classified as “de minimis” benefits of fringe benefits, shall
constitute as deductible expense upon such employer. Where compensation is paid in
property other than money, the employer shall make necessary arrangements to ensure
that the amount of the tax required to be withheld is available for payment to the BIR.

Classification of Gross Compensation Income

Basic salary or wage

Salary – earnings received periodically for a regular work other than manual labor.
Example: monthly salary of an employee (b) Wages – earnings received usually
according to specified intervals of work, as by the hour, day, or week. Example: a
carpenter’s wage.

Honoraria – payments given in recognition for services performed for which the
established practice discourages charging a fixed fee. Example: honorarium of a guest
lecturer

Fixed or variable allowances i.e. Transportation, Representation, and other allowances

such as Cost of Living Allowances (COLA)

General Rule: Fixed or variable transportation, representation or other allowances that

are received by a public officer or employee of a private entity, in addition to the regular
compensation fixed for his position or office is a COMPENSATION subject to
withholding tax. (Rev. Regs. 2-98)

Exception: Any amount paid specifically, either as advances or reimbursements for

travelling, representation and other bona fide ordinary and necessary expenses incurred

Page 32
or reasonably expected to be incurred by the employee in the performance of his duties
are NOT COMPENSATION subject to withholding tax, provided the following
conditions are satisfied:
a. It is for ordinary and necessary travelling and representation or entertainment
expenses paid or incurred by the employee in the pursuit of the employer’s trade,
business or profession; and
b. The employee is required to account or liquidate for the foregoing expenses.
c. The excess of actual expenses over advances made shall constitute taxable income if
such amount is not returned to the employer. The employee is required to
account/liquidate for the expenses in accordance with the specific requirements of
substantiation for each category of expenses pursuant to Section 34 of the Tax Code.

Note: Reasonable amounts of reimbursements/advances for traveling and entertainment

expenses which are pre-computed on a daily basis and are paid to an employee while he
is on an assignment or duty. – NOT subject to withholding tax on wages and
substantiation requirements.

Commission – usually a percentage of total sales or on certain quota of sales volume

attained as part of incentive such as sales commission.

Received by an employee for the services rendered to the employer including a director’s
fee of the company, fees paid to the public officials such as clerks of court or sheriffs for
services rendered in the performance of their official duty over and above their regular
salaries.

Tips and Gratuities – those paid directly to the employee (usually by a customer of the
employer) which are not accounted for by the employee to the employer. (taxable income
but not subject to withholding tax) [RR NO. 2-98, Sec. 2.78.1]

Hazard or Emergency Pay – additional payment received due to the workers’ exposure to
danger or harm while working. It is normally added to the basic salary together with the
overtime pay and night differential to arrive at gross salary.

Retirement Pay – a lump sum payment received by an employee who has served a
company for a considerable period of time and has decided to withdraw from work into
privacy. [RR 6-82, Sec. 2b]

In general, retirement pay is taxable except in the following instances:

a. SSS or GSIS retirement pays.
b. Retirement pay (R.A. 7641) due to old age provided the following requirements are
met:
c. The retirement program is approved by the BIR Commissioner;
d. It must be a reasonable benefit plan. (Its implementation must be fair and equitable
for the benefit of all employees)
e. The retiree should have been employed for 10 years in the said company;
f. The retiree should have been 50 years old or above at the time of retirement; and
g. It should have been availed of for the first time.

Page 33
Separation pay – taxable if VOLUNTARILY availed of. It shall not be taxable if
involuntary i.e. death, sickness, disability, reorganization/merger of company and
company at the brink of bankruptcy or for any cause beyond the control of the said
official or employee.

“For any cause beyond the control.” –

Connotes involuntariness on the part of the official or employee
The separation from the service of the official or employee must not be asked for or
initiated by him.

The separation was not of his own making.

Such fact shall be duly established by the employer by competent evidence which should
be attached to the monthly return for the period in which the amount paid due to the
involuntary separation was made.

Amounts received by reason of involuntary separation remain EXEMPT from income tax
even if the official or the employee, at the time of separation, had rendered less than ten
(10) years of service and/or is below fifty (50) years of age. (f) Any payment made by an
employer to an employer to an employee on account of dismissal, constitutes
compensation regardless of whether the employer is legally bound by contract, statute, or
otherwise, to make such payment.

Pension – a stated allowance paid regularly to a person on his retirement or to his

dependents on his death, in consideration of past services, meritorious work, age, loss, or
injury. Pension is taxable unless the law states otherwise, or unless the BIR approves the
pension plan of a private company.

Vacation and sick leave – rules in determining whether money received for vacation and
sick leave is taxable or not: (a) If paid or availed of as salary of an employee who is on
vacation or on sick leave notwithstanding his absence from work, it constitutes
TAXABLE compensation income. [RR 6-82, 2d] (b) Monetized value of unutilized
vacation leave credits of ten (10) days or less which were paid to private employees
during the year and the monetized value of leave credits paid to government officials and
employees are not subject to income tax and to the withholding tax. [RR no. 2-98, Sec
2.78.1(A)(7)] Note: monetization of sick leave credits of private employees even if not
exceeding 10 days is not exempt from income tax and withholding tax on wages. (c)
Terminal leave or money value of accumulated vacation and sick leave benefits received
by heir upon death of employee is not taxable.

Thirteenth month pay and other benefits – Not taxable if the total amount received is
P30,000 or less. Any amount exceeding P30,000 is taxable. [Sec. 32 (7)e, NIRC]
Overtime Pay – premium payment received for working beyond regular hours of work
which is included in the computation of gross salary of employee. It constitutes
compensation.

Profit Sharing – the proportionate share in the profits of the business received by the
employee in addition to his wages.

Page 34
 Awards for special services – awards for past services or suggestions to employers
resulting in the prevention of theft or robbery, etc. are also compensations.

Beneficial Payments – such as where employer pays the income tax owed by an
employee are additional compensation income.

Other forms of compensation – other forms received due to services rendered are
compensation paid in kind, e.g., insurance premium paid by the employer for insurance
coverage where the heirs of the employee are the beneficiaries is the employee’s income.

Note: Any amount which is required by law to be deducted by the employer from the
compensation of an employee including the withheld tax is considered as part of the
employee’s compensation and is deemed to be paid to the employee as compensation at
the time the deduction is made. (This also applies to deductions not required by law.)

Withholding Tax on Compensation Income

The income recipient (i.e., EE) is the person liable to pay the tax on income, yet to
improve the collection of compensation income of EEs, the State requires the ER to
withhold the tax upon payment of the compensation income

(2) Fringe benefits

Fringe benefit means any good, service, or other benefit furnished or granted by an
employer, in cash or in kind, in addition to basic salaries, to an individual employee
(except rank and file employees) such as, but not limited to the following:
1. Housing
2. Expense Account
3. Vehicle of any kind
4. Household personnel, such as maid, driver and others
5. Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted.
6. Membership fees, dues and other expenses borne by the employer for the employee
in social and athletic clubs and similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or his dependents; and
10. Life or health insurance and other non-life insurance premiums or similar amounts
on excess of what the law allows. [Sec. 33(B)]

Tax Rate and Tax Base

Tax base is based on the grossed-up monetary value (GMV) of fringe benefits. (b) Rate is
generally 32% (c) GMV represents: (a) the whole amount of income realized by the
employee which includes the net amount of money or net monetary value of property that
has been received; and (b) the amount of fringe benefit tax due from the employee which
has been withheld and paid by the employer for and in behalf of his employee..

How GMV is determined

GMV is determined by dividing the actual monetary value of the fringe benefit by 68%
[100% - tax rate of 32%]. For example, the actual monetary value of the fringe benefit is

Page 35
P1,000. The GMV is equal to P1,470.59 [P1,000 / 0.68]. The fringe benefit tax,
therefore, is P470.59 [P1470.59 x 32%].

Special Cases:
a. For fringe benefits received by non-resident alien not engaged in trade of business in
the Philippines (NRANETB), the tax rate is 25% of the GMV. The GMV is
determined by dividing the actual monetary value of the fringe benefit by 75%
[100% - 25%].
b. For fringe benefits received by alien individuals and Filipino citizens employed by
regional or area headquarters, regional operating headquarters, offshore banking
units (OBUs), or foreign service contractor or by a foreign subcontractor engaged in
petroleum operations in the Philippines, or by any of their Filipino individual
employees who are employed and occupying the same positions as those occupied by
the alien employees, the tax rate is 15% of the GMV. The GMV is determined by
dividing the actual monetary value of the fringe benefit by 85% [100% - 15%].
c. What is the tax implication if the employer gives ‘fringe benefits’ to rank-and-file
employees? Fringe benefits given to a rank-and-file employee are treated as part of
his compensation income subject to normal tax rate and withholding tax on
compensation income, except de minimis benefits and benefits provided for the
convenience of the employer.

Payor of Fringe Benefit Tax (FBT):

The employer withholds and pays the FBT but the law allows him to deduct such tax
from his gross income

Special treatment of fringe benefits Persons liable:

The Employer (as a withholding agent), whether individual, professional partnership or a
corporation, regardless of whether the corporation is taxable or not, or the government
and its instrumentalities, is liable to remit the fringe benefit tax to the BIR once fringe
benefit is given to a managerial or supervisory employee.

The fringe benefit tax (FBT) is a final tax on the employee’s income to be withheld by
the employer. The withholding and remittance of FBT shall be made on a calendar
quarterly basis.

Managerial employee: one who is vested with the powers or prerogatives to lay down
and execute management policies and/or to hire, transfer, suspend, lay-off, recall,
discharge, assign or discipline employees.

Supervisory employees: those who, in the interest of the employer, effectively

recommend such managerial actions if the exercise of such authority is not merely
routinary or clerical in nature but requires the use of independent judgment.

All employees not falling within any of the above definitions are considered rank-and-file
employees.

Basic Rule: Convenience of the Employer Rule

a. If meals, living quarters, and other facilities and privileges are furnished to an
employee for the convenience of the employer, and incidental to the requirement of

Page 36
 the employee’s work or position, the value of that privilege need not be included as
compensation (Henderson v. Collector)
b. Fringe benefit tax is imposed on fringe benefits received by supervisory and
managerial employees. The fringe benefits of rank and file employees are treated as
part of compensation income subject to income tax and withholding tax on
compensation.

(3) Professional income

Refers to fees received by a professional from the practice of his profession, provided
that there is no employer-employee relationship between him and his clients.

(4) Income from business

Any income derived from doing business (b) Doing business: The term implies a
continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident
to, and in progressive prosecution of, the purpose and object of its organization

(5) Income from dealings in properties

Dealings in property such as sales or exchanges may result in gain or loss. The kind of
property involved (i.e., whether the property is a capital asset or an ordinary asset)
determines the tax implication and income tax treatment, as follows:

Types of Gains from dealings in property

(1) Ordinary Income vis-à-vis Capital Gain

If the asset involved is classified as ordinary, the entire amount of the gain from the
transaction shall be included in the computation of gross income [Sec 32(A)], and the
entire amount of the loss shall be deductible from gross income. [Sec 34(D)].

If the asset involved is a capital asset, the rules on capital gains and losses apply in
the determination of the amount to be included in gross income.

These rules do not apply to: (a) real property with a capital gains tax (final tax), or (2)
shares of stock of a domestic corporation with a capital gains tax (final tax). Also,
sale of shares of stock of a domestic corporation, held as capital assets, through the
stock exchange by either individual or corporate taxpayers, is subject to ½ of 1%
percentage tax based on gross selling price.

The following percentages of the gain or loss recognized upon the sale or exchange of
a capital asset shall be taken into account in computing net capital gain, net capital
loss, and net income:
Page 37
 a. If the taxpayer is an individual – 100% if the capital asset has been held for not
more than 12 months; and 50% of the capital asset has been held for more than 12
months
b. If the taxpayer is a corporation – 100%, regardless of the holding period of the
capital asset (Sec. 39(B), NIRC)

The tax rules for the gains or losses from sales or exchanges of capital assets over
ordinary assets are as follows:
1. Net capital gain is added to ordinary gain but net capital loss is not deductible
from ordinary gain.
2. Net ordinary loss is deductible from ordinary gain.
3. Capital losses are deductible only to the extent of the capital gain.
4. There is a net capital loss carry-over on the net capital asset’s loss in a taxable
year which may be deducted as a short-term capital loss from the net capital gain
of the subsequent taxable year; provided that the following conditions shall be
observed:
a. The taxpayer is other than a corporation;
b. The amount of loss does not exceed the income before exemptions at the year
when the loss was sustained; and (3) The holding period should not exceed 12
months. (Valencia)

When a capital gain or capital loss is sustained by a corporation, the following rules
shall be observed:
1. There is no holding period; hence, there is no net capital loss carry-over.
2. Capital gains and losses are recognized to the extent of their full amount.
3. Capital losses are deductible only to the extent of capital gains.
4. Net capital losses are not deductible from ordinary gain or income but ordinary
losses are deductible from net capital gains.

Note: For sale, barter, exchange or other forms of disposition of shares of stock
subject to the 5%/10% capital gains tax on the net capital gain during the taxable
year, the capital losses realized from this type of transaction during the taxable year
are deductible only to the extent of capital gains from the same type of transaction
during the same period. If the transferor of the shares is an individual, the rule on
holding period and capital loss carry-over will not apply, notwithstanding the
provisions of Section 39 of the Tax Code as amended (RR 6-2008, c.4)

(2) Actual gain vis-à-vis Presumed Gain Presumed Gain:

In the sale of real property located in the Philippines, classified as capital asset, the tax
base is the gross selling price or fair market value, whichever is higher. The law
presumes that the seller makes a gain from such sale. Thus, whether or not the seller
makes a profit from the sale of real property, he has to pay 6% capital gains tax. In fact,
her has to pay the tax, even if he incurs an actual loss from the sale thereof.

(Note, however, that where an individual sells his real property classified as a capital
asset to the government, he has the option whether to be taxed at the graduated income
tax rates or at 6% capital gains tax.)

Actual Gain:

Page 38
 The tax base in the sale of real property classified as an ordinary asset is the actual gain.
If the seller incurs a loss from the sale, such loss may be deducted from his gross income
during the taxable year. The ordinary gain shall be added to the operating income and the
net taxable income shall be subject to the graduated rates from 5% to 32% (if an
individual) or to 30% corporate tax or to 2% MCIT (if a corporation).

(6) Passive investment income

(7) Annuities, proceeds from life insurance or other types of insurance

1. Annuities are instalment payments received for life insurance sold by insurance
companies.
2. The aleatory contract of life annuity binds the debtor to pay an annual pension or
income during the life of one or more determinate persons in consideration of a
capital consisting of money or other property, whose ownership is transferred to him
at once with the burden of the income. [Art. 2021, New Civil Code]
3. The annuity payments represent a part that is taxable and not taxable. If part of
annuity payment represents interest, then it is a taxable income. If the annuity is a
return of premium, it is not taxable.

(8) Prizes and awards

Contest prizes and awards received are generally taxable. Such payment constitutes gain
derived from labor.

The exceptions are as follows:

1. Prizes and awards made primarily in recognition of religious, charitable, scientific,

educational, artistic, literary or civic achievements are EXCLUSIONS from gross
income if:
a. The recipient was selected without any action on his part to enter a contest or
proceedings; and
b. The recipient is not required to render substantial future services as a condition
to receiving the prize or award.
2. Prizes and awards granted to athletes in local and international sports competitions
and tournaments held in the Philippines and abroad and sanctioned by their national
3. Associations shall be EXEMPT from income tax.
(9) Pensions, retirement benefit or separation pay
(10) Income from any source whatever

f) Exclusions from gross income

(1) Rationale for the exclusions
(2) Taxpayers who may avail of the exclusions
(3) Exclusions distinguished from deductions and tax credits
(4) Exclusions under the Constitution
(5) Exclusions under the Tax Code

Page 39
 (6) Exclusions under special laws

4. Deductions from Gross Income

Deductions are items or amounts which the law allows to be deducted from the gross of income
of a taxpayer in order to arrive at taxable income.

In general, deductions or allowable deductions are business expenses and losses incurred which
the law allows to reduce gross business income to arrive at net income subject to tax. (Sec. 65,
Rev. Reg. No. 2)

Deductions are in the nature of an exemption from taxation; they are strictly construed against
the claimant, who must point to a specific provision allowing them and who has the burden of
proving that they falls within the purview of such provision. Thus, all deductions must be
substantiated, except when the law dispenses with the records, documents or receipts to support
the deductions.

If the exemption is not expressly stated in the law, the taxpayer must at least be within the
purview of the exemption by clear legislative intent (Commissioner of Customs v. Philippine
Acetylene Co.) However, if there is an express mention in the law or if the taxpayer falls within
the purview of the exemption by clear legislative intent, the rule on strict construction will not
apply. (Commissioner v. Anoldus Caprentry Shop)

The purpose of deductions from gross income is to provide the taxpayer a just and reasonable tax
amount as the basis of income tax. It is because many taxpayers spend adequate expenditures in
order to obtain a legitimate income.

a) General rules

1. Deductions must be paid or incurred in connection with the taxpayer’s trade, business or
profession
2. Deductions must be supported by adequate receipts or invoices (except standard
deduction)
3. Additional requirement relating to withholding

b) Return of capital

Income tax is levied by law only on income; hence, the amount representing return of capital
should be deducted from proceeds from sales of assets and should notbe subject to income
tax.

Costs of goods purchased for resale, with proper adjustment for opening and closing
inventories, are deducted from gross sales in computing gross income (Sec. 65, Rev. Regs. 2)

a. Sale of inventory of goods by manufacturers and dealers of properties: In sales of goods

representing inventory, the amount received by the seller consists of return of capital and
gain from sale of goods or properties. That portion of the receipt representing return of
capital is not subject to income tax. Accordingly, cost of goods manufactured and sold

Page 40
 (in the case of manufacturers) and cost of sales (in the case of dealers) is deducted from
gross sales and is reflected above the gross income line in a profit and loss statement.
b. Sale of stock in trade by a real estate dealer and dealer in securities: Real estate dealers
and dealers in securities are ordinarily not allowed to compute the amount representing
return of capital through cost of sales. Rather they are required to deduct the total cost
specifically identifiable to the real property or shares of stock sold or exchanged.
c. Sale of services: Their entire gross receipts are treated as part of gross income.

c) Itemized deductions

These are enumerated in Section 34 of the NIRC. Additional deductions are granted to
insurance companies in Section 37, while losses from wash sales of stock or securities by a
dealer in securities are provided for in Section 38 of the NIRC. Other itemized deductions
could be granted under general or special laws, e.g. additional training expenses are allowed
to enterprises registered with PEZA, BOI, and SBMA.

d) Optional Standard Deduction

Optional standard deduction in Section 34(L) available only to individual taxpayers deriving
business, professional, capital gains and passive income not subject to final tax, or other
income.

e) Personal and Additional Exemptions

f) Items not deductible

In computing net income, no deduction shall in any case be allowed in respect to:

1. Personal, living or family expenses – these are personal expenses and not related to the
conduct of trade or business
2. Any amount paid out for new buildings of for permanent improvements, or betterments
made to increase the value of any property or estate – these are capital expenditures
added to the cost of the property and the periodic depreciation is the amount that is
considered as deductible expense
3. Note: Shall not apply to intangible drilling and development costs incurred in petroleum
operations which are deductible under Subsection (G) (1) of Sec. 34 of the NIRC
4. Any amount expended in restoring property or in making good the exhaustion thereof for
which an allowance is or has been made
5. Premiums paid on any life insurance policy covering the life of any officer or employee,
or of any person financially interested in any trade or business carried on by the taxpayer,
individual or corporate, when the taxpayer is directly or indirectly a beneficiary under
such policy (Sec. 36 [A], NIRC)
6. Losses from sales or exchanges of property between related parties (Sec. 36 [B], NIRC)
7. Interest expense, bad debts, and losses from sales of property between related parties
8. Non-deductible interest
9. Non-deductible taxes
10. Non-deductible losses

Page 41
 11. Losses form wash sales of stock or securities

5. Income Tax on Individuals

a) Income Tax on Resident Citizens, Non-resident Citizens and Resident Aliens

(1) Coverage – Income from all sources within and without the Philippines; exceptions

(2) Taxation on compensation income

Income arising from an ER-EE relationship. It means all remuneration for services
performed by an EE for his ER, including the cash value of all remuneration paid in any
medium other than cash. (Sec. 78(A)). It includes, but is not limited to salaries and
wages, commissions, tips, allowances, bonuses, Fringe Benefits of rank and file EEs and
other forms of compensation.

(i) Inclusions – monetary and non-monetary compensation

1. Monetary compensation – If compensation is paid in cash, the full amount

received is the measure of the income subject to tax.
a. Regular salary/wage

i. Salary – earnings received periodically for a regular work other than

manual labor, such as monthly salary of an employee
ii. Wages – all remuneration (other than fees paid to a public official) for
services performed by an employee for his employer, including the
cash value of all remuneration paid in any medium other than cash.
[Sec. 78A, NIRC]

b. Separation pay/retirement benefit not otherwise exempt

i. Retirement Pay – a lump sum payment received by an employee who

has served a company for a considerable period of time and has
decided to withdraw from work into privacy. [RR 6-82, Sec. 2b]

General Rule: Retirement pay is taxable

Exceptions:
a. SSS or GSIS retirement pays.
b. Retirement pay (R.A. 7641) due to old age provided the following
requirements are met:
1. The retirement program is approved by the BIR Commissioner;
2. It must be a reasonable benefit plan. (fair and equitable);
3. The retiree should have been employed for 10 years in the said
company;
4. The retiree should have been 50 years old or above at the time
of retirement; and
5. It should have been availed of for the first time.

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 ii. Separation pay – taxable if voluntarily availed of. It shall not be
taxable if involuntary i.e. Death, sickness, disability, reorganization
/merger of company and company at the brink of bankruptcy or for any
cause beyond the control of the said official or employee

c. Bonuses, 13th month pay, and other benefits not exempt

i. Tips and Gratuities – those paid directly to the employee (usually by a

customer of the employer) which are not accounted for by the
employee to the employer. (taxable income but not subject to
withholding tax) (RR NO. 2-98, Sec. 2.78.1)
ii. Thirteenth month pay and other benefits - Not taxable if the total
amount received is P30,000 or less. Any amount exceeding P30,000 is
taxable. (Sec. 32 (7)e, NIRC)
iii. Overtime Pay – premium payment received for working beyond
regular hours of work which is included in the computation of gross
salary of employee. It constitutes compensation.

d. Directors’ Fees – received by an employee for the services rendered to the

employer including a director’s fee of the company, fees paid to the public
officials such as clerks of court or sheriffs for services rendered in the
performance of their official duty over and above their regular salaries.

2. Nonmonetary compensation - If services are paid for in a medium other than

money, the fair market value of the thing taken in payment is the measure of the
income subject to tax.
a. Fringe benefit not subject to tax
If the recipient of the fringe benefits is a rank and file employee, and the said
fringe benefit is not tax-exempt, then the value of such fringe benefit shall be
considered as part of the compensation income of such employee subject to
tax payable by the employee. (Domondon)

(ii) Exclusions – Fringe benefits subject to tax; De Minimis benefits; 13th month pay
and other benefits and payments specifically excluded from taxable
compensation income

Fringe benefit subject to tax

Where the recipient of the fringe benefit is not a rank and file employee, and the said
benefit is not tax-exempt, then the same shall not be included in the compensation
income of such employee subject to tax. The fringe benefit [tax] is instead levied
upon the employer, who is required to pay. (Domondon)

De minimis benefits
a. Facilities or privileges of relatively small value furnished by an employer to his
employees and are as a means of promoting the health, goodwill, contentment,
or efficiency of his employees.
b. These are exempt from fringe benefit tax and compensation income tax.

Page 43
 13th month pay and other benefits and payments specifically excluded from taxable
compensation income

Gross benefits received by employees of public and private entities provided that the
total exclusion shall not exceed P30,000 (amounts in excess are considered
compensation income)

Benefits include:
1. Benefits received by government employees under RA 6686
2. Benefits received by employees pursuant to PD 851 (13th Month Pay Decree)
3. Benefits received by employees not covered by PD 851 as amended by
Memorandum Order No. 28; and, (4) Other benefits such as productivity
incentives and Christmas bonus

(iii) Deductions – Personal and additional exemptions; Health and hospitalization

insurance

Deductions
1. Personal exemptions and additional exemptions

a. Basic Personal Exemptions

According to RA 9504 (effective July 6, 2008) basic personal exemption is
Fifty thousand pesos (P50,000) for each individual taxpayer, regardless
whether single, married or head of the family.
b. Additional Exemptions (AE) - depends on the number of qualified dependent
children Amount allowed as a deduction P25,000 per dependent child, but
not to exceed four children (RA 9504)

Health and hospitalization insurance

a. Premium Paid on Health or Hospitalization Insurance [Sec.34 (M)]
b. Amount of premium paid on health and/or hospitalization by an individual
taxpayer (head of family or married), for himself and members of his family
during the taxable year.

(3) Taxation of business income/income from practice of profession

All income obtained from doing business and/or engaging in the practice of a profession
shall be included in the computation of taxable income.

(4) Taxation of Passive Income

Passive income subject to final tax “Final tax” means tax withheld from source, and the
amount received by the income earner is net of the tax already. The tax withheld by the
income payor is remitted by him to the BIR. The income having been tax-paid already, it
need not be included in the income tax return at the end of the year. These passive
income items are as follows:
1. Interest income
2. Royalties
3. Dividends from domestic corporations

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4. Prizes and other winnings

Interest income
a. On any currency bank deposit, yield or any other monetary benefit from deposit
substitutes, trust funds and similar arrangements - 20% final tax
b. Under the expanded foreign currency deposit system (efcds) - 7.5% final tax for
residents, exempt if non-residents
c. Treatment of income from long-term deposits

On long-term deposit or investment certificates (LTDIC) in banks (e.g., savings, common

or individual trust funds, deposit substitutes, investment management accounts and other
investments, which have maturity of 5 years or more) – exempt

Should LTDIC holder pre-terminate LTDIC before the 5th year, a final tax shall be
imposed on the entire income based on the remaining maturity:

Dividends from domestic corporation

1. Cash and/or property dividends actually or constructively received by an individual
from
a. a domestic corporation
b. a joint stock company
c. insurance or mutual fund companies
d. regional operating headquarters of multinational companies

2. Share of an individual in the distributable net income after tax of a partnership

(except a general professional partnership) of which he is a partner

3. Share of an individual member or co-venturer in the net income after tax of an

association, a joint account, or a joint venture or consortium taxable as a corporation

4. Rate:
a. 10%for residents (RC, RA) and non-resident citizens (NRC);
b. 20% for NRAETB(non-resident aliens engaged in trade or business)

5. A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax.

6. However, if a corporation cancels or redeems stock issued as a dividend at such time

and in such manner as to make the distribution and cancellation or redemption, in
whole or in part, essentially equivalent to the distribution of a taxable dividend,the
amount so distributed in redemption or cancellation of the stock shall be considered
as taxable income to the extent that it represents a distribution of earnings or profits.
(Sec. 73B, NIRC)
a. In other words, stock dividends are generally not subject to tax as long as there
are no options in lieu of the shares of stock.
b. On the other hand, a stock dividend constitutes income if it gives the shareholder
an interest different from that which his former stockholdings represented.

Prizes and other winnings

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 1. Winnings, except Philippine Charity sweepstakes / lotto winnings – 20%
2. Prizes exceeding P10,000 – 20%

(5) Taxation of Capital Gains

Income from sale of shares of stock of a Philippine corporation

a. Shares traded and listed in the stock exchange – exempt

The transaction is exempt from income tax regardless of the nature of business of the
seller or transferor. However, it is subject to the one-half of one percent (1/2 of 1%)
stock transaction tax imposed under Sec. 127(A) of the Tax Code based on the gross
selling price or gross value in money of the shares of stock sold or transferred.

b. Shares not listed and traded in the stock exchange – subject to final tax
On sale, barter, exchange or other disposition of shares of stockof a domestic
corporation not listed and traded through a local stock exchange, held as a capital
asset:

On the net capital gain: (1) Not over P100,000 = Final Tax of 5% (2) On any amount in
excess of P100,000 = plus Final Tax of 10% on the excess

Note:
a. Net capital gain: selling price less cost
b. Selling price: consideration on the sale or fair market value of the shares of stock at
the time of the sale, whichever is higher
c. Cost: original purchase price

Income from the sale of real property situated in the Philippines

What property covered

Property located in the PH classified as capital assets

What transactions covered

Sales, exchanges, or other disposition of real property (classified as capital assets),
including pacto de retro sales and other forms of conditional sales of the following:
citizens, resident aliens, NRAETB, NRANETB, domestic corporations.

Tax rate
General Rule: 6% of—whichever is higher
a. Gross selling price, or
b. Fair market value (determined in accordance with Sec. 6(E)).

Except
1. In case of sales made to the government, any of its political subdivisions or agencies,
or to GOCCs, it can be taxed either: (a) Under Sec. 24(C)(1) – 6% CGT, or (b) Under
Sec. 24(A), at the option of the taxpayer.
2. In case of the sale of or disposition of their principal residence by natural persons

a. Requirements:

Page 46
 1. Sale or disposition by a natural person of his principal residence,
2. The proceeds of which is fully utilized in acquiring/constructing a new
principal residence,
3. Such acquisition/construction taking place within 18 calendar months from
the date of sale or disposition,
4. The taxpayer notifies the Commissioner within 30 days from the
sale/disposition through a prescribed return of his intention to avail of the
exemption,
5. The tax exemption can only be availed of once every 10 years

b. Tax treatment:
Exempt from capital gains tax (CGT). If there is no full utilization of the proceeds
of sale or disposition, the portion of the gain presumed to have been realized from
the sale or disposition shall be subject to CGT.

c. How taxable portion and tax determined:

1. The historical cost or adjusted basis of the real property sold or disposed shall
be carried over to the new principal residence built or acquired.
2. Computation for the basis of new principal residence:

Income from the sale, exchange, or other disposition of other capital assets

Other properties shall be subject to income tax—

1. At the graduated income tax rates, if the seller is an individual;

a. Long-term capital gains: only 50% is recognized.
b. Short-term capital asset transactions: 100% subject to tax. (Sec. 39(B))
Determination of whether short- or long-term: If held for <12 mos, then short-
term. Otherwise, long-term.

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 2. At 30% corporate income tax, if the seller is a corporation. (a) Rule: Capital gain/loss
is recognized in full.

Capital assets shall refer to all real properties held by a taxpayer, whether or not
connected with his trade or business, and which are not included among the real
properties considered as ordinary assets under Section 39(A)(1) of the NIRC.

Ordinary assets shall refer to all real properties specifically excluded from the definition
of capital assets under Section 39(A)(1) of the NIRC, namely:
1. Stock in trade of a taxpayer or other real property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year; or
2. Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business; or
3. Real property used in trade or business (i.e., buildings and/or improvements) of a
character which is subject to the allowance for depreciation provided for under Sec.
34(F) of the Code; or
4. Real property used in trade or business of the taxpayer.

b) Income Tax on Non-Resident Aliens Engaged in Trade or Business

General Rules
a. Subject to an income tax in the same manner as an individual citizen and a resident alien
individual on taxable income from all sources within the Philippines
b. Non-resident alien doing business in the Philippines: a non-resident alien individual who
shall come to the Philippines and stay therein for an aggregate period of more than 180
days during any calendar year

Cash and/or Property Dividends

The following shall be subject to an income tax of twenty percent (20%) on the total amount
thereof:

a. Cash and/or property dividends from:

1. A domestic corporation;
2. A joint stock company;
3. An insurance or mutual fund company;
4. A regional operating headquarters of multinational company;
5. The share of a nonresident alien individual in the distributable net income after tax of
a partnership (except a general professional partnership) of which he is a partner;
6. The share of a nonresident alien individual in the net income after tax of an
association, a joint account, or a joint venture taxable as a corporation of which he is
a member or a coventurer;

b. Interests
c. Royalties (in any form); and
d. Prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be
subject to graduated tax) and other winnings (except Philippine Charity Sweepstakes and
Lotto winnings);

Except:

Page 48
 1. The following Royalties shall be subject to a final tax of ten percent (10%) on the total
amount thereof:
a. On books as well as other literary works; and
b. On musical compositions
2. Cinematographic films and similar works shall be subject to twenty-five percent (25%)
of the gross income
3. Interest income from long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the ta But should the holder of the certificate pre-
terminate the deposit or investment before the fifth (5th) year, a final tax shall be
imposed on the entire income and shall be deducted and withheld by the depository bank
from the proceeds of the long-term deposit or investment certificate based on the
remaining maturity thereof:
a. Four (4) years to less than five (5) years - 5%;
b. Three (3) years to less than four (4) years - 12%; and
c. Less than three (3) years - 20%.

Capital Gains
Capital gains realized from sale, barter or exchange of shares of stock in domestic
corporations not traded through the local stock exchange, and real properties shall be subject
to the similar tax prescribed on citizens and resident aliens.
a. Sale, barter or exchange of Shares of stock in domestic corporation not traded – (1) Net
over P100,000 – 5% of net capital gains realized (2) On any amount in excess of
P100,000 – 10% of net capital gains realized
b. Sale, barter or exchange of real properties – 6% of gross selling price or current FMV
whichever is higher

c) Income Tax on Non-Resident Aliens Not Engaged in Trade or Business

1. Alien individuals employed by:

Regional or Area Headquarters (RAHQ) and Regional Operating Headquarters (ROHQ)
established in the Philippines by multinational companies

Multinational company
A foreign firm or entity engaged in international trade with affiliates or subsidiaries or
branch offices in the Asia-Pacific Region and other foreign markets \ (b) Offshore
Banking Units established in the Philippines

2. Alien individuals who are permanent residents of a foreign country but who are
employed and assigned in the Philippines by a foreign service contractor or by a foreign
service subcontractor engaged in petroleum operations in the Philippines

Tax Rate and Base

15% of gross income received as salaries, wages, annuities, compensation, remuneration
and other emoluments, such as honoraria and allowances. The same tax treatment shall
apply to Filipinos employed and occupying the same positions as those of aliens
employed by these multinational companies, offshore banking units and petroleum
service contractors and subcontractors.

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 Note that the coverage of the special classification (and the corresponding tax rate) is
limited to income received as wages. Hence, any income earned from all other sources
within the Philippines by the alien employees shall be subject to the pertinent income tax
(example: sale of real property in the Philippines is subject to 6% capital gain tax,
imposed on the gross selling price or fair market value of the property at the time of the
sale, whichever is higher)

d) Individual Taxpayers Exempt from Income Tax

(1) Senior citizens

Who covered: any resident citizen—

a. At least 60 years old, and
b. Who are considered minimum wage earners under RA 9504. (Sec. 4 (b) RA 7432, as
amended by RA 9994) and/or the aggregate amount of gross income earned by the
senior citizen during the taxable year does not exceed the amount of his personal
exemptions (BPE and APE).

(2) Minimum wage earners

Rule: they shall be exempt from payment of income tax on their taxable income Limit:
however, if he receives “other benefits” in excess of the allowable statutory amount of
P30,000, then he shall be taxable on the exceeds benefits as well as his salaries, wages,
and allowances, just like an employee receiving compensation income beyond the
statutory minimum wage.

(3) Exemptions granted under international agreements

RMC No, 31-2013, April 12, 2013 – taxation of compensation income of Philippine
nationals and alien individuals employed by foreign governments/embassies/diplomatic
missions and international organizations situated in the Philippines

6. Income Tax on Corporations

a) Income Tax on Domestic Corporations and Resident Foreign Corporation

(1) Regular Tax

Regular Tax Normal Corporate Income Tax Rate: 30% of Taxable Income (effective
January 1, 2009)

(2) Minimum Corporate Income Tax (MCIT)

a. Applies to domestic corporations and RFCS whenever such corporations have zero
or negative taxable income or whenever the MCIT is greater than the normal
income tax due from such corporations.
b. Imposed upon any domestic corporation beginning the fourth taxable year in which
such corporation commenced its business operations. For purposes of the MCIT,
the taxable year in which business operations commenced shall be the year when

Page 50
 the corporation registers with the BIR (not in which the corporation started
commercial operations).
c. Tax rate: 2% of the Gross Income

(3) Branch Profit Remittance Tax

Taxable transaction
Any profit remitted by a branch of a multinational corporation to its head office

Tax Rate and Base

15% final tax based on the total profits applied or earmarked for remittance without any
deduction for the tax component. The 15% final tax should excluding:
a. Profits on activities which are registered with the Philippine Economic Zone
Authority (PEZA) and
b. Passive income gains and profits received not directly connected with the conduct of
its trade or business in the Philippines.

Income not treated as branch profits unless effectively connected with the conduct of
trade or business in the Philippines:
1. Interests, dividends, rents, royalties remuneration for technical services
2. Salaries, wages premiums, annuities, emoluments
3. Other fixed or determinable annual, periodic or casual gains, profits, income
4. Capital gains received during each taxable year from all sources within the
Philippines

Notes: (a) imposed whether the head office of the foreign corporation is located in a tax
treaty country, in a tax haven or other non-treaty country. (b) imposed only on the profits
remitted by a Philippine branch to the head office of a foreign corporation.

(4) Allowable deductions

(i) Itemized deductions

1. Bad debts
2. Expenses
3. Losses
4. Taxes
5. Depreciation
6. Interest
7. Depletion of oil and gas wells and mines
8. Charitable and other contributions
9. Research and development
10. Pension trusts

(ii) Optional Standard Deductions

a. Before RA 9504, effective July 6, 2009, OSD only applied to individuals except
non-resident aliens.

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 b. But by virtue of RA 9504, it now also applies to corporations, except non-
resident foreign corporation.
c. Moreover, the rate was increased from 10% to 40%.

(5) Taxation of Passive Income

Passive income subject to tax:

a. Interest from deposits and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements and royalties
b. Capital gains from the sale of shares of stock not traded in the stock exchange
c. Income derived from depository bank under the expanded foreign currency deposit
system
d. Inter-corporate dividends
e. Capital gains realized from the sale, exchange, or disposition of lands and/or
buildings

Passive income not subject to tax

a. Income derived by a depository bank under the expanded foreign currency deposit
system from foreign currency transactions with nonresidents, offshore banking units
in the Philippines, local commercial banks, including branches of foreign banks that
may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business
with foreign currency depository system units and other depository banks under the
expanded foreign currency deposit system shall be exempt from income tax

Except: net income from transactions specified by the Secretary of Finance upon
recommendation by the Monetary Board

BUT: Interest income from foreign currency loans granted by such depository banks
under said expanded foreign currency deposit system to residents, other than offshore
banking units in the Philippines, shall be subject to a final tax at the rate of 10%.

b. Any income of nonresidents, whether individuals or corporations, from transactions

with depository banks under the expanded system shall be exempt from income tax.

(6) Taxation of Capital Gains

Income from sale of shares of stock

On sale, barter, exchange or other disposition of shares of stock of a domestic
corporation not listed and traded through a local stock exchange, held as a capital asset:
On the net capital gain:
a. First P100,000: Final Tax of 5%
b. On any amount in excess of P100,000: plus 10% Final tax on the excess

Income from the sale of real property situated in the Philippine & Income from the
sale, exchange, or other disposition of other capital assets

On the sale, exchange or disposition of lands and/or buildings which are not actually used
in the business of a corporation and are treated as capital assets -On the gross selling

Page 52
 price, or the current fair market value at the time of the sale, whichever is higher, a final
tax of 6%

Note: Tax treatment is the same as that of individuals. The capital gains tax is applied on
the gross selling price, or the current fair market value at the time of the sale, whichever
is higher. Any gain or loss on the sale is immaterial because there is a conclusive
presumption by law that the sale resulted in a gain.

b) Income Tax on Non-Resident Foreign Corporations

General Rule
Except as otherwise provided, the tax is 30% of the gross income (except certain passive
income)received during each taxable year from all sources within the Philippines, such as
interests (except interests on foreign loans, dividends, rents, royalties, salaries, premiums
(except reinsurance premiums), annuities, emoluments or other fixed or determinable annual,
periodic or casual gains, profits and income, and capital gains EXCEPT capital gains on the
sale of shares of stock (not listed and traded through a local stock exchange), of a domestic
corporation which are subject to the tax rates prescribed for individuals and resident foreign
corporations.

Tax on Certain Income

Interest on foreign loans

a. On foreign loans contracted on or after August 1, 1986 – 20%
b. Under the expanded foreign currency deposit system (EFCDS) - exempt

Intercorporate dividends
a. (Intercorporate Dividend) – 15%, as long as the country in which the nonresident foreign
corporation is domiciledallowsa tax credit for taxes “deemed paid” in the Philippines
equivalent to at least15%
b. 15% represents the difference between the regular income tax of 30% on corporations
and the 15% tax on dividends (“tax sparing credit”)
c. If the country within which the NRFC is domiciled does NOT allow a tax credit, a final
withholding tax at the rate of30% is imposed on the dividends received from a domestic
corporation.

Capital gains from sale of shares of stock not traded in the stock exchange
On sale, barter, exchange or other disposition of real property or on shares of stockof a
domestic corporation not listed and traded through a local stock exchange, held as a capital
asset:

On the net capital gain

a. First P100,000 Final Tax of 5%
b. On any amount in excess of P100,000 plus Final Tax of 10% on the excess

Exclude:
1. Film rentals and other payments to non-resident cinematographic film owner, lessor or
distributor. Final tax of 25% of gross income from all sources within the Philippines

Page 53
 2. Rental, lease and charter fees payable to nonresident owner or lessor of vessels chartered
by Philippine nationals Final tax of 4.5% of gross rentals, lease or charter fees from
leases or charters to Filipino citizens or corporations, as approved by the Maritime
Authority
3. Rentals, charter and other fees payable to nonresident owner or lessor of aircraft
machineries and other equipment Final tax of 7.5% of gross rentals or fees

c) Income Tax on Special Corporations

(1) Domestic Corporations

(i) Proprietary educational institutions and hospitals

Tax Rate and Base – 10% on net income (except on income subject to capital
gains tax and passive income subject to final tax) within and without the
Philippines

Caveat: If gross income from unrelated trade or business or other activity exceeds
50%of total gross income derived from all sources, the tax rate of 30% shall be
imposed on the entire taxable income.

Unrelated trade, business or other activity- any trade, business or other activity,
the conduct of which is not substantially related to the exercise or performance by
such educational institution or hospital of its primary purpose or function.

Proprietary educational institution- any private school maintained and

administered by private individuals or groups with an issued permit to operate
from the DECS, CHED or TESDA. (Sec. 27(B), NIRC)

(ii) Non-profit hospitals

(iii) Government-owned or controlled corporations, agencies or instrumentalities

General Rule: GOCCs are taxable as any other corporation engaged in similar
business, industry or activity, except:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Local water districts (LWDs)
5. Philippine Charity Sweepstakes Office (PCSO) (Sec. 27(C), NIRC)

General Rule: The government is exempt from tax.

Exception: When it chooses to tax itself. Nothing can prevent Congress from
decreeing that even instrumentalities or agencies of the government performing
governmental functions may be subject to tax. Where it is done precisely to fulfill
a constitutional mandate and national policy, no one can doubt its wisdom.
(Mactan Cebu Airport v Marcos, 1996)

Page 54
 If the taxing authority is the local gov’t unit RA 7160 expressly prohibits LGUs
from levying tax on the Nat’l Gov’t, its agencies and instrumentalities and other
LGUs.

(iv) Depository banks (foreign currency deposit units)

Income derived by a depository bank under the expanded foreign currency

deposit system from foreign currency transactions with local commercial banks,
including branches of foreign banks that may be authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact business with foreign currency depository
system units and other depository banks under the expanded foreign currency
deposit system, including interest income from foreign currency loans granted by
such depository banks under said expanded foreign currency deposit system to
residents, shall be subject to a final income tax at the rate of ten percent (10%) of
such income.

Any income of nonresidents, whether individuals or corporations, from

transactions with depository banks under the expanded system shall be exempt
from income tax. (NIRC, Sec. 27(D)(3)).

(2) Resident Foreign Corporations

(i) International carriers doing business in the Philippines

Tax Rate and Base – 2.5% on Gross Philippine Billings (GPB)

Gross Philippine Billing

In the case of International Air Carriers, GPB refers to the amount of:
a. Gross revenue derived from carriage of persons, excess baggage, cargo and
mail originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket
or passage document
b. Gross revenue from tickets revalidated, exchanged and/or indorsed to another
international airline if the passenger boards a plane in a port or point in the
Philippines
c. For flights which originate from the Philippines, but transshipment of passenger
takes place at any port outside the Philippines on another airline, the gross
revenue consisting of only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the Philippines to the point of
transshipment [RR 15-2002]

Air Canada vs. CIR (CTA Case No. 6572):

a. A foreign airline company selling tickets in the Philippines through their local
agents shall be considered as resident foreign corporation engaged in trade or
business in the country.
b. The absence of flight operations within the Philippine territory cannot alter the
fact that the income received was derived from activities within the Philippines.
c. The test of taxability is the source, and the source is that activity which
produced the income.

Page 55
 In the case of International Shipping, GPB means: Gross revenue whether for
passenger, cargo or mail originating from the Philippines up to final destination,
regardless of the place of sale or payments of the passage or freight documents.

(ii) Off-shore banking units

Coverage of the Rule

Only income derived by offshore banking units from foreign currency transactions
with:
1. Non-residents,
2. Other offshore banking units
3. Local commercial banks including branches of foreign banks that may be
authorized by the bangko sentral ng pilipinas (bsp) to transact business with
offshore banking units

Tax Rate
Exempt from all taxes, except net income from such transactions as may be
specified by the Secretary of Finance, upon recommendation by the Monetary
Board to be subject to the regular income tax payable by banks

Exception:
Interest income derived from foreign currency loans granted to residents other than
offshore banking units or local commercial banks, including local branches of
foreign banks that may be authorized by the BSP to transact business with offshore
banking units, shall be subject only to a final tax at the rate of 10%.

(iii) Resident depository banks (foreign currency deposit units)

(iv) Regional or Area Headquarters and Regional Operating Headquarters of

Multinational Companies

Regional or area headquarters: not subject to income tax

Regional or area headquarters: a branch established in the Philippines by
multinational companies and which headquarters do not earn or derive income from
the Philippines and which act as supervisory, communications and coordinating
center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and
other foreign markets.

Regional operating headquarters

10%of their taxable income
1. A branch established in the Philippines by multinational companies which are
engaged in any of the following services: (SMART - BAD – PPL)
2. General Administration and planning
3. Business Planning and coordination
4. Sourcing and Procurement of raw materials and components
5. Corporate finance Advisory services
6. Marketing control and sales promotion

Page 56
 7. Training and personnel management
8. Logistic services
9. Research and development services and product development
10. Technical Support and maintenance (10) Data processing and communications,
and
11. Business development.

(3) Improperly Accumulated Earnings Tax (IAET)

A tax equivalent to 10% of improperly accumulated income. (Sec. 29 [A], NIRC)

Improperly accumulated earnings refer to profits of a corporation that are accumulated

instead of distributing it to its shareholders for the purpose of avoiding the income tax
with respect to its shareholders or the shareholders of another corporation.

Note: If the earnings and profits were distributed, the shareholders would be liable for
income tax, whereas if there is no distribution, they would incur no tax with respect to
the undistributed earnings of the corporation. Hence, IAET is imposed:
1. In the nature of a penalty to the corporation for the improper accumulation of its
earnings; and
2. As a form of deterrent to the avoidance of tax upon shareholders who are supposed to
pay dividends tax on the earning distributed to them by the corporation.

Rule: There is imposed for each taxable year, in addition to other taxes, a tax equal to
10% of the improperly accumulated taxable income of domestic and closely-held
corporations formed or availed of for the purpose of avoiding the income tax with respect
to its shareholders or the shareholders of any other corporation, by permitting the
earnings and profits of the corporation to accumulate instead of dividing them among or
distributing them to the shareholders.

Rationale: It is a tax in the nature of a penalty to the corporation for the improper
accumulation of its earnings, and a deterrentto the avoidance of tax upon shareholders
who are supposed to pay dividends tax on the earnings distributed to them. The
touchstone of the liability is the purpose behind the accumulation of the income and not
the consequences of the accumulation.

Exception: The use of undistributed earnings and profits for the reasonable needs of the
business would not generally make the accumulated or undistributed earnings subject to
the tax.

To whom is it imposed?
A: Upon a domestic corporation and closely-held corporations which is formed or
availed of for the purpose of avoiding the income tax with respect to its shareholders or
the shareholders of any other corporation by permitting earnings and profits to
accumulate instead of dividing or distributing it.

Note: IAET does not apply to the following:

1. Publicly-held corporations (Sec. 29 B [2], NIRC)
2. Banks, other non-bank financial intermediaries.

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 3. Insurance companies
4. Publicly-held corporations
5. Taxable partnerships
6. General professional partnerships
7. Non- taxable joint ventures3
8. Enterprises duly registered with the Philippine Economic Zone Authority under R.A.
7916, and enterprises registered pursuant to the Bases Conversion and Development
Act of 1992 under R.A. 7227, as well as other enterprises duly registered under
special economic zones declared by law which enjoy payment of special tax rate on
their registered operations or activities in lieu of other taxes, national or local. (Sec.
4, RR 2-2001)

(4) Exemptions from Tax on Corporations

Corporations are exempted from income tax under the NIRC

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 purposes
and without profit;
3. A beneficiary society, order or association operating for the exclusive benefit of the
members such as a fraternal organization operating under the lodge system, or mutual
aid association or a nonstock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively to the members of
such society, order, or association, or nonstock corporation or their dependents;
4. Cemetery company owned and operated exclusively for the benefit of its members;
5. Non-stock corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation
of veterans, no part of its net income or asset shall belong to or inures to the benefit
of any member, organizer, officer or any specific person;
6. Business league chamber of commerce, or board of trade, not organized for profit
and no part of the net income of which inures to the benefit of any private stock-
holder, or individual;
7. Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
8. A non-stock and non-profit educational institution;
9. Government educational institution;
10. Farmers' or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, mutual or cooperative telephone company, or like organization of
a purely local character, the income of which consists solely of assessments, dues,
and fees collected from members for the sole purpose of meeting its expenses; and
11. Farmers', fruit growers', or like association organized and operated as a sales agent
for the purpose of marketing the products of its members and turning back to them
the proceeds of sales, less the necessary selling expenses on the basis of the quantity
of produce finished by themfs. (Sec. 30, NIRC)

Note: The income of whatever kind and character of the foregoing organizations from
any of their properties, real or personal, or from any of their activities conducted for
profit regardless of the disposition made of such income, shall be subject to tax imposed
under the NIRC.

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 Common Requisites for Exemption
1. Not organized and operated principally for Profit;
2. No part of the net income Inures to the benefit of any member or individual;
3. No capital is represented by Shares of stock; and
4. Educational or instructive in character.

(5) Tax on other Business Entities: General Partnerships, General Professional

Partnerships, Co-ownerships, Joint Ventures and Consortia

7. Filing of Returns and Payment of Income Tax

a) Definition of a Tax Return and Information Return

Tax Return
This is a report made by the taxpayer to the BIR of all gross income received during the
taxable year, the allowable deductions including exemptions, the net taxable income, the
income tax rate, the income tax due, the income tax withheld, if any, and the income tax still
to be paid or refundable.

b) Period within which to file Income Tax Return of Individuals and Corporations

1. Individual and Corporate ITR (MAMALATEO, Reviewer, supra at 260-261; NIRC,

Sec. 75)

When to File (Due Date of

Who Files What to File (Period)
Filing)

Q1 return April 15 of the same year

Individual deriving purely
Q2 return August 15 of the same year
trade, business or
professional income, or November 15 of the same
Q3 return
mixed income year
April 15 of the following
Annual return
year (NIRC, Sec. 74)
Q1 return
60 days after the close of
Q2 return each of the first 3 quarters of
Domestic corporation and the taxable year
Q3 return
resident foreign corporation
On or before the 15th day of
Annual return the 4th month following the
taxable year

2. CGT Return from sale or exchange of shares of stock not traded thru local stock
exchange: Within thirty (30) days after each transaction and a final consolidated return

Page 59
 on or before April 15 of each year covering all stock transactions of the preceding taxable
year (NIRC, Sec. 51(C)).

3. CGT Returns from sale or disposition of real property under Section 24(D): Within
thirty (30) days following each sale or other disposition (NIRC, Sec. 51(C)).

Extension of Time to File Return:

The CIR may, on meritorious cases, grant a reasonable extension of time for filing income
tax return (NIRC, Sec. 53).

c) Person liable to file Income Tax Returns

(1) Individual taxpayers

(i) General rule and exceptions

a. Resident citizen; and

b. NRC, RA and NRA-ETD with respect to income from sources within the
Philippines.

Exceptions: (P2FE)
a. Individual whose gross income does not exceed total Personal and
additional exemptions;

Exception to the exception: individuals engaged in business or practice

of profession within the Philippines

b. Individual with respect to Pure compensation income derived from

sources within the Philippines, the income tax on which has been correctly
withheld;

Exception to the exception: An individual deriving compensation

concurrently from two or more employers at any time during the taxable
year

c. Individual whose sole income has been subjected to Final withholding

income tax; and

d. Individual who is Exempt from income tax (NIRC, Sec. 51(A)(2)).

Special Rules:

1. Return of Husband and Wife

File one return for the taxable year if the following requisites are complied
with:
a. They are married; and
b. They do not derive income purely from compensation (NIRC, Sec. 51(D)).

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 If it is impracticable to file one return, each spouse shall file a separate return
of income but the return so filed shall be consolidated by the BIR for the
purpose of verification for the year (NIRC, Sec. 51(D)).

2. Unmarried Minor
Income of unmarried minors derived from property received from the living
parent shall be included in the return of the parent, except;
a. When donor’s tax has been paid on such property; or
b. When transfer of such property is exempt from donor’s tax (NIRC, Sec.
51(E)).

3. Persons under Disability

If a taxpayer sis unable to make his own return, it may be made by his:
a. Duly authorized agents;
b. Representative;
c. Guardian; or
d. Other person charged with the care of his person or property who will
assume the responsibility of making the return and incurring penalties
provided for erroneous, false or fraudulent return (NIRC, Sec. 51(F)).

(ii) Substituted filing

Mode of filing when the employer’s annual information return of withholding

taxes on compensation (BIR Form No. 1604-CF) may be considered as the
“substitute” ITR of employee inasmuch as the information provided in his ITR
would exactly be the same information contained in the employer’s annual
information return (R.R. No. 03-2002, Sec. 4, R.M.C. No. 01-2003).

Requisites: (POESRI)
1. Employee receives Purely compensation income (regardless of amount);
2. The income is only from One employer;
3. Amount of tax due from the employee Equals the amount of tax withheld by
the employer;
4. Employee’s Spouse also complies with all 3 conditions stated above;
5. Employer files the annual information Return (BIR Form No. 1604-CF); and
6. Employer Issues BIR Form No. 2316 (Certificate of Compensation
Payment/Tax Withheld) to each employee.

Note: In cases covered by substituted filing, the employer shall submit to the BIR
the duplicate copy of BIR Form No. 2316 not later than February 28 following
the close of the calendar year, otherwise, it will be subjected to prescribed
penalties (R.R. No. 11-2013, Sec. 2).

(2) Corporate taxpayers

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 Every corporation subject to tax shall render a return which shall be filed by the
president, vice-president or other principal officer, and shall be sworn by such officer and
by the treasurer or assistant treasurer (NIRC, Sec. 52).

d) Where to file Income Tax Returns

The income tax return shall be filed with an authorized agent bank, revenue District Officer
(RDO), collecting agent or duly authorized treasurer of the municipality or city in which the
taxpayer has his legal residence or principal place of business. If there is no legal residence
or principal place of business, it shall be filed with the office of the Commissioner (NIRC,
Sec. 5(B)).

e) Penalties for Non-filing of Returns

Civil Penalties – There shall be imposed, in addition to the tax required to be paid, a penalty
equivalent to twenty-five percent (25%) of the amount due (NIRC, Sec. 248).

Failure to File Return, Supply Correct and Accurate Information, Pay Tax Withhold
and Remit Tax and Refund Excess Taxes Withheld on Compensation – Any person
required under this Code or by rules and regulations promulgated thereunder to pay any tax
make a return, keep any record, or supply correct the accurate information, who willfully
fails to pay such tax, make such return, keep such record, or supply correct and accurate
information, or withhold or remit taxes withheld, or refund excess taxes withheld on
compensation, at the time or times required by law or rules and regulations shall, in addition
to other penalties provided by law, upon conviction thereof, be punished by a fine of not less
than Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (1) year but
not more than ten (10) years.

Any person who attempts to make it appear for any reason that he or another has in fact filed
a return or statement, or actually files a return or statement and subsequently withdraws the
same return or statement after securing the official receiving seal or stamp of receipt of
internal revenue office wherein the same was actually filed shall, upon conviction therefor,
be punished by a fine of not less than Ten thousand pesos (P10,000) but not more than
Twenty thousand pesos (P20,000) and suffer imprisonment of not less than one (1) year but
not more than three (3) years (NIRC, Sec. 255).

8. Withholding of Taxes

a) Concept of Withholding Taxes

Withholding tax is a method of collecting income tax in advance from the taxable income of
the recipient of income. It is a systematic way of collecting taxes at source, an indispensable
method of collecting taxes to ensure adequate revenue for the government.

The withholding of income tax on compensation income, on certain income payments made
to resident taxpayers, and on income payments made to non-resident taxpayers is very
important for all taxpayers, because the obligation to withhold and remit the tax is mandatory
and prescribed by law.

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 In the operation of the withholding tax system, the payee is the taxpayer, the person on
whom the tax is imposed, while the payor, a separate entity, acts no more than an agent of
the government for the collection of the tax in order to ensure its payment. The amount
thereby used to settle the tax liability is deemed sourced from the proceeds constitutive of the
tax base. In an ad valorem tax, the tax paid or withheld is not deducted from the tax base,
except when the law clearly spells out in defining the tax base.

The duty to withhold is different from the duty to pay income tax. The revenue officers
generally disallow the expenses claimed as deduction from gross income, if no withholding
of tax as required by law or the regulations was withheld and remitted to the BIR within the
prescribed dates.

In addition, the withholding tax that should have been withheld and remitted to the BIR as
well as the penalties for non-, late or erroneous payment of the withholding tax such as
surcharges and deficiency interest are assessed by the BIR. (Mamalateo)

Withholding Agent Any person or entity who is required to deduct and remit the taxes
withheld to the government. (a) In general, any juridical person, whether or not engaged in
trade or business; (b) An individual, with respect to payments made in connection with his
trade or business. However, insofar as taxable sale, exchange or transfer of real property is
concerned, individual buyers who are not engaged in trade or business are also constituted as
withholding agents. In any case, no Certificate Authorizing Registration (CAR)/Tax
Clearance Certificate (TCL) shall be issued to the buyer unless the withholding tax due on
the sale, transfer or exchange of real property has been duly paid; ac. All government offices,
including GOCCs, as well as local government units.

All income payments which are required to be subjected to withholding tax shall be subject
to the corresponding withholding tax rate to be withheld by the person having control over
the payment and who, at the same time, claims the expenses. (RR 30-2003)

Duties and Obligations of the Withholding Agent

a. To Register - withholding agent is required to register within ten (10) days after
acquiring such status with the Revenue District office having jurisdiction where the
business is located
b. To Deduct and Withhold - withholding agent is required to deduct tax from all money
payments subject to withholding tax
c. To Remit the Tax Withheld - withholding agent is required to remit tax withheld at the
time prescribed by law and regulations
d. To File Annual Return - withholding agent is required to file the corresponding Annual
Information Return at the time prescribed by law and regulations
e. To Issue Withholding Tax Certificates - withholding agent shall furnish Withholding Tax
Certificates to recipient of income payments subject to withholding

b) Kinds of Withholding Taxes

1. Withholding of final tax of certain incomes

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 Subject to rules and regulations the Secretary of Finance may promulgate, upon the
recommendation of the Commissioner, requiring the filing of income tax return by
certain income payees, the tax imposed or prescribed by specific section of the NIRC on
specified items of income shall be withheld by pay or corporation and/or person and paid
in the same manner and subject to the same conditions as provided in Section 58 of the
NIRC.

2. Withholding of creditable tax at source

The Secretary of Finance may, upon the recommendation of the Commissioner, require
the withholding of a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided for by law, at the
rate of not less than one percent (1%) but not more than thirty-two percent(32%), which
shall be credited against the income tax liability of the taxpayer for the taxable year.

3. Withholding of Creditable Tax (RR 2-98)

a. Under the creditable withholding tax system, taxes withheld on certain income
payments are intended to equal or at least approximate the tax due of the payee on
said income.
b. The income recipient is still required to file an income tax return, to report the income
and/or pay the difference between the tax withheld and the tax due on the income.
c. Taxes withheld on income payments covered by the expanded withholding tax and
compensation income are creditable in nature.

C. Transfer Taxes

1. Estate Tax

a) Basic principles, concept, and definition

Definition
A graduated tax imposed upon the privilege of the decedent to transmit property at death and
is based on the net estate, considered as a unit, and it is determined by subtracting from the
gross estate the allowable deductions.

Tax on the right to transmit property at death and on certain transfers which are made by the
statute the equivalent of testamentary dispositions and is measured by the value of property
at time of death.

b) Nature, purpose, and object

Nature
It is in reality an excise or privilege tax imposed on the right to succeed to, receive, or take
property by or under a will or the intestacy law, or deed, grant, or gift to become operative at
or after death. [Lorenzo v. Posadas, 64 Phil 353]

Purpose or object
1. The object of estate tax is to tax the shifting of economic benefits and enjoyment of
property from the dead to the living.
2. Death taxes are imposed to give added income to the government.

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 Justification (theories) for the imposition of estate tax
1. Benefit received theory – The State collects the tax because of the services it renders in
the distribution of the estate of the decedent, either by law or in accordance with his will.
2. Privilege theory or state partnership theory – Succession to the property of a deceased
person is not a right but a privilege granted by the State and consequently, the legislature
can constitutionally burden such succession with a tax. The State collects the tax because
of the protection it provides in the acquisition of large estates. Hence, the State is a
“silent or passive partner” in the accumulation of said large property.
3. Ability to pay theory – Receipt of inheritance, which is in the nature of unearned wealth
or windfall, place assets into the hands of the heirs and beneficiaries. This creates an
ability to pay the tax and thus contributes to government income.
4. Redistribution of wealth theory – Receipt of inheritance is a contributing factor to the
inequalities in wealth and income. The imposition of estate tax reduces the property
received by the successor, this helping to promote a more equitable distribution of wealth
in society. The tax base is the value of the property and the progressive scheme of
taxation is precisely motivated by the desire to mitigate the evils of inheritance in the
present form. The taxes paid by rich people are programmed for disbursement by
Congress more for the benefit of the poor in terms on social services, education, health,
etc.

c) Time and transfer of properties

Decedent’s interest is to its extent at the time of his death. [Sec. 85(A), NIRC]
Estate taxation is governed by the statute in force at the time of death of the decedent. Estate
tax accrues as of the death of the decedent and the accrual of the tax is distinct from the
obligation to pay the same. Upon the death of the decedent, succession takes place and the
right of the State to tax the privilege to transmit the estate vests instantly upon death. [Sec. 3,
RR2-2003]

Taxable Transfers
1. Transfers Mortis Causa – Gratuitous transfers after death, either testate or intestate.
2. Transfers Inter Vivos – Generally attract donor’s tax. However, certain transfers inter
vivos are treated by law as substitutes for testamentary dispositions (i.e., transfers which
are inter vivos in form but mortis causa in substance) where certain circumstances
provided by law are present, and are accordingly included in the computation of the gross
estate in order to arrive at the proper estate tax liability.
a. Transfers in contemplation of death [Sec. 85(B), NIRC]
b. Transfer with retention or reservation of certain rights [Sec. 85(B), NIRC]
c. Revocable transfers [Sec. 85(C), NIRC]
d. Transfers of property arising under general power of appointment [Sec. 85(D), NIRC]
e. Transfers for insufficient consideration [Sec. 85(G), NIRC]

d) Classification of decedent

The decedent may be classified into:

1. Citizen;
2. Resident alien; or
3. Non-resident alien.

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e) Gross estate and net estate

Gross estate refers to the value of all the property, real or personal, tangible or intangible, of
the decedent wherever situated (except for non-resident alien), to the extent of his interest at
the time of his death, as well as other items includible in the gross estate (NIRC, Sec. 85).

Net estate refers to the value of the gross estate less the ordinary and special deductions
(NIRC, Sec. 86)

f) Determination of gross and net estate

Composition of the Gross Estate:

1. If the decedent is a citizen, or a resident alien – All properties, real or personal, tangible
or intangible, whatever situated, plus items includible in gross estate.
2. If the decedent is a non-resident alien – Only properties situated in the Philippines
provided that, with respect to intangible personal property, its inclusion is subject to the
rule of reciprocity provided for under Sec. 104 of the NIRC (R.R. No. 02-2003, Sec. 4).

Determination of the Net Estate

1. If the decedent is a citizen, or a resident alien – Net estate sis equal to gross estate less
ordinary and special deductions and exclusions allowed by law (R.R. No. 2-2003, Sec. 6).
2. If the decedent is a non-resident alien – Net estate is equal to gross estate less ordinary
deductions and exclusions allowed by law (R.R. No. 2-2003, Sec. 7).

Note: Non-resident aliens are not entitled to special deduction.

g) Items to be included in the gross estate

Inclusions in the Gross Estate (ITR-GP2I)

1. Decedent’s Interest at the time of his death;

It includes any interest having value or capable of being valued, transferred by the
decedent at the time of his death (i.e. dividends declared by a corporation before death of
the stockholder although paid after death; partnership profits even if paid after death of
the partner) (MAMALATEO, supra at 359).

2. Transfer in contemplation of death;

General Rule: The transfer shall be considered as transfer in contemplation of death if,
during the lifetime of the decedent, he still retained on the property of any of the
following;
a. Possession or enjoyment thereof;
b. Receipt of the income or the fruits notwithstanding the transfer; or
c. Right, either alone or in conjunction with any person, to designate person who shall
possess or enjoy the said property or income therefrom.

Exception: Bona fide sale for an adequate and full consideration in money or in money’s
worth.

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3. Revocable Transfer;
General Rule: A transfer is a revocable transfer where:
a. There is a transfer by trust or otherwise; and
b. This enjoyment thereof was subject at the date of his death to any change through the
exercise of a power (in whatever capacity exercisable) by:
1. The decedent alone:
2. The decedent in conjunction with any other person without regard to when or
from what source the decedent acquired such power to alter, amend, revoke or
terminate; or
3. Where any such power is relinquished in contemplation of the decedent’s death

Exception: Bona fide sale for an adequate and full consideration in money or money’s
worth.

4. Property passing under a General Power of Appointment;

Power of Appointment – The right to designate the person or persons who shall enjoy
and possess certain property from the estate of a prior decedent (III DOMONDON, supra
at 52).

Requisites for Taxability:

a. Existence of a general power of appointment;
b. Exercise of such power by the decedent by will or by deed in certain cases; and
c. The passing of the property by virtue of such exercise (1 DE LEON, supra at 760).

General Rule: Property over which the decedent held a power of appointment is not
includible in his gross estate unless such power sis general.
a. General – When it authorizes the donee (decedent) to appoint any person he pleases,
including himself, thus having full dominion over the property as though he owned it
(Ibid.).
b. Special – When the donee (decedent) can appoint only among a restricted or
designated class of persons other than himself (Ibid.).

The general power of appointment may be exercised by the decedent:

a. By will;
b. By deed executed in contemplation of, or intended to take effect in possession or
enjoyment at, or after his death; and
c. By deed under which he has retained for his life or any period not ascertainable
without reference to his death or for any period which does not in fact end before his
death:
1. The possession or enjoyment or the right to the income from the property; or
2. The right, either alone or in conjunction with any person, to designate the persons
who shall possess or enjoy the property or the income.

Exception: Bona fide sale for an adequate and full consideration in money or money’s
worth.

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 5. Proceeds of a life insurance taken out by the decedent upon his own life, where the
beneficiary is the estate, his executor or administrator irrespective of whether or not the
insured retained the power of revocation; or any beneficiary designated as revocable;

Requisites:
1. The decedent takes an insurance policy on his own life; and
2. The amounts are receivable by:
a. The estate, his executor, or administrator irrespective of whether or not the
insured retained the power of revocation; or
b. Any beneficiary designated as revocable.

Note: The proceeds of life insurance are not included in a decedent’s gross estate when
the beneficiary is other than the estate, his executor, or administrator and the designation
is revocable.

6. Prior interests; and

7. Property transfers for Insufficient consideration.

Transfers, trust, interests, rights or powers (denominated as transfer in contemplation of
death revocable transfer and property passing under general power of appointment)
made, created, exercised or relinquished for a consideration in money or money’s worth.

Exception: A bona fide sale for an adequate and full consideration in money or money’s
worth.

The value to be included in the gross estate is the excess of the fair market value of the
property at the time of the decedent’s death over the consideration received.

Formula:

FMV of the property at the date of decedent’s death

Less Actual consideration received by the decedent
=Amount includible in decedent’s gross estate

h) Deductions and exclusions from estate

1. Ordinary; and
2. Special (RR No. 2-2003, Sec. 8).

Summary of Deductions (NIRC, Sec. 86)

Ordinary Deductions (FVPS) Special Deductions (FAMS)

A. FJC2U2L 1. Family Home;
1. Funeral Expenses; 2. Amount received by heirs under RA
2. Judicial Expenses; No. 4917;
3. Claims against the estate; 3. Medical expenses; and

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 4. Claims against insolvent persons; 4. Standard deductions.
5. Unpaid mortgages;
6. Unpaid taxes; and
7. Losses.

B. Vanishing Deduction (Property

Previously Taxed)
C. Transfer for Public Use
D. Net share of the Surviving Spouse in
the Conjugal or Community Property

Citizens and Resident Aliens

Citizen and resident alien decedents are entitled to the abovementioned deductions.

Non-resident aliens (EVP-N) (RR No. 2-2003, Sec. 7)

1. Expenses, Losses, Indebtedness and Taxes (ELIT)

Computation of Allowable Deduction for Non-resident aliens:

Allowable Deduction = Philippine gross estate x ELIT

World gross estate

2. Vanishing deductions for property in the Philippines;

3. Transfers for Public Use; and
4. Net share of the surviving spouse in the conjugal property. (NIRC, Sec. 86).

Items NOT allowed as deduction to non-resident aliens: (FAMS)

1. Family home;
2. Amounts received by heirs under RA No. 4917;
3. Medical Expenses; and
4. Standard deduction.

Note: No deduction shall be allowed in the case of a non-resident decedent not a citizen of
the Philippines, unless the executor, administrator, or anyone of the heirs, as the case may be,
includes in the return required to be filed under Section 90 of the Code the value at the time
of the decedent’s death of that part of his gross estate not situated in the Philippines (RR No.
2-2003, Sec. 7).

i) Tax credit for estate taxes paid to a foreign company

(1) In General. - The tax imposed by this Title shall be credited with the amounts of any
estate tax imposed by the authority of a foreign country.

(2) Limitations on Credit. - The amount of the credit taken under this Section shall be
subject to each of the following limitations: (a) The amount of the credit in respect to the
tax paid to any country shall not exceed the same proportion of the tax against which
such credit is taken, which the decedent's net estate situated within such country taxable
under this Title bears to his entire net estate; and (b) The total amount of the credit shall
not exceed the same proportion of the tax against which such credit is taken, which the

Page 69
 decedent's net estate situated outside the Philippines taxable under this Title bears to his
entire net estate. (NIRC, Sec. 86(E)).

j) Exemption of certain acquisitions and transmissions

The following shall not be taxed:

1. The merger of usufruct in the owner of the naked title;
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee
to the fideicommissary;
3. The transmission from the first heir, legatee or donee in favor of another beneficiary, in
accordance with the desire of the predecessor; and
4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable
institutions, no part of the net income of which insures to the benefit of any individual:
Provided, however, That not more than thirty percent (30%) of the said bequests, devises,
legacies or transfers shall be used by such institutions for administration purposes.

k) Filing of notice of death

1. When notice of death shall be filed:

a. When the transfer is subject to tax; or
b. Although exempt from tax, the gross value of the estate exceeds P20,000.
2. Period of Filing: The notice of death must be filed by the executor, administrator or any
of the legal heirs, as the case may be, with the Commissioner within 2 months after the
decedent’s death or within a like period after qualifying as executor or administrator
(NIRC, Sec. 89).

l) Estate tax return

1. When estate tax return shall be filed:

a. In all cases of transfers subject to estate tax; or
b. Where, though exempt from estate tax, the gross value of the estate exceeds
P200,000; or
c. Where, regardless of the gross value, the estate consists of registered or registrable
property such as real property, motor vehicle, shares of stocks or other similar
property for which a clearance from BIR is required as a prerequisite for the transfer
of ownership in the name of the transferee (RMC No. 34-2013).

Note: When the gross estate exceeds P2M, the estate tax return shall be supported by a
statement duly certified by a CPA (NIRC, Sec. 90(A)).

There is also an additional requirement of registering the estate and getting a separate
TIN (NIRC, Sec. 236(i))

2. Period of Filing:
General Rule: Estate tax return must be filed within 6 months from the decedent’s death
(NIRC, Sec. 90(B)).

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 Exception: In meritorious cases, the Commissioner may grant reasonable extension not
exceeding 30 days (NIRC, Sec. 90(C)).

3. Where to file the estate tax return and pay the estate tax due:
a. Resident decedent – the executor or administrator shall register the estate of the
decedent and secure a new TIN from the RDO where the decedent was domiciled at
the time of his death and shall the estate tax return and pay the corresponding estate
tax with:
i. Authorized Agent Bank (AAB);
ii. Revenue District Officer (RDO);
iii. Collection Officer; or
iv. Duly authorized Treasurer of the city or the municipality where the decedent was
domiciled at the time of his death, whichever is applicable.

b. Non-resident decedent, whether non-resident citizen or non-resident alien, with

executor or administrator in the Philippines – the estate tax return shall be filed
with and the TIN for the estate shall be secured from the RDO where such executor
or administrator is registered. If the executor or administrator is not registered, the
estate tax return shall be filed with and the TIN of the estate shall be secured from the
RDO having jurisdiction over the executor or administrator’s legal residence.

c. Non-resident decedent who does not have an executor or administrator on the

Philippines – the estate tax return shall be filed and the TIN for the estate shall be
secured from the Office of the Commissioner (RR No. 2-2003, Sec. 9).

Note: Notwithstanding the foregoing, the Commissioner of Internal Revenue may

continue to exercise his power to allow a different venue/place in the filing of tax returns
(RR No. 2-2013, Sec.9).

2. Donor’s Tax

a) Basic principles, concept, definition

Definition
An excise tax imposed on the privilege to transfer property by way of gift inter vivos based
on a pure act to liberality without any or less than adequate consideration and without any
legal compulsion to give (III DOMONDON, supra at 156).

Basic Principles of Donor’s Tax

1. Donor’s tax shall be imposed upon the transfer by any person, resident or non-resident,
of any property by gift (NIRC, Sec 98(A)).
2. Donor’s tax shall apply whether the transfer is by trust or otherwise, and whether the gift
is direct or indirect, and whether the property is real or personal, tangible or intangible
(NIRC, Sec. 98(B)).

Note: The term “transfer of property in trust or otherwise, direct or indirect” is used in
the most comprehensive sense. It includes not only the transfer or any right or interest in
property, but less than title. A transfer becomes complete and taxable when the donor has

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 divested himself of all beneficial interest in himself or his estate. The law contemplates
the passage of control over the economic benefits of the property rather than mere
technical changes in the title (Estate of Sanford v. Commissioner of Internal Revenue,
308 U.S. 39).

3. The donor’s tax is imposed on donations inter vivos (CIVIL CODE, Art. 729).
4. Donations mortis causa partake of the nature of the testamentary dispositions and are
subject to estate tax (CIVIL CODE, Art. 728).
5. Donor’s tax shall not apply unless and until there is a completed gift (RR No. 2-2003,
Sec. 11).

b) Nature, purpose and object

Nature of Donor’s Tax

1. It is an exercise on the privilege of the donor to give or on the transfer of property by way
of gift inter vivos.
2. It is not a property tax (RR No. 2-2003, Sec. 11)

Purposes or Objects of Donor’s Tax:

1. Donor’s tax supplements the estate tax by preventing the avoidance of the latter through
the device of donating the property during the lifetime of the deceased.
2. It also prevents the avoidance of income taxes, since a gratuitous transfer is an exclusion
from gross income under Sec. 32 of the NIRC (1 DE LEON, supra at 800).

c) Time and transfer of properties

d) Requisites of a valid donation

Requisites of a Taxable (Valid) Donation: (CD2AF)

1. Capacity of the donor – All persons who may contract and dispose of their property may
make a donation (CIVIL CODE, Art. 735). The donor’s capacity shall be determined as
of the time of the making of the donation (CIVIL CODE, Art. 737).
2. Donative intent (intention to donate) – Donative intent must be present in a direct gift of
property in order that the donor’s tax can be assessed and collected. Donative is not,
however, required in transfers of property for less than adequate and full consideration
(MAMALATEO, supra at 387).
3. Delivery, whether actual or constructive of the subject gift – There is delivery if the
subject matter is within the dominion and control of the donee.
4. Acceptance by the donee – The acceptance is necessary, because nobody is obliged to
receive a gift against his will. One the acceptance is made known to the donor, the swill
of the donor and done concur, and the donation, as a mode of transferring ownership,
becomes perfect (Osorio v. Osorio, GR No. L-16544, March 30, 1921)

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 Acceptance must be made during lifetime of the donor and of the done (CIVIL CODE,
Art. 746). If the donor dies before he learns of the acceptance, the donation does not take
effect (CIVIL CODE, Art. 1323).
5. Form prescribed by law
In order that the donation of an immovable may be valid, it must be made in a public
document specifying therein the property donated. The acceptance may be made in the
same Deed of Donation or in a separate public document, but it shall not take effect
unless it is done during the lifetime of the donor. If the acceptance is made in a separate
instrument, the donor shall be notified thereof in an authentic form and this step shall be
noted in both instruments. (CIVIL CODE, Art. 749; RR No. 2-2003, Sec. 11).

If the value of the personal property donated exceeds P500,000, the donation and the
acceptance shall be made in writing, otherwise, the donation shall be void (CIVIL CODE,
Art. 748)

e) Transfers which may be constituted as donation

(1) Sales/exchange/transfer of property for insufficient consideration

(2) Condonation/remission of debt

If the creditor condones the indebtedness of the debtor the following rules will apply:
a. On account of debtor’s services to the creditor, the same is taxable income to the
debtor.
b. If no services were rendered but the creditor simply condones the debt, it is taxable
gift and not the taxable income.
c. If a corporation forgives a stockholder’s debt, the transaction has the effect of the
payment of dividend (1 DE LEON, supra at 804).

(3) Transfer for less than adequate and full consideration

General Rule: If the property transferred is for less than adequate and full consideration
in money or money’s worth, the amount by which the FMV exceeds the consideration
shall be deemed a gift and be included in computing the amount of gifts made during
the year (NIRC, Sec. 100)

Reason: The NIRC considers the transfer as a donation since what motivated the
transferor in transferring the property is his generosity.

In essence, the donor intended a donation but opted to transfer the property for
inadequate consideration so to avoid paying donor’s tax.

Exception: Where property transferred is real property located in the Philippines

considered as capita asset, the donor’s tax is not applicable but the Final Capital Gains
Tax of six percent (6%) of the fair market value or gross selling price, whichever is
higher (SABABAN, supra at 154).

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 Where the consideration is fictitious, the entire value of the property transferred shall be
subject to donor’s tax (1 DE LEON, supra at 814).

f) Classification of donor

1. Resident Citizens;
2. Non-resident citizens;
3. Resident aliens;
4. Non-resident aliens;
5. Domestic corporation; and
6. Foreign corporation
Note: A corporation, whether domestic or foreign, is included since it is capable of entering
into a contract of donation, through a Board Resolution (CORPORATION CODE, Sec. 36).

The classification of donors determines the manner in which they are subject to donor’s
taxes. Donors are classified in accordance with the situs of donor’s taxation (III
DOMONDON, supra at 171).

g) Determination of gross gift

1. Resident or Citizen Donor – Gross gift includes real properties, tangible and intangible
personal properties wherever located.
2. Non-resident Alien Donor – Gross gift includes real properties, tangible and intangible
properties located in the Philippines (REYES, Transfer Taxes, supra at 133-134).
Note: If the donor is a non-resident alien, intangible properties belonging to him situated
in the Philippines shall be subject to rules on reciprocity (NIRC, Sec. 104).

h) Composition of gross gift

1. Resident or Citizen Donor – Gross gift includes real properties, tangible and intangible
personal properties wherever located.
2. Non-resident Alien Donor – Gross gift includes real properties, tangible and intangible
properties located in the Philippines (REYES, Transfer Taxes, supra at 133-134).

Note: If the donor is a non-resident alien, intangible properties belonging to him situated
in the Philippines shall be subject to rules on reciprocity (NIRC, Sec. 104).

i) Valuation of gifts made in property

1. Real property – it shall be valued at the FMV of the property at the time of the gift. The
appraised FMV of the property shall be whichever is higher between the FMV as
determined by the commissioner or the FMV as shown in the schedule of values fixed by
provincial and city Assessors (NIRC, Sec. 102; Sec. 88(B)).

2. All other property – it shall be valued at the FMV of the property at the time of the gift
(NIRC, Sec. 102).

j) Tax credit of donor’s taxes paid to a foreign country

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 The donor tax imposed upon a citizen or resident at the time of the donation shall be credited
with the amount of any donor’s tax of any character and description, imposed by the
authority of a foreign country (NIRC, Sec. 101(C)(1))

k) Exemptions of gifts from donor’s tax

1. Gifts made by a resident

a. Dowries or gifts made on account of marriage and before its celebration or within one
year thereafter by parents to each of their legitimate, illegitimate or adopted children
to the extent of the first P10, 000.
b. Gifts made to or for the use of the National Government or any entity created by any
of its agencies which is not conducted for profit, or to any political subdivision of the
said government.
c. Gifts in favor of educational, charitable, religious, cultural or social welfare
corporation, institutions, foundations, trust or philanthropic organization, research
institution or organization, accredited nongovernment organization (NGO).
Provided, that no more than 30% of said gifts shall be used by such donee for
administration purposes.

2. Gifts made by a non-resident not a citizen of the Phil.

a. same as (b)
b. same as (c) except accredited non-government organization (NGO)

l) Persons liable

m) Tax basis

The basis shall be the total net gifts made during the calendar year (NIRC, Sec. 99).

D. Value-Added Tax (VAT)

It is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties or
services in the Philippines and on importation of goods into the Philippines (R.R. No. 16-2005, Sec.
4, 105-2).

1. Concept, characteristics/elements of VAT-taxable transactions

1. It is an indirect tax. The amount of maybe shifted or passed on by the seller to the buyer,
transferee or lessee of goods, properties or services (NIRC, Sec. 105(B)).

2. It is a tax imposed on value added to goods or services. The tax is so called because it is
imposed on the value not previously subjected to the VAT, i.e., on the value added to the

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 goods or services at each stage of the distribution chain (2 DE LEON, The NIRC Annotated
(2016), p. 2) [hereinafter 2 DE LEON]

Value added – is the value added to the raw materials or to the purchases, other than the
labor component of the goods or service, by the producer, before its sale.

3. It is a transparent form of sales tax. VAT is a tax on the taxable sale, barter or exchange of
goods, properties or services. A barter or exchange has the same tax consequence as a sale. A
sale may be an actual sale or a deemed sale or an export sale or a local sale (MAMALATEO,
Reviewer on Taxation (2014) p.401) [hereinafter MAMALATEO, Reviewer].

Transparent – the law requires that the tax be shown as a separate item in the VAT invoice
of receipt.

4. It is a broad-based tax on consumption of goods, properties or services in the Philippines.

Broad-based – there is VAT on every stage of the taxable sales of goods, properties or
services.

5. It is collected through the tax credit method (sometimes referred to as the invoice method).

6. It does not cascade (tax on tax), hence, there is no tax pyramiding.

Cascading – Tax passed on by the previous seller, which is now a component of gross
selling price/receipts of the seller, is again subjected to tax.

Reason: Because VAT allows a seller to credit his input tax (which is equivalent to the
output tax of previous seller) from his output tax. Hence, there is no tax on tax.

7. It adopts the “tax-inclusive method”. Unless otherwise stated, any price charged by a VAT
registered person shall be deemed to include the VAT charged.

8. It follows the Destination Principle/Cross Border Doctrine.

9. It is a regressive tax. The VAT is an antithesis of progressive taxation. By its very nature, it
is regressive. The principle of progressive taxation has no relation with the VAT system
inasmuch as every goods bought or services enjoyed is the same regardless of income
(ABAKADA Guro Party List v. Executive Secretary, G.R. No. 168056, September 1, 2005).

2. Impact and incidence of tax

Impact of Taxation – refers to the statutory taxpayer (3 DOMONDON, Taxation (2014), p.227)
[hereinafter, 3 DOMONDON].

In VATable transactions, the impact of taxation is on the seller upon whom the tax has been
imposed in the first instance.

Exception: Technical importations

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 In case of tax-free importation of goods by persons, entities or agencies exempt from tax; where
such goods are subsequently sold, transferred or exchanged in the Philippines to non-exempt
persons or entities, the purchasers, transferees or recipients shall be considered as the importers
who shall be liable for the VAT on such importations (NIRC, Sec. 107(B)).

Incidence of Taxation – refers to the person or entity to whom the burden of the indirect tax is
shifted. The one who ultimately bears the burden of the tax (3 DOMONDON, Taxation (2014),
p.229) [hereinafter 3 DOMONDON].

In VATable transactions, the incidence of taxation is on the final consumer who finally bears the
burden of tax.

Note: Once the VAT is shifted to the buyer/customer as an addition to the cost of goods or
services sold, it is no longer a tax but an additional cost which the buyer/customer has to pay in
order to obtain the goods or services. The buyer cannot be held directly liable to pay tax or
invoke an exemption privilege to avoid paying the output tax passed on to them by the vendor, in
the form of higher selling price (BIR Ruling No. 639-12, December 4, 2012).

3. Tax credit method

Tax Credit Method – the input tax shifted by the seller to the buyer sis credited against the
buyer’s output taxes when he in turn sells the taxable goods, properties or services.

4. Destination Principle / Cross Border Doctrine

Destination Principle or Cross Border Doctrine

Goods and services are taxed only on the country where these are consumed, and in connection
with the said principle, the Cross Border Doctrine mandates that no VAT shall be imposed to
form part of the cost of the goods destined for consumption outside the territorial border of the
taxing authority (Atlas Consolidated Mining and Development Corp. v. Commissioner of
Internal Revenue, G.R. Nos. 141104 & 148763, June 8, 2007).

5. Person liable

1. Any person who in the course of trade or business:

a. Sells, barters, or exchanges goods or properties (seller or transferor), leases goods or
properties (lessor); or
b. Renders services (service provider).

Except: A person, whether or not VAT – registered, whose annual gross sales or receipts
does not exceed P1,919,500 shall not be liable to Vat, but instaed he shall be liable for the
3%percentage tax, unless he opted to be registered as a VAT person (NIRC, Sec. 116).

2. Imports goods (importer) – the person who brings good into the Philippines, whether or not
made in the course of trade or business (R.R. No. 16-2005, Sec. 4. 105-1).

In the Course of Trade of Business (Rule of Regularity)

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 Regular conduct or pursuit of a commercial or an economic activity, including transactions
incidental thereto, by any person regardless of whether or not the person engaged therein is a
non-stock non-profit private organization (irrespective of the disposition of its net income
and whether or not it sells exclusively to members or their guests), or government entity
(NIRC, Sec. 105; R.R. No. 16-2005, Sec. 4. 105-3).

A transaction will be characterized as having been entered into by a person in the course of
trade or business if it is:
1. Regularly conducted; and
2. Undertaken in pursuit of a commercial or economic activity.

Regular involves more than one isolated transaction. It requires repetition and continuity of
action (INGLES, supra at 277).

Incidental means depending upon or appertaining to something else primary; something

necessary, appertaining to or depending upon another, which is termed the principal;
something incidental to the main purpose (Black’s Law Dictionary, 6th ed., p. 762).

Isolated transaction connotes no regularity of activity. Hence, it is not subject to VAT.

Notes:

1. Transactions incidental to the pursuit of a commercial or economic activity are

considered as entered into in the course of trade or business and are also subject to VAT
(Kepco Ilijan Corp. v. Commissioner of Internal Revenue, CTA Case No. 8091. October
23, 2013).
2. It does not follow that an isolated transaction cannot be an incidental transaction for VAT
purposes (Mindanao II Geothermal Partnership v. Commissioner of Internal, G.R. Nos.
193301 & 194637, March 11, 2013).
3. The sale which was involuntary and made pursuant ti the declared policy of Government
for privatization would no longer be repeated or carried on with regularity. Hence if the
sale is made not in its regular activity, it is considered as an isolated transaction not
subject to VAT (Commissioner of Internal Revenue v. Magsaysay Lines, G.R. No.
146984, July 28, 2006).

6. Imposition of VAT

a) On sale of goods or properties

Goods or Properties
Means all tangible and intangible and intangible objects which are capable of pecuniary
estimation and shall include, among others: (TEMPR)
1. Radio, television, satellite Transmission and cable transmission time;
2. The right or privilege to use in the Philippines of any industrial, commercial or scientific
Equipment;
3. The right or privilege to use Motion pictures films, tapes and discs;
4. The right or privilege to use Patent, copyright, design or model, plan, secret formula or
process, goodwill, trademark, trade, or other like property or right; and

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5. Real properties held primarily for sale to customers or held for lease in the ordinary
course of trade or business (NIRC, Sec. 106).

Requisites for taxability of sale of goods and personal properties:

1. There is an actual or deemed sale, barter or exchange of goods or personal properties for
a valuable consideration;
2. The sale is in the course of trade or business or exercise of profession in the Philippines;
3. The goods or properties are located in the Philippines and are for use or consumption
therein; and
4. The sale is not exempt from VAT under Sec. 109 of the NIRC, special law, or
international agreement binding upon the government of the Philippines (R.R. No.16-
2005, Sec. 4. 106. 1).

Absence of any of the above requisites exempts the transaction from VAT. However,
percentage taxes transaction from VAT. However, percentage taxes may apply.

Tax Base and Tax Rate, Twelve percent (12%) of the gross selling price or gross value in
money of the goods or properties sold, bartered or exchanged. Such tax is to be paid by the
seller or transferor (MAMALATEO, Reviewer, supra at 435).

Gross Selling Price for Goods or Properties other than Real Property – the total amount
of money or its equivalent which the purchaser pays or is obligated to pay to the seller in
consideration of the sale, barter or exchange of the goods or properties, excluding VAT. The
excise tax, if any, on such goods or properties shall form part of the gross selling price
(NIRC, Sec. 106(A)).

If the VAT is not Billed Separately, the selling price stated in the sales document shall be
deemed to be inclusive of VAT (NIRC Sec. 106; R.R. No. 16-2005).

Allowable Deductions from Gross Selling Price:

1. Sales discounts determined and granted at the time of the sale as expressly indicated in
the invoice, Discounts conditioned upon the subsequent happening of an event or
fulfillment of certain conditions shall not be allowed as deductions;

In accounting terms, sales discounts are those granted by sellers to induce customers to
promptly pey their accounts (Belicon, Hinayon, Ireneo, Fundamentals of accounting
(2015), p. 285).

2. Sales returns and allowances granted where proper credit or refund was made during
the month or quarter to the buyer for sales previously recorded as taxable sales (R.R. No.
16-2005).

Sales returns arise when customers return all or a portion of the goods that they
purchased due to wrong specifications, poor quality of the merchandise, or if erroneous,
merchandise was delivered (Id. at 284).

Sales allowances arise when the customer is willing to accept the goods despite certain
defects in exchange for a price adjustment or an “allowance” granted by the seller (Ibid.).

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b) On importation of goods

The importation of goods herein contemplated refers to importation: by any person, who may
or may not be engaged in trade or business in the Philippines (R.R No. 15-2005).

Tax base and tax rate: Twelve percent (12%) based on:
1. Total value used by the BOC in determining tariff and customs duties, plus customs
duties, excise taxes if any, and other charges prior to the release of goods from the
customs;
2. Landed cost in case the valuation used by the BOC is based on volume and quantity.
Landed cost consists of the invoice amount, customs duties, freight: insurance and other
charges and also excise tax, if any (NIRC, Sec. 107).

The same rule applies to technical importation of goods sold by a person located in a
special Economic Zone to a customer located in a customs territory (R.R. No. 16-2005,
Sec. 4. 1011).

(1) Transfer of goods by tax exempt persons

In the case of goods imported into the Philippines by VAT- Exempt persons, entities or
agencies Which are Subsequently sold, Transferred or Exchanged in the Philippines to
non-exempt person or entities, the latter shall be considered the importers thereof, who
shall be liable for the VAT due on such importation (R.R. No. 16-2005 Sec. 4. 101-1).

Illustration: MD is a tax-exempt entity that imported goods, and then subsequently sold
it to E, a Vat person. E has to pay for the VAT. E can claim the VAT paid as creditable
input taxes.

When and by whom paid: The VAT on importation shall be paid by the importer prior
to the release of such goods from customers custody.

c) On services

Sale or exchange of Services

Means the performance of all kinds of services in the Philippines for others for a fee,
remuneration or consideration whether in kind or in cash (NIRC, Sec.108).

Requisites for Taxability: (SPCVE)

1. There is a sale or exchange of Service of lease or use of property enumerated in the law
or other similar services;
2. The service is Performed or to be performed in the Philippines, and in case of tease,
property leased or used must be located in the Philippines (place where the contract of
lease or the licensing agreement was executed is irrelevant);
3. The service is in the Course of the taxpayer’s trade or business or profession;
4. The service is for a Valuable consideration actually or constructively received; and
5. The service is not Exempt under the NIRC, special law or international agreement (NIRC
Sec.108(A)).

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 The place where the service is performed determines the jurisdiction to impose the value
added tax also known as the situs-of-service principle (MAMALATEO, Reviewer, supra at
424-425).

Absence of any of these requisites renders the transaction exempt from VAT, but it may still
be subject to other percentage tax under the NIRC.

Tax Base and Tax Rate: Twelve percent (12%) of the gross receipts derived from the sale
or exchange of service including the use or lease of properties (NIRC, Sec. 108).

Gross Receipts (R.R 16-2005, Sec. 4. 108-4)

Total amount of money or its equivalent actually or constructively received for the services
performed or to be performed for another person, excluding VAT representing:
1. Payments on the contract price, compensation, service fee, rental or royalty;
2. The amount changed for materials supplied with the service; and
3. Deposit applied as payments for services rendered and advance payments

Except:
1. Those amounts earmarked for payment of unrelated third party; or
2. Amounts received as reimbursement for advanced payment on behalf of another which
do not redound to the benefit of another which do not redound to the benefit of the payor.

7. Transactions deemed sale

a) Transfer, use or consumption not in the course of business of goods/properties

originally intended for sale or use in the course of business

The donation by a VAT-registered person of its ordinary assets is subject to VAT pursuant to
Section 4.106-7 or R.R. No. 16-05, as amended, the same being considered a transaction
deemed sale.

Illustration:
A. Co., a domestic real estate dealer, donated 23 residential lots with the improvements
thereon to
B. Co., a non-stock non-profit organization established for charitable purposes and
registered with the Philippine Council for NGO certification (PCNC)

b) Distribution or transfer to shareholders, investors or creditors

Illustration:
Some of the importations of JGU Corporation are 100 cars which are intended to be sold
locally. The cars are currently being sold in the local market at P500,000 per unit. Twenty
units of these cars were declared as property dividends and distributed to its stockholders.

The distribution of 20 units sis deemed a sale and subject to 12% VAT on the taxable base of
P500,000 per unit.

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 c) Consignment of goods if actual sale is not made within 60 days from date of
consignment

Exception: Consigned goods physically returned by the consignee within the 60-day period
are not deemed sold.

d) Retirement from or cessation of business with respect to inventories on hand

Retirement from or cessation of business with respect to all goods on hand, whether capital
goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation.
a. Change of ownership of a business when:
i. Single proprietorship incorporates; and
ii. Proprietor of single proprietorship sells his business
b. Dissolution of a partnership and creation of a new partnership and creation of a new
partnership which takes over the business (NIRC Sec. 106(B); RR No. 16-2005, Sec.
4.106(b)).

Illustration:
A Co., a domestic realty corporation, was dissolved via shortening of its corporate term. It
executed a Deed of Assignment to transfer a parcel of land to its stockholder, Mr. X, as
liquidating dividend. Is the transfer a “deemed sale transaction” for VAT purposes?

YES. Under section 106(B)(4) of the NIRC, transactions deemed sale include the retirement
from or cessation of business, with respect to inventories of taxable goods existing as of such
retirement and cessation. Thus, the conveyance of the real property as liquidating dividend is
a “deemed sale transaction” subject to the 12% VAT (BIR Ruling No. 363-2014 dated
September 22, 2014).

8. Change or cessation of business with respect to inventories on hand

a) Subject to VAT

(1) Change of business activity from VAT taxable status to VAT-exempt status

Change of business activity from VAT taxable status to VAT-exempt status (e.g., A VAT-
registered person engaged in a taxable activity like a wholesaler or a retailer who
discontinue such activity and engage instead in life insurance business or in any other
business not subject to VAT);

(2) Approval of request for cancellation of a registration due to reversion to exempt

status

Approval of a request for cancellation of VAT registration due to:

a. Reversion to exempt status.

(3) Approval of request for cancellation of registration due to desire to revert to exempt
status after lapse of consecutive years

Approval of a request for cancellation of VAT registration due to:

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 a. Desire to revert to exempt status after lapse of 3 consecutive years from the time of
registration by a person who voluntarily registered despite being exempt under Sec.
109(2) of the NIRC; or
b. Failure to meet the specific threshold (P1,919,500) by one who commenced business
with the expectation of reaching the required gross sales or receipts during the first
12 months of operation (RR 16-2005, Sec. 4.106-8).

b) Not subject to VAT

(1) Change of control of a corporation

The 12% VAT shall not apply to goods or properties which are originally intended for
sale or for use in the course of business existing as of the occurrence of the following as
they are more changes ion from and not in substance

1. Change of control of a corporation by the acquisition of the controlling interest of

such corporation by another stockholder (individual or corporate) or group of
stockholders.

He goods or properties used in the business (including those held for lease) or those
comprising the stock in trade of the corporation having a change in corporate
control will not be considered sold, bartered, or exchanged despite the change in
the ownership interest in the said corporation since the same corporation still owns
them.

Exception:
1. Exchange of property by corporation acquiring control for the shares of the target
corporation.
2. From the point of view of the person who joins the corporation, who exchange his
properties held for sale or lease for shares of stocks, whether resulting in corporate
control or not.

(2) Change on the trade or corporate name

Change in trade name or corporate names of the business.

(3) Merger or consolidation of corporations

The unused input tax of the dissolved corporation, as of the date of merger or
consolidation, shall be absorbed by the surviving corporation (RR No. 10-2011).

9. Zero-rated and effectively zero-rated sales of goods or properties

Zero-rated sales shall result to zero (0) output tax since the tax rate applied to the tax base is
0%. Since the output tax sis zero, the seller shall pay no VAT.

A zero-rate sale by a VAT-registered person is still considered as a taxable transaction for VAT
purposes although the VAT rate is 0%.

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Zero-Rated Sales of Goods or Properties (NIRC, Sec. 106(A)(2)): EFI

Export Sales (ANEGEI)

a. The sale and Actual shipment of goods from the Philippines to a foreign country (actual
export sale) which must be paid for in acceptance foreign currency and accounted for in
accordance with the rules and regulations of BSP.
b. The sale of raw materials or packaging materials to a Non-resident buyer for delivery to
resident local export oriented enterprise to be used in manufacturing, processing,
packing, or repacking in the Philippines of the said buyer’s goods, which must be paid
for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of BSP.
c. Sale of raw materials or packaging materials o an Export-oriented enterprise.

Export-Oriented Enterprise – An enterprise whose export sales exceed 70% of the total
annual production (RR No. 16-2005, Sec. 4.106-5)

d. Sale of Gold to the BSP.

Except for sale of gold to the BSP, sale of metallic minerals to persons and entities is
subject to 12% VAT if the value exceeds the threshold set by the NIRC and existing
issuances. Sale of gold to BSP is subject to VAT at 0% if the seller is a VAT-registered
taxpayer (RR No. 6-2012)

e. Those “considered Export sales under E.O. 226” (Omnibus Investment Code of 1987)
and other special laws.

Considered Export Sales (under E.O. 226)

Shall mean the Philippine Free on Board (FOB) value determined from invoices, bills of
lading, and other commercial documents of export products exported directly by
registered export producers, or the net selling price of export products sold by a
registered export producer to another export producer, or to an export trader that
subsequently exports the same.

Products sold shall only be deemed export sales when actually exported by the other
producer or export trader.

“Considered export sales under E.O. 226” is expanded to make sales of goods and
services by a VAT-registered in the customs territory to Ecozone and Freeport enterprises
automatically zero-rated (RR No. 4-2007, Sec. 4, 106-5)

1. Sale of goods, supplies, equipment and fuel to persons engaged exclusively in

International shipping or international air transport operations.

Goods subject to zero-rating are limited to goods and passengers transported from a port
in the Philippines directly to a foreign port, or vice versa, without docking or stopping at
any other port in the Philippines.

“Without docking or stopping at any other port in the Philippines” an international

airline that makes a stopover in a Philippine port to unload passengers and/or cargoes

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 from a foreign destination or to pick up passengers and/or cargoes for foreign destination
is deemed not to have docked or stopped at any other port in the Philippines (RR 4-2007,
Sec. 4, 106-5).

10. VAT-exempt transactions

a) VAT exempt transactions; in general; enumeration

“VAT-exempt transactions” refer to the sale of goods or properties and/or service and the use
or lease of properties that is not subject to VAT (output tax) and the seller is not allowed any
tax credit of VAT (input tax on purchases (R.R. No. 6-2005, Sec 4.109-1).

The person making the exempt sale of goods properties or services shall not bill any output
tax to his customers because the said transaction is not subject to VAT (R.R. No. 16-2005,
sec. 4.109-1).

The seller does not charge VAT and he cannot claim Exemption from what has been passed
to him (INGLES, supra at 299).

Features of VAT-Exempt Transaction:

1. VAT-exempt transaction shall not be included in determining the general threshold
prescribed by law (P1,919,500) (R.R. No. 16-2011).
2. VAT-exempt transaction shall not be liable for VAT or the 3% percentage tax under Sec.
116 of the NIRC.
3. The person making the exempt sale of goods, properties, or service shall not bill any
output tax to his customers because the said transaction is not subject to VAT (R.R. No.
16-2005).

Exempt Transactions v. Exempt party

An exempt transaction involves goods of services which by their nature, are specifically
listed in and expressly from VAT under the NIRC without regard the VAT status of the
party. The seller is not allowed any tax refund or credit for input taxes paid.

An exempt party is a person or entity granted VAT exemption under the NIRC, a special
law or an international agreement to which the Philippines is a signatory. Such party may be
allowed a tax refund on credit for input taxes paid, depending on his registration as a VAT or
non VAT taxpayer (Commissioner of internal revenue v. Seagate Technology, G.R. No.
153866, February 11, 2005)

11. Input and Output tax

a) Definition

Input VAT
The VAT due from or paid by a VAT registered person in the course of his trade or business
on importation of goods or local purchases of goods, or services including lease or use of
property, from a VAT registered person (NIRC, Sec. 110(A)(3)).

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 Input tax is what is passed on to the purchaser/taxpayer by the seller. If the purchaser is a
VAT-registered person then he can use the input tax credit in to the output taxes he is liable
to remit to the BIR (INGLES, supra at 307).

Sources of Input Tax:

1. Passed-on VAT (12%) – VAT paid on
a. Purchase or importation of goods;
b. Purchase of real properties; and
c. Purchase of services.
2. Transaction Deemed Sale (12%);
3. Presumptive Input tax (4%);
4. Transitional Input Tax (2% or actual VAT paid);
5. Standard Input Tax (7%);
6. Withholding Input Tax; and
7. Excess Input Tax.

Output Tax
The VAT due on the sale or lease of taxable goods or properties or services by any person
registered or required to register under VAT (NIRC, Sec110(A)(3)(b)).

Note: The output tax in the seller is input tax in the purchases (INGLES supra at 306).

Sources of Output Tax

1. Actual sales;
2. Zero-rated Sales; and
3. Deemed Sales.

b) Sources of input tax

(1) Purchase or importation of goods

(2) Purchase of real properties for which VAT has actually been paid

(3) Purchase of services for which VAT has actually been paid

(4) Transactions deemed sale

The following transactions shall be deemed sale therefore making them covered by VAT:
a. Transfer, use or consumption not in the course of business of goods or properties
originally intended for sale or for use in the course of business;
b. Distribution or transfer to:
i. Shareholders or investors as share in the profits of the VAT-registered persons; or
ii. Creditors in payment of debt;

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 c. Consignment of goods if actual sale is not made within sixty (60) days following the
date such goods were consigned; and
d. Retirement from or cessation of business, with respect to inventories of taxable goods
existing as of such retirement or cessation.

(5) Presumptive input

Persons or firms engaged in the: (PM)

1. Processing of mackerel, milk and sardines (MMS);
2. Manufacturing cooking oil, packed noodle-based instant meals and refined sugar
(CPR).

Processing – shall mean pasteurization canning, and activities which through

physical or chemical process alter exterior texture or form or inner substance of a
product in such a manner as to prepare it for special use to which it could not have
been put in its original form or condition (RR No. 16-2005, Sec. 4.111-1).

Determination of Input Tax: The presumptive input tax shall be 4% of the gross value
in money of their purchases of primary agricultural products which are used as inputs to
their production.

The amount is creditable against the output tax of a VAT-registered person.

(6) Transitional input

Transition input tax on the inventory on hand as of the effectivity of the VAT registration
of taxpayers who:
1. Became VAT-registered persons upon exceeding the minimum turnover of
P1,919,500 in any 12-month period;
2. Voluntarily registers as a VAT payer even if turnover does not exceed P1,919,500
(except franchise grantees of radio and/or television broadcasting whose threshold is
P10M); and
3. If he is already a VAT-registered person and also deals in goods and properties, the
sale of which is exempt, but it becomes a taxable transaction under a new or
amendatory law (MAMALATEO, Reviewer, supra at 487).

Purpose: During the period of transition from non-VAT to VAT status, the transitional
input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very
beginning, the VAT-registered taxpayer is obliged to remit a significant portion of the
income it derived from its sales as output VAT. The transitional input tax credit mitigates
this initial diminution of the taxpayer’s income by affording the opportunity to offset the
losses incurred through the remittance of the output VAT at a stage when the person is
yet unable to credit input VAT payments (Fort Bonifacio Development Corporation v.
Commisisoner of Internal Revenue, G.R. No. 173425, January 22, 2013).

Allowed Transitional Input Tax Credit:

Whichever is higher between:

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 1. Two percent (2%) of the value of the beginning inventory on hand; or
2. Actual VAT paid on such goods, materials and supplies.

The amount is creditable against the output tax of the VAT-registered person.

Prior payment of taxes not necessary for availment of transitional input tax
There is nothing in the provisions of Sec. 105 (now Sec. 111) of the NIRC which indicate
that prior payment of taxes is necessary for the availment of the transitional input tax. All
that is required under Sec. 105 (now Sec. 111) of the NIRC is for the taxpayer to file a
beginning inventory with the BIR (Fort Bonifacio Development Corporation v.
Commisisoner of Internal Revenue, G.R. No. 173425, January 22, 2013).

c) Persons who can avail of input tax credits

d) Determination of output/input tax; VAT payable; excess input tax credits

(1) Determination of output tax

Output Tax

a. For sale of goods or properties:

Gross selling price x VAT rate = Output tax

b. For sale of services:

Gross receipts x VAT rate = Output tax

c. Where the basis for computing output tax is either the gross selling price of gross
receipts, but the amount of VAT is erroneously billed in the invoice – The total
invoice amount is presumed to be comprising of gross selling price/gross receipts
plus the correct VAT. Using 12% as the VAT rate, the formula to compute the output
tax is:

Total invoice amount x 12% = Output tax

112%

The input tax that can be claimed by the buyer shall be the corrected amount of VAT.

(2) Determination of creditable input tax

The amount of input taxes creditable during a month or quarter shall be determined by:

1. Adding all creditable input taxes during the month or quarter and any amount of
input tax carried-over from the preceding month or quarter.
2. Reduced by the amount of claim for VAT refund or tax credit certificate (whether
filed with BIR, with Department of Finance, Board of Investments or the BOC) and
other adjustments, such as purchase returns or allowances, input tax attributable to

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 exempt sales and input tax attributable to sales subject to final VAT withholding (RR
No. 16-2005, Sec. 4.110-5).

The 70% can on creditable input tax has already been removed (RA No. 9351
amended Sec. 110(B), NIRC).

(3) Allocation of input tax on mixed transactions

1. All the input taxes that can be directly attributed to transactions subject to VAT may
be recognized for input tax credit;
2. If any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt
transaction, the input tax shall be pro-rated to the VAT taxable and VAT-exempt
transactions and only to the ratable portion pertaining to transactions subject to VAT
may be recognized for input tax credit. The allocation of input taxes shall be done
proportionately to each category of transaction.
3. The input tax attributable to VAT-exempt sales shall not be allowed as credit against
output tax but should be treated as part of cost of the asset or operating expense;
4. For persons engaged in both zero-rated sales and nonzero-rated sales, the aggregate
input taxes shall be allocated ratably between the zero-rated sale and nonzero-rated
sale (RR No. 16-2005, Sec. 4.110-4).

(4) Determination of the output tax and VAT payable and computation of VAT payable
or excess tax credits

Output Tax

d. For sale of goods or properties:

Gross selling price x VAT rate = Output tax

e. For sale of services:

Gross receipts x VAT rate = Output tax

f. Where the basis for computing output tax is either the gross selling price of gross
receipts, but the amount of VAT is erroneously billed in the invoice – The total
invoice amount is presumed to be comprising of gross selling price/gross receipts
plus the correct VAT. Using 12% as the VAT rate, the formula to compute the output
tax is:

Total invoice amount x 12% = Output tax

112%

The input tax that can be claimed by the buyer shall be the corrected amount of VAT.

VAT Payable/Excess Input Tax:

Output tax less input tax is VAT Payable or Excess Input Credits, whichever is the case,
on a monthly VAT declaration and quarterly VAT returns, subject to limitations
prescribed the regulations.

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 Formula:
Output tax exceeds Input tax at the end of Output tax P xx.xx
any taxable quarter Less: Input tax P xx.xx
VAT Payable P xx.xx
Input tax inclusive of input tax carried over Output tax
from the previous quarter exceeds output Less: Input tax P xx.xx
tax Excess Input (xx.xx)
Tax (P xx.xx)

Notes:
1. If at the end of any taxable quarter, VAT is a positive amount (the output tax exceeds
the input tax, such amount is called as excess output tax), then it is the VAT payable
by the VAT-registered person. VAT payable in case of importation; and
2. If the input tax, inclusive of the input tax carried over from the previous quarter,
exceeds the output tax, the excess input tax shall be carried over to the succeeding
quarter or quarters as tax credit (RR No. 16-2005, Sec. 4.110-7 (b)).

Output Input Net VAT Excess Treatment

Payable Input
12% 12 10 2 0
10 12 0 2 Tax Credit
0% 0 12 0 12 Refundable/Creditable
Exempt 0 12 0 12 Unrecoverable

*All amounts are only assumed for illustration purpose.

e) Substantiation of input tax credits

Who can claim input VAT; Time for claiming

The input tax credit on importation of goods or domestic purchase of goods or properties or
services by a VAT-registered person shall be creditable:
1. To the importer upon payment of VAT prior to the release of goods from customs
custody.
2. To the purchaser of the domestic goods or properties upon consummation of the sale.
3. To the purchaser of services or the lessee or licensee upon payment of the compensation,
rental, royalty or fee.
4. To the purchaser of real property under:
a. Cash/Deferred Payment Basis – upon consummation of sale.
b. Installment Basis – every installment payment (NIRC, Sec. 110(2)).

Required Supporting Documents (RR No. 16-05):

Transaction Required Documents
Input taxes on domestic purchases of goods VAT invoice
or properties
Input Tax on Purchases of Real Property:
Cashe/Deferred basis Public Instrument (i.e. deed of absolute sale,

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 deed of conditional sale, contract/agreement
to sell, etc.) together with the VAT invoice
for the entire selling price and Non-VAT
ORs for the initial and succeeding payments
Installment basis Public instrument and VAT OR for every
payment
Input tax on domestic purchases of services VAT OR
Input tax on importation of goods Import entry or other equivalent document
showing actual payment of VAT on the
imported goods
Transitional input tax Inventory of goods as shown in a detailed list
to be submitted to the BIR
Input tax on “deemed sale” transactions Required invoices
Input tax from payments made to non- Monthly Remittance Return of Value Added
residents (such as for services, rentals, or Tax Withheld (BIR Form 1600) filed by the
royalties) resident payor in behalf of the non-resident
evidencing remittance of VAT due which
was withheld by the payor
Advance VAT on sugar Payment order showing payment of the
advance VAT

All purchases covered by invoices other than a VAT invoice shall not be entitled to a refund
of input VAT (Atlas Consolidated Mining and Development Corporation v. Commissioner
of Internal Revenue, GR No. 145526, March 26, 2007).

The company’s failure to substantiate its zero-rated sales with duly registered VAT official
receipts resulted in the denial of the application for refund. VAT invoice and official receipts
must be duly registered with the BIR; the proper authority to print (ATP) was secured by the
taxpayer for the VAT invoice and official receipts (Emerson Electric (Asia) Ltd. ROHQ v.
Commissioner of Internal Revenue, CTA Case No. 8470, October 1, 2014).

12. Refund or tax credit of excess input tax

a) Who may claim for refund/apply for issuance of tax credit certificates

To claim refund or tax credit, claimant must comply with the following criteria:
1. The taxpayer is a VAT registered;
2. The taxpayer is engaged in zero-rated or effectively zero-rated sales;
3. The input taxes are due or paid;
4. The input taxes are not transitional input taxes;
5. The input taxes have not been applied against output taxes during and in the succeeding
quarters;
6. The input taxes claimed are attributable to zero-rated or effectively zero-rated sales;
7. For zero-rated sales under Secs. 106(A)(2)(1) and (2), 106(B), and 108(B)(1) and (2), the
acceptable foreign currency exchange proceeds have been duly accounted for in
accordance with BSP rules and regulations;

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 8. Where there are both zero-rated or effectively zero-rated sales and taxable or exempt
sales, and the input taxes cannot be directly and entirely attributable to any of these sales,
the input taxes shall be proportionately allocated on the basis of sales volume; and
9. The claim is filed within two years after the close of the taxable quarter when such sales
were made (in contrast with the period of filing an action to recover taxes already paid
which is reckoned from the date of payment).

b) Period to file claim/apply for the issuances of tax credit certificates

c) Manner of giving refunds

Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized
representative without the necessity of being countersigned by the Chairman of the
Commission of Audit.

d) Destination principle/Cross-border doctrine

Zero-rating does not require that the services be destined for consumption abroad or be
exported – Note that while Section 108(B)(2) of the Tax Code only requires payment of the
services in acceptable foreign currency, accounted for in accordance with existing BSP
regulations, VAT Ruling No. 040-98 requires that the services be “destined for consumption
abroad” and “not rendered within the Philippines.” In fact, said VAT ruling appears to
digress even from the very revenue regulations which it purports to interpret. Section 4.102 -
2(b)(2) of Rev. Regs. No. 5-96 does not require that the services to be rendered by a VAT
registered person be destined, consumed or rendered abroad. In sum, it is very clear that
VAT Ruling No. 040-98 not only expands the language of Section 108 (B)(2) but also of
Rev. Regs. No. 5-96 which interprets said statute. The same cannot be countenanced. It is a
settled rule of legal hermeneutics that the implementing rules and regulations cannot amend
the act of Congress, for administrative rules and regulations are intended to carry out, not
supplant or modify, the law.

The additional conditions prescribed by the BIR that the services should be destined to be
consumed abroad and should be of the same class or of the same nature as project studies,
information services, engineering and architectural designs and other similar services are
void because they are not covered by the provisions of the basic law.

Source of foreign currency sis not required by law to be zero-rated – In availing of the
zero-rating incentive provided by law for foreign currency remittance in our country, it is
sufficient that foreign currency inwardly remitted in our economy. We do not give much ado
as to where the money is sourced for as long as the foreign currency remittance in our
country is duly accounted for in accordance with the rules and regulations of the BSP.

Such tax treatment of goods brought into the export processing zones are only consistent
with the Destination Principle and Cross Border Doctrine to which the Philippine VAT
system adheres. According to the Destination Principle, goods and services are taxed only in
the country where these are consumed. In connection with the said principle, the Cross
Border Doctrine mandates that no VAT shall be imposed to form part of the cost of the
goods destined for consumption outside the territorial border of the taxing authority. Hence,

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 actual export of goods and services from the Philippines to a foreign country must be free of
VAT, while those destined for use or consumption within the Philippines shall be imposed
with 10% (now 12%) VAT. Export processing zones are to be managed as a separate
customs territory from the rest of the Philippines and, thus, for tax purposes, are effectively
considered as foreign territory. For this reason, sales by persons from the Philippine customs
territory to those inside the export processing zones are already taxed as exports. (Atlas
Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue,
G.R. Nos. 141104 & 148763, June 8, 2007)

13. Invoicing Requirements

a) In general

A VAT-registered person shall issue:

1. VAT Invoice – for every sale, barter or exchange of goods or properties.

2. VAT official receipt – for every lease of goods or properties and for every sale, barter or
exchange of services.

Only VAT registered persons are required to print their Tax Identification Number (TIN)
followed by the world “VAT” in their invoice or official receipt, which shall be considered
the “VAT” invoice” or VAT OR”. All purchases not covered by invoice/receipt, which shall
be considered the “VAT invoice” or “VAT OR”. All purchases not covered by
invoice/receipts other than the VAT invoice/VAT official receipt shall not give rise any input
tax (R.R. No. 16-2005 Sec 4.113-1 (A)).

b) In “deemed sale” transactions

Invoicing and Recording Deemed Sale Transactions:

1. Transfer, use or consumption not in the course of business of goods or properties

originally intended for sale or use in the course of business – a memorandum entry in the
subsidiary sale journal to record withdrawal of goods for personal use is required.

2. Distribution or transfer to shareholders or investors as share in the profits of the VAT-

registered persons or to creditors in payment of debt; and consignment of goods, if actual
sale is not made within sixty (60) days following the date such goods were consigned –
an invoice which includes all the invoicing requirements. The data appearing in the
invoice shall be duly recorded in the subsidiary sale journal. The total amount of
“deemed sale” shall be included in the return to be filed for the month or quarter.

3. Retirement from or cessation of business with respect to inventories on hand – an

inventory shall be prepared and submitted to the RDO who has jurisdiction over the
taxpayer’s principal place of business not later than thirty (30) days after retirement or
cessation form business. An invoice shall also be prepared for the entire inventory, which

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 shall be the basis of the entry into the subsidiary sale journal. The invoice needs to
enumerate the specific items appearing in the inventory, but it must show the total
amount. It is sufficient to just make a reference to the inventory, regarding the description
of the goods. However, the sales invoice number should be indicated in the inventory
filed and a copy thereof shall from part of this invoice.
a. If the business is to be continued by the new owners or successors, the entire
amount of output tax on the amount deemed sold shall be allowed as input taxes.
b. If the business is to be liquidated and the goods in the inventory are sold or
disposed of to VAT-registered buyers, an invoice or instrument of sale or transfer
shall be prepared, citing the invoice number wherein the tax was imposed on the
deemed sale. At the same time, the tax paid corresponding to the goods sold should
be separately indicated in the instrument of sale (RR No. 16-2005, Sec. 4.113-2).

c) Consequences of issuing erroneous VAT invoice or VAT official receipt

If a person who is not VAT-registered issues an invoice or receipt showing his TIN, followed
by the word “VAT”, the erroneous issuance shall result to the following:

1. The issuer shall, in addition to any liability to other percentage tax, be liable to:
a. The twelve percent (12%) VAT without the benefit of any input tax credit; and
b. A fifty percent (50%) surcharge.

2. The VAT shall be recognized as an input tax credit to the purchaser, if the requisite
information is shown on the receipt or invoice.

3. If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-
exempt transaction, but fails to display prominently on the invoice or receipt the term
“VAT-exempt sale” the issuer shall be liable to account for the twelve percent (12%)
VAT as if the transaction is not an exempt transaction. The purchaser shall be entitled to
claim an input tax credit on his purchase (R.R. 16-2005, Sec. 4.113-4).

14. Filing of returns and payment

Who are required to file a VAT Return:

1. Every person or entity who in the course of his trade or business, sale or lease goods,
properties and services subject to VAT, if the aggregate amount of actual gross sales or
receipts exceed P1,919,500 for any twelve (12) month period;
2. A person required to register as VAT taxpayer but failed to register;
3. Any person who imports goods;
4. Professional practitioners
a. Professional practitioners were formerly exempted from VAT and pays only income
tax.
b. However, on January 1, 2003, PPs were also subject to either VAT or three percent
(3%) percentage Tax (R.A. No. 7716 and 9010 witch were implemented by R.R. No 1-
2003 and 3-2003).
c. Services of professional practitioners are subject to:
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 i. VAT if the gross professional fees exceed P1,919,500 for any 12-month
period; or
ii. Three percent (3%) percentage Tax if the gross professional fees does not
exceed P1,919,500 for any 12-month period (R.R. 16-2005).

Time for Filing a Return

Every person liable to pay VAT shall file a:
1. Monthly return not later than the 20th day following the end of each month; and
2. Quarterly return of the amount of his quarterly gross sales or receipts within twenty-five
(25) days following the close of the taxable quarter.

A VAT-registered person shall pay the value-added tax on a monthly basis.

Taxable quarter shall mean the quarter that is synchronized to the income tax quarter of the
taxpayer (i.e., calendar or fiscal year).

Amounts reflected in the monthly VAT declarations for the first two (2) months of the quarter
shall still be included in the quarterly VAT return that reflects the reflects the cumulative figures
for the taxable quarter. Payments in the monthly VAT declarations shall, however, be credited in
the quarterly VAT return to arrive at the net VAT payable or excess input tax/over-payment as of
the end of a quarter.

15. Withholding of final VAT on sales to government

Sale of goods and services to government is subject to 12% VAT. However, the Government is
required to deduct and withhold a final VAT of 5% for its purchases (R.R. No.16-2005, Sec.114-
2).

Creditable Withholding of VAT on Payments to Non-Residents

The Government or any of its political subdivisions, instrumentalities or agencies, including
GOCCs as well as private corporations, individuals, estates and trusts, whether large or non-
large taxpayers, shall withhold 12% VAT, with respect to:
1. Lease or use of properties or property rights owned by non-residents; and
2. Other services rendered in the Philippines by non-residents (RR No. 16-2005, Sec. 4.114-2).

Standard Input Tax

Input tax attributed to VATable sales to Government is not creditable against output tax on sales
to non-Government entities.

Input taxes can be directly attributable to VATable sales of goods and services to the
Government or any of its political subdivisions, instrumentalities or agencies including GOCCs
shall not be credited against output taxes arising from sales to non-Government entities.

The Government or any of its political subdivisions, instrumentalities or agencies including

GOCCs shall deduct and withhold a final VAT due at the rate of 5% of the gross payment
(NIRC, Sec. 114(C)).

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 The remaining 7% effectively accounts for the standard input VAT for sales of goods or
services to government of any of its political subdivisions, instrumentalities or agencies
including GOCCs, in lieu of the actual input vat directly attributable or ratably apportioned to
such sales.

Output VAT 12%

Less: Standard Input VAT 7%
Final Withholding VAT 5%

If actual input VAT attributable so sale to government exceeds 7% of gross payments, the excess
may form part of the seller’s expense or cost.

If actual input VAT attributable to sale to government is less than 7% of gross payments, the
difference must be closed (deducted) to expense or cost.

E. Percentage Taxes (concept and nature only)

It refers specifically to the business taxes covered by Title V of the NIRC of 1997, as amended,
payable by any person or entity whose sale of goods or services is not covered by the VAT system
(2 CASASOLA, National Internal Revenue Code (Annotated), (2013), p.935) [hereinafter 2
CASASOLA].

Transactions covered by Percentage Tax

1. Sale of goods or services of persons who are exempt from VAT under Section 109 (1)(W) of the
Tax code and who is not a VAT-registered person and whose gross annual sales or receipts do
not exceed P1,919,500 effective January 1, 2012;

2. Other kinds of business subject to the other percentage taxes under Title V of the NIRC of 1997,
as amended, regardless of whether or not the gross annual receipts exceed P1,919,500 such as:
a. Domestic Carriers by land and keepers of garages (Sec. 117);
b. International carries (Sec. 1188);
c. Franchise grantees (Sec 119);
d. Overseas dispatch, message or conversation originating from the Philippines (Sec. 120);
e. Banks and non-bank financial intermediaries (Sec, 121);
f. Other non-banking financial intermediaries (Sec. 122);
g. Life insurance companies (Sec 123);
h. Agents of foreign insurance companies (Sec124);
i. Proprietors of amusement places (Sec. 125);
j. Winnings (Sec. 126); and
k. Sale, barter or exchange of shares of stock listed and traded through the local stock exchange
or through initial public offerings (Sec. 127) (ld. at 936).

Nature of Percentage Tax

The nature or PT is essentially a tax on the articles sold, bartered or exchanged. It is an indirect tax
which can be passed on to the buyer (Philippine Acetylene Co., Inc. v. Commissioner of Internal
revenue, G.R. L-19707, August 17, 1967).

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 Tax rate for transactions subject to Percentage Tax
Any person whose sales or receipts are exempt from the payment of value-added tax and who is not
a VAT-registered person shall pay a tax equivalent to three percent (3%) of his gross quarterly sales
or receipts. Provided, that cooperatives shall be exempt from the three percent (3%) gross receipts
tax herein imposed (NIRC, Sec. 116).

F. Excise tax (concept and nature only)

It is a tax levied on a specific article rather than one upon the performance, carrying on, of the
exercise of an activity. Excise tax refers to taxes applicable to certain specified or selected goods or
articles manufactured or produced in the Philippines for domestic sale or consumption or any other
disposition and to things imported into the Philippines, which tax shall be in addition to the value-
added tax (VAT) (2CASASOLA, supra at 994).

Nature of excise tax

Excise tax may be considered tax on production as they are collected only from manufacturers and
producers. Basically an indirect tax, it is directly levied upon manufacturer or importer upon
removal of the taxable goods from its place of production or from the customs custody. These taxes,
however, may be actually passed on to the end consumer as part of the transfer value or selling price
of goods sold, bartered or exchanged (Silkair Pte. Ltd. V. Commissioner of Internal Revenue, GR
No. 184398, February 25, 2010).

Kinds of excise tax

1. Specific tax – refers to the excise tax imposed which is based on weight or volume capacity or
any other physical unit or measurement; and
2. Ad valorem tax – refers to the excise tax which is based on selling price or other specified value
of the goods (NIRC, Sec. 129).

G. Documentary Stamp Taxes (concept and nature only)

H. Tax Remedies under the NIRC

Tax Remedies
Procedural steps that may be undertaken by the government or a taxpayer for the resolution of
disputes concerning the levy or imposition assessment, collection, and refund of taxes (4
DOMONDON, Taxation) Tax Remedies (2014) p. 338) [hereinafter 4 DOMONDON].

1. General Concepts

a) Assessment

(1) Definition and requisites of a valid assessment

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 Assessment
Generally, it is a finding by the taxing agency that the taxpayer has not paid his correct
taxes (4 DOMONDON, supra at 354).

Requisites for Valid Assessment

1. It must have been issued within the prescriptive period for the issuance of assessment
notices;
2. As a general rule, it may be issued only after a pre-assessment notice has been served
upon the taxpayer;
3. It shall state the facts, law, rules and regulations, or jurisprudence on which the
assessment is based, otherwise, the assessment sis void; and
4. The taxpayer must have personally received the assessment notice or a tax
agent/practitioner, who is appointed by the taxpayer (4 DOMONDON, supra at 356-
357).

b) Tax delinquency as distinguished from Tax deficiency

Delinquency Tax
Occurs when the taxpayer fails:
1. To pay the amount of the tax due on any return required to be filed (i.e., the taxpayer
filed a return but did not pay the entire amount written in the return); or
2. To pay the deficiency tax on the date appearing in the demand of the CIR.

Note: Delinquent taxes can be collected administratively via distraint or levy or by judicial
action (INGLES, Tax made less taxing (2015), p.354) [hereinafter INGLES].

Deficiency Tax
1. Amount by which the tax imposed by law as determined by the CIR or his representative
exceeds the amount shown as the tax by the taxpayer in his return; or
2. If no amount is shown by the taxpayer, or if no return is made, then the amount by which
the tax as determined by the CIR or his representative exceeds the amounts previously
assessed (or collected without assessment) as a deficiency.

Note: Deficiency taxes must be assessed prior to collection, as the deficiency has to be
determined first (INGLES, supra at 354).

c) Jeopardy assessment

A tax assessment made by an authorized Revenue Officer without the benefit of complete or
partial audit, in light of the officer’s belief that the assessment and collection of a deficiency
tax will be jeopardized by delay caused by the taxpayer’s failure to:

a. Comply with audit and investigation requirements to present his books of accounts
and/or pertinent records, or
b. Substantiate all or any of the deductions; exemptions or credits claimed in his return
(R.R. No. 30-2002, Sec. 3(1)(a)).

d) Prescriptive period for assessment

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(1) General rule

Within three (3) years after the last day prescribed by law for the filing of the return or
from the date of actual filing of the return, whichever comes later (ordinary or normal
assessment) (NIRC, Sec. 203).

Exceptions:
1. In case of false or fraudulent return with intent to evade tax or failure to file a return –
within ten (10) years after the discovery of the falsity, fraud or omission
(extraordinary or abnormal assessment) (NIRC, Sec. 222(a))
2. In case there is a valid waiver of the Statute of Limitations – up to the extended
period agreed upon (NIRC, Sec. 222(b))

(2) False or fraudulent returns and non-filing of returns

False return
Contains wrong information due to mistake, carelessness or ignorance (Aznar v.
Commissioner of Internal Revenue, GR No. L-20569, August 23, 1974).

A substantial under remittance of withholding tax on compensation constitutes falsity to

warrant the ten (10)-year prescriptive period (Samar-I Electric Cooperative, Inc. v.
Commissioner of Internal Revenue, GR No. 193100, December 10, 2014).

Fraudulent Return
For the ten (10)-year prescriptive period to apply based on fraud, such must first be
proved as a fact by the BIR (ABAN, supra at 274).

Failure to File a Return

Instances Constituting Failure to File Return
The following constitutes failure to file return to warrant the 10-year prescriptive period:
1. A deficient return which prevented the CIR from computing taxes due. Such
defective return is the same as if no return is filed at all (Commissioner of Internal
Revenue v. Gonzales, GR No. L-19495, November 24, 1966); and
2. Failure to report income in the returns which were clearly not exempted from tax.
The Court did not treat this as a simple omission as the same involved substantial
sums (Standard Chartered Bank v. Commissioner of Internal Revenue, CTA EB Case
No. 731, September 13, 2012).

(3) Suspension of the running of statute of limitations

Grounds for Suspension of the Running of the Statute of Limitations to Assess and
Collect: (PRA-PO)
a. When the CIR sis Prohibited from making the assessment or beginning the distraint
or levy or a proceeding in court, and for sixty (60) days thereafter;
b. When the taxpayer requests for a Reinvestigation which is grant by the CIR;
Requisites:

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 (a) There must be request for reinvestigation and not a request for reconsideration
(Commissioner of Internal Revenue v. Philippine Global Communications, GR
No. 167146, October 31, 2006): and
(b) The request for reinvestigation must be granted or acted upon by the CIR (Bank
of the Philippine Islands v. Commissioner or Internal Revenue, GR No. 174942,
March 7, 2008, citing Commissioner of Internal Revenue v. Suyoc Consolidated
Mining Co., GR No. L-11527, November 25, 1958; Bravo Alabang, Inc. v.
Commissioner of Internal Revenue, CTA Case No. 8199, November 29, 2012)

Note: The burden of proof that the taxpayers request for reinvestigation had been
actually granted shall be on the CIR. The grant may be expressed in communications
with the taxpayer or implied from the actions of the CIR or his authorized BIR
representatives in response to the request for reinvestigation (Bank of the Philippine
Islands v. Commissioner of Internal Revenue, GR No. 139736, October 17, 2005).

c. When the taxpayer cannot be located in the Address given by him in the retun, unless
he informs the CIR of any change in his address;
d. When the warrant of distraint or levy is duly served, and no Property is located; and
e. When the taxpayer is Out of the Philippines (NIRC, Sec. 223).

2. Civil penalties, additions to the tax

Definition
Increments to the basic tax incident due to the taxpayer’s noncompliance with certain legal
requirements.

a) Delinquency interest and deficiency interest

Deficiency Interest – Any deficiency in the tax due, as the term is defined in this Code,
shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be
assessed and collected from the date prescribed for its payment until the full payment
thereof. (NIRC 249(B)).

Delinquency Interest – In case of failure to pay:

(1) The amount of the tax due on any return to be filed, or

(2) The amount of the tax due for which no return is required, or
(3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the
notice and demand of the Commissioner, there shall be assessed and collected on the
unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is
fully paid, which interest shall form part of the tax.

b) Surcharge

1. 25% surcharge
a. Failure to file any return and pay the tax due thereon as required under the
provisions of this Code or rules and regulations on the date prescribed; or
b. Unless otherwise authorized by the Commissioner, filing a return with an internal
revenue officer other than those with whom the return is required to be filed; or
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 c. Failure to pay the deficiency tax within the time prescribed for its payment in the
notice of assessment; or
d. Failure to pay the full or part of the amount of tax shown on any return required to
be filed under the provisions of this Code or rules and regulations, or the full
amount of tax due for which no return is required to be filed, on or before the date
prescribed for its payment. (Sec. 248)

2. 50% surcharge
a. in case of willful neglect to file the return within the period prescribed by the
Code, or
 will not apply in case a taxpayer, without notice from the Commissioner,
or his duly authorized representative, voluntarily files the said return (only
25% shall be imposed)
 50% surcharge shall be imposed in case the taxpayer files the return only
after prior notice in writing from the Commissioner or his duly authorized
representative (Sec. 4.2, Rev. Reg. 12-99)

b. in case a false or fraudulent return is willfully made

Prima Facie evidence
 substantial underdeclaration (exceeding 30% of that declared) of taxable
sales, receipts or income,
 or a substantial overstatement (exceeding 30% of actual deductions) of
deductions (Sec. 248)

c) Compromise penalty

It is an amount of money that the taxpayer pays to compromise a tax violation. This is paid in
lieu of criminal prosecution. A taxpayer cannot be compelled to pay a compromise penalty.
If he does not want to pay, the CIR must institute a criminal action.

3. Assessment process and reglementary periods

a) Letter of Authority and Tax Audit

Letter of Authority
An official document that empowers a Revenue Officer to examine and scrutinize a
taxpayer’s books of accounts and other accounting records, in order to determine the
taxpayer’s correct internal revenue tax liabilities (Commissioner of Internal Revenue v.
Lancaster PH, Inc., CTA (En Banc) EB No. 352, April 30, 2008).

Electronic Letter of Authority (eLA)

Starting August 16, 2010, only eLas shall be issued by the Bureau for the audit/investigation
of tax liabilities, except estate tax cases (RMO No. 69-2010).

Tax Audit or Investigation

Effect of failure to complete audit within 120 days – Beginning June 1, 2010, there is no
need for revalidation of the LA if the prescribed audit period has been exceeded. However,
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 the failure of the Revenue Officer to complete audit shall be subject to the applicable
administrative sanction (RMO No. 44-2010).

b) Notice of Informal Conference

The Notice of Informal Conference is a written statement issued by the BIR informing the
taxpayer of the discrepancies in the taxpayer’s tax payments for the purpose of conducting an
informal conference wherein the taxpayer will be given an opportunity to present his side of
the case.

c) Issuance of Preliminary Assessment Notice; general rule and exceptions

Preliminary Assessment Notice (PAN) is issued to the taxpayer informing him of the
findings of the Revenue Officer if after review and evaluation of taxpayer’s records, there is
a sufficient basis to assess the taxpayer for any deficiency taxes (RR No. 12-99, Sec. 3.1.1, as
amended by RR No. 18-2013).

Note: Prior to issuance of PAN, the taxpayer may be allowed to make voluntary payments of
probable deficiency taxes and penalties (RMC No. 11-2014).

Requisites of a Valid PAN (SAWI)

1. Must be Served toc the taxpayer personally and if not practicable, by substituted service
or by mail (RR No. 12-99, Sec. 3.1.1, as amended by RR No. 18-2013);
2. The Assessment was conducted within the scope of authority given by a valid LA
(Commissioner of Internal Revenue v. Sony PH, Inc., GR No. 178697, November 17,
2010);
3. Must be in Writing and contain the facts and the law on which the proposed assessment
is based (NIRC, Sec. 228, par. 2; RR No. 12-99, Sec. 3.1.1, as amended by RR No. 18-
2013); and
4. Must be Issued by the CIR or his duly authorized representative. The duly authorized
representatives are:
a. Revenue Regional Directors;
b. ACIR-LTS; and
c. ACIR-Enforcement and Advocacy Service (RR No. 12-99, Sec. 3.1.1, as amended by
RR No. 18-2013) (RMC No. 11-2014).

Note: The issuance of a Notice of Informal Conference under RR No. 12-99 before issuing
PAN is already dispensed with pursuant to RR No. 18-2013 issued on November 28, 2013.

d) Issuance of Formal Letter of Demand and Final Assessment Notice

A. Requisites of a Valid FLD/FAN (PANIS-BeFS)

1. Must be issued after issuance of a valid PAN, except for the instances where a PAN
sis not required (NIRC, Sec. 228, Pars. 1 and 2; RR No. 12-99, Sec. 3.1.2, as amended
by RR No. 18-2013);

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 2. Must be Issued by the CIR or his duly authorized representative. The term “duly
authorized representative” refers to the same persons who are authorized to issue PAN
(RR No. 12-99, Sec. 3.1.3, as amended by RR No. 18-2013; RMC No. 11-2013);
3. Must be Served to the taxpayer personally and if not practicable, by substituted service
or my mail (RR No. 12-99, Sec. 3.1.6, as amended by RR No. 18-2013);
4. Must be served to the taxpayer Before the lapse of the prescriptive period for making
assessment (NIRC, Sec. 203);
5. Must be in writing and contain the Facts and the law in which the assessment is based
(RR No. 12-99, Sec. 3.1.3, as amended by RR No. 18-2013); and
6. The assessment was conducted within the Scope of authority given by a valid LA
(Commissioner of Internal Revenue v. Sony PH, Inc., GR No. 178697, November 17,
2010).

B. Period to Issue FLD/PAN

FLD/PAN shall be issued fifteen (15) days from date of receipt by the taxpayer of the
PAN whether the same was protested or not (RMO No. 26-2016).

C. When PAN can be issued

General Rule: FAN can be issued only after a PAN was issued. This is part of the
requirements of due process and failure to comply therewith would render the assessment
void (Commissioner of Internal Revenue v. Metro Superama, Inc., GR No. 185371,
December 8, 2010; SVI Information v. Commissioner of Internal Revenue, CTA Case No.
8496, February 10, 2014).

Exceptions: In the following instance where is not required, a FLD/PAN shall be issued
outright: (METER)
1. When the finding for any deficiency tax is the result of Mathematical error in the
computation of the tax as appearing on the face of the return;
2. When the Excise tax due on excisable articles has not been paid;
3. When a discrepancy has been determined between the Tax withheld and the amount
actually remitted by the withholding agent;
4. When an article locally purchased or imported by an Exempt person, such as, but not
limited to, vehicles, capital equipment, machineries and spare parts, has been sold,
traded or transferred to non-exempt persons; or
5. When a taxpayer who opted to claim a Refund or tax credits of excess creditable
withholding tax for a taxable period was determined to have carried over and
automatically applied the same amount claimed against the estimated tax liabilities
for the taxable quarter or quarters of the succeeding taxable year (RR No. 12-99, Sec.
3.1.2, as amended by RR No. 18-2013).

Note: The issuance of FAN before the lapse of the fifteen (15) day period for the
taxpayer to file its reply to the PAN inflicts no prejudice on the taxpayer for as long as
the taxpayer is properly served the FAN and it is able to intelligently contest the FAN b
filing a protest within the period allowed by law.

Reason: A PAN preparatory to the issuance of FAN is not, legally speaking, an

assessment even if it contains a computation of the tax liabilities of a taxpayer and a

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 demand for payment of the computed tax liabilities was made (Oakwood Management
Services, Inc. v. Commissioner of Internal Revenue, CTA Case No. 7989, August 8,
2013).

D. When FAN deemed made

The assessment is deemed to have been made on the date when the demand letter or
notice of assessment is released, mailed or sent, even though the same is actually received
by the taxpayer after the expiration of the prescriptive period (Basilan Estates v.
Commissioner of Internal Revenue, GR No. L-22492, September 5, 1967).

General Rule: When a mail matter is sent by registered mail, there exists a presumption
that is was received in the regular course of mail (Republic v. Court of Appeals, GR No.
L-38540, April 30, 1987).

For the presumption to apply, the following facts must be proved:

1. Letter was properly addressed with postage prepaid; and
2. Letter was mailed (Barcelon Roxas Securities Inc., v. Commissioner of Internal
Revenue, GR No. 157064, August 7, 2006).

Exception: When there a direct denial of the receipt. The burden is shifted to the BIR to
prove that the letter mailed was received by the addressee.

If the taxpayer denies having received an assessment from the BIR, it then becomes
incumbent upon the latter to prove by competent evidence that such notice was indeed
received by the addressee. While it is true that an assessment is made when the notice is
sent within the prescribed period, the release,, mailing, or sending of the same must still
be clearly and satisfactorily proved (Commissioner of Internal Revenue v. CGJM PHL
Manufacturing, Inc., GR No. 202695, February 29, 2016).

E. 3 Possible Scenarios After Issuance of FLD/FAN

1. Taxpayer may pay the assessment

After the issuance of the FAN/FLD, the taxpayer accepts and settles/pays the
assessment in full, Payment Form 0605 shall be duly prepared, filed and paid as
evidence of the settlement (RMO No. 26-2016).

2. Taxpayer fails to file protest

If the taxpayer fails to file a valid protest against the FLD/FAN within thirty (30)
days from date of receipt thereof, the assessment shall become final, executory, and
demandable. No request for reconsideration or reinvestigation shall be granted (RR
No. 12-99, Sec. 3.1.4, as amended by RR No. 18-2013).

3. Taxpayer may file a protest

Requisites of a Valid Protest: (W2ATh-FiCo)

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 1. Must be accompanied by a Waiver of Statute of Limitations (Bank of the
Philippine Islands v. Commissioner of Internal Revenue, GR No. 139736,
October 17, 2005);
2. Must be in Writing (RR No. 12-99, Sec. 3.1.4, as amended by RR No. 18-
2013);
3. Must be Addressed to the CIR or his duly authorized representative (RR No.
12-99, Sec. 3.1.4, as amended by RR No. 18-2013);
4. Must be submitted within Thirty (30) days from receipt of FLD/FAN (RR No.
18-2013);
5. Must be Filed by the taxpayer or his duly authorized representative, in person
or through registered mail with return card, with the Office of the duly
authorized representatives of the CIR (Regional Director, ACIR-LTS, ACIR-
Enforcement Service) who signed the FLD/FAN (RMC No. 11-2014; RR No.
39-2013);

Note: The revenue officials who received the protests shall submit a report on
all protests filed to the CIR. The Office of the CIR shall then create a
database of these. If the protest filed is not included in the database, the same
shall be considered as not officially filed, hence, without force and effect (RR
No. 39-2013).

6. Must Contain the following: (Na2TA-DI2F)

a. Name of the taxpayer and address for the immediate past three (3) taxable
years;
b. Nature of request whether reinvestigation or reconsideration specifying
newly registered evidence he intends to present if it is a request for
reinvestigation;
c. Taxable periods covered;
d. Assessment number;
e. Date of receipt or assessment notice or letter of demand and date of
assessment notice;
f. Itemized statement of the findings to which the taxpayer agrees as a basis
for computing the tax due, which amount should be paid immediately
upon the filing of the protest;
g. Itemized schedule of the adjustments with which the taxpayer does not
agree; and
h. Statement of the Facts and law in support of the protest (RR No. 12-85,
Sec. 6; RR No. 12-99, Sec. 3.1.3, as amended by RR No. 18-2013).

e) Disputed Assessment

Happens when a valid protest against FLD/FAN was submitted.

3 Possible Scenarios After Protest

After the taxpayer submitted a protest and the relevant supporting documents, as the case
may be, the CIR or his duly authorized representative may exercise the following: (DI-In)

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 1. Direct grant or denial of protest – renders a decision through FDDA granting or denying
the protest within the prescribed period to act upon the protest (RR No. 12-99, Sec. 3.1.5,
as amended by RR No. 18-2013);
2. Indirect denial or protest – denies the protest in another way without rendering a decision
through FDDA within the prescribed period to act upon the protest; or
3. Inaction – not act upon the protest within the prescribed period (RR No. 12-99, Sec.
3.1.4, as amended by RR No. 18-2013).

4. Collection

It is the actual effort exerted by the government to effect the exaction of what is due from the
taxpayer. It is the final stage and goal of tax administration.

a) Requisites

The following are the requisites before taxpayer may be required to pay the assessed:
1. There must be an assessment that has become final, executory, and collectible;
2. The amount being collected must be part of the government’s accounts receivable;
3. The amount being collected must not have been written-off or cancelled;
4. The right of the government to collect has not yet prescribed;
5. The proper procedure for collection whether administrative or judicial are followed;
6. The taxpayer can still be located; and
7. The government is not enjoined from collecting the tax (4 DOMONDON, supra at 474).

b) Prescriptive periods; suspension of running of statute of limitations

Grounds for Suspension of the Running of the Statute of Limitations to Assess and
Collect: (PRA-PO)
a. When the CIR sis Prohibited from making the assessment or beginning the distraint or
levy or a proceeding in court, and for sixty (60) days thereafter;
b. When the taxpayer requests for a Reinvestigation which is grant by the CIR;

Requisites:
(a) There must be request for reinvestigation and not a request for reconsideration
(Commissioner of Internal Revenue v. Philippine Global Communications, GR No.
167146, October 31, 2006): and
(b) The request for reinvestigation must be granted or acted upon by the CIR (Bank of
the Philippine Islands v. Commissioner or Internal Revenue, GR No. 174942, March
7, 2008, citing Commissioner of Internal Revenue v. Suyoc Consolidated Mining
Co., GR No. L-11527, November 25, 1958; Bravo Alabang, Inc. v. Commissioner of
Internal Revenue, CTA Case No. 8199, November 29, 2012)

Note: The burden of proof that the taxpayers request for reinvestigation had been actually
granted shall be on the CIR. The grant may be expressed in communications with the
taxpayer or implied from the actions of the CIR or his authorized BIR representatives in
response to the request for reinvestigation (Bank of the Philippine Islands v.
Commissioner of Internal Revenue, GR No. 139736, October 17, 2005).

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 c. When the taxpayer cannot be located in the Address given by him in the retun, unless he
informs the CIR of any change in his address;
d. When the warrant of distraint or levy is duly served, and no Property is located; and
e. When the taxpayer is Out of the Philippines (NIRC, Sec. 223).

I. Taxpayer’s remedies

1. Protesting an assessment

a) Protested assessment

When the Commissioner or his duly authorized representative finds that proper taxes should
be assessed, he shall first notify the taxpayer of his findings: Provided, however, that a pre-
assessment notice shall not be required in the following cases:

(a) When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the tax withheld and the amount
actually remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and
automatically applied the same amount claimed against the estimated tax liabilities for
the taxable quarter or quarters of the succeeding taxable year; or
(d) When the excise tax due on exciseable articles has not been paid; or
(e) When the article locally purchased or imported by an exempt person, such as, but not
limited to, vehicles, capital equipment, machineries and spare parts, has been sold,
traded or transferred to non-exempt persons.

The taxpayers shall be informed in writing of the law and the facts on which the assessment
is made; otherwise, the assessment shall be void.

b) Period to file protest

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be
required to respond to said notice.

If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall
issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or

reinvestigation within thirty (30) days from receipt of the assessment in such form and
manner as may be prescribed by implementing rules and regulations.

Within sixty (60) days from filing of the protest, all relevant supporting documents shall
have been submitted; otherwise, the assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred eighty
(180) days from submission of documents, the taxpayer adversely affected by the decision or
inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the

Page 107
 said decision, or from the lapse of one hundred eighty (180)-day period; otherwise, the
decision shall become final, executory and demandable.

c) Form, content, and validity of protest

Forms of Protest

1. Request for Reconsideration – a plea for a reevaluation of an assessment on the basis of

existing records without need of additional evidence which may involve a question of
fact or few or both; and
2. Request for Reinvestigation – a plea for the re-evaluation of an assessment on the basis
of the newly discovered or additional evidence that a taxpayer intends to present in the
reinvestigation which may also involve a question of law or fact or both (RR No. 12-99,
Sec. 3.1.4, as amended by RR No. 18-2013).

Reconsideration Reinvestigation
Definition
Involves reevaluation of assessment based on Involves presentation of newly discovered or
existing records additional evidence
Effect on the Statute of Limitations
Does not toll the Statute of Limitations Tolls the Statute of Limitations because a
reinvestigation, which entails reception and
evaluation of additional evidence will take
more time than reconsideration
(Commissioner of Internal Revenue v.
Philippine Global Communications, GR No.
167146, October 31, 2006)
Submission of Documents
Not required Required within sixty (60) days from date of
filing of protest
When 180-day period commence
From the filing of the protest From the submission of the complete
supporting documents
(4 DOMONDON, supra at 441)

d) Submission of supporting documents

Submission of documents after protest

For requests for reinvestigation, the taxpayer shall submit all relevant supporting documents
in support of his protest within sixty (60) days from date of filing of his letter of protest.

For requests for reconsideration, the sixty (60)-day period shall not apply (RR No. 12-99,
Sec. 3.1.4)

Relevant Supporting Documents

Those documents necessary to support the legal and factual bases in disputing a tax
assessment as determined by the taxpayer (RR No. 12-99, Sec. 3.1.4)

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 Note: The BIR cannot demand what type of supporting documents should be submitted
(Commissioner of Internal Revenue v. First Express Pawnshop Company, Inc., GR No.
172046, June 16, 2009).

Reason: Taxpayer would be placed at the mercy of the BIR which may require production of
documents which taxpayer could not produce (Standard Chartered Bank v. Commissioner of
Internal Revenue, CTA Case No. 5696, August 16, 2001)

e) Effect of failure to file protest

Non-submission of the documents renders the assessment final (RR No. 12-99, Sec. 3.1.4 as
amended by RR No. 18-2013).

The phrase the assessment shall become final means that the FLD/FAN shall become final
by operation of law. The taxpayer shall be barred from disputing the correctness of the
FLD/FAN by introduction of newly discovered or additional evidence because it is deemed
to have lost its jurisdiction to present this evidence. The BIR shall then deny the request for
reinvestigation through the issuance of a Final Decision on Disputed Assessment (FDDA)
(RMC No. 11-2014).

f) Decision of the Commissioner on the protest filed

(1) Period to act upon or decide on protest filed

a. By CIR – in case of protest within one hundred eighty (180) days from filing of
protest (regardless of the form of protest), in case of administrative appeal within one
hundred eighty (180) days from filing of the administrative appeal.

Administrative Appeal – request for reconsideration filed with the CIR to elevate
the denial of protest made by his duly authorized representative.

b. By Duly Authorized Representative

i. Request for reinvestigation – within one hundred eighty (180) days from
submission of the relevant documents.
ii. Request for reconsideration – within one hundred eighty (180) days from
filing of protest (RR No. 12-99, Sec. 3.1.4 as amended by RR No. 18-
2013).

(2) Remedies of the taxpayer in case the Commissioner denies the protest or fails to act
on the protest

1. Inaction by the CIR – either:

a. Appeal to the CTA within thirty (30) days from the expiration of the 180-day
period; or

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 b. Await the final decision of the CIR on the disputed assessment, and then appeal
such final decision to the CTA within thirty (30) days after the receipt of a copy
of such decision (RR 12-99, Sec. 3.1.4, as amended RR No. 18-2013).

2. Inaction by Duly Authorized Representative – either:

a. Appeal to the CTA within thirty (30) days from the expiration of the 180-day
period counted from the date of filing of the protest in case of a request for
reconsideration or from the date of submission by taxpayer of the required
documents within sixty (60) days from filing of protest in case of a request for
reinvestigation; or
b. Await the final decision of the duly authorized representative on the disputed
assessment (RR No. 12-99, Sec. 3.1.4, as amended by RR No. 18-2013).

The options are mutually exclusive and resort to one bars the application of the other
(RR No. 12-99, Sec. 3.1.4, as amended by RR No. 18-2013; Rizal Commercial
Banking Corp. v. Commissioner of Internal Revenue, GR No. 168498, April 24, 2007;
Lascona Land Co. v. Commissioner of Internal Revenue, GR No. 171251, March 5,
2012).

If the taxpayer opted to wait the final decision of the CIR or his duly authorized
representative, he may later use the remedies available to him in contesting said
decision, as discussed previously.

(3) Effect of failure to appeal

Effect of failure to appeal the inaction to the CTA within 30-day period: It will not result
in the finality of the FLD/FAN, as the taxpayer can wait for the decision (Rizal
Commercial Banking Corp. v. Commissioner of Internal Revenue, GR No. 168498, April
24, 2007).

2. Compromise and abatement of taxes

Compromise
A contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end
to one already commenced (CIVIL CODE, Art. 2028). In case of tax assessment, it is a contract
between the government and the taxpayer to settle the liability.

Note: Compromise discussed herein is different from compromise penalty.

Compromise v. Compromise Penalty

Compromise Compromise Penalty
Nature
Amount of money paid by the taxpayer to settle Amount paid by the taxpayer to compromise a
his deficiency taxes tax violation and pain in lieu of criminal
prosecution

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 Amount
Fixed percentage rate depending on the ground Fixed amount or based on a graduated table
for compromise which is computed based on depending usually on the gross annual sales,
the basic assessed tax earnings or receipts of the taxpayer (RMO No.
19-2007)
Remedy in Case of Non-Payment by the Taxpayer
1. Enforce the compromise; or Institute a criminal action (RMO No. 19-2007)
2. Treat it as rescinded and insist upon the
original demand (CIVIL CODE, Art.
2041).

Abatement
Cancellation of the entire tax liability of the taxpayer (NIRC, Sec. 204(B)).

Who has the authority to abate

CIR has the sole authority to abate or cancel internal revenue taxes, penalties and/or interest (RR
13-2001, Sec. 4).

Coverage of Abatement
General Rule: The CIR’s authority to compromise is generally applicable to surcharge and
compromise penalties only.

Exception: In meritorious instances, the CIR may abate the interest as well as basic tax assessed,
provided, however, that cases for abatement or cancellation of tax, penalties and/or interest by
the CIR shall be coursed through certain officials.

Grounds for Abatement (EC)

1. The tax or any portion thereof appears to be unjustify or Excessively assessed; or
2. The administration and Collection costs involved do not justify the collection of the amount
due (NIRC, Sec. 204(B)).

Compromise v. Abatement
Compromise Abatement
Nature
Involves a reduction of the taxpayer’s liability Involves the cancellation of the entire tax
liability of a taxpayer
Officer/s Authorized to Compromise/Abate
CIR, NEB and REB CIR
Grounds
1. Reasonable doubt as to validity of 1. The tax or any portion thereof appears
assessment; or to be unjustly or excessively assessed;
2. Financial incapacity of taxpayer or
2. The administration and collection costs
involved do not justify the collection of
the amount due.

3. Recovery of Tax erroneously or Illegally Collected

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a) Tax refund as distinguished from Tax credit

Tax Refund – actual reimbursement of the tax (ABAN, supra at 325).

Tax Credit – refers to the amount of tax due to a taxpayer resulting from overpayment of a
tax liability or erroneous payment of a tax due (RR No. 5-2000).

The government issues a tax credit certificate (TCC) or a tax credit memo covering the
amount determined to be reimbursable after proper verification and the same may be applied
against any sum that may be due and collectible from the taxpayer.

All TTCs issued by the BIR shall not be allowed to be transferred or assigned to any person
(RR No. 14-2011, Sec. 2).

b) Grounds, requisites and period for filing a claim for refund or issuance of a tax credit
certificate

Grounds for Filing a Claim for Tax Refund or Tax Credit (EPS)

1. Tax is Erroneously or illegally assessed or collected;

There is erroneous payment of taxes when a taxpayer pays under a mistake of fact, as
where he is not aware of an existing exemption sin his favor at the time the payment was
made (51 Am. Jur., cited in UST Cooperative Store v. City of Manila, GR No. L-17133,
December 31, 1965).

An “erroneous or illegal tax” is defined as one levied without statutory authority, or upon
property not subject to taxation or by some person having no authority to levy the tax, or
one which in some other similar respect is illegal (Commissioner of Internal Revenue v.
Pilipinas Shell Petroleum Corp., GR No. 188497, April 25, 2012).

2. Penalty is collected without authority;

3. Sum collected is excessive or in any manner wrongfully collected (NIRC, Sec. 229;
Commissioner of Internal Revenue v. Fortune Tobacco Corp., GR No. 167274-75, July
21, 2008).

Requisites of Tax Refund or Tax Credit (GroC-Cat-2Proven)

1. There must be a legal Ground or basis for tax refund or tax credit (NIRC, Sec. 229); and
2. There must be a written Claim for refund or credit filed by the taxpayer with CIR (NIRC,
Sec. 229; Vda. De Aguinaldo v. Commissioner of Internal Revenue, GR No. L-19927,
February 26, 1965).

Reason: The claimant must file a written claim before resorting to an action in court to:
a. Afford the CIR an opportunity to correct the action of subordinate officers; and
b. Notify the government that such taxes have been questioned and the notice should
then be borne in mind in estimating the revenue available for expenditure (NIRC, Sec.
229; Commissioner of Internal Revenue v. Acosta, GR No. 154068, August 3, 2007).

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 Exceptions:
a. A return filed showing an overpayment shall be considered as a written claim for
credit or refund (NIRC, Sec. 204(C)); and
b. The CIR may, even without the written claim therefor, refund or credit any tax where
on the face of the return upon which the payment was made, such payment appears
clearly to have been erroneously paid (NIRC, Sec. 229).

3. The claim must be a Categorical demand for reimbursement (Bermejo v. Collector of

Internal Revenue, GR No. L-3029, July 25, 1950).
4. The claim with the CIR and the 30-day period must be filed within two (2) years from the
date of payment of the tax or penalty.

Rule: The administrative claim must be filed within the said 2-year period, regardless of
any supervening cause (NIRC, Sec. 229).

If the CIR takes time in deciding the claim, and the period of two (2) years is about to
end, the suit or proceeding for a refund must be started in the CTA before the end of the
2-year period even without the decision of the CIR (Gibbs v. Commissioner of Internal
Revenue, GR No. L-13453, February 29, 1960).

Two-year Prescriptive Period

General Rule: The two-year prescriptive period runs from the payment of the tax.

Exceptions:
a. Overpaid quarterly income taxes – from the date the final adjustment return is filed after
the end of the taxable year (Commissioner of Internal Revenue v. Court of Appeals, GR
No. 117254, January 21, 1999).

Reason: It is at that point in can already be determined whether there has been
overpayment (Commissioner of Internal Revenue v. Court of Appeals, GR No. 117254,
January 21, 1999).

b. When the final adjustment return was actually filed before the last day prescribed by law
for filing – from the date of actual filing (Commissioner of Internal Revenue v. Court of
Appeals, GR No. 117254, January 21, 1999).

c. Tax sought to be refunded is illegally or erroneously collected – from the date the tax
was paid (Commissioner of Internal Revenue v. Victorias Milling, GR No. L-24108,
January 3, 1968).

d. Tax is paid only in installments or only in part – from the date the last or final
installment or payment (Collector v. Prieto, GR No. L-11976, August 29, 1961).

e. Taxpayer merely made a deposit – from the conversion of the deposit to payment (Union
Garment v. Collector, CTA Case No. 416, November 17, 1958).

Merely making a deposit is not equivalent to payment until the amount is actually
applied to the specific purpose for which it was deposited.

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 f. The tax has been withheld from source (through the withholding tax system) – from the
date it falls due at the end of the taxable year.

Prior payment of the tax must be Proven. There must be actual collection and receipt by the
government of the tax sought to be recovered and this requires factual proof (Collector of
Internal Revenue v. Li Yao, GR No. L-11851, December 27, 1963).

Reason: A claim for refund partakes the nature of an exemption which cannot be allowed
unless granted in the most explicit and categorical language (Commissioner of Internal
Revenue v. S.C. Jonhnson & Son, Inc., GR No. 127105, June 25, 1999).

c) Statutory basis and proof of claim for refund or tax credit

d) Proper party to file claim for refund or tax credit

General Rule: The person entitled to ask for a refund/credit is the taxpayer who paid the
same.
1. Where tax has been shifted
The rule applies even if the tax has been actually shifted by the taxpayer to his customers
and even if the tax has been billed as a separate item in the income. This is so because the
tax is by law imposed directly on the seller for selling.

2. Where claimant exempted from both direct and indirect taxes

If the law confers exemption only from direct taxes, the statutory taxpayer is the proper
party to file the claim for refund/credit. On the other hand, if the exemption conferred
applies to both direct and indirect taxes a claimant is entitled to tax refund/credit even if
the applicable tax was merely shifted to it.

3. Where donor’s tax was assumed by done

CTA held that where under the terms of donation, the donor’s tax was assumed by the
done but said tax was advanced by the donor, the done was the proper party to claim
refund of the donor’s tax (2 DE LEON, NIRC Annotated (2016), p. 469-470)
[hereinafter, 2 DE LEON].

J. Government remedies

1. Administrative remedies

a) Tax lien

A legal claim or charge on property, real or personal, established by law as security in default
of the payment of taxes (The Hongkong and Shanghai Banking Corp. v. Rafferty, GR No. L-
13188, November 15, 1918).

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 Validity of a Tax Lien
The lien shall be valid against any mortgagee purchaser or judgment creditor only when
notice of such lien shall be filed by the CIR in the office of the Register of Deeds of the
province or city where the property of the taxpayer is situated or located (NIRC, Sec. 219).

Extinguishment of Tax Liens

Tax liens may be extinguished as follows:
1. By payment or rescission of the tax;
2. By prescription of the right of the government to assess or collect (NIRC, Secs. 203 and
202);
3. By failure to file notice of lien in the office of the Register of Deeds as against
mortgagee, purchaser or judgment creditor (NIRC, Sec. 219);
4. By destruction of the property subject of the lien.

Note: In cases of Nos. 1 & 2, there is no more tax liability; Under Nos. 3 & 4, the taxpayer is
still liable (2 DE LEON, supra at 498-499).

b) Distraint and levy

Distraint
Distraint is a remedy whereby the collection of delinquent taxes is enforced on the goods,
chattels or effects and other personal property of whatever character of the taxpayer (NIRC,
Sec. 205(a)).

Kinds of Distraint
1. Actual Distraint
Resorted to when at the time required for payment, a person fails to pay his delinquent
tax obligation (NIRC, Sec. 207(A)). It is the actual seizure and taking possession of
personal property of the taxpayer (MAMALATEO, Reviewer on Taxation (2014), p. 563)
[hereinafter MAMALATEO, Reviewer].

2. Constructive Distraint
Issued where no actual tax delinquency of the taxpayer is necessary before the same is
resorted to by the government (MAMALATEO, Reviewer, supra at 563).

It is a preventive remedy to forestall possible dissipation of the taxpayer’s assets when

delinquency takes place (ABAN, supra at 238).

Procedure for Actual Distraint

1. Commencement of distraint proceedings;
2. Services of warrant of distraint;
3. Report on the distraint;
4. Notice of sale of distrained properties; and
5. Sale at public auction.

Levy
Refers to the seizure of real properties and interest in or rights to such properties for the
satisfaction of taxes due from the delinquent taxpayer (DIMAAMPO, supra at 168).

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 Note: Improvement attached to the land, by express provision of law (CIVIL CODE, Art.
415), though not physically so united, the sugar quotas are inseparable therefrom, just like
servitudes and other real rights over an immovable, and should be considered as real
property subject to levy, not distraint (Presbitero v. Fernandez, GR No. L-19527, March 30,
1963).

When may levy be effected

After the expiration of the time required to pay the delinquent tax obligation, real property
may be levied upon before, simultaneously, or after the distraint of personal property
belonging to the delinquent taxpayer (NIRC, Sec 207(B)); and the remedy by distraint and
levy may be repeated if necessary until the full amount, including all expenses, is collected
(NIRC, Sec. 217).

In case the warrant of levy is not issued before or simultaneously with the warrant of
distraint and the personal property of the taxpayer is not sufficient to satisfy his tax
delinquency, the CIR or his authorized representative shall, within thirty (30) days after the
execution of the distraint, proceed with the levy on taxpayer’s real property (NIRC, Sec.
207(B)).

Procedure for Levy:

1. Issuance of Warrant of Levy
2. Service of the Warrant of Levy
3. Advertisement of the Sale
4. Public Sale of Property under Levy
5. Redemption of Property Sold
6. Forfeiture to the Government
7. Resale of Real Estate Taken for Taxes
8. Further Distraint and Levy

c) Forfeiture of real property

Forfeiture
The divestiture of property without compensation, in consequence of a default or offense
(Ballantine’s Law Dictionary, p. 519).

Seizure v. Forfeiture
In seizure for the enforcement of tax lien, the residue, after deducting the tax liability and
expenses, will go to the taxpayer (Bank of the Philippine Islands v. Trinidad, GR No. 16014,
October 4, 1941).

In forfeiture, all the proceeds of the sale will go to the coffers of the government (US v.
Surla, GR No. 6536, September 2, 1911).

A taxpayer in forfeiture or seizure cases to enforce tax lien may still be subject to criminal
action even if his property has been forfeited (Garcia v. Collector of Internal Revenue, GR
No. 44372, November 3, 1938).

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 Enforcement of the Remedy of Forfeiture:
1. In case of personal property – by seizure and sale, or destruction of specific forfeited
property; and
2. In case of real property – by judgment of condemnation and sale in a legal action or
proceeding, civil or criminal, as the case may require (NIRC, Sec. 224).

This remedy is different from the provision directing forfeiture of real property in certain
cases in the remedy of levy under Sec. 215. Judicial intervention which is required for
forfeiture of real property under Sec. 224 is not essential since the taxpayer has the right
of redemption (2 DE LEON, supra at 522-523).

d) Suspension of business operation

Power of the Commissioner to Suspend the Business Operations of a Taxpayer

The Commissioner or his authorized representative is hereby empowered to suspend the
business operations and temporarily close the business establishment of any person for any
of the following violations:

1. In the case of a VAT-registered Person

a. Failure to issue receipts or invoices;
b. Failure to file a value-added tax return as required under Section 114; or
c. Understatement of taxable sales or receipts by thirty percent (30%) or more of
his correct taxable sales or receipts for the taxable quarter.

2. Failure of any Person to Register as Required under Section 236. - The temporary
closure of the establishment shall be for the duration of not less than five (5) days
and shall be lifted only upon compliance with whatever requirements prescribed by
the Commissioner in the closure order. (NIRC, Sec. 115)

e) Non-availability of injunction to restrain collection of tax

General Rule: No court shall have the authority to grant an injunction to restrain the
collection of any national internal revenue tax, fee or charge. (NIRC, Sec. 218)

Exception:
When in the opinion of the CTA:
1. Collection of the tax would jeopardize the government and/or taxpayer; and
2. Shall thereafter require the taxpayer to deposit the amount claimed or to file a surety
bond for not more than double the amount with the court (R.A. No. 9282, Sec. 9).

2. Judicial remedies – civil or criminal action

Civil Action
For tax remedy purposes, these are actions instituted by the government to collect internal
revenue taxes including the filing by the government of claims against the deceased taxpayer
with the probate court. The government can collect when the assessment has become final and
executory.

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Can the BIR file a civil action for collection pending decision of the administrative protest?
YES. The request for reinvestigation and reconsideration was in effect considered denied by CIR
when the latter filed a civil suit for collection of deficiency income (Commissioner of Internal
Revenue v. Union Shipping, GR No. L-66160, May 21, 1990).

Form and Mode of Proceeding (NOA):

1. Civil actions shall be brought in the Name of the Government of the Philippines (i.e.,
Republic of the Phil. versus a delinquent taxpayer).
2. It shall be conducted by legal Officers of the BIR.
3. No civil or criminal action for the recovery of taxes shall be filed in court without the
Approval of the CIR (NIRC, Sec. 220), but the latter may delegate such power to his
subordinate officials in the legal service through administrative issuances (NIRC, Sec. 7).

Participation of the Solicitor General

In view of the amendment of Sec. 220 of the NIRC, the written conformity of the CIR and no
longer of the Solicitor General or the Government Corporate Counsel, should be secured (2 DE
LEON, supra at 501).

Sec. 220 of the NIRC must not be understood as overturning the long established procedure
before the SC in requiring the Solicitor General to represent the interest of the Republic. This
court continues to maintain that it is the Solicitor General who has primary responsibility to
appear for the government in appellate proceedings (Commissioner of Internal Revenue v. La
Suerte Cigar, GR No. 144942, July 4, 2002).

Criminal Action
A criminal complaint is instituted to penalize the taxpayer for violation of the NIRC and not to
demand payment

Criminal Cases
All violation of any provision of the NIRC shall prescribe after five (5) years (NIRC, Sec. 281).

When does the period of prescription begin to run:

1. From the day of the commission of the violation of the law (NIRC, Sec. 281); or

In case of willful failure to pay deficiency tax, the five (5)-year prescriptive period should be
reckoned from the date of the final notice and demand for payment of the deficiency taxes.
This is because prior to the receipt of the letter-assessment, no violation has yet been
committed by the taxpayers (Lim, Sr. v. Court of Appeals, GR Nos. L-48134-37, October 18,
1990).

2. If the same be not known at the time from the discovery thereof and the institution of judicial
proceedings for its investigation and punishment (NIRC, Sec. 281).

Necessity of Judicial Proceeding

The Supreme Court held that in case of falsity or fraud with intent to evade the tax, the right of
the government to collect through criminal action is imprescriptible because the said remedy of
collection through criminal action is only deemed instituted from discovery thereof and the

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institution of judicial proceedings for its investigation and punishment (Lim, Sr. v. Court of
Appeals, GR Nos. L-48134-37, October 18, 1990).

Interruption of Prescriptive Period

The period shall be interrupted:
1. When proceedings are instituted against the guilty persons; or

Note: The period shall begin to run again if the proceedings are dismissed for reason not
constituting jeopardy (NIRC, Sec. 281).

2. When the offender is absent from the Philippines (NIRC, Sec. 281).
Two Common Crimes Punishable
1. Attempt to evade or defeat tax (NIRC, Sec. 254); and
2. Failure to file return, supply correct and accurate information, pay tax, withhold and remit
tax and refund excess taxes withheld on compensation (NIRC, Sec. 255).

Elements for Non-Filing of Tax Return

1. The accused was a person required to make or file a return;
2. The accused failed to make or file the return at the time required by law; and
3. The failure was willful.

Elements for Failure to Supply Correct Information

1. The accused is a person required under NIRC or by rules and regulation to pay any tax, make
a return, keep any record or supply correct and accurate information;
2. The accused failed to supply correct and accurate information; and
3. Such failure was willful.

Willful Blindness Doctrine

A taxpayer can no longer raise the defense that the error in their tax returns are not their
responsibility or that it is the fault of the accountants they hired (INGLES, supra at 361).

Criminal action in violation of the NIRC also constitutes a collection method because the
judgment in the criminal case shall not only impose the penalty but shall also order the payment
of the taxes subject of the criminal case as finally decided by the CIR (NIRC, Sec. 205).

Any person convicted of a crime penalized by the NIRC shall in addition to being liable for the
payment of the tax, be subject to the penalties imposed therein (NIRC, Sec. 253(a))

Important Principles on Criminal Actions

1. Assessment is not necessary before filing a criminal action and criminal action may be filed
during the pendency of an administrative protest in the BIR.
2. Effect of acquittal of the taxpayer in a criminal action
3. Effect of payment of tax due after apprehension
4. Effect of subsequent satisfaction of civil liability
5. No subsidiary imprisonment
6. Criminal action may be filed despite the lapse of the period to file a civil action for collection
of taxes
7. Filing of a criminal action is not an implied assessment by the CIR
8. No reservation to file civil action

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 9. Assessment is still necessary even if the accused is found guilty under Sec. 255 of the NIRC

Civil Action Criminal Action

Purpose
Instituted by the government to collect internal Instituted to penalize a taxpayer for violating
revenue taxes the NIRC and not to demand payment
Assessment
Assessment must be final and executory Assessment is not necessary before filing a
criminal action
Prescription
Five (5) years from the date of assessment File (5) years from the day of the commission
of the violation of the law or the discovery of
the crime.
Effect of Pending Administrative Protest
The BIR can file a civil action pending the Protesting an assessment cannot stop criminal
decision of an administrative protest. prosecution
Form
Comply with NIRC, Sec. 20 Comply with NIRC, Sec. 20

III. LOCAL TAXATION [LOCAL GOVERNMENT CODE (LGC) OF 1991, as amended]

A. Local government taxation

Power of the local government units (LGUs) to impose and collect taxes on its constituents in order
to raise revenues to enable them to perform the functions for which they have been organized (1
DOMONDON, Bar Reviewer (2006), p. 651) [hereinafter, 1 DOMONDON, Bar Reviewer].

1. Fundamental principles

(PIE-CUP-UP)
1. Levied and collected for Public purposes;
2. Revenues collected under the LGC shall Inure solely to the benefit of, and subject to
disposition by the LGU levying the tax or other imposition unless otherwise specifically
provided therein;
3. Shall be Equitable and based as much as possible on the taxpayer’s ability to pay;
4. Shall not be Contrary to law, public policy, national economically policy, or in restraint of
trade;
5. Shall be Uniform in each local LGU;
6. Collection of local taxes and other impositions shall not be let to any Private person;
7. Shall not be Unjust, excessive, oppressive, or confiscatory; and
8. Each LGU shall, as far as practicable, evolve a Progressive system of taxation (LGC, Sec.
130).

2. Nature and source of taxing power

a) Grant of local taxing power under the LGC

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 1. Not inherent but a direct grant – the taxing power of provinces, cities, municipalities and
barangay, though not inherent, is not a mere delegation by the legislative body but a
direct grant from the Constitution (CONST. Art. X, Sec. 5).

The power to tax is no longer vested exclusively on Congress; local legislative bodies are
now given direct authority to levy taxes, fees and other charges pursuant to Article X,
Section 5 of the 1987 Constitution (Batangas Power Corp. v. Batangas City, G.R. No.
152675, April 28, 2004).

Where there is neither a grant nor a prohibition by statute, the taxing power must be
deemed to exist although Congress may provide statutory limitations and guidelines.

Reason: To safeguard the viability and self-sufficiency of LGUs (Manila Electric Co. v.
Province of Laguna, G.R. No. 131359, May 5, 1999)

2. Limited – it is neither plenary nor absolute. While a direct grant, the same is limited and
would be subject to such guidelines as Congress has provided such as progressively, etc.
3. Legislative – It may be exercised only by the local legislatures i.e., the Sanggunian.
4. Territorial – It can only be exercised within the territorial jurisdiction of the LGU.

b) Authority to prescribe penalties for tax violations

1. The Sanggunian is authorized to prescribe fines or other penalties for violations of tax
ordinances.
a. in no case shall fines be less than P1,000 nor more than P5,000
b. nor shall the imprisonment be less than one (1) month nor more than six (6) month.
2. Such fine or other penalty shall be imposed at the discretion of the court.
3. The Sangguniang Barangay may prescribe a fine of not less than P100 nor more than
P1,000.

c) Authority to grant local tax exemptions

Local government units may, through ordinances duly approved, grant tax exemptions,
incentives or reliefs under such terms and conditions, as they may deem necessary.

d) Withdrawal of exemptions
The withdrawal of tax exemptions or incentives provided in the LGC can only affect those
franchises granted prior to the effectivity of the law. Because petitioner’s franchise was
granted 2 month after the effectivity of the said law, it is thus not covered by the said
withdrawal. However, the “in lieu of all taxes” clause applies only to national internal
revenue taxes and not to local taxes. Furthermore, the “in lieu of all taxes” clause in R.A.
7294 was rendered ineffective by the advent of the VAT Law (Smart Communications, Inc.
v. City of Davao, G.R. No. 155491, September 16, 2008).

e) Authority to adjust local tax rates

Adjustment of the tax rates as prescribed herein should not be oftener than once every five
(5) years, and in no case shall such adjustment exceed ten percent (10%) of the rates fixed
under the LGC.

f) Residual taxing power of local governments

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 To levy taxes, fees or charges on any base or subject NOT:
1. Specifically enumerated in LGC
2. Taxed under the provisions of the NIRC, as amended, and
3. Other applicable laws

Conditions:
1. That the taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory or
contrary to declared national policy
2. The ordinance levying such taxes, fees or charges shall not be enacted without any prior
public hearing conducted for the purpose.

Limitations of the Residual Power

1. Constitutional limitations on taxing power
2. Common limitations prescribed in Sec. 133 of the LGC
3. Fundamental principles governing the exercise of the taxing power of the LGUs
prescribed under Sec. 130 of the LGC
4. The ordinance levying such residual taxes shall not be enacted without any prior public
hearing conducted for the purpose and
5. The principle of preemption.

g) Authority to issue local tax ordinances

Local Sanggunians has the authority to enact the following tax ordinance:
1. Imposing taxes, fees or charges or to generate revenue;
2. Prescribing penalties for violation of tax ordinance;
3. Granting local tax exemptions and incentives; and
4. Condoning tax delinquencies (V DOMONDON Taxation, supra at 65).

3. Local taxing authority

a) Power to create revenues exercised through Local Government Units (LGUs)

The power to impose a tax, free, or charge or to generate revenue under this Code shall be
exercised by the Sanggunian of the local government unit concerned through an appropriate
ordinance (LGC, Sec. 132).
1. Sangguniang Panglalawigan – for provinces
2. Sangguniang Panglungsod – for cities
3. Sangguniang Pambayan – for municipalities
4. Barangay Council – for barangays or barrios (LGC, Section 41(b))

Note: The exercise of the power to tax by the local legislative assembly is subject to the veto
power of the local chief executive (LGC, Sec. 55)

b) Procedure for approval and effectivity of tax ordinances

1. Filing of proposal. The proposed tax or revenue ordinance is prepared.

2. Publication or posting. Within ten (10) days from filing the same, it shall be posted for
three (3) consecutive days in a newspaper of local circulation or shall be posted

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 simultaneously in at least two (2) conspicuous places within the territorial jurisdiction of
the LGU where there are no newspapers of local circulation (IRR of the LGC, Art. 276).
Note: The tax ordinance will be null and void if it fails to comply with such publication
requirement (Coca-Cola v. City of Manila, G.R. No. 156252, June 27, 2006).
3. Notification. The Sanggunian shall cause the sending of written notices of the proposed
ordinance enclosing a copy to interested of affected parties operating or doing business
within the territorial jurisdiction of the LGU. The notice(s) shall specify the date(s) and
venue of the public hearing (Coca-Cola v. City of Manila, G.R. No. 156252, June 27,
2006).
4. Mandatory public hearing. The public hearing shall be held no less than ten (10) days
from the time notices were sent out, posted or published (Ongsuco v. Malones, G.R. No.
182065, October 27, 2009).
Note: While the Sanggunians are required to conduct public hearings prior to the
enactment of tax ordinances and revenue measures (LGC, Sec. 186 and 187), the
National Legislature, on the other hand has the discretion whether or not they would
conduct public hearings before the enactment of tax laws (SABABAN, Taxation Law
Review (2008), p. 9) [hereinafter, SABABAN]
5. Reading of the proposal
6. Approval of ordinance (IRR of the LGO, Art. 108 & 109)
a. The ordinance must be approved by a majority of the members of the Sanggunian
present provided that there is a quorum
b. It shall be presented to the Local Chief Executive (LCE) who may either approve or
veto the proposed ordinance. The veto shall be communicated to the Sanggunian
within 15 days (in case of a province) and 10 days (in case of a city or a municipality,
otherwise, the ordinance shall be deemed approved).
Note: the veto may be based on ground that the proposed ordinance is ultra vires or
prejudicial to the public welfare. The LCE may veto an ordinance or resolution only
once.
c. The Sanggunian concerned may override the veto of the LCE by 2/3 vote of all its
members.
7. Review of the Approved Ordinance by Higher Sanggunians (IRR of the LGC, Arts.
110-111)
a. By the Sangguniang Panlalawigan
i. Within 3 days after approval, the secretary to the sangguniang
panglungsod/bayan shall transmit to the sangguniang panlalawigan for review,
copies of approved ordinances.
ii. If no action has been taken by the sangguniang panlalawigan within thirty (30)
days after submission of such an ordinance, the same shall be presumed valid.
b. By the Sangguniang Panlungsod/Bayan
i. Within 10 days after its enactment, the sangguniang barangay shall furnish copies
of the approved ordinance to the sangguniang panlungsod/bayan for review.
ii. The sangguniang panlungsod/bayan fails to take action on barangay ordinances
within 30 days from receipt thereof, the same shall be deemed approved.

8. Publication of Tax ordinances and Revenue Measures. Within 10 days after their
approval, certified true copies of all tax ordinances or revenue measures shall be
published for 3 consecutive days in a newspaper of local circulation or posted in at least
2 conspicuous and publicly accessible places where there are no newspapers of local
circulation (IRR of the LGC, Art. 276).

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 9. Effectivity. Tax ordinances and revenue measures shall take effect 15 days after its
publication unless otherwise provided therein (CIVIL CODE, Art. 2)

4. Scope of taxing power

Provinces – Except as otherwise provided in this Code, the province may levy only the taxes,
fees, and charges as provided in this Article. (LGC, Sec. 134)

Municipalities – Except as otherwise provided in this Code, municipalities may levy taxes, fees,
and charges not otherwise levied by provinces. (LGC, Sec. 142)

Cities – Except as otherwise provided in this Code, the city, may levy the taxes, fees, and
charges which the province or municipality may impose: Provided, however, That the taxes,
fees and charges levied and collected by highly urbanized and independent component cities
shall accrue to them and distributed in accordance with the provisions of this code. The rates of
taxes that the city may levy may exceed the maximum rates allowed for the province or
municipality by not more than fifty percent (50%) except the rates of professional and
amusement taxes. (LGC, Sec. 151)

Barangays – The Barangays may levy taxes, fees, and charges, as provided in this Article,
which shall exclusively accrue to them:
(a) Taxes – On stores or retailers with fixed business establishments with gross sales or receipts
of the preceding calendar year of Fifty Thousand pesos (P50,000.00) or less, in the case of
cities and Thirty thousand pesos (P30,000.00) or less, in the case of municipalities, at a rate
not exceeding one percent (1%) on such gross sales or receipts.
(b) Service Fees or Charges – Barangays may collect reasonable fees or charges for services
rendered in connectioin with the regulation or the use of Barangay-owned properties or
service facilities such as palay, copra, or tobacco dryers.
(c) Barangay Clearance – No city or municipality may issue any license or permit for any
business or activity unless a clearance is first obtained from the Barangay where such
business or activity is located or conducted. For such clearance, the Sangguniang Barangay
may impose a reasonable fee. The application for clearance shall be acted upon within seven
(7) working days from the filing thereof. In the event that the clearance is not issued within
the said period, the city or municipality may issue the said license or permit.
(d) Other Fees and Charges - The Barangay may levy reasonable fees and charges:
(1) On commercial breeding of fighting cocks, cockfighting and cockpits;
(2) On places of recreation which charge admission fees; and
(3) On billboards, signboards, neon signs, and outdoor advertisements. (LGC, Sec. 152)

5. Specific taxing power of LGUs

A. Provinces
1. Tax on transfer of real property ownership
2. Tax on business of printing and publication
3. Franchise tax
4. Tax on sand, gravel and other quarry resources extracted from public land
5. Professional tax
6. Amusement tax

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 7. Annual fixed tax for every delivery truck or van of manufacturers or producers,
wholesalers of, dealers, or retailer, in certain products

B. Municipalities
1. Tax on manufacturers, assemblers, re-packers, processors, brewers, distillers, rectifiers,
and compounders of liquors, distilled spirits, and wines or manufacturers of any article of
commerce of whatever kind or nature
2. Tax on wholesalers, distributors, or dealers in any article of commerce of whatever kind
or nature
3. Tax on exporters, and on manufacturers, millers, producers, wholesalers, distributors,
dealers or retailers of essential commodities
4. Tax on retailers
5. Tax on contractors and other independent contractors
6. Tax on banks and other financial institutions
7. Tax on peddlers engaged in the sale of any merchandiser or article of commerce
8. Tax on any business, not otherwise specified in the preceding paragraphs, which the
Sanggunian concerned may deem proper to tax

C. Cities
D. Barangays

6. Taxing powers of provinces (Exclude: Rates)

a) Tax on transfer or real property ownership

Transaction Taxed – Sale, donation, barter, or any other mode of transferring ownership or
title of real property.

Tax Rate – not more than 50% of 1% (0.5%)

Tax Base – The total consideration involved or of the fair market value in case the monetary
consideration involved in the transfer is not substantial, whichever is higher

Exception – Transfer or disposition pursuant to R.A. 6657 (Comprehensive Agrarian

Reform Program) (LGC, Sec. 135)

Person Liable to Pay – Seller, donor, transferor, executor, or administrator

Time of Payment – Within 60 days from the date of the execution of the deed or from the
date of the decedent’s death.

Embassies, consulates, and other diplomatic offices are deemed part of the territory of the
country they represent and therefore, are exempt from any national or local taxes based on
the generally accepted principle that the tax laws of one country are not applicable to
another. Consequently, the purchase of property by the Embassy of the Islamic Republic of
Iran of a real property in the Republic of Iran of a real property in the Republic of the
Philippines for official use as the ambassador’s residence was considered as tax exempt and
the transfer taxes paid by the buyer under protest was ordered refunded (DOF 2nd
Indorsement dated February 10, 1993 to the Treasurer of Makati).

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b) Tax on business of printing and publication

Transaction Taxed – Business of printing and/or publication of books, cards, posters, etc.

Tax Rate – a) Not more than 50% of 1%; or b) In case of a newly started business: not more
than 1/20 of 1%

Tax Base – a) Gross annual receipts for the preceding year; or b) In case of a newly started
business: capital investment

Exception – Printing of DepED/CHED/TESDA prescribed texts or references

The press is not exempt from the taxing power of the State and that what the Constitutional
guarantee of free press prohibits are laws which single out or target a group belonging to the
press for a special treatment or which in any way discriminate the press on the basis of the
content of the publication (Tolentino v. Secretary of Finance, G.R. No. 115455, October 31,
1995).

General Rule: Only cities and municipalities can impose business taxes.

Exception: Provinces can impose business taxes on business of printing and publication.

c) Franchise tax

Transaction Taxed – Enjoyment of a franchise (secondary franchise)

Tax Rate – a) Not more than 50% of 1%; or b) In case of a newly started business: not more
than 1/20 of 1%.

Tax Base – a) Gross annual receipts for the preceding year; or b) In case of a newly started
business: capital investment.

No Exception – Notwithstanding any exemption granted by any law or other special law, the
province may impose a tax on businesses enjoying a franchise (LGC, Sec. 137).

A franchise tax is a tax on the privilege of transacting business in the state and exercising
corporate franchise granted by the state (National Power Corp. v. City of Cabanatuan, G.R.
No. 149110, April 9, 2003).

The tax covers special or secondary franchises which refer to the right or privileges conferred
upon an existing corporation such as the right to use the streets of a municipality to lay pipes
of tracks, erect poles or string wires. To be covered by franchise tax, two requisites must be
satisfied:
a. It has a “franchise” in the sense of a secondary or special franchise; and
b. It is exercising its rights or privileges under this franchise within the territory of the LGU
(National Power Corp. v. City of Cabanatuan, G.R. No. 149110, April 9, 2003).

Simultaneous imposition of Franchise and Local Business Tax

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 While the ‘city of business tax’ and the ‘franchise tax’ are both based on the gross receipts
and sales of petitioner’s business, the 2 taxes, however are different in terms of their nature
or character. A business tax is imposed on the privilege of engaging in the business of
contracting a system of communications, whereas a franchise tax is imposed for the exercise
of enjoying a franchise. Clearly, while the city tax and franchise tax are both imposed by the
same taxing authority, on the same subject matter and for the same taxing period, the
imposition thereof, however, does not constitute double taxation as they are not of the same
kind of character (Sky Cable Corp. v. Quezon City, CTA AC No. 102, February 10, 2014).

d) Tax on sand, gravel and other quarry services

Transaction Taxed – Extraction of ordinary stones, gravel, sand, earth and other quarry
resources as defined under the NIRC, from public lands or from the beds of seas, lakes, river,
streams, creeks, and other public waters within its territorial jurisdiction.

Tax Rate – Not more than 10%

Tax Base – Fair market value in the locality per cubic meter of the subject

Who Issues Permit – Issued exclusively by the provincial governor pursuant to the
ordinance of the Sangguniang Panlalawigan

Distribution of Tax Proceeds – a) Province – 30%; b) Component city or municipality

where resources extracted – 30%; c) Barangay where resources extracted – 40%

Notes: The authority to impose taxes and fees for extraction of sand and gravel belongs to
the province, and not to the municipality where they are found (Municipality of San
Fernando La Union v. Sta. Romana, G.R. No. L-30159, March 31, 1987).

Province has no authority to impose taxes on stone, sand, gravel, earth and cother quarry
resources extracted from private lands because such tax is a tax upon the performance,
carrying on, or, exercise of an activity already being taxed under the NIRC. The common
limitations prohibit the LGU from imposing such tax (V DOMONDON, Taxation, supra at
103).

The payment of local tax on sand, gravel and quarry resources and obtaining of business
permit from the local government are pre-requisites before one can engage in quarrying
operations (Province of Cagayan v. Lara, G.R. No. 188500, July 24, 2013).

e) Professional tax

Transaction Taxed – Exercise or practice of profession requiring government licensure

examination

Tax Rate – Not to exceed P300

Tax Base – Reasonable classification by the Sangguniang Panlalawigan

Exception – Professionals exclusively employed in the government

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 Time of Payment – Payable annually on or before January 31 or before beginning the
practice of the profession

Place of Payment – Province where he practices his profession or where the principal office
is located.

Notes: Employer of a person subject to professional tax shall require payment by that person
of the tax on his profession before employment and annually thereafter (LGC, 139(c)).

Tax is to be paid only once every year. A person who has paid the corresponding
professional tax shall be entitled to practice his profession in any part of the Philippines
without being subjected to any other national of local tax, license, or fee for the practice of
such profession (LGC, Sec. 139(b)).

The professionals subject to tax herein imposed are only those who have passed the bar
examinations, or in any board or other examinations conducted by the Professional
Regulation Commission (PRC).

For example, a lawyer who is also a Certified Public Accountant (CPA) must pay the
professional tax imposed on lawyers and that fixed for CPAs, if he is to practice both
professions (IPR of LGC, Art. 228(f)).

f) Amusement tax

Transaction Taxed – Ownership, lease or operation of theaters, cinemas, concert halls,

circuses, boxing stadium and other places of amusement

Tax Rate – Not more than 10% (as amended by R.A. 9640 (An Act Amending Sec. 140(A) of
the LGC, May 21, 2009))

Tax Base – Gross receipts from admission fees

Exception – Operas, concerts, dramas, recitals, painting and art exhibitions, flower shows,
musical programs, literary and oratorical presentation. Except (Taxable): Pop, rock, or
similar concerts

Distribution of Proceeds – Tax shall be shared equally by the province and municipality
where such amusement places are located.

Amusement is a pleasurable diversion and entertainment. It is synonymous to relaxation,

avocation, pastime or fun (LGC, Sec. 131(b)).

Amusement places include theaters, cinemas, concert halls, circuses and other places of
amusement where one seeks admission to entertain oneself by seeing or viewing the show or
performances (LGC, Sec. 131(c)).

Businesses not subject to Amusement Tax

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 a. Resorts, swimming pools, bath houses, hot springs, and tourists spots – cannot be
considered as among the ‘other places of amusement’ contemplated by Sec. 140 of the
LGC and which may properly be subject to amusement tax (Principle of Ejusdem
Generis) (Pelizloy Realty Corp. v. Province of Benguet, G.R. No. 183137, April 10,
2013).
b. Professional basketball games – they do not fall within the meaning of “other places of
amusement” under the same category as theaters, cinematographs, concert halls and
circuses which basically belong to artistic forms of entertainment, while the former cater
sports and gaming (Principle of Ejusdem Generis) (Philippine Basketball Association vs.
Court of Appeals, G.R. No. 119122, August 8, 2000).

It is the intent of the legislature not to impose VAT on persons already covered by the
amusement tax. Thus, the gross receipts derived by respondent from admission ticket in
showing motion pictures, films or movies are subject to the amusement tax and not VAT
under the NIRC (Commissioner of Internal Revenue v. SM Prime Holdings, Inc., G.R. No.
183505, February 26, 2010).

Place upon which Provinces/Cities cannot impose Amusement Tax (because the NIRC
already imposes Amusement Tax):
1. Cockpits;
2. Cabarets;
3. Night or day clubs;
4. Boxing exhibitions;
5. Professional basketball games;
6. Jai-Alai; and
7. Racetracks (NIRC, Sec. 125).

g) Tax on deliver truck/van

Transaction Taxed – Used by manufacturer, producers, wholesalers, dealers, retailers, of

truck, van, vehicle in the delivery or distribution of distilled spirits, fermented liquors,
softdrinks, cigar and cigarettes and other products, determined by the Sangguniang
Panlalawigan, to sale outlets or consumers, whether directly or indirectly, within the
province.

Tax Rate – not to exceed P500

Tax Base – Every truck, van or vehicle

Note: They shall be exempt from the tax on peddlers which may be imposed by
municipalities (LGC, Sec. 141(b)).

7. Taxing powers of cities (Exclude: Rates)

Except as otherwise provided in the LGC, the city may levy the taxes, fees, and charges which
the province or municipality may impose (LGC, Sec. 151).

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 1. The taxes, fees, and charges levied and collected by highly urbanized and independent
component cities shall accrue to them and distributed in accordance with the provisions of
the Code.
2. The rate of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than 50%.

Exception: The rates of professional and amusement taxes.

Under the LGC, there are three types of cities: Component Cities (CCs), Independent
Component Cities (ICCs) and Highly Urbanized Cities (HUCs). ICCs and HUCs are
independent of the province (LGC, Secs. 451-452). This means that taxes, fees, and charges
levied and collected by ICCs and HUCs accrue solely to them (LGC, Sec. 151).

8. Taxing powers of municipalities (Exclude: Rates)

a) Tax on various types of businesses

A municipality may impose taxes on the following businesses:

1. On manufacturers, assemblers, re-packers, processors, brewers, distillers, rectifiers,
and compounders of liquors, distilled spirits, and wines or manufacturers of any
article of commerce of whatever kind of nature;

Tax Rate: Graduated scale of P165 - P24,375 per annum or a tax rate not exceeding
37½% of 1%.

Tax Base: Gross sales or receipts for the preceding calendar year.

2. On wholesalers, distributors, or dealers in any article of commerce of whatever kind

of nature;

Tax Rate: Graduated scale of P18,000 – P10,000 per annum or rate not exceeding 50%
of 1%.

Tax Base: Gross sales or receipts for the preceding calendar year.

Wholesale – Sale where the purchaser buys or imports the commodities for resale to
persons other than the end user regardless of the quantity of the transaction (LGC, Sec.
131(z)).

Dealer – One whose business is to buy and sell merchandise, goods, and chattels as a
merchant. He stands immediately between the producer or manufacturer and the
consumer (LGC, Sec. 131(k)).

3. On exporters, and on manufacturers, millers, producers, wholesalers, distributors,

dealers or retailers of essential commodities;

Tax Rate: No exceeding ½ of the rates prescribed under Nos. 1, 2 & 4.

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 Essential Commodities (RW-CLAP-SC)
1. Rice and corn;
2. Wheat or cassava flour, meat, dairy products, locally manufactured, processed or
preserved food, sugar, salt and other agricultural, marine, and fresh water products,
whether in their original state or not;
3. Cooking oil and cooking gas;
4. Laundry soap, detergents, and medicine;
5. Agricultural implements, equipment and post- harvest facilities, fertilizers, pesticides,
insecticides, herbicides and other farm inputs;
6. Poultry feeds and other animal feeds;
7. School supplies; and
8. Cement.

4. On retailers;

Tax Rate: Two percent (2%) for P400,000 or less; 1% for the excess over P400,000.

Tax Base: Gross sales or receipts for the preceding calendar year.

Note: Barangays shall have the exclusive power to levy the business tax on retailers as
provided under Sec. 152 of the LGC, if gross sales or receipts do not exceed P50,000 in
case or cities or P30,000 in case of municipalities.

Retail – a sale where the purchaser buys the commodity for his own consumption,
irrespective of the quantity of the commodity sold (LGC, Sec. 131(w)).

5. On contractors and other independent contractors;

Tax Rate: Graduated scale of P27.50 – P11,500 per annum or rate not exceeding 50% of
1%

Tax Base: Gross sales or receipts for the preceding calendar year.

Contractor – includes persons, natural or juridical, not subject to professional tax under
Sec. 139 of the LGC, whose activity consists essentially of the sale of all kinds of
services for a free, regardless of whether or not the performance of the service calls for
the exercise or use of the physical or mental faculties of such contractor or his employees
(LGC, Sec. 131(h)).

Transportation contractors are not included in the term “contractor” a defined in Sec. 131
of LGC. The taxing power of LGUs does not extend to taxes on the gross receipts of
transportation contractors (LGC, Sec. 133(j)).

6. On banks and other financial institutions;

Tax Rate: Not exceeding 50% of 1%.

Tax Base: Gross sales or receipts for the preceding calendar year derived from interests,
commissions and discounts from lending activities, income from financial leasing,

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 dividends, rentals on property and profit from exchange or sale of property, insurance
premium.

Note: All other income and receipt of banks and financial institutions not otherwise
enumerated above shall be excluded from the taxing authority of the LGU (IRR of LGC,
Art. 232(f)).

7. On peddlers engaged in the sale of any merchandise or article of commerce; and

Tax Rate: Not exceeding P50 per peddler annually.

Peddler – any person who, either for himself or on commission, travels from place to
place and sells his goods or offers to sell and deliver the same (LGC, Sec. 131(t)).

8. On any business, not otherwise specified in the preceding paragraphs, which the
Sanggunian concerned may deem proper to tax.

Conditions:
a. Business not subject to VAT or percentage tax under NIRC; or
b. If the business is subject to VAT or percentage tax under NIRC, the tax rate shall not
exceed 2% of gross sales/receipts of the preceding calendar year (LGC, Sec. 143(h)).

Exception: Any business engaged in the production, manufacture, refining, distribution

or sale of oil, gasoline, and other petroleum products shall not be subject to any local tax
(IRR of LGC, Art. 232(h)).

b) Ceiling on business taxes imposable by LGUs within Metro Manila

The municipalities within Metro Manila may levy taxes at rates which shall not exceed by
50% the maximum rates prescribed in Sec. 143 of the LGC for another municipalities (LGC,
Sec. 144).

c) Tax on retirement of business

A business subject to tax shall, upon termination thereof, submit a sworn statement of its
gross sales or receipts for the current year.

If the tax paid during the year be less than the tax due in said gross sales or receipts of the
current year, the difference shall be paid before the business is considered officially retired.

d) Rules on payment of business taxes

1. The taxes shall be payable for every separate or distinct establishment or place where
business subject to the tax is conducted and one line of business does not become exempt
by being conducted with some other business for which such tax has been paid.

The basis for the computation of business tax is the gross sales/receipts for the preceding
year and the latest income tax returns and financial statements for purposes of verifying
the accuracy of the declarations that they have made the previous year.

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 Presumptive Income Level Approach Assessment (PILAA)
The PILAA may be used only if the taxpayer is unable to provide proof of its income
(First Planters Pawnshop, Inc. v. City Treasurer of Pasay City, CTA EB No. 501,
December 10, 2010).

2. The tax on a business must be paid by the person conducting the same;

3. In cases where a person conducts or operates 2 or more of the businesses mentioned in

Sec. 143 of LGC which are subject to:
a. Same rate of tax – the tax shall be computed on the combined total gross sales or
receipts of the said 2 or more related businesses.
b. Different rates of tax – the gross sales or receipts of each business shall be separately
reported for the purpose of computing the tax due from each business.

e) Fees and charges for regulation & licensing

1. The municipality may impose and collect such reasonable fees and charges on business
and occupation (LGC, Sec. 147);

Exception: Professional taxes reserved for provinces on the practice of any profession or
calling, commensurate with the cost of regulation, inspection and licensing before any
person may engage in such business or occupation, or practice such profession or calling.

2. Fees for sealing and licensing of weights and measures (LGC, Sec. 148); and

3. Fishery rentals, fees and charges (LGC, Sec. 149).

f) Situs of tax collected

1. When there is a branch or sales office or warehouse in the city or municipality

where the sale was made – tax shall accrue and shall be paid to the municipality where
such branch or sales outlet is located.

Branch office – a fixed place in a locality which conducts operations of the business as
an extension of the principal office (IRR of the LGC, Art. 243(a)(2)).

Offices used only as display areas of the product where no stocks or items are stored for
sale although orders for the products may be received thereat, are not branch or sales
offices as herein contemplated. A warehouse which accepts orders and/or issues sales
invoices independent of a branch with sales office shall be considered as sales office
(ABAN, supra at 415).

2. Where there is no branch, sales office, or warehouse – the sale shall be duly recorded
in the principal office and the taxes due shall accrue and shall be paid to such city or
municipality.

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 Principal office – the head or main office of the business appearing in pertinent
documents submitted to the SEC and specifically mentioned in the Articles of
Incorporation (IRR of the LGC, Art. 243(a)(1)).

3. If there is no branch but there is a factory, project office, plant, or plantation in

pursuit of business
a. Thirty percent (30%) of all sales recorded in the principal office – taxable by the city
or municipality where the principal office is located (IRR of LGC, Art. 243(b)(3));
b. Seventy percent (70%) of all sales recorded in the principal office – taxable by the
city or municipality where the factory, project office, plant or plantation is located
(IRR of LGC, Art. 243(b)(3)); if the plantation is located in a locality other that where
the factory is located, the 70% sales allocation shall be divided as follows:
i. Sixty percent (60%) – city or municipality where the factory is located (IRR of
LGC, Art. 243(b)(4)(i));
ii. Forty percent (40%) – city or municipality where the plantation is located
(IRR of LGC, Art. 243(b)(4)(ii)).

Where there are two or more factories, project offices, plants or plantations, located
in different localities, the 70% sales allocation mentioned above shall be prorated
among the localities where the factories, project offices, plants, and plantations are
located in proportion to their respective volumes of production during the period for
which the tax is due (IRR of LGC, Art. 243(b)(5)).

Plantation – a tract of agricultural land where trees or seedlings are planted, whether
fruit bearing or not, uniformly spaced or seeded by broadcast methods or normally
arranged to allow highest production. Inland fishing ground shall be considered as
plantation (IRR of the LGC, Art. 243(a)(4)).

4. Where Sales are made by Route Trucks, Vans or Vehicles (IRR of LGC, Art. 243(d))
a. Sale made in the locality where manufacturer, producer, wholesaler, retailer or dealer
has a branch, sales office or warehouse, the sales are recorded in the branch, sales
office or warehouse – tax due is paid to LGU where such branch, sales office or
warehouse is located.
b. Sale made in the locality where manufacture, producer, wholesaler, retailer or dealer
has no branch, sales office or warehouse – Sales are recorded in the branch, sales
office or warehouse from where the route trucks withdraw their products for sale and
tax due is to be paid to the LGU where such branch, sales office or warehouse is
located.

Notes:
1. As long as there is a branch, the sale will be recorded there.
2. The rules for allocation apply only if there is no branch.
3. The sales allocation shall be applied irrespective of whether or not sales are made in the
locality where the factory, project office, plant, or plantation is located.
4. A city can validly tax orders booked and paid for in the company’s branch office in the
city, even if the orders are delivered outside the city (Philippine Match v. City of Cebu,
G.R. No. L-30745, January 18, 1978).

9. Taxing powers of barangays (Exclude: Rates)

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 The Barangays may levy taxes, fees, and charges, as provided in this Article, which shall
exclusively accrue to them:

(a) Taxes – On stores or retailers with fixed business establishments with gross sales or receipts
of the preceding calendar year of Fifty Thousand pesos (P50,000.00) or less, in the case of
cities and Thirty thousand pesos (P30,000.00) or less, in the case of municipalities, at a rate
not exceeding one percent (1%) on such gross sales or receipts.

(b) Service Fees or Charges – Barangays may collect reasonable fees or charges for services
rendered in connectioin with the regulation or the use of Barangay-owned properties or
service facilities such as palay, copra, or tobacco dryers.

(c) Barangay Clearance – No city or municipality may issue any license or permit for any
business or activity unless a clearance is first obtained from the Barangay where such
business or activity is located or conducted. For such clearance, the Sangguniang Barangay
may impose a reasonable fee. The application for clearance shall be acted upon within seven
(7) working days from the filing thereof. In the event that the clearance is not issued within
the said period, the city or municipality may issue the said license or permit.

(d) Other Fees and Charges – The Barangay may levy reasonable fees and charges:
(1) On commercial breeding of fighting cocks, cockfighting and cockpits;
(2) On places of recreation which charge admission fees; and
(3) On billboards, signboards, neon signs, and outdoor advertisements. (Sec. 152, LGC)

10. Common revenue raining powers

a) Service fees and charges – Local government units may impose and collect such reasonable
fees and charges for services rendered.

b) Public utility charges – Public Utility Charges for the operation of public utilities owned,
operated and maintained by LGUs within their jurisdiction.

c) Toll fees or charges – Toll fees or charges for the use of any public road, pier or wharf,
waterway, bridge, ferry or telecommunication system funded and constructed by the local
government unit concerned Exceptions: a. Officers and enlisted men of the AFP and PNP; b.
Post office personnel delivering mail; and c. Physically handicapped and disabled citizens
who are sixty-five (65) years or older.(Sec. 152, LGC)

When public safety and welfare so requires, the sanggunian concerned may discontinue the
collection of the tolls, and thereafter the said facility shall be free and open for public use.

11. Community tax

It is a poll or capitation tax imposed upon the residents of a city or municipality (V

DOMONDON, Taxation, supra at 161).

Authorized to Cities or municipalities (LGC, Sec. 156)

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Levy
Persons 1. Individuals
Liable 2. Juridical Persons
Individuals 1. Every inhabitant of the Philippines (regardless of citizenship);
Liable (LGC, 2. Who is 18 years or over; and
Sec. 157) a. Who has been regularly employed on a wage or salary basis for at least
30 consecutive working days during any calendar year; or
b. Who is engaged in business or occupation; or
c. Who owns a real property with an aggregate assessed value of P1,000 or
more; or
d. Who is required by law to file an income tax return.
Juridical Every corporation no matter how created or organized, whether domestic or
Persons resident foreign, engaged in or doing business in the Philippines.
Liable (LGC,
Sec. 158)
Exempted Absolutely (LGC, Sec. 159);
from Paying 1. Diplomatic; and
the Tax 2. Consular Representatives.
Exempt for the rest of the year:
1. Transient visitors when their stay in the Philippines does not exceed 3
months (LGC, Sec. 159);
2. Persons who come to reside in the Philippines on or after July 1 (LGC,
Sec. 161);
3. Persons who become 18 years of age or on after July 1 (LGC, Sec. 161);
4. Persons who cease to belong to an exempt class on or after July 1 (LGC,
Sec. 161).
Tax Rate for P5.00 plus P1.00 for every P1,000 income regardless of whether from business,
Individuals exercise of profession or from property (not to exceed P5,000)
(LGC, Sec.
157) Note: In case of husband and wife, the additional tax shall be based on the total
property, gross receipts or earnings owned or derived by them.
Tax Rate for P500 plus annual additional tax (not to exceed P10,000)
Juridical
Persons (LGC, Annual additional tax in accordance with the following schedule:
Sec. 158) 1. For every P5,000 worth of real property owned by it during the
preceding year based on the valuation used for the payment of the real
property tax – P2.00; and
2. For every P5,000 of gross receipts or earnings derived by it from its
business in the Philippines during the preceding year – P2.00.
Place of Residence of the individual or in the place where the principal office of the
Payment juridical entity is located.
(LGC, Sec.
160)
Time of Accrues on the 1st day of January of each year which shall be paid not later than
Payment the last day of February of each year.
(LGC, Sec.
161) If a person reaches the age of 18 years or losses the benefit of exemption on or
before the last day of March, he shall have 20 days within which to pay the
community tax without becoming delinquent.

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 Corporations established and organized on or before the last day of March shall
have 20 days within which to pay the community tax without becoming
delinquent.
Penalty for An interest of 24% per annum from the due date until it is paid shall be added
Delinquency to the amount due.
(LGC, Sec.
161)

12. Common limitations on the taxing powers of LGUs

Local government units cannot levy:

1. Income tax, except on banks and other financial institutions;
2. Documentary stamp tax;
3. Estate tax, inheritance, gifts, legacies and other acquisitions mortis causa except as otherwise
provided
4. Customs duties, registration fees of vessels and wharfage on wharves, tonnage dues and all
other kinds of customs fees, charges and dues except wharfage on wharves constructed and
maintained by the local government unit concerned;
5. Taxes, fees, charges and other impositions upon goods carried into or out of, or passing
through, the territorial jurisdictions of local government units in the guise of charges for
wharfage, tolls for bridges or otherwise.
6. Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or
fishermen;
7. Taxes on business enterprises certified by the Board of Investments as pioneer or non-
pioneer for a period of 6 and 4 years, respectively, from the date of registration;
8. Excise taxes on articles enumerated under the NIRC, as amended, and taxes, fees or charges
on petroleum products;
9. Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions
on goods or services except as otherwise provided herein;
10. Taxes on the gross receipts of transportation contractors and persons engaged in the
transportation of passengers or freight by hire and common carriers by air, land or water,
except as provided in the Code;
11. Taxes on premiums paid by way of Reinsurance or retrocession;
12. Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds
of licenses or permits for the driving thereof, except tricycle;
13. Taxes, fees or other charges on Philippine products actually exported, except as otherwise
provided in the Code;
14. Taxes, fees or charges on Countryside and barangay business enterprises and cooperatives
duly registered under R.A. 6810 and R.A. 6938, (Cooperatives Code of the Philippines) ; and
15. Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units. (LGC, Sec. 133)

13. Collection of business taxes

a) Tax period and manner of payment

Tax Period – Calendar year, unless otherwise provided in the LGC

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 Manner of Payment – May be paid in lump-sum or quarterly instalments

b) Accrual of tax – First (1st) day of January of each year. However, new taxes, charges and
fees or charges in the rates thereof shall accrue on the 1st day of the quarter following the
effectivity of the ordinance imposing such new levies or rates.

c) Time of payment – Within the first 20 days of January or of each subsequent quarter as the
case may be.

Extension for the Time of Payment – Only for a period not exceeding 6 months for
justifiable reason or cause without surcharges or penalties

d) Penalties on unpaid taxes, fees or charges – Surcharge not exceeding 25% of the amount
of taxes not paid on time and an interest at the rate not exceeding 2% per month of the
unpaid taxes, including surcharges, until such amount is fully paid but in no case shall total
36 months.

e) Authority of treasurer in collection and inspection of books

Collecting Officer – Shall be collected by the provincial, city, municipal, or barangay

treasurer, or their duly authorized deputies. The provincial, city, or municipal treasurer may
designate the barangay treasurer as his deputy to collect local taxes, fees, or charges.

Examination of Books of Accounts by Local Treasurer – The local treasurer may, by

himself or through any of his deputies duly authorize in writing, examine the books,
accounts, and other pertinent records of any person, partnership, corporation, or association
subject to local taxes, fees and charges in order to ascertain, assess and collect the correct
amount of the tax, fee, or charge. Such examination shall be made during regular business
hours, only once for every tax period.

14. Taxpayer’s remedies

a) Periods of assessment and collection of local taxes, fees or charges

1. Local taxes, fees, or charges shall be assessed within five (5) years from the date they
became due. No action for the collection of such taxes, fees, or charges, whether
administrative or judicial, shall be instituted after the expiration of such period: Provided,
That, taxes, fees or charges which have accrued before the effectivity of this Code may
be assessed within a period of three (3) years from the date they became due.
2. In case of fraud or intent to evade the payment of taxes, fees, or charges, the same may
be assessed within ten (10) years from discovery of the fraud or intent to evade payment.
3. Local taxes, fees, or charges may be collected within five (5) years from the date of by
or judicial action. No such action shall be instituted after the expiration of said period:
Provided, however, That, taxes, fees or charges assessed before the effectivity of this
Code may be collected within a period of three (3) years from the date of assessment.
4. The running of the periods of prescription provided in the preceding paragraphs shall be
for the time during which:
(1) The treasurer is legally prevented from making the assessment of collection;

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 (2) The taxpayer requests for a reinvestigation and executes a waiver in writing before
expiration of the period within which to assess or collect; and
(3) The taxpayer is out of the country or otherwise cannot be located. (LGC, Sec. 194)

b) Protest of assessment

When the local treasurer or his duly authorized representative finds that correct taxes, fees, or
charges have not been paid, he shall issue a notice of assessment stating the nature of the
tax, fee or charge, the amount of deficiency, the surcharges, interests and penalties. Within
sixty (60) days from the receipt of the notice of assessment, the taxpayer may file a written
protest with the local treasurer contesting the assessment; otherwise, the assessment shall
become final and executory. The local treasurer shall decide the protest within sixty (60)
days from the time of its filing. If the local treasurer finds the protest to be wholly or partly
meritorious, he shall issue a notice canceling wholly or partially the assessment. However, if
the local treasurer finds the assessment to be wholly or partly correct, he shall deny the
protest wholly or partly with notice to the taxpayer. The taxpayer shall have thirty (30) days
from the receipt of the denial of the protest or from the lapse of the sixty (60) day period
prescribed herein within which to appeal with the court of competent jurisdiction otherwise
the assessment becomes conclusive and unappealable. (LGC, Sec. 195)

c) Claim for refund of tax credit for erroneously or illegally collected tax, fee or charge

In order to be entitled to a refund or credit of local taxes, the following procedural

requirements must concur:
a. Must file a written claim for refund or credit with the local treasurer; and
b. The case or proceeding for refund has to be filed within 2 years from the date of the
payment of the tax, fee, or charge of from the date the taxpayer is entitled to a refund or
credit (LGC, Sec. 196).

In Local Taxation, supervening causes are allowed as reckoning points for prescriptive
period purposes. In national taxes, they are not considered (INGLES, supra at 478).

15. Civil remedies by the LGUs for collection of revenues

a) Local government’s lien for delinquent taxes, fees or charges

Local taxes, fees, charges, and other revenues constitute a lien, superior of all liens, charges
or encumbrances in favour of any person, enforceable by any appropriate administrative or
judicial action (LGC, Sec. 173).

How local government lien extinguished

The lien may only be extinguished upon full payment of the delinquent local taxes, fees, and
charges, including related surcharges and interest (LGC, Sec. 173).

b) Civil remedies, in general

(1) Administration action

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By Administrative Action through Distraint of Personal Property and by Levy upon
Real Property

A. Distraint of any personal property belonging to the taxpayer or subject to the lien
(LGC, Sec. 175).

At any time prior to the consummation of the sale, the taxpayer may pay the proper
charges (LGC, Sec. 175(d)).

When personal property considered sold to LGU: Should the property distrained
be not disposed of within 120 days, the same shall be considered as sold to the LGU
(LGC, Sec. 175(e)).

Unlike the NIRC, the Local Tax Code does not contain any specific provision
prohibiting courts from enjoining the collection of local taxes. Such statutory lapse or
intent may have allowed preliminary injunction where local taxes are involved. But it
cannot negate the procedural rules and requirements under Rule 58 of the Rules of
Courts (Valley of Trading Co. v. CFI of Isabela, G.R. No. L-49529, March 31, 1989).

B. Levy of any real property belonging to the delinquent taxpayer (LGC, Secs. 176-
180).

At any time before the date fixed for the sale, the taxpayer may stay the proceedings
by paying the proper charges.

When LGU may purchase real property advertised for sale:

1. There is no bidders; or
2. The highest bid is for an amount insufficient to pay the taxes, fees, charges,
surcharges, interests or penalties (LGC, Sec. 181).

Further Distraint and Levy: The remedies of distraint and levy may be repeated if
necessary until the full amount due including all expenses is collected (LGC, Sec.
184).

Properties Exempt from Distraint and Levy (LGC, Sec. 185)

1. Tools and implements necessarily used by the delinquent taxpayer in his trade or
employment;
2. One (1) horse, cow, carabao, or other beast of burden, such as the delinquent
taxpayer may select, and necessarily used by him in his ordinary occupation;
3. His necessary clothing, and that of all his family;
4. Household furniture and utensils for housekeeping and used for that purpose by
the delinquent taxpayer, such as he may select, of a value not exceeding
P10,000.00;
5. Provisions, including crops, actually provided for individual or family use
sufficient 4 months;
6. The professional libraries of doctors, engineers, lawyers and judges;

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 Note: Under the 1997 Rules of Court (RULE 39, Sec. 13(g)) professional libraries
and equipment of professionals are exempt from execution not exceeding
P300,000.00.

7. One fishing boat and net, not exceeding the total value of P10,000.00, by the
lawful use of which a fisherman earns his livelihood; and
8. Any material or article forming part of a house or improvement of any real
property.

(2) Judicial action

The LGU concerned may enforce the collection of delinquent taxes, fees, charges or
other revenues by civil action in any court of competent jurisdiction within 5 years from
the date taxes, fees or charges become due (LGC, Secs. 183 and 194). The local
government files an ordinary suit for the collection of sum of money before the MTC,
RTC, or CTA Division depending upon the jurisdiction amount (V DOMONDON,
Taxation, supra at 225).

Jurisdiction

Court Jurisdictional Amount

MTC
Original If principal amount of taxes, fees exclusive of charges and penalties does
not exceed P300,000 or P400,000 in Metro Manila
RTC
Original If principal amount of taxes, fees exclusive of charges and penalties
exceeds P300,000 or P400,000 in Metro Manila
Provided: The amount is less than P1 million
Appellate The RTC shall exercise appellate jurisdiction over all cases decided by
the MeTCs, MTCs, and MCTCs in their respective territorial jurisdiction.
CTA Division
Original If principal amount of taxes, fees exclusive of charges and penalties is P1
million or above
Appellate Over appeals from the judgments resolutions or orders of the RTCs in tax
collection cases originally decided by them in their respective
jurisdiction.
CTA En Banc
Appellate 1. Decisions or resolutions over petitions for review of the CTA
Division in the exercise of its exclusive appellate jurisdiction over
local taxes decided by the RTC in the exercise of their original
jurisdiction; and
2. Over petitions for review of the judgments, resolution of orders of
the RTCs in the exercise of their appellate jurisdiction over tax
collection cases originally decided by the MeTCs, MTCs, and
MCTCs, in their respective territorial jurisdiction.

B. Real Property Taxation

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Direct taxes imposed on the privilege to use real property such as land, building, machinery, and
other improvements, unless specifically exempted (Province of Nueva Ecija v. Imperial Mining Co.,
Inc. G.R. No. L-59463, November 19, 1982).

1. Fundamental principles

Fundamental Principles Governing Real Property Taxation: (PAUCE)

a. The appraisals, assessment, levy and collection of real property tax shall not be let to any
Private person;
b. Real property shall be classified for assessment purposes on the basis of its Actual use;
c. Real property shall be assessed on the basis of Uniform classification within each local
government unit (LGU);
d. Real property shall be appraised at its Current and fair market value; and
e. The appraisal and assessment of real property shall be Equitable (LGC, Sec. 198).

2. Nature of real property tax

Nature or Characteristics of Real Property Tax: (DIAL UP)

a. Direct tax whose burden could not be shifted by the one who pays to other persons;
b. Indivisible single obligation;
c. Ad valorem tax based on the assessed value of the property;
d. Local tax;
e. Imposed on the Use and not on the ownership; and
f. Progressive/proportionate in character depending to a certain extent on the use and value of
the property (V DOMONDON, Taxation (2013), p. 235) [hereinafter V DOMONDON].

3. Imposition of real property taxes

a) Power to levy real property taxes

A province or city or a municipality within the Metropolitan Manila Area may levy an
annual ad valorem tax on real property such as land, building, machinery, and other
improvement not hereinafter specifically exempted.

b) Exemption from real property taxes

The following are exempted from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration
or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques,
nonprofit or religious cemeteries and all lands, buildings, and improvements actually,
directly, and exclusively used for religious, charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively used by local
water districts and government-owned or controlled corporations engaged in the supply
and distribution of water and/or generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided for under R. A. No.
6938; and

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 (e) Machinery and equipment used for pollution control and environmental protection.
Except as provided herein, any exemption from payment of real property tax previously
granted to, or presently enjoyed by, all persons, whether natural or juridical, including all
government-owned or -controlled corporations are hereby withdrawn upon the
effectivity of this Code. (LGC, Sec. 234)

4. Appraisal and assessment of real property tax

a) Rule on appraisal of real property tax at fair market value

All real property, whether taxable or exempt, shall be appraised at the current and fair market
value prevailing in the locality where the property is situated. The Department of Finance
shall promulgate the necessary rules and regulations for the classification, appraisal, and
assessment of real property pursuant to the provisions of this Code. (LGC, Sec. 201)

b) Declaration of real property

Declaration of Real Property by the Owner or Administrator. – It shall be the duty of all
persons, natural or juridical, owning or administering real property, including the
improvements therein, within a city or municipality, or their duly authorized representative,
to prepare, or cause to be prepared, and file with the provincial, city or municipal assessor, a
sworn statement declaring the true value of their property, whether previously declared or
undeclared, taxable or exempt, which shall be the current and fair market value of the
property, as determined by the declarant. Such declaration shall contain a description of the
property sufficient in detail to enable the assessor or his deputy to identify the same for
assessment purposes. The sworn declaration of real property herein referred to shall be filed
with the assessor concerned once every three (3) years during the period from January first
(1st) to June thirtieth (30th) commencing with the calendar year 1992. (LGC, Sec. 202)

Declaration of Real Property by the Assessor. – When any person, natural or juridical, by
whom real property is required to be declared under Section 202 hereof, refuses or fails for
any reason to make such declaration within the time prescribed, the provincial, city or
municipal assessor shall himself declare the property in the name of the defaulting owner, if
known, or against an unknown owner, as the case may be, and shall assess the property for
taxation in accordance with the provision of this Title. No oath shall be required of a
declaration thus made by the provincial, city or municipal assessor. (LGC, Sec. 204)

c) Listing of real property in assessment rolls

1. Real property shall be listed, valued and assessed in the name of the owner,
administrator, or anyone having legal interest in the property. The exceptions are:
a. Undivided real property – in the name of the estate or heirs or devisees without
designating them individually;
b. In case of undivided real property other than that owned by a deceased – in the
name of one or more co-owners;
c. Corporation, partnership, and association – same as individuals; and
d. Owned by Republic of the Philippines, its instrumentalities, political subdivision,
beneficial use is transferred to a taxable person – in the name of the possessor
(LGC, Sec. 205).

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 2. All declaration shall be kept and filed under a uniform classification system to be
established by the provincial, city or municipal assessor (LGC, Sec. 207)

d) Preparation of schedules of fair market values

Before any general revision of property assessment is made pursuant to the provisions of this
Title, there shall be prepared a schedule of fair market values by the provincial, city and the
municipal assessors of the municipalities within the Metropolitan Manila Area for the
different classes of real property situated in their respective local government units for
enactment by ordinance of the Sanggunian concerned. The schedule of fair market values
shall be published in a newspaper of general circulation in the province, city or municipality
concerned, or in the absence thereof, shall be posted in the provincial capitol, city or
municipal hall and in two other conspicuous public places therein. (LGC, Sec. 212).

(1) Authority of assessor to take evidence

For the purpose of obtaining information on which to base the market value of any real
property, the assessor of the province, city or municipality or his deputy may summon
the owners of the properties to be affected or persons having legal interest therein and
witnesses, administer oaths, and take deposition concerning the property, its ownership,
amount, nature, and value. (LGC, Sec. 213).

(2) Amendment of schedule of fair market values

The provincial, city or municipal assessor may recommend to the Sanggunian concerned
amendments to correct errors in valuation in the schedule of fair market values. The
Sanggunian concerned shall, by ordinance, act upon the within ninety (90) days from
receipt thereof. (LGC, Sec. 214).

e) Classes of real property

Classes of Real Property for Assessment Purposes

For purposes of assessment, real property shall be classified as residential, agricultural,
commercial, industrial, mineral, or special. The city or municipality within the Metropolitan
Manila Area, through their respective Sanggunian, have the power to classify lands as
residential, agricultural, commercial, industrial, mineral, timberland, or special in accordance
with their zoning ordinances. (LGC, Sec. 215).

Special Classes of Real Property

All lands, buildings, and other improvements actually, directly and exclusively used for
hospitals, cultural, or scientific purposes, and those owned and used by local water districts,
and government-owned or -controlled corporations rendering essential public services in the
supply and distribution of water and/or generation and transmission of electric power shall be
classified as special. (LGC, Sec. 216).

f) Actual use of property as basis of assessment

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 Real property shall be classified, valued and assessed on the basis of its actual use regardless
of where located, whoever owns it, and whoever uses it. (LGC, Sec. 217).

g) Assessment of property

(1) General revisions of assessments and property classifications

The provincial, city or municipal assessor shall undertake a general revision of real
property assessments within two (2) years after the effectivity of this Code and every
three (3) years thereafter. (LGC, Sec. 219).

(2) Date of effectivity of assessment or reassessment

Rule: All assessments or reassessments made after January 1 of any year shall take effect
on January 1 of the succeeding year.

Exception: Reassessments shall take effect at the beginning of the quarter next following
the reassessment IF made due to:
1. Its partial or total destruction;
2. Major change in its actual use;
3. Great and sudden inflation or deflation of real property values;
4. Gross illegality of the assessment; and
5. Any other abnormal cause (LGC, Sec. 221).

h) Assessment of property subject to back taxes

Real property declared for the first time shall be assessed for taxes for the period during
which it would have been liable but in no case for more than ten (10) years prior to the date
of initial assessment: Provided, however, That such taxes shall be computed on the basis of
the applicable schedule of values in force during the corresponding period. If such taxes are
paid on or before the end of the quarter following the date the notice of assessment was
received by the owner or his representative, no interest for delinquency shall be imposed
thereon; otherwise, such taxes shall be subject to an interest at the rate of two percent (2%)
per month or a fraction thereof from the date of the receipt of the assessment until such taxes
are fully paid. (LGC, Sec. 222).

i) Notification of new or revised assessments

When real property is assessed for the first time or when an existing assessment is increased
or decreased, the provincial, city or municipal assessor shall within thirty (30) days give
written notice of such new or revised assessment to the person in whose name the property is
declared. The notice may be delivered personally or by registered mail or through the
assistance of the punong Barangay to the last known address of the person to be served.
(LGC, Sec. 223).

C. Collection of Real Property Tax

1. Date of accrual of real property taxes and special levies

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 The real property tax for any year shall accrue on the first day of January and from that date it
shall constitute a lien on the property which shall be superior to any other lien, mortgage, or
encumbrance of any kind whatsoever, and shall be extinguished only upon the payment of the
delinquent tax. (LGC, Sec. 246).

2. Collection of taxes

a) Collecting authority

The collection of the real property tax with interest thereon and related expenses, and the
enforcement of the remedies provided for in this Title or any applicable laws, shall be the
responsibility of the city or municipal treasurer concerned. The city or municipal treasurer
may deputize the Barangay treasurer to collect all taxes on real property located in the
Barangay: Provided, That the Barangay treasurer is properly bonded for the purpose:
Provided, further, That the premium on the bond shall be paid by the city or municipal
government concerned. (LGC, Sec. 247).

b) Duty of assessor to furnish local treasurer with assessment rolls

The provincial, city or municipal assessor shall prepare and submit to the treasurer of the
local government unit, on or before the thirty-first (31st) day of December each year, an
assessment roll containing a list of all persons whose real properties have been newly
assessed or reassessed and the values of such properties. (LGC, Sec. 248).

c) Notice of time for collection taxes

1. To be posted by the city or municipal treasurer in conspicuous and publicly accessible

place at the city or municipal hall:
a. For basic RPT and Additional tax for SEF- on or before January 31 of each year;
b. For any other tax-any other date provided in the ordinance.

2. Publication sin a newspaper of general circulation in the locality once a week for two (2)
consecutive weeks. (LGC, Sec. 248).

3. Periods within which to collect real property taxes

The basic real property tax and any other tax levied under this Title shall be collected within five
(5) years from the date they become due. No action for the collection of the tax, whether
administrative or judicial, shall be instituted after the expiration of such period. In case of fraud
or intent to evade payment of the tax, such action may be instituted for the collection of the same
within ten (10) years from the discovery of such fraud or intent to evade payment. The period of
prescription within which to collect shall be suspended for the time during which:

(1) The local treasurer is legally prevented from collecting the tax;
(2) The owner of the property or the person having legal interest therein requests for
reinvestigation and executes a waiver in writing before the expiration of the period within
which to collect; and
(3) The owner of the property or the person having legal interest therein is out of the country or
otherwise cannot be located. (LGC, Sec. 270).

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4. Special rules on payment

a) Payment of real property taxes in instalments

The owner of the real property or the person having legal interest therein may pay the basic
real property tax and the additional tax for Special Education Fund (SEF) due thereon
without interest in four (4) equal installments; the first installment to be due and payable on
or before March Thirty-first (31st); the second installment, on or before June Thirty (30); the
third installment, on or before September Thirty (30); and the last installment on or before
December Thirty-first (31st), except the special levy the payment of which shall be governed
by ordinance of the Sanggunian concerned. The date for the payment of any other tax
imposed under this Title without interest shall be prescribed by the Sanggunian concerned.
Payments of real property taxes shall first be applied to prior years delinquencies, interests,
and penalties, if any, and only after said delinquencies are settled may tax payments be
credited for the current period. (LGC, Sec. 250).

b) Interests on unpaid real property taxes

In case of failure to pay the basic real property tax or any other tax levied under this Title
upon the expiration of the periods as provided in Section 250, or when due, as the case may
be, shall subject the taxpayer to the payment of interest at the rate of two percent (2%) per
month on the unpaid amount or a fraction thereof, until the delinquent tax shall have been
fully paid: Provided, however, That in no case shall the total interest on the unpaid tax or
portion thereof exceed thirty-six (36) months. (LGC, Sec. 255).

c) Condonation of real property taxes

In case of a general failure of crops or substantial decrease in the price of agricultural or

agribased products, or calamity in any province, city, or municipality, the Sanggunian
concerned, by ordinance passed prior to the first (1st) day of January of any year and upon
recommendation of the Local Disaster Coordinating Council, may condone or reduce, wholly
or partially, the taxes and interest thereon for the succeeding year or years in the city or
municipality affected by the calamity. (LGC, Sec. 276).

5. Remedies of LGUs for collection of real property taxes

a) Issuance of notice of delinquency for real property tax payment

When the real property tax becomes delinquent, the local treasurer concerned shall
immediately cause a notice of the delinquency which shall specify the date upon which the
tax became delinquent and that personal property may be distrained to effect payment of the
tax, surcharges, interests and penalties. The notice of the delinquency shall be:
1. Posted at the main hall and in a publicly accessible and conspicuous place in each
barangay of the local government unit concerned and
2. Published once a week for two (2) consecutive weeks, in a newspaper of general
circulation in the province, city, or municipality (Ibid).

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 The basic real property tax and any other tax related thereto constitute a lien on the property
subject to tax (LGC, Sec. 257).

b) Local government’s lien

A legal claim on the property subject to RPT as security for the payment of the tax obligation
(V DOMONDON, supra at 360).

It is superior to all liens, charges or encumbrances irrespective of the owner or possessor

thereof, and is enforceable by administrative or judicial action. It is extinguished only upon
payment of tax and related interests and expenses (LGC, Sec. 257).

It is constituted on the property subject to the tax from the date the real property tax accrued
which is on the first day of January (LGC, Sec. 246).

c) Remedies in general

The LGU concerned may avail any (or ALL) of the following remedies:
I. Lien;
II. Administrative action; or
A. Levy on the real property subject to tax
B. Distraint of personal property
III. Judicial action

Note: The LGC does not approve for a hierarchy of remedies on what should be first
exercised, the administrative or judicial remedies, subject to the doctrine of exhaustion of
administrative remedies (i.e. Appeal to the Local Board of Assessment Appeals before
institution of judicial action) (V DOMONDON, supra at 361).

d) Resale of real estate taken for taxes, fees or charges

The Sanggunian concerned may, by ordinance duly approved, and upon notice of not less
than twenty (20) days, sell and dispose of the real property acquired under the preceding
section at public auction. The proceeds of the sale shall accrue to the general fund of the
local government unit concerned. (LGC, Sec. 264).

e) Further levy until full payment of amount due

Levy may be repeated if necessary until the full due, including all expenses, is collected.
(LGC, Sec. 265).

D. Refund or credit of real property taxes

1. Payment under protest

(a) No protest shall be entertained unless the taxpayer first pays the tax. There shall be
annotated on the tax receipts the words "paid under protest". The protest in writing must be
filed within thirty (30) days from payment of the tax to the provincial, city treasurer or

Page 148
 municipal treasurer, in the case of a municipality within Metropolitan Manila Area, who
shall decide the protest within sixty (60) days from receipt.
(b) The tax or a portion thereof paid under protest, shall be held in trust by the treasurer
concerned.
(c) In the event that the protest is finally decided in favor of the taxpayer, the amount or portion
of the tax protested shall be refunded to the protestant, or applied as tax credit against his
existing or future tax liability.
(d) In the event that the protest is denied or upon the lapse of the sixty day period prescribed in
subparagraph (a), the taxpayer may avail of the remedies as provided for in Chapter 3, Title
II, Book II of this Code. (LGC, Sec. 252).

2. Repayment of excessive collections

When an assessment of basic real property tax, or any other tax levied under this Title, is found
to be illegal or erroneous and the tax is accordingly reduced or adjusted, the taxpayer may file a
written claim for refund or credit for taxes and interests with the provincial or city treasurer
within two (2) years from the date the taxpayer is entitled to such reduction or adjustment. The
provincial or city treasurer shall decide the claim for tax refund or credit within sixty (60) days
from receipt thereof. In case the claim for tax refund or credit is denied, the taxpayer may avail
of the remedies as provided in Chapter 3, II, Book II of this Code. (LGC, Sec. 253).

E. Taxpayer’s Remedies

1. Contesting an assessment of value of real property

a) Appeal to the Local Board of Assessment Appeals (LBAA)

Any owner or person having legal interest in the property who is not satisfied with the action
of the provincial, city or municipal assessor in the assessment of his property may, within
sixty (60) days from the date of receipt of the written notice of assessment, appeal to the
Board of Assessment appeals of the province or city by filing a petition under oath in the
form prescribed for the purpose, together with copies of the tax declarations and such
affidavits or documents submitted in support of the appeal. (LGC, Sec. 226).

b) Appeal to the Central Board of Assessment Appeals (CBAA)

The Central Board of Assessment appeals shall be composed of a chairman and two (2)
members to be appointed by the President, who shall serve for a term of seven (7) years,
without reappointment. Of those first appointed, the chairman shall hold office for seven (7)
years, one member for five (5) years, and the other member for three (3) years. Appointment
to any vacancy shall be only for the unexpired portion of the term of the predecessor. In no
case shall any member be appointed or designated in a temporary or acting capacity. The
chairman and the members of the Board shall be Filipino citizens, at least forty (40) years old
at the time of their appointment, and members of the Bar or Certified Public Accountants for
at least ten (10) years immediately preceding their appointment. The chairman of the Board
of Assessment appeals shall have the salary grade equivalent to the rank of Director III under
the Salary Standardization Law exclusive of allowances and other emoluments. The
members of the Board shall have the salary grade equivalent to the rank of Director II under
the Salary Standardization Law exclusive of allowances and other emoluments. The Board

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 shall have appellate jurisdiction over all assessment cases decided by the Local Board of
Assessment appeals.

There shall be Hearing Officers to be appointed by the Central Board of Assessment appeals
to civil service laws, rules and regulations, one each for Luzon, Visayas and Mindanao, who
shall hold office in Manila, Cebu City and Cagayan de Oro City, respectively, and who shall
serve for a term of six (6) years, without reappointment until their successors have been
appointed and qualified. The Hearing Officers shall have the same qualifications as that of
the Judges of the Municipal Trial Courts.

The Hearing Officers shall each have the salary grade equivalent to the rank of Director I
under the Salary Standardization Law exclusive of allowances and other emoluments. The
Hearing Officers shall try and receive evidences on the appealed assessment cases as may be
directed by the Board.

The Central Board Assessment appeals, in the performance of its powers and duties, may and
organize staffs, offices, units, prescribe the titles, functions and duties of their members and
adopt its own rules and regulations. Unless otherwise provided by law, the annual
appropriations for the Central Board of Assessment appeals shall be included in the annual
budget of the Department of Finance in the corresponding General Appropriations Act.
(LGC, Sec. 230).

c) Effect of payment of tax

Appeal on assessments of real property shall, in no case, suspend the collection of the
corresponding realty taxes on the property involved (LGC, Sec. 231).

F. Payment of real property tax under protest

1. File protest with local treasurer

Assessor submits assessment roll to Local Treasurer (LT) (LGC, Sec. 248). Posting of notice of
deadline for payment at a conspicuous place at the LGU hall OR publish the same in a
newspaper of gen. circulation in the LGU once a week for 2 consecutive weeks. Local Treasurer
collects the tax starting January 1 of calendar year (LGC, Sec. 249).

Owner pays the tax. Written protest must be filed within 30 days from payment before the LT
(LGC, Sec. 252(a)).

Taxpayer pays tax under protest. Protest is then filed within 30 days from payment of tax to LT.
LT shall decide within 60 days from receipt (LGC, Sec. 252(a)).

If protest is approved: the amount shall be refunded or applied as tax credit (LGC, Sec. 252(c)).

2. Appeal to the LBAA

If Protest is denied of after the lapse of 60 days: Appeal to LBAA (Sec. 252(d), LGC). LBAA
shall decide within 120 days from date of receipt of appeal (LGC, Sec. 229(a)).

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 3. Appeal to the CBAA

If LBAA rejects protest, owner may appeal to CBAA within 30 days from receipt of notice
(LGC, Sec. 229(a))

4. Appeal to the Court of Tax Appeals (CTA)

If CBAA rejects protest, owner may appeal to CTA en banc within 30 days from receipt of
decision (R.A. No. 9282).

5. Appeal to the Supreme Court (SC)

Appeal to SC 15 days (RULES OF COURT, RULE 43)

IV. TARIFF AND CUSTOMS CODE OF THE PHILIPPINES (P.D. No. 1464), as amended by the
CUSTOMS MODERNIZATION AND TARIFF ACT (Republic Act No. 10863), which took effect
on June 16, 2016)

A. Tariff and Duties

1. Definitions

Tariff: Tariff is a list of schedule of articles on which a duty is imposed upon the importation
into the country, with the rates at which they are severally taxed. Tariff is a list of schedule of
articles on which a duty is imposed upon the importation into the country, with the rates at which
they are severally taxed. Derivatively, it refers to the system of imposing duties or taxes on the
importation of foreign merchandise (Black’s Law Dictionary).

Tariff can also mean the duties imposed on the articles which are payable to the government
(INGLES, Tax Made Less Taxing: A Reviewer with Codals and Cases (2015), p. 518)
[hereinafter INGLES].

Kinds of Tariff:
1. Export Tariff – tariff based on the gross free-on-board (FOB) value at the prevailing rate of
exchange at the time of shipment is levied, assessed and collected on traditional export
products (P.D. No. 230); and
2. Import Tariff – duty levied upon articles when imported from any country upon each
importation, even though previously exported from the Philippines, except as otherwise
specifically provided for under the tariff and customs code or special laws (R.A. No. 10863,
Sec. 104).

Custom Duties: The name given to taxes on the importation and exportation of commodities;
the tariff of tax assessed upon merchandise imported from, or exported to, a foreign country
(Nestle PHL v. Court of Appeals, G. R. No. 134114, July 6, 2001).

Free Zones

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 Special economic zones registered with the PEZA, duly chartered or legislated special economic
zones and freeports, and such other freeports as established or may be created by law (R.A. No.
10863, Sec. 102(w)).

2. Purpose for Imposition

a. Customs duties are imposed for both revenue-raising and for regulatory purposes (INGLES,
supra at 519);
b. The levying of customs duties on imported goods may have in some measure the effect of
protecting local industries – where such local industries actually exist and are producing
comparable goods (Garcia v. Executive Secretary, G.R. No. 101273, July 3, 1992).

3. Kinds or Classification of Duties

a) Ordinary/regular duties
Taxes that are imposed or assessed upon merchandise from, or exported to a foreign country
for the purpose of raising revenue.

They may also be imposed to serve as protective barriers which would prevent the entry of
merchandise that would compete with locally manufactured items. They are also referred to
as tariff barriers.

(1) Ad valorem (Exclude: Methods of Valuation) – computed based on the value of

imported article.
(2) Specific Duty – computed based on the dutiable weight of goods.

b) Special duties
Additional import duties imposed won specific kinds of imported articles under certain
conditions.

Purpose: For the protection of consumers and manufacturers, as well as Philippine products
from undue competition posed by foreign made products.

(1) Dumping duties – occurs when foreign producers sell their products to an importer in
the domestic market at prices lower than in their own national markets, or at prices below
cost of production, the sale or importation of which injures or threatens to injure a
domestic injury producing like or comparable products or retards the establishment of a
potential industry.

(2) Countervailing duties – special duty imposed whenever any article of commerce is
granted directly or indirectly by the government in the country of origin or exportation of
such product, commodity or article and the importation of such subsidized product or
article has caused or threatens to cause material injury to a domestic industry or has
materially retarded the growth or prevents the establishment of a domestic industry.

(3) Marking duties – additional customs duties imposed on foreign articles (or its container
if the article itself cannot be marked) not marked in any official language of the
Philippines and in a conspicuous place as legibly, indelibly and permanently in such

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 manner as to indicate to an ultimate purchaser in the Philippines the name of country of
origin of the article.

Purpose: To prevent deception of the consumers.

(4) Retaliatory/discriminatory duties – a duty imposed upon articles of a foreign country

which discriminates against Philippine commerce in such a manner to place it at a
disadvantage compared with the commerce of another foreign country (INGLES, supra at
552).

(5) Safeguard Measures – trade remedy measures adopted by the government to provide
affected domestic industries relief against imports.

General Safeguard Measures – Imposed against imports if the products at issue are
being imported in such increase quantities, either absolute or relative to domestic
production, and under such conditions as to cause or threaten to cause serious injury to
the domestic industry.

Special Safeguard Measures – imposed against importations of agricultural products

whose quantitative import restrictions were converted (tariffied) into ordinary customs
duties and agricultural products designated with symbol “SSG” in the GATT Schedule of
Concessions.

4. Flexible tariff clause

Basis: The Congress may, by law, authorize the President to fix within specified limits, and
subject to such limitations and restrictions as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the
national development program of the Government. (CONST. Art. VI, Sec. 28, Par. (2)).

Under the Flexible Clause, the President is empowered to:

1. Increase, reduce, or remove, existing protective rates of import duties including the necessary
changes in the classification;
Condition: The increased rate shall not exceed % ad valorem.
2. Establish import quota or ban import of any commodity whenever necessary; and
3. Impose additional duty on all imports, whenever necessary (R.A. No. 10863, Sec. 1608(a));
Condition: Additional duty shall not exceed 10% ad valorem.

Requisites for the Exercise of the Power: (IR-CPR)

1. In the Interest of general welfare, and national security; and
2. Recommendation of NEDA
a. Before submission of the recommendation of NEDA, the Tariff Commission shall
Conduct an investigation.
b. Public hearing by the Tariff Commission shall be held, wherein interested parties shall be
afforded reasonable opportunity to be present, produce evidence, and be heard.
c. The Report of the Commission shall be submitted to NEDA within 30 days after the
termination of the public hearing (R.A. No. 10863, Sec. 1608(b)).

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 Exception: Recommendation of NEDA sis not required in the imposition of additional duty not
exceeding 10% ad valorem.

B. Accrual and Payment of Tax and Duties

1. General Rule: Except as otherwise provided, all goods imported in the Philippines shall be
subject to duly upon importation, including goods previously exported from the
Philippines.

All goods, when imported into the Philippines, shall be subject to duty upon importation,
including goods previously exported from the Philippines, except as otherwise specifically
provided in R.A. No. 10863 or in other laws.

They become dutiable from the entry of the vessel or aircraft into the Philippine jurisdiction.

a) Taxable Importations

b) Prohibited Importations

The importation and exportation of the following goods are prohibited:

(a) Written or printed goods in any form containing any matter advocating or inciting
treason, rebellion, insurrection, sedition against the government of the Philippines, or
forcible resistance to any law of the Philippines, or written or printed goods containing
any threat to take the life of, or inflict bodily harm up on any person in the Philippines;
(b) Goods, instruments, drugs and substances designed, intended or adapted for producing
unlawful abortion, or any printed matter which advertises, describes or gives direct or
indirect information where, how or by whom unlawful abortion is committed;
(c) Written or printed goods, negatives or cinematographic films, photographs, engravings,
lithographs, objects, paintings, drawings or other representation of an obscene or
immoral character;
(d) Any goods manufactured in whole or in part of gold, silver or other precious metals or
alloys and the stamp, brand or mark does not indicate the actual fineness of quality of the
metals or alloys;
(e) Any adulterated or misbranded food or goods for human consumption or any adulterated
or misbranded drug in violation of relevant laws and regulations;
(f) Infringing goods as defined under the Intellectual Property Code and related laws; and
(g) All otter goods or parts thereof which importation and exportation are explicitly
prohibited by law or rules and regulations issued by the competent authority. (R.A. No.
10863, Sec. 118).

c) De Minimis Importations (Small Value Importations)

This pertains to an importation the dutiable value of which does not exceed Ph10,000. There
will be no duties and taxes that will be collectible by the BOC for de minimis importations.
This threshold value is subject to review by the Finance Secretary every 3 years (Customs
A.O. 02-2016)

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d) Conditionally-Free and Duty-Exempt Importations
Goods which are exempt from the payment of import duties upon compliance with the
formalities prescribed in the regulations (R.A. No. 10863, Sec. 800).

(1) Returning residents

The phrase "returning residents" shall refer to nationals who have stayed in a foreign
country for a period of at least sis (6) months. Returning residents shall have tax and duty
exemption on personal and household effects: Provided, that:
(1) It shall not be in commercial quantities;
(2) It is not intended for barter, sale or for hire; and
(3) Limited to the FCA or FOB value of:
i. Three hundred fifty thousand pesos (P350,000.00) for those who have stayed in a
foreign country for at least ten (10) years and have not availed of this privilege
within ten (10) years prior to returning resident's arrival;
ii. Two hundred fifty thousand pesos (P250,000.00) for those who have stayed in a
foreign country for a period of at least five (5) but not more than ten (10) years and
have not availed of this privilege within five (5) years prior to returning resident's
arrival; or
iii. One hundred fifty thousand pesos (P150,000.00) for those who have stayed in a
foreign country for a period of less than five (5) years and have not availed of this
privilege within six (6) months prior to returning resident's arrival.

Any amount in excess of the above-stated threshold shall be subject to the corresponding
duties and taxes under this Act.

Every three (3) years after the effectivity of this Act, the Secretary of Finance shall adjust the
amount herein stated to its present value using the CPI as published by the PSA. (R.A. No.
10863, Sec. 800).

(2) Conditions for exemption from tax and duties

Goods shall be exempt from the payment of import duties upon compliance with the
formalities prescribed in the regulations which shall be promulgated by the
Commissioner with the approval of the Secretary of Finance: Provided, That goods sold,
bartered, hired or used for purposes other than what they were intended for and without
prior payment of the duty, tax or other charges which would have been due and payable
at the time of entry if the goods had been entered without the benefit of this section, shall
be subject to forfeiture and the importation shall constitute a fraudulent practice against
customs laws: Provided, however, That a sale pursuant to a judicial order or in
liquidation of the estate of a deceased person shall not be subject to the preceding
proviso, without prejudice to the payment of duties, taxes and other charges: Provided,
further, That the President may, upon the recommendation of the Secretary of Finance,
suspend, disallow or completely withdraw, in whole or in part, any conditionally free
importation under this section.

The provisions of general and special laws, to the contrary notwithstanding, including
those granting franchises, there shall be no exemption whatsoever from the payment of
duties except as provided for in this Act; those granted to government agencies,

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 instrumentalities or government-owned or -controlled corporations (GOCCs) with
existing contracts, commitments, agreements, or obligations with foreign countries
requiring such exemption; those granted to international institutions, associations or
organizations entitled to exemption pursuant to agreements or special laws; and those
that may be granted by the President upon prior recommendation of the NEDA in the
interest of national economic development.

(3) Balikbayan boxes

Residents of the Philippines, OFWs or other Filipinos while residing abroad or upon their
return to the Philippines shall be allowed to bring in or send to their families or relatives
in the Philippines balikbayan boxes which shall be exempt from applicable duties and
taxes imposed under the NIRC of 1997, as amended: Provided, That balikbayan boxes
shall contain personal and household effects only and shall neither be in commercial
quantities nor intended for barter, sale or for hire and that the FCA value of which shall
not exceed one hundred fifty thousand pesos (P150,000.00): Provided, further, That
every three (3) years after the effectivity of this Act, the Secretary of Finance shall adjust
the amount herein stated to its present value using the CPI as published by the PSA:
Provided, finally, That residents of the Philippines, OFWs or other Filipinos can only
avail of this privilege up to three (3) times in a calendar year. Any amount in excess of
the allowable non-dutiable value shall be subject to the applicable duties and taxes; (R.A.
No. 10863, Sec. 800).

2. Goods Declaration

a) Formal entry distinguished from Informal entry

Formal Entry
All goods declaration for consumption shall be cleared through a formal entry process (R.A.
No. 10863, Sec. 402).

Note: All importations entered through a formal entry process shall be covered:
1. When there is sale – a letter of credit or any verifiable commercial document evidencing
payment; or
2. When there is no sale for export – any commercial document indicating the commercial
value of the goods (R.A. No. 10863, Sec. 402).

Informal Entry
The following goods shall be cleared through an informal entry process:
1. Goods of a commercial nature with Free in Board (FOB) or Free Carrier At (FCA) less
than P50,000; and
2. Personal and household effects of goods, not in commercial quantity, imported in
passenger’s baggage, or mail (R.A. No. 10863, Sec. 402).

FORMAL ENTRY INFORMAL ENTRY

As to documentary requirements
All importations entered through, a formal There is no such requirement in an informal
entry process shall be covered by a letter of entry process.
credit or any verifiable commercial document

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 evidencing payment or in cases where there
is no sale for export, by any commercial
document indicating the commercial value of
the goods.
As to application
As a rule, all goods declaration for Applies only to the following:
consumption shall be cleared through a a. Goods of a commercial nature with
formal entry process. Free on Board or Free Carrier
Arrangement (FCA) value or less
than P50,000; or
b. Personal or household effects or
goods, not in commercial quantity,
imported in passenger’s baggage or
mail

b) Filing of Goods Declaration

As far as practicable, the format of the goods declaration shall conform with international
standards. The data required in the goods declaration shall be limited to such particulars that
are deemed necessary for the assessment and collection of duties and taxes, the compilation
of statistics and compliance with this Act. The Bureau shall require the electronic lodgement
of the goods declaration.

The Bureau shall only require supporting documents necessary for customs control to ensure
that all requirements of the law have been complied with. Translation of supporting
documents shall not be required except when necessary.

Goods declaration must be lodged within fifteen (15) days from the date of discharge of the
last package from the vessel or aircraft. The period to file the goods declaration may, upon
request, be extended on valid grounds for another fifteen (15) days: Provided, That the
request is made before the expiration of the original period within which to file the goods
declaration: Provided, however, That the period of the lodgement of the goods declaration
maybe adjusted by the Commissioner. (R.A. No. 10863, Sec. 407).

c) Assessment and Payment of Duties and Taxes, Interest and Surcharge

Assessment refers to the process of determining the amount of duties and taxes and other
charges due on imported and exported goods (R.A. No. 10863, Sec. 102(f)).

When Assessment Deemed Tentative

Assessment shall be deemed tentative if the duties and taxes initially assessed are disputed
by the importer.

Note: The assessment shall be completed upon final readjustment based on the tariff ruling
in case of classification dispute, or the final resolution of the protest case involving
valuation, rules of origin, and other customs issues (R.A. No. 10863, Sec. 425).

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 When Assessment of Duty Less Than the Entered (Declared) Value of the Goods
Duty may be assessed upon an amount less than the entered value:
1. In cases when the importer certifies at the time of entry that the entered value is higher
than the dutiable value and that the goods are so entered in order to meet increases made
by the appraiser in similar cases then pending re-appraisement; and
2. The lower assessment shall be allowed only when the importer’s contention is sustained
by a final decision, and shall appear that such action of the importer was taken in good
faith after due diligence and inquiry (R.A. No. 10863, Sec. 428).

When Assessment Deemed Final

Assessment shall be deemed final 15 days after receipt of the notice of assessment by the
importer or consignee (R.A. No. 10863, Sec. 429).
Note: In the absence of fraud and when the goods have been finally assessed and released,
the assessment shall be conclusive upon all parties 3 years from the date of final payment of
duties and taxes, or upon completion of the post clearance audit (R.A. No. 10863, Sec. 430)

Legal Interest on Unpaid Duties and Taxes

Unpaid duties, taxes and other charges, shall incur legal interest of 20% per annum computed
from the date of final assessment when payment becomes demandable.
Note: the legal interest shall likewise accrue on any fine or penalty imposed (R.A. No. 10863,
Sec. 104).

Surcharge for Failure to Pay

For failure to pay duties and taxes of an assessment within 15 days from the date of final
assessment, a surcharge of 10% of the total assessed amount of balance amount thereof shall
be added and collected, which surcharge shall increase to 25% if the delinquency lasts for
more than 1 year (R.A. No. 10863, Sec. 1425)

d) Provisional Goods Declarations

The kind of declaration used when the declarant does not have all the information or
supporting documents required to complete the goods declaration (R.A. No. 10863, Sec. 403).

Requisites:
1. Such declaration contains the necessary information required by the Bureau.
2. The declarant undertakes to complete the information or submit the supporting
documents within 45 days from the filing of the provisional goods declaration, extendible
for another 45 days (R.A. No. 10863, Sec. 403).

Notes:
1. The duty treatment of the goods under provisional goods declaration shall not be
different from those with complete declaration.
2. Goods under provisional goods declaration may be released upon posting of any
required security equivalent to the amount of the applicable duties and taxes (R.A.
No. 10863, Sec. 403)

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 e) Relief Consignments
Goods such as food, medicine, equipment and materials for shelter donated or leased to
government institutions and accredited private entities for free distribution to or use of
victims of calamities shall be treated and entered as relief consignment. Upon declaration of
a state of calamity, the clearance of such goods will be a matter of priority (R.A. No. 10863,
Sec. 120).

Tax treatment: Relief consignment imported during a state of calamity and intended for a
specific calamity area for the use of the calamity victims therein, shall be exempt from duties
and taxes (R.A. No. 10863, Sec. 121).

f) Misdeclaration, Misclassification, and Undervaluation in Goods Declarations

(1) Definitions and distinction

Misdeclaration – is committed when the discrepancy pertains to quantity, quality,

description, weight, or measurement of the imported goods.

Misclassification – exists when insufficient or wrong description of the goods or use of

wrong description of the goods or use of wrong tariff heading was declared resulting on a
discrepancy.

Undervaluation – is committed when:

a. The declared value fails to disclose in full the price actually paid or payable or any
dutiable adjustment to the price, or
b. An incorrect valuation methods is used; or
c. The valuation rules are not properly observed.

(2) Imposition of Surcharges

1. In case of misdeclaration and misclassification – Surcharge of 250% of the duty and

tax due.
Note: No surcharge shall be imposed when:
a. Discrepancy in duty is less than 10%; or
b. The declared tariff heading is rejected in a formal customs dispute settlement
process; or
c. The tariff classification declaration relied on an official government ruling.

2. In case of undervaluation – a surcharge of 250% of the duty and tax due.

Note: No surcharge shall be imposed when:
a. Discrepancy in duty is less than 10%; or
b. The declared value is rejected as a result of an official ruling or decision under the
customs dispute settlement process.

C. Unlawful Importation or Exportation (Exclude: Penalties)

1. Technical smuggling and Outright smuggling

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 Technical Smuggling – An act of importing goods in the country by means of fraudulent,
falsified or erroneous declaration of goods to its nature, kind, quality, quantity or weight to
reduce or avoid payment of prescribed taxes, duties and other charges (R.A. No. 10863, Sec.
102(nn)).

Outright Smuggling – An act of any person who shall import goods into the country:
1. Without complete customs prescribed importation documents; or
2. Without being cleared by customs or other regulatory government agencies (R.A. No. 10863,
Sec. 102(ff)).

Purpose of Outright Smuggling: To evade the payment of prescribed taxes, duties and other
government charges (R.A. No. 10863, Sec. 102(ff))

2. Other fraudulent practices

Fraudulent Practices Punishable by Surcharge

1. Misdeclaration, and undervaluation in goods declaration (Sec. 1400);
Misdeclaration as to quantity, quality, description, weight, or measurement of the goods, or
misclassification through insufficient or wrong description of the goods or use of wrong
tariff heading resulting to a discrepancy in duty and tax to be paid between what is legally
determined upon assessment and what is declared, shall be subject to a surcharge equivalent
to two hundred fifty percent (250%) of the duty and tax due. No surcharge shall be imposed
when the discrepancy in duty is less than ten percent (10%), or when the declared tariff
heading is rejected in a formal customs dispute settlement process involving difficult or
highly technical question of tariff classification, or when the tariff classification declaration
relied on an official government ruling.

There is undervaluation when: (a) the declared value fails to disclose in full the price actually
paid or payable or any dutiable adjustment to the price actually paid or payable; or (b) when
an incorrect valuation method is used or the valuation rules are not properly observed,
resulting in a discrepancy in duty and tax to be paid between what is legally determined as
the correct value against the declared value. When the undervaluation is established without
the need to go through the formal dispute settlement process provided for in this Act, a
surcharge shall be imposed equivalent to two hundred fifty percent (250%) of the duty and
tax due. No surcharge shall be imposed when the discrepancy in duly is less than ten percent
(10%); or the declared value is rejected as a result of an official ruling or decision under the
customs dispute settlement process involving difficult or highly technical question relating to
the application of customs valuation rules.

A discrepancy in duty and tax to be paid between what is legally determined and what is
declared amounting to more than thirty percent (30%) shall constitute a prima facie evidence
of fraud.

When the misdeclaration, misclassification or undervaluation is intentional or fraudulent,

such as when a false or altered document is submitted or when false statements or
information are knowingly made, a surcharge shall be imposed equivalent to five hundred
percent (500%) of the duty and tax due and that the goods shall be subject to seizure
regardless of the amount of the discrepancy without prejudice to the application of fines or

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 penalties provided under Section 1401 of this Act against the importer and other person or
persons who willfully participated in the fraudulent act.

2. Failure or refusal of party to give evidence or submit documents for assessment (Sec. 1402);
When the owner, importer or consignee of any imported goods, or the agent of either, fails or
refuses, upon lawful demand in writing by any customs officer to appear, lawfully depose, or
submit to examination or to answer any material question or refuses to produce records,
accounts or invoices in possession pertaining to the value, classification or disposition of the
goods in question and deemed material in assessing the same, the District Collector shall
assess a surcharge of twenty percent (20%) on the dutiable value of the goods which is the
subject of the importation.

3. Failure to declare baggage (Sec. 1404);

Whenever dutiable goods are not declared by any person arriving within the Philippines,
such goods shall be seized and the person may obtain release of such goods, if not imported
contrary to any law, upon payment of a surcharge equivalent to thirty percent (30%) of the
landed cost of such goods, in addition to all duties, taxes and other charges due. Nothing in
this section shall preclude the filing of criminal action against the offender.

4. Unauthorized withdrawal of imported goods from bonded warehouse (Sec. 1422);

Any person who causes the unauthorized withdrawal of imported goods stored from a CBW
shall be liable for payment of a surcharge of fifty percent (50%) of duties, taxes, customs
fees, and charges, found to be due and unpaid. The amount of surcharge shall be added to the
duties, taxes and charges due on the goods withdrawn. If the delinquency lasts for more than
one (1) year, the surcharge shall be increased by twenty-five percent (25%) of the unpaid
duties and taxes annually: Provided, That where the withdrawal is attended with fraud, such
as when a fake or altered withdrawal permit is submitted, the warehouse operator shall be
held liable under the pertinent provisions of this Act, without prejudice to the suspension or
revocation of the warehousing privileges granted by the Bureau pursuant to this Act.

5. Failure to pay duties, taxes and other charges (Sec. 1425); and
For failure to pay the duties, taxes and other charges of an assessment within fifteen (15)
days from the date of final assessment, a surcharge of ten percent (10%) of the total assessed
amount or balance thereon shall be added and collected, which surcharge shall be increased
to twenty-five percent (25%) if the delinquency lasts for more than one (1) year.

6. Breach of security (Sec. 1426)

Upon breach of security require d to be filed under this Act, the District Collector, subject to
the approval of the Commissioner, may accept in satisfaction thereof a smaller stun than that
mentioned in the penalty clause of the security, but in no case less than the amount necessary
to indemnify the government for the damage occasioned by such breach.

Fraudulent Practices Punishable by Fine

1. Sec. 1405. Vessel, Seacraft, or Aircraft Departing Before Undergoing Customs Formalities.
– Any vessel, seacraft, or aircraft arriving within the limits of a Customs District from a
foreign port which departs before undergoing customs formalities, without being compelled
to do so by stress of weather, pursuit or duress of enemies, or other necessity, shall be liable
for a fine of not less than one hundred thousand pesos (P100,000.00) but not more than three
hundred thousand pesos (P300,000.00).

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2. Sec. 1406. Obstruction to Boarding Officer. – If the master or pilot-in-command or any
member of the complement of any vessel or aircraft arriving at the Philippine port obstructs
or hinders any officer from lawfully going on board such vessel or aircraft for the purpose of
enforcing this Act, or intentionally causes any officer to be so obstructed or hindered, the
vessel or aircraft shall be liable to a fine of not less than one hundred thousand pesos
(P100,000.00) but not more than three hundred thousand pesos (P300,000.00).

3. Sec. 1407. Unlawful Boarding or Leaving of Vessel or Aircraft. – If, upon arrival at the
Philippine port, any master of a vessel or pilot-in-command of an aircraft engaged in a
foreign trade permits any person to board or leave the vessel or aircraft without the
permission of the customs officer-in-charge, the owner or operator of such vessel or aircraft
shall he liable for a fine of not less than one hundred thousand pesos (100,000.00) but not
more than three hundred thousand pesos (P300,000.00).

4. Sec. 1408. Unloading of Cargo Before Arrival at Port of Entry. – If, upon the arrival within
the limits of any Customs District of the Philippines of any vessel or aircraft engaged in
foreign trade, the master or pilot-in-command thereof permits any part of the cargo to be
unloaded before arrival at the port of entry, and without authority from a proper customs
officer, the owner, operator, or agent of such vessel or aircraft shall he liable for a fine of not
less five hundred thousand pesos (P500,000.00) but not more than two million pesos
(P2,000,000.00): Provided, That no fine shall accrue upon satisfactory proof to the proper
District Collector that the unloading was rendered necessary by stress of weather, accident or
other necessity: Provided, however, That the fine imposed herein shall be without prejudice
to the application of fines or penalties provided under Section 1401 of this Act.

5. Sec. 1409. Unloading of Cargo at Improper Time or Place After Arrival. – The owner or
operator of any vessel or aircraft from which cargo is discharged upon arrival in the
Philippines at a time or place other than that designated by the District Collector, shall be
fined not less one hundred thousand pesos (P100,000.00) but not more than three hundred
thousand pesos (P300,000.00): Provided, That no fine shall accrue upon satisfactory proof to
the proper District Collector that the unloading was rendered necessary by stress of weather,
accident or other necessity.

6. Sec. 1410. Failure to Exhibit or Deposit Documents. – When the master of a vessel or pilot-
in-command of an aircraft engaged in foreign trade fails to submit to the District Collector at
the time of entry of the vessel or aircraft the register or other documents in lieu thereof,
together with the clearance and other documents granted by the customs officers to the vessel
or aircraft at the last foreign port of departure, or fails to exhibit any certificate or other
documents required to be then exhibited, the owner or operator of such vessel or aircraft shall
be liable for a fine of not less than one hundred thousand pesos (P100.000.00) but not more
than three hundred thousand pesos (P300,000.00).

7. Sec. 1411. Bringing of Unmanifested Arms, Explosives or War Equipment. – The owner,
operator, or agent of a vessel or aircraft arriving at a port in the Philippines bearing cargo
consisting of firearms, gunpowder, cartridges, dynamite or any other explosives, munitions
or equipment of war not contained in the manifest of the vessel or aircraft, or which are
concealed on board, shall be liable for a fine of not less than five hundred thousand pesos
(P500,000.00) but not more than one million pesos (P1,000,000.00).

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8. Sec. 1412. Failure to Supply Advance and Requisite Manifests. – Failure to transmit the
electronic manifest within the required time as may be prescribed by the Bureau, prior to
arrival of the carrying vessel or aircraft at the port of entry shall make the owner, operator, or
agent of the vessel or aircraft liable for a fine of not less than one hundred thousand pesos
(P100,000.00) but not more than three hundred thousand pesos (P300,000.00).

If the transit time from port of origin to port of entry is at least seventy-two (72) hours, the
shipping or forwarding agent of the carrier or the vessel who fails to submit the manifest at
least twenty-four (24) hours before entry shall likewise be liable for a fine of not less than
one hundred thousand pesos (P100,000.00) but not more than three hundred thousand pesos
(P300,000.00).

9. Sec. 1413. Disappearance of Manifested Goods. – When any package or goods mentioned in
the manifest meant to be unloaded at the port of destination is not unloaded upon the arrival
of the vessel or aircraft, its agent shall be liable for a fine of not less than one hundred
thousand pesos (P100,000.00) but not more than three hundred thousand pesos (P300,000.00)
unless the disappearance of the package or the goods in question was not due to the
negligence of the master of the vessel or pilot-in-command of an aircraft, and is explained to
the satisfaction of the District Collector.
The owner, operator, or agent of a vessel or aircraft shall be liable for the payment of the
same fine when a package or goods listed in the manifest does not tally materially in
character or otherwise with the description thereof in the manifest.

10. Sec. 1414. Discrepancy Between Actual and Declared Weight of Manifested Goods. – If the
gross weight of goods or package described in the manifest or bill of lading exceeds the
declared weight by more than ten percent (10%), and such discrepancy was due to the
negligence of the master or pilot-in-command, the owner, employee, operator or agent of the
importing vessel or aircraft shall be liable for a fine of not more than twenty percent (20%) of
the value of the package or goods in respect to which the deficiency exists.

11. Sec. 1415. Discrepancy With the Master's or Pilot's-in-Command Report. – When a vessel or
aircraft arriving from a foreign port is compelled by necessity to unload in another port other
than the port of entry and permission is granted by the District Collector for the unloading of
the vessel or aircraft or the delivery of any part of the cargo and it shall be found that there is
discrepancy between the cargo unloaded and the report of the master or the pilot-in-
command and such discrepancy is not satisfactorily explained, the owner, operator or agent
of the vessel or aircraft shall be liable for a fine of not less than one hundred thousand pesos
(P100,000.00) but not more than three hundred thousand pesos (P300,000.00).

12. Sec. 1417. False Statement of Vessel's or Aircraft's Destination. – When the master or pilot-
in-command of a vessel or aircraft loaded with goods shall make a false statement as to the
next destination of such vessel or aircraft when that information is required by a customs
officer, the owner or operator of such vessel or aircraft shall be liable for a fine of not less
than one hundred thousand pesos (P100,000.00) but not more than three hundred thousand
pesos (P300,000.00). The arrival of a vessel or aircraft at a different port other than the one it
had been originally authorized and cleared for without having been impelled to do so by
necessity, shall be prima facie proof that the original statement of the actual destination of
the vessel or aircraft was false.

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13. Sec. 1419. Breaking of Seal Placed by Customs Officers. – If any seal placed by a customs
officer upon any vessel or aircraft or compartment thereof, or upon any box, trunk or other
package of goods on board is broken, the owner, operator, or agent of the vessel or aircraft
shall be liable for a fine of not less than one hundred thousand pesos (P100,000.00) but not
more than three hundred thousand pesos (P300,000.00) for each broken or destroyed seal.

14. Sec. 1420. Breaking of Lock or Fastening Placed by Customs Officers. – If any lock or other
fastening device placed by a customs officer upon any hatch door, or other means of
communication in the hold of a vessel or aircraft, or other part thereof for the security of the
same during the night time, is unlawfully opened, broken or removed, or if any of the goods
contained in the hold or in the other compartments so secured is clandestinely abstracted and
landed, the owner, operator, or agent of the vessel or aircraft shall be liable for a fine of not
less than one hundred thousand pesos (P100,000.00) but not more than three hundred
thousand pesos (P300.000.00).
15. Sec. 1421. Removal, Breakage, and Alteration of Marks. – Any person who, without
authority, willfully removes, breaks, injures, defaces or alters any customs seal or other
fastening or mark placed upon any vessel, vehicle, on land, sea or air, warehouse or package
containing merchandise or baggage in bond or in customs custody, shall be punished with the
penalty prescribed in Section 1420 hereof.

16. Sec. 1429. Other Offenses. – The owner or operator of a vessel, aircraft or train shall be liable
for a fine for the following acts:ChanRoblesVirtualawlibrary
(a) For anchoring at any dock, pier, wharf, quay, or bulkhead other than a port of entry, a
fine of not less than five hundred thousand pesos (P500,000.00) but not more than one
million pesos (P1,000,000.00) for overseas vessels;
(b) For dumping of garbage or slops over the sides of the vessel within three (3) miles from
the nearest coastline, a fine of not less than one million pesos (P1,000,000.00) but not
more than ten million pesos (P10,000,000.00);
(c) For dumping or causing to spread crude oil, kerosene, or gasoline in the bay or at the
piers within three (3) miles from the nearest coastline, a fine of not less than one million
pesos (P1,000,000.00) but not more than ten million pesos (P 10,000,000.00) for each
offense;
(d) For loading gasoline or any other petroleum products at a place other than that
designated, by the regulations, a fine of not less than five hundred thousand pesos
(P500,000.00) but not more than one million pesos (P1,000,000.00) for each offense;
(e) For causing the emission and spread of harmful gas, fumes and chemicals, a fine of not
less than one million pesos (P1,000,000.00) but not more than ten million pesos
(P10,000,000.00) for each offense; and
(f) For transporting hazardous waste, radioactive waste and other toxic substances as
provided under the Basel Convention and Republic Act No. 6969, otherwise known as
the "Toxic Substances and Hazardous and Nuclear Wastes Control Act of 1990", the
penalty shall be forfeiture of the vessel in favor of the government.

The fines imposed herein shall be without prejudice to the application of fines or penalties
provided under special laws and regulations.

Fraudulent Practices Considered as Criminal Offenses

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1. Sec. 1401. Unlawful Importation or Exportation. – Any person who shall fraudulently
import or export or bring into or outside of the Philippines any goods, or assist in so
doing, contrary to law, or shall receive, conceal, buy, sell, or in any manner facilitate the
transportation, concealment, or sale of such goods after importation, or shall commit
technical smuggling as defined in this Act shall be penalized by:
a. Imprisonment of not less than thirty (30) days and one (1) day but not more than six
(6) months, or a fine of not less than twenty-five thousand pesos (P25,000.00) but not
more than seventy-five thousand pesos (P75,000.00), or both, if the appraised value of
the goods unlawfully imported, to be determined in the manner prescribed under this
Act, including duties and taxes, of the goods unlawfully imported does not exceed two
hundred fifty thousand pesos (P250,000.00);

b) (b) Imprisonment of not less than six (6) months and one (1) day but not more than
one (1) year, or a fine of not less than seventy-five thousand pesos (P75,000.00) but
not more than one hundred fifty thousand pesos (P150,000.00), or both, if the
appraised value of the goods unlawfully imported, to be determined in the manner
prescribed under this Act, including duties and taxes, exceeds two hundred fifty
thousand pesos (P250,000.00) but not more than five hundred thousand pesos
(P500,000.00);
c) Imprisonment of not less than one (1) year and one (1) day but not more than three (3)
years, or a fine of not less than one hundred fifty thousand pesos (P150,000.00) but not
more than three hundred thousand pesos (P300,000.00) or both, if the appraised value
of the goods unlawfully imported, to be determined in the manner prescribed under
this Act, including duties and taxes, exceeds five hundred thousand pesos
(P500,000.00) but not more than one million pesos (P 1,000,000.00);
d) Imprisonment of not less than three (3) years and one (1) day but not more than six (6)
years, or a fine of not less than three hundred thousand pesos (P300,000.00) but not
more than one million five hundred thousand pesos (P 1,500,000.00), or both, if the
appraised value of the goods unlawfully imported, to be determined in the manner
prescribed under this Act, including duties and taxes, exceeds one million pesos
(P1,000,000.00) but not more than five million pesos (P5,000,0 00.00);
e) Imprisonment of not less than six (6) years and one (1) day but not more than twelve
(12) years, or a fine of not less than one million five hundred thousand pesos (P
1,500,000.00) but not more than fifteen million pesos (P15,000,000.00), or both, if the
appraised value of the goods unlawfully imported, to be determined in the manner
prescribed under this Act, including duties and taxes, exceeds five million pesos
(P5,000,000.00) but not more than fifty million pesos (P50,000,000.00);
f) Imprisonment of not less than twelve (12) years and one (1) day but not more than
twenty (20) years, or a fine of not less than fifteen mill-inn pesos (P15,000,000.00) but
not more than fifty million pesos (P50,000,000.00), or both, if the appraised value of
the goods unlawfully imported, to be determined in the manner prescribed under this
Act, including duties and taxes, exceeds fifty million pesos (P50,000,000.00) but not
more than two hundred million pesos (P200,000,000.00);
g) If the appraised value of the goods unlawfully imported to be determined in the
manner prescribed under this Act, including duties and taxes, exceeds two hundred
million pesos (P200,000,000.00) or if the aggregate amount of the appraised value of
the goods which are the subject of unlawful importation committed in more than one
instance, including duties and taxes, exceeds two hundred million pesos
(P200,000,000.00), the same shall be deemed as a heinous crime and shall be

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 punishable with a penalty of reclusion perpetua and a fine of not less than fifty million
pesos (P50,000,000.00); and
h) The penalty of prision mayor shall be imposed when the crime of serious physical
injuries shall have been committed, and the penalty of reclusion perpetua shall be
imposed when the crime of homicide shall have been committed by reason or on the
occasion of the unlawful importation.

In applying the above scale of penalties, an offender who is a foreigner shall be deported
without further proceedings after serving the sentence. If the offender is a public officer
or employee, the penalty which is the next higher in degree shall be imposed in addition
to the penalty of perpetual disqualification from public office, and disqualification to vote
and to participate in any public election. If the offender fails to pay the fine, subsidiary
imprisonment shall be served.

When, upon trial for violation of this section, the defendant is shown to have had
possession of the goods in question, possession shall be deemed sufficient evidence to
authorize conviction unless the defendant shall explain the possession to the satisfaction
of the court: Provided, That each act of unlawful importation or exportation shall be
deemed as a separate offense: Provided, however, That payment of the tax due after
apprehension shall not constitute a valid defense in any prosecution, under this section:
Provided, further, That outright smuggling shall also be punishable under this section:
Provided, finally,That the rights and privileges provided in this Act for the importers,
consignees, exporters, service providers, third parties and other third parties who
committed this offense shall be revoked.

2. Sec. 1403. Other Fraudulent Practices Against Customs Revenue. – Any person who
makes or attempts to make any entry of imported or exported goods by means of any
false or fraudulent statement, document or practice or knowingly and willfully files any
false or fraudulent claim for payment of drawback or refund of duties shall, for each act,
be punished in accordance with the penalties prescribed in Section 1401 of this Act.

3. Sec. 1416. Failure to Report Fraud. – A master, pilot-in-command or other officer,

owner or agent of any vessel or aircraft trading with or within the Philippines who has
knowledge of the commission of fraud that shall result in the loss or diminution of
customs revenue but fails to report all information relative thereto to the Distract
Collector shall be penalized with imprisonment of not less than six (6) months and one
(1) day but not more than one (1) year and shall be liable for a fine of not less than one
hundred thousand pesos (P100,000.00) but not more than three hundred thousand pesos
(P300,000.00). If the offender is a foreigner, the offender shall be deported after serving
the sentence. If the offender is a public officer or employee, the offender shall suffer
additional penalty of perpetual disqualification to hold public office, to vote and to
participate in any election. All the benefits due from service in the government, including
the separation and retirement benefits, shall be forfeited.

4. Sec. 1418. Affixing Seals. – Any person who, without authority, affixes or attaches a
customs seal, fastening, or any mark, or fastening purporting to be a customs seal, to any
vessel, aircraft, vehicle, warehouse, or package, shall be penalized with imprisonment of
not less than six (6) months and one (1) day but not more than one (1) year, and shall be
liable for a fine of not less than one hundred thousand pesos (P100,000.00) but not more

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 than three hundred thousand pesos (P300,000.00). If the offender is a foreigner, the
offender shall be deported after serving the sentence. If the offender is a public officer or
employee, the offender shall suffer an additional penalty of perpetual disqualification to
hold public office and disqualification from exercising the right to vote and to participate
in any election.

5. Sec. 1423. Removing or Repacking Goods in Warehouse. – Any person who fraudulently
conceals, removes, or repacks merchandise in any warehouse or fraudulently alters,
defaces, or obliterates any mark or numbers placed upon packages deposited in such
warehouse, or shall aid or abet any such acts, shall be punished with the penalties
prescribed in Section 1418 hereof.

Merchandise so concealed, removed, or repacked, or packages upon which marks,

numbers or the values thereof have been so altered, defaced, or obliterated shall be
forfeited in favor of the government.

6. Sec. 1427. Failure to Keep Importation Records and Full Access to Customs Officers. –
Any person who fails to keep all the records of importations or books of accounts,
business and computer systems and all customs commercial data in the manner
prescribed under this Act, shall be punished with imprisonment of not less than three (3)
years and one (1) day but not more than six (6) years and/or a fine of one million pesos
(Pl,000,000.00). This penalty shall likewise be imposed against importers and brokers
who deny an authorized customs officer full and free access to such records, books of
accounts, business and computer systems, and all customs commercial data including
payment records, without prejudice to the imposition of the administrative sanctions by
the Bureau against contumacious importers, including the authority to hold delivery or
release of their imported goods.

7. Sec. 1428. Concealment or Destruction of Evidence of Fraud. – Any person who

willfully conceals or destroys any invoice, book, or document relating to any goods liable
to duty after an inspection thereof has been demanded by the District Collector or at any
time conceals or destroys any such invoice, book, or document for the purpose of
suppressing any evidence of fraud therein contained, shall be penalized with
imprisonment of not less than three (3) years and one (1) day but not more than six (6)
years and shall be liable for a fine of not less than three hundred thousand pesos
(P300,000.00) but not more than one million pesos (P1,000,000.00).

D. Remedies

1. Government

a) Administrative/extrajudicial

(1) Search, seizure, forfeiture, arrest

Seizure refers to the actual or constructive taking or bringing into custody the goods,
things or chattels by virtue of a Warrant of Seizure and Detention issued by the Collector
of Customs for violation of the CMTA.

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 Forfeiture refers to the permanent transfer of ownership of seized items from the
importer or owner to the government for an established violation of CMTA.

Summary of Seizure and Forfeiture Proceedings

a. Warrant of Seizure (WS) – the District Collector shall issue a WS upon
determination of the existence of probable cause that violation of the CMTA was
committed (R.A. No. 10863, Sec. 1117).
b. Service of WS – upon the owner or importer of the goods or the authorized
representative thereof (R.A. No. 10863, Sec. 1119).

Note: if, within 15 days after service of warrant, no owner or agent can he found or
appears before the District Collector, the seized goods shall be forfeited ipso facto in
favour of the government (R.A. No. 10863, Sec. 1121).

c. Preparation of List of seized goods by the District Collector (including

description, classification, and valuation) (R.A. No. 10863, Sec. 1120).
d. Hearing – within 15 days, or 5 days in case of perishable goods, from issuance of the
WS (R.A. No. 10863, Sec. 1125).
e. Rendition of Decision – the District Collector shall render a decision within thirty
(30) days upon termination of the hearing or within 10 days in case of perishable
goods (R.A. No. 10863, Sec. 1125).

Note: Upon motion of the importer of the perishable goods, the goods may be sold at a
public auction during the pendency of the forfeiture proceedings. The proceeds of the
auction shall be held in escrow until the final resolution of the proceedings (R.A. No.
10863, Sec. 1118).

f. Appeal to the Commissioner – within 15 days or 5 days in case of perishable goods,

from receipt of the decision (R.A. No. 10863, Sec 1126)

(2) Authority of the Commissioner to make compromise

Sec. 1131. Authority of the Commissioner to Make Compromise. – Subject to the

approval of the Secretary of Finance, the Commissioner may compromise any
administrative case arising under this Act involving the imposition of fines and
surcharges, including those arising from the conduct of a post clearance audit, unless
otherwise specified by law.

Cases involving forfeiture proceedings shall however not be subject to any compromise.

b) Judicial

This remedy is normally availed of when the tax lien is lost by the release of the goods.
1. Civil action; and
2. Criminal action

(1) Rules on appeal including jurisdiction

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 Sec. 1135. Supervision and Control over Criminal and Civil Proceedings. – Civil and
criminal actions and proceedings instituted on behalf of the Government under the
authority of this Act or other laws enforced by the Bureau shall be brought in the name of
the government of the Philippines and shall be prosecuted and handled by the Bureau
with the assistance of the Department of Justice (DOJ): Provided, That the determination
of the existence of probable cause and the subsequent filing of any criminal or civil case
with the proper court against violators of this Act shall exclusively belong to the DOJ:
Provided, however, that no civil or criminal action for the recovery of duties or the
enforcement of any fine, penalty or forfeiture under this Act shall be filed in court
without the approval of the Commissioner.

2. Taxpayer

(a) Protest

Definition
A formal written statement objecting to the imposition and collection of additional customs
duties and taxes to preserve the importer’s right to a refund or release of security, if posted,
in case it turns out that additional taxes are not legally due.

When Protest May Arise

Protest may arise when a ruling or decision of the District Collector or customs officer
involves:
a. Customs valuation;
b. Rules of origin; and
c. Other customs issues, except the fixing of fines in seizure cases (R.A. No. 10863, Sec.
1106).

When Protest May be Made

The party adversely affected may appeal by way of protest against such ruling or decision:
a. By presenting to the Commissioner at the time when payment of the amount claimed to
be due the government is made; or
b. Within 15 days thereafter, a written protest setting forth the objection to the ruling or
decision in question and the reasons therefore.

Protest Exclusively Remedy in Protestable Case

In all cases subject to protest, the interested party who desires to have the action of the
District Collector reviewed, shall file a protest, otherwise the action of the District Collector
shall be final and conclusive (R.A. No. 10863, Sec. 1107).

Amount Protestated May or May Not Be Paid at the Time of Protest

Subject to the approval of the SOF, the Commissioner shall provide such rules and
regulations as to the requirement:
1. For payment or non-payment of the disputed amount; and
2. In case of non-payment, the release of the importation under protest upon posting of
sufficient security (R.A. No. 10863, Sec. 1108).

Form and Scope of Protest

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 A protest shall:
1. Specify the particular decision or ruling of the District Collector for which protest is
being made;
2. Indicate the particular ground or grounds upon which the protesting party bases the claim
for relief;
3. Be limited of the particular goods subject of a goods declaration, but any number of
issues may be raised in a protest with reference to the goods declaration constituting the
subject matter of the protest. (R.A. No. 10863, Sec. 1108);

Decision in Protest
The Commissioner shall render a decision within 30 days from receipt of the protest. In case
the protest is sustained, in whole or in part, the appropriate order shall be made, and the entry
shall be reassessed, if necessary (R.A No. 10863, Sec. 1110);

Decision Adverse to the Government

When the decision of the Collector is adverse to the government, said decision sis
automatically elevated to the Commissioner for review, and if such decision is affirmed by
the Commissioner, the same shall be automatically elevated, and finally, to the SOF (R.A.
No. 10863, Sec. 1128).

Reasons:
a. To protect the interest of the Government;
b. A favourable decision will not be appealed by the taxpayer and certainly a Collector will
not appeal his own decision; and
c. Lifeblood Theory (Yaokasin v. Commissioner of Customs, G.R. No. 84111, December 22,
1989).

(b) Abandonment

The renunciation by an importer of all his interests and property rights over imported articles
(R.A. No. 10863, Sec. 1129).

Kinds of Abandonment
1. Express Abandonment – When the owner, importer, or consignee of the imported
article, expressly signifies in writing and under oath to the Collector of Customs his
intention to abandon the shipment in favour of the government (R.A. No. 10863, Sec.
1129(a)).
2. Implied Abandonment
a. Failure to file goods declaration
When the owner, importer, consignee, or interested party after due notice, fails to file
the goods declaration within the prescribed period.

Note: the term goods declaration shall include provisional or incomplete goods
declaration deemed valid by the Bureau.

b. Failure to pay duties and taxes

Having filed such goods declaration:
i. The owner, importer, consignee or interested party after due notice, fails to pay
the assessed duties and taxes; or

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 ii. If the regulated goods failed to comply with prior import permit requirement
within 15 days from the date of final assessment.

Note: If such regulated goods are subject of an Alert Order and the assessed D&T are
not paid within 15 days from notification by the Bureau of the resolution of the Alert
Order, the same shall also be deemed abandoned.

c. Failure to claim the goods

i. Having paid the assessed duties, taxes and other charges, the owner, importer,
consignee or other interested party after due notice, ,fails to claim the goods
within 30 days from payment.
ii. When the owner or importer fails to claim goods in customs bonded warehouses
within the prescribed period (R.A. No. 10863, Sec. 1129(b-e)).

Due Notice Requirement in Abandonment

The due notice requirement may be provided by the Bureau through:
a. Electronic notice; or
b. Personal service.
For non-regular importers, notification shall be by registered mail or personal service. For
this purpose, the accreditation of importers, exporters, and other third parties shall include
provision for mandatory receipt of electronic notices

Effects of Abandonment
1. Expressly abandoned goods shall ipso facto be deemed the property of the Government
and shall be disposed of in accordance with the provisions of R.A. No. 10863;
2. Impliedly abandoned goods may be reclaimed by the owner or importer of goods at any
time within 30 days after the lapse of the prescribed period to file the declaration; and
3. When the Bureau sell impliedly abandoned goods, the proceeds of the sale, after
deduction of any duty and tax shall be turned over to those persons entitled to receive
them or if not possible, held at their disposal for a specified period. After the lapse of the
specified period, the balance shall be transferred to the forfeiture fund (R.A. No. 10863,
Sec. 1130).

(c) Abatement and refund

The reduction or diminution, in whole or in part, of duties and taxes where payment has not
been made (R.A. No. 10863, Sec. 102(a)).

Claim for Abatement

When goods have not yet been released for consumption or have been placed under another
customs procedure, the declarant shall neither be required to pay the duties nor be entitled to
refund thereof in any of the following case: (ADS)
a. When the goods are Abandoned, destroyed rendered commercially valueless;
b. When the goods are Destroyed or irrevocably lost by accident or force majeure, the
remaining waste or scrap after destruction shall be subject to duties and taxes; and
c. When there are Shortages due to the nature of the goods (R.A. No. 10863, Sec. 904).

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 Note: No abatement of duties shall be made on account of damage incurred or deterioration
suffered during the voyage of importation and duties will be assessed on the actual quantity
imported (R.A. No. 10863, Sec. 905).

Refund
The return, in whole or in part, of duties and taxes paid on goods (R.A. No. 10863, Sec.
102(ll)).

Grant of Refund
Where it is established that duties and taxes have been overcharged as a result of an error in
the assessment or goods declaration (R.A. No. 10863, Sec. 903).

Denial of Refund
If the amount of duties and taxes involved is less than P5,000 (R.A. No. 10863, Sec. 903).

Claim for Refund: (W12C)

a. In Writing;
b. Filed with the Bureau within 12 months from the date of payment of duties and taxes;
and
c. If a corresponding refund of internal revenue taxes on the same importation becomes due,
the Bureau shall cause the refund of internal revenue taxes in favor of the importer after
issuance of a Certification from the CIR, when applicable (R.A. No. 10863, Sec. 913).

The importer may file an appeal of a denial of a claim for refund or abatement with the
Commissioner within 30 days from the date of the receipt of the denial (R.A. No. 10863,
Sec. 913).

Drawback (R.A. No. 10863, Secs. 900-902)

An allowance made by the government upon the duties due on imported merchandise when
the importer, instead of selling it here, re-exports it; or refunding of such duties if already
paid. This allowance amounts, in some cases, to the whole of the original duties; in others,
to a part only (Black’s Law Dictionary).

V. JUDICIAL REMEDIES [R.A. NO. 1125, as amended, and the Revised Rules of the Court of Tax
Appeals (CTA)]

A. Jurisdiction of the CTA

1. Exclusive appellate jurisdiction over civil tax cases

a) Cases within the jurisdiction of the court en banc

A. Decisions or Resolutions on Motions for Reconsideration or New Trial of the Court

in Division in the Exercise of its Exclusive Appellate Jurisdiction over:
1. Cases arising from administrative agencies – BIR, BOC, DOF, DTI, DA;
2. Local tax cases decided by the RTCs in the exercise of their original jurisdiction;
and
3. Tax collection cases decided by the RTCs in the exercise of their original
jurisdiction involving final and executory assessments for taxes, fees, charges and

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 penalties, where the principal amount of taxes and penalties claimed is less than P1
Million.

B. Decisions, Resolutions or Orders on Motions for Reconsideration or New Trial of

the Court in Division in the Exercise of its Exclusive Original Jurisdiction over tax
collection cases where the principal amount of taxes and fees exclusive of charges and
penalties claimed is P 1 Million or more.

Note: A petition for review of a decision or resolution of the Court in Division must be
preceded by the filing of a timely motion for reconsideration or new trial with the
Division. The word “must” clearly indicates the mandatory – not merely directory –
nature of a requirement (Commissioner of Internal Revenue v. Sales, G.R. No. 183868,
November 22, 2010).

C. Decisions, Resolutions or Orders of the RTCs decided or resolved by them in the

exercise of their Appellate Jurisdiction over
1. Local tax cases, and
2. Tax collection cases.

Note: Real property tax cases decided by the RTC are not under the CTA’s jurisdiction.
Decisions, orders, and resolutions of the RTC in local tax cases do not include real
property tax which is an ad valorem tax. The jurisdiction of the CTA involves only
those real property tax cases originally decided by the Central Board of Assessment
Appeals (CBAA) in the exercise of its appellate jurisdiction, under Sec. 7(a)(5) of R.A.
No. 9282 and under R.A. No. 7160 (Habawel v. Court of Tax Appeals, G.R. No.
174759, September 7, 2011).

The CTA has jurisdiction to determine if the warrant of distraint and levy issued by the
BIR is valid and to rule if the Waiver of Statute of Limitations was validly effected
(Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G.R. No. 162852,
December 16, 2004).

D. Decisions of the CBAA in the Exercise of its Appellate Jurisdiction over cases
involving the assessment and taxation of real property originally decided by the
provincial or city board of assessment appeals.

b) Cases within the jurisdiction of the court in divisions

A. Decisions of or Inaction by the CIR

1. In cases involving disputed assessments, refunds or internal revenue taxes, fees or
other charges, penalties in relation thereto; or
2. Other matters arising under the NIRC or other laws administered by the BIR.

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 The term “other matters” is limited only by the qualifying phrase that follows it. The
appellate jurisdiction of the CTA Division is not limited to cases which involve decisions
of the CIR on matters relating to assessments or refunds. It covers other cases that arise
out of the NIRC or related laws administered by the BIR. The issue of whether or not the
BIR’s right to collect taxes had already prescribed is a subject matter falling under the
NIRC. In connection therewith, the NIRC also states that the collection of taxes sis one
of the duties of the BIR. Thus, from the foregoing, the issue of prescription of the BIR’s
right to collect taxes may be considered as covered by the term “other matters” over
which the CTA has appellate jurisdiction (Commissioner of Internal Revenue v.
Hambrecht & Quist Phil., Inc., G.R. No. 169225, November 17, 2010).

Note: The inaction by the CIR within the 180-day period under Sec. 228 of the NIRC is
deemed a denial for purposes of allowing the taxpayer to appeal with the CTA but it does
not necessarily constitute the CIR’s formal decision (RRCTA, Rule 4, Sec. 3(a)(2)).

B. Decisions of the Commissioner of Customs in cases involving liability for customs

duties, fees or other money charges; seizures, detention or release of other property
affected; fines, forfeitures or other penalties in relation thereto; or other matters arising
under the Customs Law or other laws administered by the BOC.

C. Decisions of the Secretary of Finance on customs cases elevated for automatic review
from decisions of the Commissioner of Customs which are adverse to the Government
under the CMTA;

Reason and Purpose of Automatic Review: To protect the Government against corrupt
and conniving customs collector. The owner of the goods cannot be expected to appeal
the collector’s division when it is favourable to him (2 DIMAAMPO, supra at 248)

D. Decisions of the Secretary of Trade and Industry in the case of non-agricultural

product, commodity or article, and the Secretary of Agriculture in the case of
agricultural product, commodity or article, involving dumping (R.A. No. 8752) and
countervailing duties (R.A. No. 8751) and safeguard measures (R.A. No. 8800), where
either party may appeal the decision to impose or not to impose said duties.

RRs, RMOs, and RMCs are Appealable to CTA

The questioned RRs, RMOs, and RMCs are actually rulings or opinions of the CIR
implementing the NIRC and are appealable to the CTA (Commissioner of Internal
Revenue v. Leal, G.R. No. 113459, November 18, 2002).

E. Decisions, Resolutions or Orders of the RTC in Local Tax Cases decided or resolved
by them in the Exercise of their Original Jurisdiction;
With the passage of R.A. No. 9282, the authority to exercise either original or appellate
jurisdiction over local tax cases depended on the amount of the claim (China Banking
Corp. v. City Treasurer of Manila, G.R. No. 204117, July 1, 2015).

F. Appeals from the Judgments, Resolutions or Orders of the RTCs in Tax Collection
Cases originally decided by them where the principal amount of taxes and fees,
exclusive of charges and penalties, claimed is less than P1 Million.

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 2. Criminal cases

a) Exclusive original jurisdiction

Those arising from violations of the NIRC or CMTA and other laws administered by the BIR
or BOC, where the principal amount of taxes and fees, exclusive of charges and penalties,
claimed is P1 Million or more (RRCTA, Rule 4, Sec. 3(b)(1)).

Regular courts shall have jurisdiction in offenses of felonies where (R.A. No. 1125, Sec.
7(b)(1)).
1. The principal amount of taxes and fees, exclusive of charges and penalties claimed is less
than P1 Million pesos; or
2. No specified amount is claimed.

Note: As to which court shall exercise jurisdiction, the rules on jurisdiction in criminal cases
shall be followed. The jurisdiction of the CTA in these cases shall be appellate (R.A No.
1125, Sec. 7(b)(1), as amended).

Inclusion of Civil Action in Criminal Action

The criminal action and the corresponding civil action for the recovery of civil liability for
taxes and penalties shall be deemed jointly instituted in the same proceeding. The filing of
criminal action shall necessarily carry with it the filing of such civil action separately from
the criminal action shall be allowed or recognized (RRCTA, Rule 9, Sec. 11).

b) Exclusive appellate jurisdiction in criminal cases

A. Appeals from the Judgments, Resolutions or Orders of the RTCs in their Original
Jurisdiction in Criminal Offenses arising from violations of the NIRC or CMTA and
other laws administered by the BIR or BOC, where the principal amount of taxes and
fees, exclusive of charges and penalties, claimed is less than P1 Million or where there is
no specified amount claim (RRCTA, Rule 4, Sec. 3(b)(2)).
B. Criminal Offenses over Petitions for Review of the Judgments, Resolutions or
Orders of the RTCs in the exercise of their Appellate Jurisdiction over tax cases
originally decided by the MTCs or MCTCs (R.A. No. 1125, as amended, Sec. 7(b)(2)(b)).

B. Judicial procedures

1. Judicial action for collection of taxes

a) Internal revenue taxes

The Government may enforce collection of internal revenue taxes by:

a. Civil action
i. By filing a civil cases for collection of a sum of money with the proper regular court
(NIRC, Secs. 203 and 222); or
ii. By filing an answer to the petition for review filed by taxpayer with CTA (Fernandez
Hermanos, Inc. v. Commissioner of International Revenue, G.R. No. L-21551,
September 30, 1969);

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 b. Criminal action
i. Attempt to evade or defeat tax (NIRC, Sec. 254); or
ii. Failure to file return, supply correct and accurate information, pay tax, withhold and
remit tax and refund excess taxes withheld on compensation (NIRC, Sec. 255).

Note: The judgment in the criminal case shall not only impose the penalty but shall also
order the payment of taxes subject of the criminal case as finally decided by the
Commissioner (NIRC, Sec. 205).

Any person convicted of a crime penalized by the NIRC shall, in addition to being liable for
the payment of the tax, be subject to the penalties imposed herein (NIRC, Sec. 253(a)).

Form and Mode Proceeding:

Same for both Civil and Criminal actions
a. It shall be brought in the name of the Government of the Philippines (i.e., Republic of the
Philippines v. delinquent taxpayer).
b. It shall be conducted by legal officers of the BIR
c. No civil or criminal action for the recovery of the taxes shall be filed in court without the
approval of the CIR (NIRC, Sec. 220).

b) Local taxes

The LGU concerned may enforce the collection of delinquent taxes, fees, charges and other
revenues by civil action in any court of competent jurisdiction (LGC, Sec. 183).
1. Court Action – The LGU nay file an ordinary suit for the collection of sum of money
before the MTC, RTC, or CTA Division depending upon the jurisdictional amount
2. Declaratory relief
3. Injunction – to be issued by the CTA if collection may jeopardize the interest of the
government and/or the taxpayer, subject to certain conditions (R.A. No. 9282, Sec. 9).

(1) Prescriptive period

Prescriptive period for the assessment of local tax

The assessment of local tax shall prescribe within five (5) years from the date taxes, fees,
or charges become due (LGC, Sec. 194(a)). However, in fraud or intent to evade the
payment of taxes, fees, or charges, the same may be assessed within 10 years from the
date of the discovery thereof (LGC, Sec. 194, Par. b).

Prescriptive period for the collection of local tax

The collection of local tax shall prescribe within five (5) years from the date of
assessment (LGC, Sec. 194, Par. c).

Grounds for the Suspension of the Running of the Prescriptive Periods

1. The Treasurer is legally prevented from the assessment or collection of the tax;
2. The taxpayer requests for a reinvestigation and executes a waiver in writing before
the expiration of the period within which to assess or collect; and
3. The taxpayer is out of the country or otherwise cannot be located (LGC, Sec. 194).

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2. Civil cases

a) Who may appeal, mode of appeal, effect of appeal

(1) Suspension of collection of tax

When to file the motion to suspend collection of tax: May be filed together with the
petition for review or with the answer, or in a separate motion filed by the interested
party at any stage of the proceedings (RRCTA, Rule 10, Sec. 3).

Requisites for Suspension of Collection of Tax: (DIVA-F)

1. The taxpayer may be required to Deposit the amount claimed or to file a surety bond
for not more than double the amount with the Court (R.A. No. 1125, Sec. 11);
2. In the opinion of the CTA, the collection may jeopardize the interest of the
Government and/or the taxpayer (RRCTA, Rule 10, Sec. 2);
3. The motion for the suspension of the collection of tax shall be Verified and shall state
clearly and distinctly the facts and the grounds relied upon in support of the motion
(RRCTA, Rule 10, Sec. 4);
4. There is an Appeal to the CTA from a decision of the CIR; and
5. That the appeal is not Frivolous or dilatory.

(2) Injunction not available to restrain collection

Justification: Lifeblood Theory

Exception: Injunction may be issued by the CTA in aid of its appellate jurisdiction under
RA 1125 (as amended by RA 9282).

Conditions for the Issuance of an Injunction by the Court of Tax Appeals

The CTA may enjoin collection of taxes:
a. If in its opinion the same may jeopardize the interest of the government and/or the
taxpayer.
b. In this instance, the court may require the taxpayer either to deposit the amount
claimed or file a surety bond for not more than double the amount with the court.

* Before enforcement of remedies, assessment is necessary to trigger the process. If no

return is filed, the Commissioner is empowered to obtain information, and to
summon/examine, and take testimony of persons to determine the amount of tax due.
(Sec. 5, 1997 NIRC)

(3) Taking of evidence

Power to Receive Evidence

The CTA may receive evidence in the following cases:
1. In all cases falling within the original jurisdiction of the Court in Division pursuant to
Sec. 3, Rule 4 of RRCTA; and
2. In appeals in both civil and criminal cases where the Court grants a new trial pursuant
to Sec. 2, Rule 53 and Sec. 12, Rule 124 of the Rules of Court (RRCTA, Rule 12, Sec.
2).

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 Evidence can be taken by a:
1. Justice of the CTA
It may be made motu propio or upon proper motion, when:
a. The determination of a question of fact arises at any stage of the proceedings; or
b. The taking of an account is necessary; or
c. The determination of an issue of fact requires the examination of a long account
(RRCTA, Rule 12, Sec. 3).

Upon completion of the hearing the Justice concerned shall submit to the Court a
written report thereon, stating the findings and conclusion (RRCTA, Rule 12, Sec. 3)

2. Court official
a. Clerk of Court;
b. Division Clerk of Court;
c. Their assistants who are members of the Philippine Bar; and
d. Court attorney (RRCTA, Rule 12, Sec. 3).

Purpose: Making comparison with the original and identification by witnesses of the
received documentary evidence (RRCTA, Rule 12, Sec. 3).

It applies only in default or ex parte or where the parties agree in writing. The court
official shall have no power to rule on objections (RRCTA, Rule 12, Sec. 3).

(4) Motion for reconsideration or new trial

The filing of a motion for reconsideration or new trial shall suspend the running of the
period within which an appeal may be perfected (RRCTA, Rule 15, Sec. 4).

A denial of the CTA in Division of the motion for reconsideration or new trial of the
decisions and resolution shall be the subject of a petition for review filed with the CTA
En Banc (4 DOMONDON, supra at 784).

Note: Rule 37, Sec. 1 of the Rules of Court was adopted by the RRCTA in Rule 15, Sec.
5. RRCTA has not included the phrase “motion for reconsideration.” Thus, for tax
matters Rule 37 applies only to “motions for new trial” (Ibid.)

b) Appeal of the CTA, en banc

A. Within fifteen (15) days from receipt of the questioned decision or ruling of CTA in
Division on a motion for reconsideration or new trial.

Note: The Motion for Reconsideration or Motion for New Trial is a condition precedent
before bringing the case to the CTA En Banc (Ingles, supra at 427). Before the CTA En
Banc could take cognizance of the petition for review concerning a case falling under its
exclusive appellate jurisdiction, the litigant must sufficiently show that it sought prior
reconsideration or moved for a new trial with the concerned CTA division
(Commissioner of Customs v. Marina Sales, Inc., G.R. No. 183868, November 22, 2010).

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 Upon proper motion and the payment of the full amount of the docket and other lawful
fees and deposit for costs before the expiration of the reglementary period, the CTA may
grant an additional period not exceeding fifteen days from the expiration of the original
period within which to file the petition for review.

B. Within thirty (30) days from receipt of the questioned decision or ruling of the CBAA
and RTC in the exercise of their appellate jurisdiction.

Mode of Appeal: Petition for Review under Rule 43 of the Rules of Court (RRCTA, Rule
8, Sec. 4).

Note: In cases falling under the exclusive appellate jurisdiction of the Court en banc, the
petition for review of a decision or resolution of the Court in Division must be preceded
by the filing of a timely motion for reconsideration or new trial with the Division
(RRCTA, Rule 8, Sec. 1).

c) Petition for review in certiorari to the SC

Within 15 days from receipt of resolution of the CTA en banc on the motion for
reconsideration or new trial (RRCTA, Rule 16, Sec. 1)

Note: The motion for reconsideration or for new trial filed before the Court shall be deemed
abandoned if, during its pendency, the movant shall appeal to the SC (RRCTA, Rule 16, Sec.
2).

3. Criminal Cases

a) Institution and prosecution of criminal actions

(1) Institution of civil action in criminal action

Effect of Institution of Criminal Action

The institution of the criminal action shall interrupt the running of the period of
prescription (RRCTA, Rule 9(2)(2)).

b) Appeal and period to appeal

1. In cases decided by the RTC in the exercise of its original jurisdiction – file a notice of
appeal pursuant to Sections 3(a) and 6, Rule 122 of the Rules of Court within 15 days
from receipt of a copy of the decision or final order with the court which rendered the
final judgment or order appealed from.
Note: The court Decision shall act on the appeal.

2. In cases decided by the Court Decision – File a petition for review under Rule 43 of the
Rules of Court within 15 days from receipt of a copy of the decision or resolution
appealed from.

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 Note: The Court En Banc shall act on the appeal. Time for filing of the petition may be
extended for an additional period not exceeding 15 days.

3. In cases decided by the RTC in the exercise of their appellate jurisdiction – file a petition
for review under Rule 43 of the Rules of Court within 15 days from receipt of a copy of
the decision or final order appealed from.
Note: The Court En Banc shall act on the appeal. In criminal actions involving violations
of the NIRC and other laws enforced by the BIR, and CMTA and other laws enforced by
the BOC, the CIR and the COC, respectively must approve their filing (RRCTA, Rule 9,
Sec. 2).

(1) Solicitor General as counsel for the people and government officials sued in their
official capacity

He may also deputize legal officers of the BIR (cases brought under the NIRC and other
laws enforced by BIR) or the legal officers of BOC (cases brought under CMTA or other
laws enforced by BOC), to appear in behalf of the officials of said agencies in their
official capacity: Provided, the Solicitor General shall have direct control and supervision
at all times over them (RRCTA, Rule 9, Sec. 10).

c) Petition for review on certiorari to the SC

Within 15 days from receipt of resolution of the CTA en banc on the motion for
reconsideration or new trial (RRCTA, Rule 16, Sec. 1)

Note: The motion for reconsideration or for new trial filed before the Court shall be deemed
abandoned if, during its pendency, the movant shall appeal to the SC (RRCTA, Rule 16, Sec.
2).

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