TAXATION LAW
TABLE OF CONTENTS III.!
TAXATION I...............................................1
I.! GENERAL PRINCIPLES OF TAXATION ......... 2!
! Definition, Concept and Purpose of
Taxation.............................................................. 2!
! Nature and Characteristics of Taxation .... 3!
! Power of Taxation as Distinguished from
Police Power and Eminent Domain ................... 5!
! Theory and Basis of Taxation .................... 6!
! Principles of a Sound Tax System ............. 7!
! Scope and Limitations of Taxation ........... 7!
1.! Inherent Limitations .............................. 7!
2.! Constitutional Limitations .................... 9!
! Situs of Taxation ....................................... 15!
! Stages or Aspects of Taxation .................. 16!
! Definition, Nature and Characteristics of
Taxes ................................................................. 17!
! Requisites of a Valid Tax .......................... 17!
! Tax as Distinguished from Other Forms of
Exactions ........................................................... 18!
! Kinds of Taxes.......................................... 20!
! Sources of Tax Laws ............................. 21!
! Construction and Interpretation ............. 23!
1.! Tax Laws .............................................. 23!
2.! Tax Exemption and Exclusion ............. 23!
3.! Tax Rules and Regulations ................. 23!
4.! Penal Provisions of Tax Laws .............. 24!
5.! Non-Retroactive Application of Tax
Laws to Taxpayers ....................................... 24!
! Doctrines of Taxation .............................. 25!
1.! Prospectivity of Tax Laws .................... 25!
2.! Imprescriptibility of Taxes ................... 25!
3.! Double Taxation .................................. 26!
4.! Power to Tax Involves Power to
Destroy… ...................................................... 27!
5.! Escape from Taxation ......................... 27!
6.! Exemption from Taxation ................... 29!
7.! Doctrine of Equitable Recoupment .... 30!
8.! Compensation and Set-Off ................. 30!
9.! Compromise and Tax Amnesty ............ 31!
10.! Taxpayer’s Suit................................. 31!
II.! NATIONAL INTERNAL REVENUE CODE
(NIRC) OF 1997, AS AMENDED ............................ 34!
! Organization and Functions of the Bureau
of Internal Revenue .......................................... 34!
1.! Rule-Making Authority of the Secretary
of Finance..................................................... 34!
2.! Jurisdiction, Power and Functions of the
Commissioner of Internal Revenue ............. 35!
INCOME TAXATION ................................ 37!
! Income Tax .............................................. 37!
1.! Definition, Nature and General
Principles ..................................................... 37!
2.! Income Tax Systems ........................... 37!
3.! Features of the Philippine Income Tax
Law.. ............................................................. 38!
4.! Criteria in Imposing Philippine Income
Tax… ............................................................. 38!
5.! Types of Philippine Income Tax .......... 38!
6.! Taxable Period .................................... 39!
7.! Kinds of Taxpayers .............................. 39!
! Income ..................................................... 42!
1.! Definition and Nature ......................... 42!
2.! When Income is Taxable ..................... 42!
3.! Tests in Determining Whether Income is
Earned for Tax Purposes.............................. 44!
4.! Classification of Income ...................... 44!
5.! Situs of Income Taxation .................... 45!
! Gross Income ........................................... 45!
1.! Definition ............................................. 45!
2.! Concept of Income from Whatever
Source Derived ............................................. 46!
3.! Gross Income vis-à-vis Net Income vis-
à-vis Taxable Income ................................... 46!
4.! Sources of Income Subject to Tax ....... 46!
5.! Classification of Income Subject to
Tax….. ........................................................... 47!
6.! Exclusions from Gross Income ............ 63!
! Deductions from Gross Income ............... 67!
1.! General Rules ...................................... 67!
2.! Return of Capital ................................. 67!
3.! Itemized Deductions ........................... 68!
4.! Optional Standard Deduction............. 78!
5.! Personal and Additional Exemptions . 79!
6.! Items Not Deductible ..........................80!
! Income Tax on Individuals ....................... 82!
1.! Income Tax on Resident Citizens, Non-
Resident Citizens and Resident Aliens........ 82!
2.! Income tax on Non-Resident Aliens
Engaged in Trade or Business ..................... 87!
3.! Income Tax on Non-Resident Aliens Not
Engaged in Trade or Business ..................... 88!
4.! Individual Taxpayers Exempt from
Income Tax ................................................... 89!
! Income Tax on Corporations ................... 95!
1.! Income Tax on Domestic Corporations
and Resident Foreign Corporations ............ 95!
2.! Income Tax on Non-Resident Foreign
Corporations [Sec. 28 (B), NIRC] ................ 99!
3.! Income Tax on Special Corporations .. 99!
4.! Improperly Accumulated Earnings
Tax….. ......................................................... 102!
5.! Exemption from Tax on
Corporations……. ....................................... 104!
i
 TAXATION LAW
6.! Tax on General Partnerships, General
Professional Partnerships, Co-Ownerships,
Joint Ventures and Consortiums ............... 105!
! Filing of Returns and Payment of Income
Tax…. ............................................................... 107!
1.! Definition of a Tax Return and
Information Return ..................................... 107!
2.! Period to File Income Tax Return of
Individuals and Corporations ..................... 107!
3.! Persons Liable to File Income Tax
Returns....................................................... 108!
4.! Where to File Income Tax Returns.... 109!
5.! Penalties for Non-Filing of Returns .. 109!
! Withholding of Taxes ............................. 110!
1.! Concept of Withholding Taxes ........... 110!
2.! Kinds of Withholding Taxes ............... 110!
TAXATION II ......................................... 112!
IV.! TRANSFER TAXES ................................. 113!
! Estate Tax ............................................... 113!
1.! Basic Principles, Concept, and
Definition .................................................... 113!
2.! Nature, Purpose, and Object ............. 113!
3.! Time and Transfer of Properties ........ 113!
4.! Classification of Decedent ................. 114!
5.! Gross Estate vis-à-vis Net Estate ....... 115!
6.! Determination of Gross Estate and Net
Estate (and Composition) ........................... 115!
7.! Items to be Included in Gross Estate .. 117!
8.! Deductions and Exclusions from
Estate….. ..................................................... 119!
9.! Tax Credit for Estate Taxes Paid in a
Foreign Country .......................................... 127!
10.! Filing of Notice of Death ................128!
11.! Estate Tax Return ..............................128!
! Donor’s Tax ............................................. 131!
1.! Basic Principles, Concept, and
Definition .................................................... 131!
2.! Nature, Purpose, and Object ............. 131!
3.! Time and Transfer of Properties ........ 131!
4.! Requisites of Valid Donation ............. 131!
5.! Transfers which May be Constituted as
Donation ..................................................... 132!
6.! Transfer for Less Than Adequate and
Full Consideration ...................................... 132!
7.! Classification of Donor ....................... 132!
8.! Determination of Gross Gift (including
Composition of Gross Gift).......................... 133!
9.! Valuation of Gifts Made in Property .. 134!
10.! Tax Credit for Donor’s Taxes Paid in a
Foreign Country .......................................... 135!
11.! Exemptions of Gifts from Donor’s
Tax…….. ....................................................... 135!
12.! Person Liable ................................. 135!
13.! Tax Basis ........................................ 136!
ii
V.! VALUE-ADDED TAX (VAT) AND
PERCENTAGE TAXES .........................................142!
! VAT .........................................................142!
1.! Concept, Characteristics/ Elements of
VAT-taxable Transactions ..........................142!
2.! Impact and Incidence of Tax .............. 143!
3.! Tax Credit Method .............................. 143!
4.! Destination Principle/Cross Border
Doctrine....................................................... 143!
5.! Persons Liable ................................... 144!
6.! Imposition of VAT .............................. 144!
7.! Transactions Deemed Sale ............... 149!
8.! Change or Cessation of Status as VAT-
Registered Person (Sec 106[C]) ................. 150!
9.! Zero-Rated Sales of Goods or
Properties, and Effectively Zero-Rated Sales
of Goods or Properties ............................... 150!
10.! VAT-Exempt Transactions .............152!
11.! Input and Output Tax ......................... 157!
12.! Substantiation of Input Tax
Credits….. ................................................... 159!
13.! Refund or Tax Credit of Excess Input
Tax…….. .......................................................162!
14.! Invoicing Requirements ................. 163!
15.! Filing of Return and Payment ...... 164!
16.! Withholding of Final VAT on Sales to
Government*.............................................. 165!
! Percentage Taxes ................................... 176!
VI.! EXCISE TAX AND DOCUMENTARY STAMP
TAX……. ............................................................... 177!
! Excise Taxes............................................ 177!
! Documentary Taxes ................................ 178!
VII.! TAX REMEDIES UNDER THE NIRC ....... 179!
! General Concepts ................................... 179!
1.! Assessment ........................................ 179!
2.! Collection .......................................... 184!
! Taxpayer’s Remedies............................. 185!
1.! Protesting the Assessment ............... 185!
2.! Compromise and Abatement of
Taxes…… .................................................... 186!
3.! Recovery of Tax Erroneously or Illegally
Collected ..................................................... 187!
! Government’s Remedies ....................... 189!
1.! Administrative Remedies .................. 189!
2.! Judicial Remedies – Civil or Criminal
Action .......................................................... 193!
VIII.! LOCAL GOVERNMENT CODE OF 1991, AS
AMENDED .......................................................... 195!
! Local Government Taxation .................. 195!
1.! Fundamental Principles (UEPIP) ...... 195!
2.! Nature and Source of Taxing Power . 195!
3.! Local Taxing Authority ...................... 196!
4.! Scope of Taxing Power ....................... 197!
5.! Specific Taxing Power of LGUs ......... 198!
 TAXATION LAW

6.! Common Limitations on the Taxing

Powers of LGUs ..........................................206!
7.! Collection of Business Tax ................ 207!
8.! Taxpayer’s Remedies ....................... 208!
9.! Civil Remedies by the LGU for Collection
of Revenues............................................... 208!
! Real Property Taxation.......................... 210!
1.! Fundamental Principles .................... 210!
2.! Nature of Real Property Tax ............. 210!
3.! Imposition of Real Property Tax ....... 210!
4.! Appraisal and Assessment of Real
Property Tax ................................................ 212!
5.! Collection of Real Property Tax .........214!
6.! Refund or Credit of Real Property
Tax……. ........................................................216!
7.! Taxpayer’s Remedies .........................216!

IX.! TARIFF AND CUSTOMS CODE OF THE

PHILIPPINES .......................................................221!
! Tariff and Duties ..................................... 221!
1.! Definition ............................................ 221!
2.! Purpose for Imposition ....................... 221!
3.! Kinds or Classification of Duties ........ 221!
4.! Flexible Tariff Clause ........................ 226!
! Requirements of Importation ................ 227!
1.! Beginning and Ending of
Importation……. ......................................... 227!
2.! Obligations of Importer..................... 227!
! Accrual and Payment of Tax and
Duties…….. ..................................................... 232!
1.! General Rule: All Imported Articles are
Subject to Duty .......................................... 232!
2.! Goods Declaration ............................ 238!
! Unlawful Importation or Exportation .....241!
1.! Technical Smuggling and Outright
Smuggling ..................................................241!
2.! Other Fraudulent Practices................241!
! Remedies ............................................... 242!
1.! Government....................................... 242!
2.! Taxpayer ............................................ 245!

X.! JUDICIAL REMEDIES ..................................251!

! Jurisdiction of the Court of Tax Appeals 251!
1.! Exclusive Appellate Jurisdiction over
Civil Tax Cases ............................................251!
2.! Criminal Cases .................................. 252!
! Judicial Procedures ............................... 253!
1.! Judicial Action for Collection of
Taxes……. ................................................... 253!
2.! Civil Cases ......................................... 253!
3.! Criminal Cases .................................. 255!

TRAIN LAW .......................................... 257!

iii
U.P. LAW BOC TAXATION I TAXATION LAW

TAXATION I
Taxation Law

Page 1 of 270
U.P. LAW BOC TAXATION I
I.! GENERAL
PRINCIPLES OF
TAXATION
! Definition,! Concept! and!
Purpose! of! Taxation
DEFINITION & CONCEPT
1.! Revenue Raising Measure
a.! Is a mode of raising revenue for public
purpose; the exercise of sovereign power to
raise revenue for the expense of the
government.
b.! The process or means by which the sovereign,
through its law-making body, raises income
to defray the necessary expenses of
government; a method of apportioning the
cost of government among those who in
some measure are privileged to enjoy its
benefits and must, therefore, bear its
burdens [51 Am. Jur. 34; 1 Cooley 72-93].
2.! As a Power
a.! It refers to the inherent power of the state to
demand enforced contributions for public
purpose or purposes.
b.! Is described as 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. [Paseo Realty & invention (see RA. No. 5448) or to finance
Development Corporation v. CA, G.R. No.
119286 (2004)]
PURPOSE
1.! Revenue-raising
Primary purpose of taxation is to provide funds or
property with which to promote the general
welfare and protection of its citizens.
Fees may be properly regarded as taxes even
though they also serve as an instrument of
regulation. If the purpose is primarily revenue, or
if revenue is, at least, one of the real and
substantial purposes, then the exaction is
properly called a tax. [PAL v. Edu, G.R. No. L-
41383 (1988)]
2.! Non-revenue/special or regulatory
Taxation is often employed as a device for
regulation by means of which certain effects or
conditions envisioned by governments may be
Page 2 of 270
TAXATION LAW
achieved. Taxes may be levied with a regulatory
purpose to provide means for the rehabilitation
and stabilization of a threatened industry which
is affected with public interest as to be within the
police power of the state. These regulatory
purposes are also known as Sumptuary. Thus,
taxation can:
a.! Strengthen anemic enterprises or provide
incentive to greater production through
grant of tax exemptions or the creation of
conditions conducive to their growth.
b.! Protect local industries against foreign
competition by imposing additional taxes on
imported goods, or encourage foreign trade
by providing tax incentives on imported
goods.
c.! Be a bargaining tool by setting tariff rates
first at a relatively high level before trade
negotiations are entered into with another
country.
d.! Halt inflation in periods of prosperity to curb
spending power; ward off depression in
periods of slump to expand business.
e.! Reduce inequalities in wealth and incomes,
as for instance, the estate, donor's and
income taxes, their payers being the
recipients of unearned wealth or mostly in
the higher income brackets. Progressive
system of taxation prevents the undue
concentration of wealth in the hands of a few
individuals. Progressivity is keystoned on the
principle that those who are able to pay
shoulder the bigger portion of the tax
burden. [Mamalateo]
f.! Taxes may be levied to promote science and
educational activities (see RA. No. 5447) or
to improve the efficiency of local police
forces in the maintenance of peace and
order through grant of subsidy (see RA.No.
6141).
g.! Be an implement of the police power to
promote the general welfare.
h.! Protect local industries from foreign
competition. Taxation is no longer
envisioned as a measure merely to raise
revenue to support the existence of the
government; taxes may be levied with a
regulatory purpose to provide means for the
rehabilitation and stabilization of a
threatened industry which is affected with
public interest as to be within the police
power of the state. [Caltex v. COA, G.R. No.
92585 (1992)]
i.! To address push for the government’s health
measure, just like what happened in the
U.P. LAW BOC TAXATION I TAXATION LAW

landmark legislation on sin taxes in 2012

(see R.A. No. 10351). ! Nature! and! Characteristics!
of! Taxation
NATURE
1.! Inherent in sovereignty – The power to tax is an
attribute of sovereignty. It is a power 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 improvement
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.
Commissioner, G.R. No. L-22074 (1965)].

2.! Essentially a legislative function – The power to

tax is peculiarly and exclusively legislative and
cannot be exercised by the executive or judicial
branch of the government [1 Cooley 160-161].
Hence, only Congress, our national legislative
body, can impose taxes. The levy of a tax,
however, may also be made by a local legislative
body subject to such limitations as may be
provided by law.

It includes the authority to:

a.! Determine the nature, purpose, extent,
coverage, apportionment, situs, and method
of collection of the tax;
b.! Grant tax exemptions or condonations; and
c.! Specify or provide for the administrative as
well as judicial remedies that either the
government or the taxpayers may avail
themselves in the proper implementation of
the tax measure.

3.! Subject to constitutional and inherent limitations

– The power to tax is said to be the strongest of
all the powers of government. It is unlimited,
plenary, comprehensive and supreme, in the
absence of constitutional restrictions, the
principal check on its abuse resting in the
responsibility of members of Congress to their
constituents. However, the power of taxation is
subject to constitutional and inherent limitations
[Mamalateo]. These limitations are those
provided in the fundamental law or implied
therefrom, while the rest spring from the nature
of the taxing power itself although they may or
may not be provided in the Constitution.

CHARACTERISTICS

Page 3 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

1.! Enforced contribution - Its imposition is in no way

dependent upon the will or assent of the person
taxed. It is not contractual, either express or
implied, but positive acts of government.
2.! Generally payable in the form of money -
Although the law may provide payment in kind
(e.g. backpay certificates under Sec. 2, R.A. No.
304, as amended);
3.! Proportionate in character - Laid by some rule of
apportionment which is usually based on ability to
pay.
“The rule of taxation shall be uniform and
equitable. The Congress shall evolve a progressive
system of taxation.” [Sec. 28 (1), Art. VI, 1987
Constitution]
4.! Personal to the taxpayer.
5.! Levied on persons, property, rights, acts,
privileges, or transactions.
6.! Levied by the State which has jurisdiction or
control over the subject to be taxed.
7.! Levied by the law-making body of the State. The
power to tax is a legislative power but is also
granted to local governments, subject to such
guidelines and limitations as law may be provided
by law.
“Each local government unit shall have the power
to create its own sources of revenues and to levy
taxes, fees, and charges subject to such guidelines
and limitations as the Congress may provide,
consistent with the basic policy of local autonomy.
Such taxes, fees, and charges shall accrue
exclusively to the local governments.” [Sec. 5, Art.
X, 1987 Constitution];
8.! Levied for public purpose. Revenues derived from
taxes cannot be used for purely private purposes
or for the exclusive benefit of private persons.
[Gaston v. Republic Planters Bank, G.R. No. 77194
(1988)]. The “public purpose or purposes” of the
imposition is implied in the levy of tax. [Mendoza v.
Municipality, G.R. No. L-7373 (1954)]. A tax levied
for a private purpose constitutes a taking of
property without due process of law; and
9.! It is also an important characteristic of most taxes
that they are commonly required to be paid at
regular periods or intervals (see 1 Cooley 64) every
year.

Page 4 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

! Power! of! Taxation! as! Distinguished! from! Police! Power! and!

Eminent! Domain!
When the distinction of exercise of powers is relevant

The distinction is important when the one exercising it is the LGU (mere delegated authority).

Since Congress has the power to exercise the State inherent powers of Police Power, Eminent Domain and Taxation,
the distinction between police power and the power to tax, which could be significant if the exercising authority were
mere political subdivisions (since delegation by it to such political subdivisions of one power does not necessarily
include the other), would not be of any moment when, Congress itself exercises the power. [NTC v. CA, G.R. No.
127937 (1999)]
Taxation Eminent Domain Police Power
May be exercised by:
•! the government; May be exercised only by:
Authority (who May be exercised only by:
•! its political subdivisions; •! the government; or
exercises the •! the government; or
Power) •! or may be granted to public •! its political subdivisions.
•! its political subdivisions.
service companies or public
utilities.
The use of the property is
The property (generally in the
“regulated” for the purpose
form of money) is taken for Merely a power to take private
Purpose of promoting the general
the support of the property for public use.
welfare; it is not
government.
compensable.
Operates upon: Operates on: Operates upon:
Persons
•! a community; •! an individual as the owner of a •! a community;
Affected
•! or class of individuals. particular property. •! or a class of individuals.
There is no transfer of title.
The money contributed
There is a transfer of the right to At most, there is restraint
Effect becomes part of the public
property. on the injurious use of
funds.
property.
Protection and benefits he Indirect benefits
receives.
It is assumed that the Market value of the property The person affected
Benefits individual receives the receives indirect benefits as
Received equivalent of the tax in the He receives the market value of the may arise from the
form of protection and property taken from him. maintenance of a healthy
benefits he receives from the economic standard of
government. society.
Amount imposed should
Generally, there is no limit on No amount imposed but rather the not be more than sufficient
Amount of
the amount of tax that may owner is paid the market value of to cover the cost of the
Imposition
be imposed. property taken. license and necessary
expenses.
Inferior to the impairment
Subject to constitutional Relatively free from
prohibition; government cannot
limitations, including the constitutional limitations
Relationship to expropriate private property, which
prohibition against and is superior to the
Constitution under a contract had previously
impairment of the obligation impairment of contract
bound itself to purchase from the
of contracts. provision.
other contracting party.
nd
([Mamalateo, Reviewer on Taxation 2 Edition (2008), Rex Bookstore, Inc., pp. 11-12)

Page 5 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

Despite the natural reluctance to surrender part

! Theory! and! Basis! of!
Taxation
1.! Lifeblood theory
Taxes are the lifeblood of the government and
their prompt and certain availability is an
imperious need. [CIR v. Pineda, G.R. No. L-22734
(1967)]
Taxes are the lifeblood of the government and so
should be collected without unnecessary
hindrance. It is said that taxes are what we pay
for civilized society. Without taxes, the
government would be paralyzed for lack of the
motive power to activate and operate it [CIR v.
Algue, G.R. No. L-28896 (1988)].
2.! Necessity theory
The power of taxation proceeds upon theory that
the existence of government is a necessity; that is
cannot continue without 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.
of one's hard earned income to the taxing
authorities, every person who is able to must
contribute his share in the running of 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 moral and
material values. This symbiotic relationship is the
rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method of
exaction by those in the seat of power. [CIR v.
Algue, supra]
4.! Jurisdiction over subject and objects
The limited powers of sovereignty are confined to
objects within the respective spheres of
governmental control. These objects are the
proper subjects or objects of taxation and none
else.

The power to tax is an attribute of sovereignty. It

is a power 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 improvement 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 v. CIR, G.R. No. L-22074 (1965)]

The obligation to pay taxes rests upon the

necessity of money for the support of the state.
For this reason, no one is allowed to object to or
resist the payment of taxes solely because no
personal benefit to him can be pointed out.
[Lorenzo v. Posadas, G.R. No. L-43082 (1937)]

3.! Benefits-protection Theory (Symbiotic

Relationship)

This principle serves as the basis of taxation and

is founded on the reciprocal duties of protection
and support between the State and its
inhabitants.

Page 6 of 270
U.P. LAW BOC
! Principles! of! a! Sound! Tax!
System
1.! Fiscal adequacy
The sources of tax revenue should coincide with,
and approximate the needs of, government
expenditures. The revenue should be elastic or
capable of expanding or contracting annually in
response to variations in public expenditures.
2.! Administrative feasibility
Tax laws should be capable of convenient, just
and effective administration. Each tax should be:
•! capable of uniform enforcement by
government officials,
•! convenient as to the time, place, and manner
of payment, and
•! not unduly burdensome upon, or
discouraging to business activity.
3.! Theoretical justice or equality
The tax burden should be in proportion to the
taxpayer’s ability to pay. This is the so-called
ability to pay principle. Taxation should be
uniform as well as equitable
Note: The non-observance of the above principles will
not necessarily render the tax imposed invalid except
to the extent those specific constitutional limitations
are violated. (De Leon)
Page 7 of 270
TAXATION I TAXATION LAW
! Scope! and! Limitations! of!
Taxation
1.! Inherent Limitations
The following are the inherent limitations of taxation:
a.! Public Purpose
b.! Inherently Legislative
c.! Territorial
d.! International Comity
e.! Exemption of Government Entities, Agencies,
and Instrumentalities
PUBLIC PURPOSE
The proceeds of the tax must be used:
1.! for the support of the State; or
2.! for some recognized objects of government or
directly to promote the welfare of the community.
Test: Whether the statute is designed to promote the
public interest, as opposed to the furtherance of the
advantage of individuals, although each advantage
to individuals might incidentally serve the public.
[Pascual v. Sec. of Public Works, G.R. No. L-10405
(1960)]
The protection and promotion of the sugar industry is
a matter of public concern; the legislature may
determine within reasonable bounds what is
necessary for its protection and expedient for its
promotion. [Lutz v. Araneta, G.R. No. L-7859 (1955)]
The public purpose of a tax may legally exist even if
the motive which impelled the legislature to impose
the tax was to favor one industry over another. [Tio v.
Videogram, G.R. No. L-75697 (1987)]
Tests in Determining Public Purpose:
1.! Duty Test - Whether the thing to be furthered by
the appropriation of public revenue is something
which is the duty of the State as a government to
provide.
2.! Promotion of General Welfare Test - Whether the
proceeds of the tax will directly promote the
welfare of the community in equal measure.
3.! Character of the Direct Object of the Expenditure
– It is the essential character of the direct object of
the expenditure which must determine its validity
as justifying a tax and not the magnitude of the
interests to be affected nor the degree to which
the general advantage of the community, and
thus the public welfare, may be ultimately
benefited by their promotion. Incidental
advantage to the public or to the State, which
results from the promotion of private enterprises
U.P. LAW BOC TAXATION I
or business, does not justify their aid with public
money. [Pascual v. Sec. of Public Works, supra]
INHERENTLY LEGISLATIVE
Stated in another way, taxation may exceptionally be
delegated, subject to such well-settled limitations as:
1.! The delegation shall not contravene any
constitutional provision or the inherent limitations
of taxation;
2.! The delegation is effected either by:
i.! the Constitution; or
ii.! by validly enacted legislative measures or
statute; and
3.! The delegated levy power, except when the
delegation is by an express provision of the
Constitution itself, should only be in favor of the
local legislative body of the local or municipal
government concerned. [Vitug and Acosta]
General Rule: Delegata potestas non potest delegari.
The power to tax is exclusively vested in the
legislative body and it may not be re-delegated.
Judge Cooley enunciates the doctrine in the following
oft-quoted language: "One of the settled maxims in
constitutional law is that the power conferred upon
the legislature to make laws cannot be delegated by
that department to any other body or authority.
Where the sovereign power of the state has located
the authority, there it must remain; and by the
constitutional agency alone the laws must be made
until the Constitution itself is charged.” [People v.
Vera, G.R. No. L-45685 (1937)]
Legislature has the power to determine the:
1.! Nature (kind),
2.! Object (purpose),
3.! Extent (rate),
4.! Coverage (subjects) and
5.! Situs (place) of taxation.
Exceptions
1.! Delegation to local governments – This exception
is in line with the general principle that the power
to create municipal corporations for purposes of
local self-government carries with it, by necessary
implication, the power to confer the power to tax
on such local governments. (1 Cooley 190). This is
logical for after all, municipal corporations are
merely instrumentalities of the state for the better
administration of the government in respect to
matters of local concern. [Pepsi-Cola Bottling Co.
of the Phil. Inc. v. Mun. of Tanauan, G.R. No. L-
31156 (1976)].
Under the new Constitution, however, LGUs are
now expressly given the power to create its own
sources of revenue and to levy taxes, fees and
Page 8 of 270
TAXATION LAW
charges, subject to such guidelines and
limitations as the Congress may provide which
must be consistent with the basic policy of local
autonomy. [Art. X, Sec 5, 1987 Constitution]
2.! Delegation to the President
i.! to enter into Executive agreements; and
ii.! to ratify treaties which grant tax
exemption subject to Senate concurrence.
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. [Art. 6, Sec. 28(2), 1987
Constitution]
3.! Delegation to administrative agencies – Limited
to the administrative implementation that calls
for some degree of discretionary powers under
sufficient standards expressed by law or implied
from the policy and purposes of the Act.
There are certain aspects of the taxing process
that are not legislative and they may, therefore,
be vested in an administrative body. The powers
which are not legislative include:
•! the power to value property for purposes of
taxation pursuant to fixed rules;
•! the power to assess and collect the taxes;
and
•! the power to perform any of the innumerable
details of computation, appraisement, and
adjustment, and the delegation of such
details.
The exercise of the above powers is really not an
exception to the rule as no delegation of the
strictly legislative power to tax is involved.
The powers which cannot be delegated include:
•! the determination of the subjects to be
taxed;
•! the purpose of the tax, the amount or rate of
the tax;
•! the manner, means, and agencies of
collection; and
•! the prescribing of the necessary rules with
respect thereto.
TERRITORIAL
Rule: A state may not tax property lying outside its
borders or lay an excise or privilege tax upon the
U.P. LAW BOC TAXATION I
exercise or enjoyment of a right or privilege derived
from the laws of another state and therein exercise
and enjoyed. (51 Am.Jur. 87-88).
Reasons:
1.! Tax laws (and this is true of all laws) do not
operate beyond a country’s territorial limits.
2.! Property which is wholly and exclusively within
the jurisdiction of another state receives none of
the protection for which a tax is supposed to be a
compensation.
Note: Where privity of relationship exists. It does not
mean, however, that a person outside of state is no
longer subject to its taxing powers. The fundamental
basis of the right to tax is the capacity of the
government to provide benefits and protection to the
object of the tax. A person may be taxed where there
is between him and the taxing state, a privity of the
relationship justifying the levy. Thus, the citizen’s
income may be taxed even if he resides abroad as the
personal (as distinguished from territorial)
jurisdiction of his government over him remains. In
this case, the basis of the power to tax is not
dependent on the source of the income nor upon the
location of the property nor upon the residence of the
taxpayer but upon his relation as a citizen to the state.
As such citizen, he is entitled, wherever he may be,
inside or outside of his country, to the protection of
his government.
INTERNATIONAL COMITY
Comity – respect accorded by nations to each other
because they are sovereign equals. Thus, the property
or income of a foreign state or government may not
be the subject of taxation by another state.
Reasons:
1.! In par in parem non habet imperium. As between
equals there is no sovereign (Doctrine of
Sovereign Equality among states under
international law). One state cannot exercise its
sovereign powers over another.)
2.! In international law, a foreign government may
not be sued without its consent. Therefore, it is
useless to impose a tax which could not be
collected.
3.! Usage among states that when a foreign
sovereign enters the territorial jurisdiction of
another, there is an implied understanding that
the former does not intend to degrade its dignity
by placing itself under the jurisdiction of the other.
EXEMPTION OF GOVERNMENT ENTITIES,
AGENCIES, AND INSTRUMENTALITIES
If the taxing authority is the National Government:
Page 9 of 270
TAXATION LAW
General Rule: Agencies and instrumentalities of the
government are exempt from tax.
Note: Unless otherwise provided by law, the
exemption applies only to government entities
through which the government immediately and
directly exercises its sovereign powers. With respect
to government-owned or controlled corporations
performing proprietary (not governmental) functions,
they are generally subject to tax in the absence of tax
exemption provisions in their charters or the law
creating them.
Reasons for the exemption:
1.! To levy a tax upon public property would render
necessary new taxes on other public property for
the payment of the tax so laid and thus, the
government would be taxing itself to raise money
to pay over for itself.
2.! This immunity also rests upon fundamental
principles of government, being necessary in
order that the functions of government shall not
be unduly impeded. (1 Cooley 263).
3.! The practical effect of an exemption running to
the benefit of the government is merely to reduce
the amount of money that has to be handled by
the government in the course of its operations:
For these reasons, provisions granting
exemptions to government agencies may be
construed liberally in favor of non-tax liability of
such agencies. [Maceda v. Macaraig, Jr., G.R. No.
88291 (1991)].
Exception: There is no constitutional prohibition
against the government taxing itself. [Coll. v. Bisaya
Land Transportation, 105 Phil. 338 (1959)].
If the taxing authority is a local government unit: RA
7160 expressly prohibits LGUs from levying tax on the
National Government, its agencies and
instrumentalities and other LGUs. [Sec. 133 (o), LGC]
2.!Constitutional Limitations
The following are the constitutional limitations of
taxation:
a.! Provisions directly affecting taxation:
1.! Prohibition against imprisonment for non-
payment of poll tax;
2.! Uniformity and equality of taxation;
3.! Grant by Congress of authority to the
President to impose tariff rates;
4.! Prohibition against taxation of religious,
charitable entities, and educational entities;
5.! Prohibition against taxation of non-stock,
non-profit educational institutions;
U.P. LAW BOC TAXATION I
6.! Majority vote of Congress for grant of tax
exemption;
7.! Prohibition on use of tax levied for special
purpose;
8.! President’s veto power on appropriation,
revenue, tariff bills;
9.! Non-impairment of jurisdiction of the
Supreme Court;
10.! Grant of power to the local government units
to create its own sources of revenue;
11.! Flexible tariff clause;
12.! Exemption from real property taxes; and
13.! No appropriation or use of public money for
religious purposes.
b.! Provisions indirectly affecting taxation:
1.! Prohibition against imprisonment for non-
payment of poll tax;
2.! Equal protection;
3.! Religious freedom; and
4.! Non-impairment of obligations of contracts
PROVISIONS DIRECTLY AFFECTING TAXATION
1.! Prohibition against imprisonment for non-
payment of poll tax
No person shall be imprisoned for debt or non-
payment of a poll tax. [Art. III, Sec. 20, 1987
Constitution]
2.! Uniformity and equality of taxation
The rule of taxation shall be uniform and
equitable. Congress shall evolve a progressive
system of taxation. [Art. VI, Sec. 28(1), 1987
Constitution]
i.! Uniformity – All taxable articles or
properties of the same class shall be taxed
at the same rate. [City of Baguio v. De
Leon, G.R. No. L-24756 (1968)].
(a)! Uniformity of operation throughout
tax unit - The rule requires the
uniform application and operation,
without discrimination, of the tax in
every place where the subject of it is
found. This means, for example, that a
tax for a national purpose must be
uniform and equal throughout the
country and a tax for a province, city,
municipality, or barangay must be
uniform and equal throughout the
province, city, municipality or
barangay.
(b)! Equality in burden – Uniformity
implies equality in burden, not
equality in amount or equality in its
strict and literal meaning. The reason
is simple enough. If legislation
Page 10 of 270
TAXATION LAW
imposes a single tax upon all persons,
properties, or transactions, an
inequality would obviously result
considering that not all persons,
properties, and transactions are
identical or similarly situated. Neither
does uniformity demand that taxes
shall be proportional to the relative
value or amount of the subject thereof.
Taxes may be progressive.
ii.! Equity
(a)! Uniformity in taxation is effected
through the apportionment of the tax
burden among the taxpayers which
under the Constitution must be
equitable. “Equitable” means fair, just,
reasonable and proportionate to the
taxpayer’s ability to pay. Taxation may
be uniform but inequitable where the
amount of the tax imposed is
excessive or unreasonable.
(b)! The constitutional requirement of
equity in taxation also implies an
approach which employs a reasonable
classification of the entities or
individuals who are to be affected by a
tax. Where the “tax differentiation is
not based on material or substantial
differences,” the guarantee of equal
protection of the laws and the
uniformity rule will likewise be
infringed.
Taxation does not require identity or equality
under all circumstances, or negate the authority
to classify the objects of taxation.
Test of Valid Classification: Classification, to be
valid, must be reasonable and this requirement is
not deemed satisfied unless:
i.! It is based upon substantial distinctions
which make real differences;
ii.! These are germane to the purpose of the
legislation or ordinance;
iii.! The classification applies not only to
present conditions but also to future
conditions substantially identical to those
of the present; and
iv.! The classification applies equally to all
those who belong to the same class.
[Pepsi-Cola v. Butuan City, G.R. No. L-
22814 (1968)]
The progressive system of taxation would place
stress on direct rather than indirect taxes, on
non-essentiality rather than essentiality to the
taxpayer of the object of taxation, or on the
U.P. LAW BOC
taxpayer’s ability to pay. Example is that
individual income tax system that imposes rates
progressing upwards as the tax base (taxpayer’s
taxable income) increases. A progressive tax,
however, must not be confused with a
progressive system of taxation.
While equal protection refers more to like
treatment of persons in like circumstances,
uniformity and equity refer to the proper relative
treatment for tax purposes of persons in unlike
circumstances.
Grant by Congress of authority to the
President to impose tariff rates
Delegation of Tariff powers to the President
under the flexible tariff clause [Sec. 28(2), Art. VI,
1987 Constitution], which authorizes the
President to modify import duties. [Sec. 1608,
Customs Modernization and Tariff Act; previously,
Sec. 401, TCC]
Prohibition against taxation of religious,
charitable entities, and educational
entities
Art. VI, Sec. 28(3), 1987 Constitution:
i.! Charitable institutions, churches and
personages or convents appurtenant
thereto, mosques, non-profit cemeteries,
and all lands, buildings, and
improvements,
ii.! Actually, directly, and exclusively used for
religious, charitable, or educational
purposes shall be exempt from taxation.
iii.! The tax exemption under this
constitutional provision covers property
taxes only and not other taxes [Lladoc v.
Commissioner, G.R. No. L-19201 (1965)].
iv.! In general, special assessments are not
covered by the exemption because by
nature they are not classified as taxes.
[Apostolic Prefect v. City Treasurer of
Baguio, G.R. No. L-47252 (1941)]
To be entitled to the exemption, the petitioner
must prove that:
i.! It is a charitable institution
ii.! Its real properties are actually, directly and
exclusively used for charitable purposes.
Revenue or income from trade, business or other
activity, the conduct of which is not related to the
exercise or performance of religious, educational
and charitable purposes or functions shall be
subject to internal revenue taxes when the same
Page 11 of 270
TAXATION I TAXATION LAW
is not actually, directly or exclusively used for the
intended purposes. [BIR Ruling 046-2000]
Test of Use of the property, and not the
Exemption ownership
Actual, direct and exclusive use for
Nature of Use religious, charitable or
educational purposes.
Real property taxes on facilities
which are
i.! actual,
ii.! incidental to, or
iii.! reasonably necessary for the
accomplishment of said
purposes such as in the case
of hospitals, a school for
training nurses, a nurses’
Scope of
home, property to provide
Exemption
housing facilities for interns,
resident doctors and other
members of the hospital
staff, and recreational
facilities for student nurses,
interns and residents, such
as athletic fields. [Abra
Valley College v. Aquino,
G.R. No. L-39086 (1988)]
TEST: Whether an enterprise is charitable or not:
•! Whether it exists to carry out a purpose
recognized in law as charitable; or
•! Whether it is maintained for gain, profit, or
private advantage.
A charitable institution does not lose its
character as such and its exemption from taxes
simply because it derives income from paying
patients, whether out-patient, or confined in the
hospital, or receives subsidies from the
government, so long as the money received is
devoted or used altogether to the charitable
object which it is intended to achieve; and no
money inures to the private benefit of the
persons managing or operating the institution.
“Exclusive" - possessed and enjoyed to the
exclusion of others; debarred from participation
or enjoyment;
"Exclusively" - "in a manner to exclude; as
enjoying a privilege exclusively.”
If real property is used for one or more
commercial purposes, it is not exclusively used
for the exempted purposes but is subject to
taxation. The words "dominant use" or "principal
use" cannot be substituted for the words "used
U.P. LAW BOC TAXATION I TAXATION LAW

exclusively" without doing violence to the purposes. (In the case of religious and charitable
Constitution and the law. Solely is synonymous entities and non-profit cemeteries, the
with exclusively. [Lung Center of the Philippines v. exemption is limited to property tax.)
Quezon City, G.R. No. 144104 (2004)]
The exemption does not cover revenues derived
Note: Lung Center did not necessarily overturn from, or assets used in, unrelated activities or
the case of Abra Valley College v. Aquino. Lung enterprise.
Center just provided a stricter interpretation. In
Abra Valley, the Court held: The primary use of Similar tax exemptions may be extended to
the school lot and building is the basic and proprietary (for profit) educational institutions by
controlling guide, norm and standard to law subject to such limitations as it may provide,
determine tax exemption, and not the mere including restrictions on dividends and provisions
incidental use thereof. Under the 1935 for reinvestment. The restrictions are designed to
Constitution, the trial court correctly held that insure that the tax-exemption benefits are used
the school building as well as the lot where it is for educational purposes.
built, should be taxed, not because the second
floor of the same is being used by the Director Lands, buildings, and improvements actually,
and his family for residential purposes (incidental directly and exclusively used for educational
to its educational purpose), but because the first purposes are exempt from property tax [Sec.
floor thereof is being used for commercial 28(3), Art. VI, 1987 Constitution], whether the
purposes. However, since only a portion is used educational institution is proprietary or non-
for purposes of commerce, it is only fair that half profit.
of the assessed tax be returned to the school
involved. Art. VI, Sec. 28, par. 3 Art. XIV, Sec. 4, par. 3
Charitable institutions,
Prohibition against taxation of non-stock, churches and parsonages
non-profit educational institutions or convents appurtenant
thereto, mosques, non-
Art. XIV, Sec. 4, 1987 Constitution profit cemeteries, and all
a.! All revenues and assets of non-stock, non- Non-stock, non-profit
lands, buildings, and
profit educational institutions used actually, educational institutions.
improvements, actually,
directly, and exclusively for educational directly, and exclusively
purposes shall be exempt from taxes and used for religious,
duties. charitable, or educational
purposes.
Proprietary educational institutions, including Income, property, and
those cooperatively owned, may likewise be Property taxes donor’s taxes and
entitled to such exemptions subject to the custom duties.
limitations provided by law, including
restrictions on dividends and provisions for Majority vote of Congress for grant of tax
reinvestment. exemption

b.! Subject to conditions prescribed by law, all Art. VI, Sec. 28, 1987 Constitution. No law granting
grants, endowments, donations, or any tax exemption shall be passed without the
contributions used actually, directly, and concurrence of a majority of all the Members of the
exclusively for educational purposes shall be Congress.
exempt from tax.
Basis: The inherent power of the state to impose
This provision covers only non-stock, non-profit taxes carries with it the power to grant tax
educational institutions. exemptions.
The exemption covers income, property, and Exemptions may be created by:
donor’s taxes, custom duties, and other taxes i.! The Constitution, or
imposed by either or both the national ii.! Statutes, subject to constitutional
government or political subdivisions on all limitations
revenues, assets, property or donations, used
actually, directly and exclusively for educational

Page 12 of 270
U.P. LAW BOC
Vote required for the grant of exemption:
Absolute majority of the members of Congress
(at least ½ + 1 of ALL the members voting
SEPARATELY)
Vote required for withdrawal of such grant of
exemption: Relative majority is sufficient
(majority of the quorum).
!
The provision guaranteeing equal protection of
the laws and that mandating the rule of taxation
shall be uniform and equitable likewise limit,
although not expressly, the legislative power to
grant tax exemption.
Grants in the nature of tax exemptions:
i.! Tax amnesties
ii.! Tax condonations
iii.! Tax refunds
Note:
i.! Local government units may, through
ordinances duly approved, grant tax
exemptions, incentives or reliefs under
such terms and conditions as they may
deem necessary. [Sec. 192, LGC]
ii.! The President of the Philippines may,
when public interest so requires, condone
or reduce the real property tax and interest
for any year in any province or city or a
municipality within the Metropolitan
Manila Area. [Sec. 277, LGC]
Prohibition on use of tax levied for special
purpose
All money collected on any tax levied for a
special purpose shall be treated as a special fund
and paid out for such purpose only.
If the purpose for which a special fund was
created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the
general funds of the Government. [Gaston v.
Republic Planters Bank, G.R. No. L-77194
(1988)].
President’s veto power on appropriation,
revenue, tariff bills
Art. VI, Sec. 27(2), 1987 Constitution. The President
shall have the power to veto any particular item or
items in an appropriation, revenue, or tariff bill, but
the veto shall not affect the item or times to which
he does not object.
Non-impairment of jurisdiction of the
Supreme Court
Page 13 of 270
TAXATION I TAXATION LAW
Art VIII, Sec. 2, 1987 Constitution. The Congress
shall have the power to define, prescribe, and
apportion the jurisdiction of the various courts but
may not deprive the Supreme Court of its
jurisdiction over cases enumerated in Section 5
hereof.
Art. VIII, Sec. 5(2(b)), 1987 Constitution. The
Supreme Court shall have the following powers: xxx
(2) Review, revise, modify or affirm on appeal or
certiorari, as the laws or the Rules of Court may
provide, final judgments and orders of lower courts
in xxx
(b) all cases involving the legality of any tax,
impost, assessment or toll or any penalty
imposed in relation thereto.
Even the legislative body cannot deprive the SC
of its appellate jurisdiction over all cases coming
from inferior courts where the constitutionality or
validity of an ordinance or the legality of any tax,
impost, assessment, or toll is in question. [San
Miguel Corp v. Avelino, G.R. No. L-39699 (1979)]
Art. VI, Sec. 30, 1987 Constitution. No law shall be
passed increasing the appellate jurisdiction of the
Supreme Court without its advice and concurrence.
Scope of Judicial Review in taxation: limited only
to the interpretation and application of tax laws.
Its power does not include inquiry into the policy
of legislation. Neither can it legitimately question
or refuse to sanction the provisions of any law
consistent with the Constitution. [Coll. v. Bisaya
Land Transportation, 105 Phil. 338 (1959)].
Grant of power to the local government units
to create its own sources of revenue
LGUs have power to create its own
sources of revenue and to levy taxes, fees
and charges, subject to such guidelines
and limitations as the Congress may
provide which must be consistent with
the basic policy of local autonomy. [Art.
X, Sec. 5, 1987 Constitution]
Flexible tariff clause
Delegation of tariff powers to the
President under the flexible tariff clause
[Art. VI, Sec. 28(2), 1987 Constitution]
Flexible tariff clause: the authority given
to the President, upon the
U.P. LAW BOC
recommendation of NEDA, to adjust the
tariff rates under Sec. 1608 of the CMTA
(previously, Sec. 401, CMTA) in the
interest of national economy, general
welfare and/or national security.
Exemption from real property taxes
Art. VI, Sec. 28(3), 1987 Constitution
Charitable institutions, churches and personages or
convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively
used for religious, charitable, or educational
purposes shall be exempt from taxation.
No appropriation or use of public money for
religious purposes
Art. VI, Sec. 29, 1987 Constitution
(1)! No money shall be paid out of the Treasury
except in pursuance of an appropriation made
by law.
(2)! No public money or property shall be
appropriated, applied, paid, or employed,
directly or indirectly, for the use, benefit, or
support of any sect, church, denomination,
sectarian institution, or system of religion, or of
any priest, preacher, minister, other religious
teacher, or dignitary as such, except when such
priest, preacher, minister, or dignitary is
assigned to the armed forces, or to any penal
institution, or government orphanage or
leprosarium.
(3)! All money collected on any tax levied for a
special purpose shall be treated as a special
fund and paid out for such purpose only. If the
purpose for which a special fund was created
has been fulfilled or abandoned, the balance, if
any, shall be transferred to the general funds of
the Government
PROVISIONS INDIRECTLY AFFECTING TAXATION
3.! Due process
Art. III, Sec. 1, 1987 Constitution. No person shall be
deprived of life, liberty, or property without due
process of law, nor shall any person be denied the
equal protection of the laws.
Substantive Due Process – An act is done under
the authority of a valid law or the Constitution
itself.
Procedural Due Process – An act is done after
compliance with fair and reasonable methods or
procedure prescribed by law.
Page 14 of 270
TAXATION I TAXATION LAW
Due Process in Taxation requirements:
i.! Public purpose
ii.! Imposed within taxing authority’s
territorial jurisdiction
iii.! Assessment or collection is not arbitrary or
oppressive
The due process clause may be invoked where a
taxing statute is so arbitrary that it finds no
support in the Constitution, as where it can be
shown to amount to the confiscation of property.
[Sison v. Ancheta, G.R. No. L-59431(1984)]
Instances of violations of the due process clause:
i.! If the tax amounts to confiscation of
property;
ii.! If the subject of confiscation is outside the
jurisdiction of the taxing authority;
iii.! If the tax is imposed for a purpose other
than a public purpose;
iv.! If the law which is applied retroactively
imposes just and oppressive taxes.
v.! If the law violates the inherent limitations
on taxation.
4.! Equal protection
Art. III, Sec. 1, 1987 Constitution. No person shall be
deprived of life, liberty, or property without due
process of law, nor shall any person be denied the
equal protection of the laws.
All persons subject to legislation shall be treated
alike under similar circumstances and conditions
both in the privileges conferred and liabilities
imposed. (1 Cooley 824-825; See Sison v.
Ancheta, supra).
The doctrine does not require that persons or
properties different in fact be treated in laws as
though they were the same. Indeed, to treat
them the same or alike may offend the
Constitution. What the Constitution prohibits is
class legislation which discriminates against
some and favors others. As long as there are
rational or reasonable grounds for so doing,
Congress may, therefore, group the persons or
properties to be taxed and it is sufficient “if all of
the same class are subject to the same rate and
the tax is administered impartially upon them.” (1
Cooley 608).
The equal protection clause is subject to
reasonable classification (See requisites for valid
classification, supra).
5.! Religious freedom
U.P. LAW BOC TAXATION I TAXATION LAW

Art. III, Sec. 5, 1987 Constitution. No law shall be

made respecting an establishment of religion, or
prohibiting the free exercise thereof. (Non-
establishment clause)
The free exercise and enjoyment of religious
profession and worship, without discrimination or
preference, shall forever be allowed. (Free exercise
clause)
No religious test shall be required for the exercise of
civil and political rights.
! Situs! of! Taxation
Meaning: Situs of taxation literally means the place
of taxation.
•! The state where the subject to be taxed has a
situs may rightfully levy and collect the tax; and
•! The situs is necessarily in the state which has
jurisdiction or which exercises dominion over the
subject in question. Within the territorial
jurisdiction, the taxing authority may determine
the situs.

The free exercise clause is the basis of tax Factors that Determine Situs:
exemptions. 1.! Nature of the tax;
2.! Subject matter of the tax (person, property, act or
The imposition of license fees on the distribution activity);
and sale of bibles and other religious literature 3.! Possible protection and benefit that may accrue
by a non-stock, non-profit missionary both to the government and the taxpayer;
organization not for purposes of profit amounts 4.! Citizenship of the taxpayer;
to a condition or permit for the exercise of their 5.! Residence of the taxpayer;
right, thus violating the constitutional guarantee 6.! Source of income.
of the free exercise and enjoyment of religious
profession and worship which carries with it the Situs of Income Tax
right to disseminate religious beliefs and Taxpayer Source of Income
information. [American Bible Society v. City of Within Without
Citizen-ship Residency
Manila, G.R. No. L-9637 (1957)] It is actually in Phils. Phils.
the nature of a condition or permit for the Filipino Resident Taxable Taxable
exercise of the right. This is different from a tax in Non- Non-
Filipino Taxable
the income of one who engages in religious Resident Taxable
activities or a tax on property used or employed Non-
Alien Resident Taxable
in connection with those activities. It is one thing Taxable
to impose a tax on the income or property of a Non- Non-
Alien Taxable
preacher. It is quite another thing to exact a tax Resident Taxable
for the privilege of delivering a sermon.
Situs of Property Tax
The Constitution, however, does not prohibit Kind of Property Situs
imposing a generally applicable tax on the sale Where it is located (lex
of religious materials by a religious organization. Real property
rei sitae)
[Tolentino v. Secretary of Finance, G.R. No. Where property is
115455 (1994)] Tangible Personal physically located
property although the owner
6.! Non-impairment of obligations of contracts resides in another
Art. III, Sec. 10, 1987 Constitution. No law impairing jurisdiction.
the obligation of contracts shall be passed. General Rule: Domicile
of the owner. Mobilia
The Contract Clause has never been thought as a Intangible personal sequuntur personam
limitation on the exercise of the State's power of property (e.g., credits, (movables follow the
taxation save only where a tax exemption has bills receivables, bank person)
been granted for a valid consideration. [Tolentino deposits, bonds,
v. Secretary of Finance, supra] promissory notes, Exceptions:
mortgage loans, 1.! When property has
judgments and corporate acquired a business
stocks) situs in another
jurisdiction; or
2.! When the law

Page 15 of 270
U.P. LAW BOC TAXATION I
provides for the situs
of the subject of tax
(e.g., Sec 104, NIRC)
Situs of Excise Tax
Kind of Excise Tax Situs
Source of the income,
nationality or residence
Income Tax
of taxpayer (Sec. 23,
NIRC)
Location of property;
Donor’s Tax nationality or residence
of taxpayer
Location of property;
Estate Tax nationality or residence
of taxpayer
Situs of Business Tax
Kind of Business Tax Situs
Where transaction is
VAT
made
Where the real property
Sale of Real Property
is located
Where the personal
Sale of Personal Property
property was sold
Page 16 of 270
TAXATION LAW
! Stages! or! Aspects! of!
Taxation
The exercise of taxation involves the following stages:
1.! Legislative Act: Levy or imposition – This process
involves the passage of tax laws or ordinances
through the legislature. The tax laws to be passed
shall determine:
•! Those to be taxed (person, property or rights);
•! How much is to be collected (the rate and the
base of tax); and
•! How taxes are to be implemented (the
manner of imposing and collecting tax).
It also involves the granting of tax exemptions, tax
amnesties or tax condonation.
2.! Executive Act: Assessment and collection – This
process involves the act of administration and
implementation of tax laws by the executive
through its administrative agencies such as the
Bureau of Internal Revenue or Bureau of Customs.
3.! Taxpayer’s Act: Payment – this process involves
the act of compliance by the taxpayer in
contributing his share to pay the expenses of the
government. Payment of tax also includes the
options, schemes or remedies as may be legally
open or available to the taxpayer.
4.! Taxpayer’s and Executive Act: Refund – A claim
for refund must first be filed with the
Commissioner of Internal Revenue. A suit or
proceeding may be filed within two years from the
date of payment of the tax or penalty regardless
of any supervening cause that may arise after
payment. The Commissioner may, even without a
written claim therefor, refund or credit any tax,
where on the face of the return, such payment
appears clearly to have been erroneously paid.
[Sec. 229, NIRC]
U.P. LAW BOC TAXATION I TAXATION LAW

! Definition,! Nature! and! ! Requisites! of! a! Valid! Tax

Characteristics! of! Taxes 1.! For a public purpose;
2.! Rule of taxation should be uniform;
TAXES 3.! The person or property taxed is within the
1.! Are enforced proportional contributions from jurisdiction of the taxing authority;
persons and property levied by the law-making 4.! Assessment and collection is in consonance with
body of the State by virtue of its sovereignty for the due process clause; AND
the support of the government and all public 5.! The tax must not infringe on the inherent and
needs. constitutional limitations of the power of
2.! Are the enforced proportional and pecuniary taxation.
contributions from persons and property levied
by the law-making body of the state having
jurisdiction over the subject of the burden for the
support of the government and public needs.
3.! Are what we pay for civilized society. Without
taxes, the government would be paralyzed for
lack of the motive power to activate and operate
it. [CIR v. Algue, supra]

ESSENTIAL CHARACTERISTICS
1.! It is a forced charge, imposition or contribution.
As such, it operates ad infinitum.
2.! It is assessed in accordance with some
reasonable rule of apportionment which means
that conformably with the constitutional
mandate for Congress to evolve a progressive tax
system, taxes must be based on taxpayer’s ability
to pay [Art VI, Sec 28[a], 1987 Constitution]
3.! It is a pecuniary burden payable in money.
4.! It is imposed by the State on persons, property,
or exercise within its jurisdiction, in accordance
with the principle of territoriality.
5.! It is levied by the legislative body of the State.
6.! It is levied for a public purpose.
7.! It is personal to the taxpayer.

Page 17 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

! Tax! as! Distinguished! from! Imposed on persons,

property and the right
Imposed only on the
right to exercise a
Other! Forms! of! Exactions to exercise a privilege.
Failure to pay does not
privilege

necessarily make the

Tariff
act or business illegal.
Taxes Tariff
Penalty for non- Failure to pay makes
All embracing term to payment: the act or business
include various kinds of illegal.
A kind of tax imposed •! Surcharges; or
enforced contributions
on articles which are •! Imprisonment
upon persons for the
traded internationally (except poll tax).
attainment of public
purposes
License or permit fee is a charge imposed under the
Toll police power for purposes of regulation.
Taxes Toll
License is in the nature of a special privilege, of a
Paid for the support of Paid for the use of
permission or authority to do what is within its terms.
the government another’s property.
It makes lawful an act which would otherwise be
Demand of
Demand of sovereignty unlawful. A license granted by the State is always
proprietorship
revocable. [Gonzalo Sy Trading vs. Central Bank of
Amount paid depends the Phil.,G.R. No. L-41480 (1976)]
Generally, no limit on
upon the cost of
the amount collected as
construction or Importance of the distinctions
long as it is not
maintenance of the 1.! It is necessary to determine whether a particular
excessive, unreasonable
public improvement imposition is a tax or a license fee because some
or confiscatory
used. limitations apply only to one and not to the other,
Imposed by the and for the reason that exemption from taxes
Imposed only by the government or by may not include exemption from license fee.
government private individuals or 2.! The power to regulate as an exercise of police
entities. power does not include the power to impose fees
A toll is a sum of money for the use of something, for revenue purposes. The amount of tax bears
generally applied to the consideration which is paid no relation at all to the probable cost of
for the use of a road, bridge or the like, of a public regulating the activity, occupation, or property
nature. (1 Cooley 77.) being taxed. [Progressive Development Corp. vs.
Quezon City, G.R. No. L-36081 (1989)]
The view has been expressed, however, that the 3.! An exaction, however, may be considered both a
taking of tolls is only another method of taxing the tax and a license fee. This is true in the case of
public for the cost of the construction and repair of car registration fees which may be regarded as
the improvement for the use of which the toll is taxes even as they also serve as an instrument of
charged. (71 Am. Jur. 2d 351.) regulation. If the purpose is primarily revenue, or
if revenue, is, at least, one of the real and
License fee substantial purposes, then the exaction is
License and Regulatory properly called a tax. [Phil. Airlines, Inc. vs. Edu,
Taxes
Fee G.R. No. L- 41383 (1988)]
Imposed under the 4.! But a tax may have only a regulatory purpose.
taxing power of the Levied under the police The general rule, however, is that the imposition
state for purposes of power of the state. is a tax if its primary purpose is to generate
revenue. revenue, and regulation is merely incidental; but
Forced contributions for Exacted primarily to if regulation is the primary purpose, the fact that
the purpose of regulate certain incidentally revenue is also obtained does not
maintaining businesses or make the imposition a tax. [Progressive
government functions. occupations. Development Corp. vs. Quezon City, supra]
Should not
unreasonably exceed Primary purpose test (as seen in Progressive
Generally unlimited as
the expenses of issuing Development Corp v. QC, supra):
to amount
the license and of 1.! Imposition must relate to an occupation or
supervision. activity that so engages the public interest in

Page 18 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

health, morals, safety and development as to implied.

require regulation for the protection and Generally cannot be
promotion of such public interest; Assignable
assigned
2.! Imposition must bear a reasonable relation to Generally paid in money May be paid in kind
the probable expenses of regulation, taking into Can be a subject of set
account not only the costs of direct regulation Cannot be a subject of off or compensation
but also its incidental consequences as well. set off or compensation (see Art. 1279, Civil
Code)
Note: Taxes may also be imposed for regulatory A person cannot be
purposes. It is called regulatory tax. Imprisonment is a
imprisoned for non-
sanction for non-
payment of debt
Fees may be properly regarded as taxes even though payment of tax, except
(except when it arises
they also served as an instrument of regulation. If the poll tax
from a crime)
purpose is primarily revenue, or if revenue is, at least, Governed by the special Governed by the
one of the real and substantial purposes, then the prescriptive periods ordinary periods of
exaction is properly called a tax. [PAL v. Edu, supra] provided for in the NIRC prescription
Does not draw interest Draws interest when it
Special assessment except only when is so stipulated or
Taxes Special Assessment delinquent where there is default
Levied not only on land Levied only on land Imposed only by public Can be imposed by
Imposed because of an authority private individual
Imposed regardless of increase in value of land
public improvements benefited by public A tax is not a debt in the ordinary sense of the word.
improvement
Contribution of a Penalty
Contribution of a Taxes Penalty
person for the
taxpayer for the support Any sanction imposed
construction of a public Violation of tax laws
of the government as a punishment for
improvement may give rise to
It has general violation of law or acts
Exceptional both as to imposition of penalty
application both as to deemed injurious
time and locality Generally intended to Designed to regulate
time and place
raise revenue conduct
A special assessment is not a personal liability of the May be imposed by the
May be imposed only by
person assessed, i.e., his liability is limited only to the government or private
the government
land involved. It is based wholly on benefits (not individuals or entities
necessity). Can be a subject of set
Cannot be a subject of off or compensation
A charge imposed only on property owners benefited set off or compensation (see Art. 1279, Civil
is a special assessment rather than a tax Code)
notwithstanding that the statute calls it a tax. The
rule is that an exemption from taxation does not
include exemption from special assessment. But the
power to tax carries with it the power to levy a special
assessment.

Note: The term "special levy" is the name used in the

present Local Government Code (RA. No. 7160). A
province, city, or municipality, or the National
Government, may impose a special levy on lands
especially benefited by public works or improvements
financed by it. [Sec. 240, RA 7160]

Debt
Taxes Debt
Generally based on
Based on laws
contract, express or

Page 19 of 270
U.P. LAW BOC TAXATION I
! Kinds! of! Taxes
1.! As to object
a.! Personal, Poll or Capitation Tax – tax of a
fixed amount imposed on persons residing
within a specified territory, whether citizens
or not, without regard to their property or the
occupation or business in which they may be
engaged (e.g. community (formerly
residence) tax). Taxes of a specified amount
imposed upon each person performing a
certain act or engaging in a certain business
or profession are not, however, poll taxes. (71
Am. Jur. 2d 357).
b.! Property Tax – tax imposed on property, real
or personal, in proportion to its value or in
accordance with some other reasonable
method of apportionment (e.g., real estate
tax). The obligation to pay the tax is absolute
and unavoidable and is not based upon the
voluntary action of the person assessed.
c.! Privilege/Excise Tax – any tax which does
not fall within the classification of a poll tax
or a property tax. Thus, it is said that an
excise tax is a charge imposed upon:
•! the performance of an act,
•! the enjoyment of a privilege, or
•! the engaging in an occupation,
profession, or business.
The obligation to pay the tax is based on the
voluntary action of the person taxed in
performing the act or engaging in the activity
which is subject to the excise. The term “excise
tax” is synonymous with “privilege tax” and the
two are often used interchangeably (e.g.,
income tax, value added tax, estate tax,
donor’s tax).
2.! As to burden or incidence
a.! Direct Taxes – taxes which are demanded
from persons who also shoulder them; taxes
for which the taxpayer is directly or primarily
liable, or which he cannot shift to another
(e.g., income tax, estate tax, donor’s tax,
community tax)
b.! Indirect Taxes – taxes which are demanded
from one person in the expectation and
intention that he shall indemnify himself at
the expense of another, falling finally upon
the ultimate purchaser or consumer; taxes
levied upon transactions or activities before
the articles subject matter thereof, reach the
consumers who ultimately pay for them not
as taxes but as part of the purchase price.
Thus, the person who absorbs or bears the
Page 20 of 270
TAXATION LAW
burden of the tax is other than the one on
whom it is imposed and required by law to
pay the tax. Practically all business taxes are
indirect (e.g., VAT, percentage tax, excise
taxes on specified goods, customs duties).
3.! As to tax rates
a.! Specific Tax – a tax of a fixed amount
imposed by the head or number or by some
other standard of weight or measurement. It
requires no assessment (valuation) other
than the listing or classification of the
objects to be taxed (e.g., taxes on distilled
spirits, wines, and fermented liquors; cigars
and cigarettes)
b.! Ad Valorem Tax – a tax of a fixed proportion
of 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 from each taxpayer can be
determined. The phrase “ad valorem” means
literally, “according to value.” (e.g., real
estate tax, excise tax on automobiles, non-
essential goods such as jewelry and
perfumes, customs duties (except on
cinematographic films)).
c.! Mixed
4.! As to purpose
a.! General or Fiscal Tax – levied for the general
or ordinary purposes of the Government, i.e.,
to raise revenue for governmental needs
(e.g., income tax, VAT, and almost all taxes).
b.! Special/Regulatory/Sumptuary Tax – levied
for special purposes, i.e., to achieve some
social or economic ends irrespective of
whether revenue is actually raised or not
(e.g., protective tariffs or customs duties on
imported goods to enable similar products
manufactured locally to compete with such
imports in the domestic market).
Tariff duties intended mainly as a source of
revenue are relatively low so as not to
discourage imports.
5.! As to scope (or authority imposing the tax)
a.! National – taxes imposed by the national
government (e.g., national internal revenue
taxes, customs duties, and national taxes
imposed by laws).
b.! Municipal or Local – taxes imposed by local
governments (e.g., business taxes that may
be imposed under the Local Government
Code, professional tax).
U.P. LAW BOC
6.! As to graduation
a.! Progressive – The rate of tax increases
as the tax base or bracket increases, e.g.,
income tax, estate tax, donor’s tax.
b.! Regressive – The rate of tax decreases
as the tax base or bracket increases.
There is no regressive tax in the
Philippines.
c.! Proportionate – The rate of tax is based
on a fixed percentage of the amount of
the property, receipts or other basis to
be taxed, e.g., real estate tax, VAT, and
other percentage taxes.
d.! Digressive – A fixed rate is imposed on a
certain amount and diminishes
gradually on sums below it. The tax rate
in this case is arbitrary because the
increase in tax rate is not proportionate
to the increase of tax base.
Regressive/Progressive system of taxation
A regressive tax must not be confused with the
regressive system of taxation.
In a society where the majority of the people have
low incomes, regressive taxation system exists
when there are more indirect taxes imposed than
direct taxes. Since the low-income sector of the
population as a whole buys more consumption
goods on which the indirect taxes are collected,
the burden of indirect taxes rests more on them
than on the more affluent groups.
A progressive tax is, therefore, also different from
a progressive system of taxation.
Page 21 of 270
TAXATION I TAXATION LAW
! Sources! of! Tax! Laws
1.! Constitution of the Philippines
A constitutional provision regarding taxation is
primarily intended to limit and regulate the
exercise of taxation power. The State can
exercise the power to tax even if the Constitution
is completely silent about taxation.
2.! Statutes
The present tax statutes of the Philippines are
embodied in R.A. 8424, which is not the
prevailing National Internal Revenue Code
(NIRC) effective January 1, 1998, which was
amended per R.A. 9337 (The VAT Reform Law).
3.! Judicial Decisions
These refer to the decisions for application made
concerning tax issues by the proper courts
exercising judicial authority of competent
jurisdiction. These courts may be the Supreme
Court and the Court of Tax Appeals. Their
decisions on tax laws comprise the greater
portion of tax jurisprudence. They form part of
the legal system of the Philippines.
By the nature of its jurisdiction, the decisions of
the Court of Tax Appeals are still appealable to
the Supreme Court. The decision of the Supreme
Court on any matter is final and executory.
4.! Executive Orders
Executive Orders are regulations issued by the
President or some administrative authority under
his direction for the purpose of interpreting,
implementing, or giving administrative effect to a
provision of the Constitution or of some law or
treaty.
5.! Tax Treaties and Conventions
These refer to the treaties or international
agreements with foreign countries regarding tax
enforcement and exemptions. They have the
force and effect of law.
6.! Revenue Regulations by the Department of
Finance
Revenue Regulations are rules or orders having
force of law issued by executive authority of the
government to ensure uniform application of the
tax law.
In order that administrative regulations may be
considered valid, all of the following requisites
must be complied with:
U.P. LAW BOC TAXATION I TAXATION LAW

a.! The regulations must be useful, practical 9.! Local Tax Ordinances
and necessary for the enforcement of the These are tax ordinances issued by the province,
law; city, municipality and baranggay subjct to such
b.! They must be reasonable in their provisions; limitations as provided by the Local Government
c.! They must not be contrary to law; and Code. [Valencia and Roxas]
d.! They must be duly published in the Official
Gazette. [Interprovincial Auto Bus Co. v.
Collector, G.R. No. L-6741 (1956); Lim Hoa
Ting v. Central Bank, G.R. No. L-10666
(1958)]

Note: Ruling of the Secretary of Finance are not

binding on the courts because the duty or power
of interpreting laws is primarily a function of the
judiciary.

The Secretary of Finance is vested with authority

to revoke, repeal or abrogate acts or previous
rulings of his predecessors in office because
these are not binding on their successors. [Hilado
v. Collector, G.R. No. L-9408 (1956)]

7.! BIR Revenue Memorandum Circulars and Bureau

of Customs Memorandum Orders
These are administrative rulings or opinions
which are less general interpretations of tax laws
being issued from time to time by the
Commissioner of the Internal Revenue or
Commissioner of the Bureau of Customs, as the
case may be. They are primarily intended to
maintain uniform application of tax laws within
the department or area of authority.

Memoranda have the status of advisory or sort of

information service. For this reason, they can be
reversed anytime.

Note: The Courts generally respect the

interpretations made by the executive officer
whose duty is to enforce the law. However, such
interpretations are not conclusive and shall be
disregarded if found erroneous by the Court.
[Molina v. Rafferty, 37 Phil 545]

8.! BIR Rulings

BIR Rulings are expressed official interpretations
of the tax laws as applied to specific transactions.
Unlike a Revenue Regulation, it is more limited
in application.

BIR Rulings are not the final interpretations of

the tax laws. They are considered the best
opinion or advisory at the moment and are
considered sound law until changed by the court.
[CIR v. Ledesma, (1970)]

Page 22 of 270
U.P. LAW BOC TAXATION I
! Construction! and!
Interpretation
1.! Tax Laws
General Rule: Tax laws are construed strictly against
the government and liberally in favor of the taxpayer.
[Manila Railroad Co. v. Coll. of Customs, G.R. No. L-
30264 (1929)].
No person or property is subject to taxation unless
within the terms or plain import of a taxing statute.
(see72 Am.Jur. 2d 44).
Taxes, being burdens, they are not to be presumed
beyond what the statute expressly and clearly
declares. [Coll. v. La Tondena, G.R. No. L-10431
(1962)]. Thus, a tax payable by “individuals” does not
apply to “corporations.”
Tax statutes offering rewards are liberally construed
in favor of informers. [Penid v. Virata, G.R. No. L-
44004 (1983)].
Exceptions:
a.! The rule of strict construction as against the
government is not applicable where the
language of the statute is plain and there is no
doubt as to the legislative intent. (see 51
Am.Jur.368). In such case, the words employed
are to be given their ordinary meaning. E.g. Word
“individual” was changed by the law to “person”.
This clearly indicates that the tax applies to both
natural and juridical persons, unless otherwise
expressly provided.
b.! The rule does not apply where the taxpayer
claims exemption from the tax.
Tax statutes are to receive a reasonable construction
or interpretation with a view to carrying out their
purpose and intent. They should not be construed as
to permit the taxpayer easily to evade the payment of
tax. (Carbon Steel Co. v. Lewellyn, 251 U.S. 201). Thus,
the good faith of the taxpayer is not a sufficient
justification for exemption from the payment of
surcharges imposed by the law for failing to pay tax
within the period required by law.
2.!Tax Exemption and
Exclusion
Tax exemptions must be shown to exist clearly and
categorically, and supported by clear legal
provisions. [NPC v. Albay, G.R. No. 87479 (1990)]
Page 23 of 270
TAXATION LAW
General Rule: In the construction of tax statutes,
exemptions are not favored and are construed
strictissimi juris against the taxpayer. [Republic Flour
Mills v. Comm. & CTA, G.R. No. L-25602 (1970)].
a.! NPC v. Albay [supra]: Tax exemptions must be
shown to exist clearly and categorically, and
supported by clear legal provisions.
b.! Floro Cement v. Gorospe [supra]: Claims for an
exemption must be able to point out some
provision of law creating the right, and cannot be
allowed to exist upon a mere vague implication
or inference.
c.! CIR v. CA [supra]: Refunds are in the nature of
exemption, and must be construed strictly
against the grantee/taxpayer.
d.! Comm. v. Kiener Co. Ltd. [G.R. No. L-24754
(1975)]: Taxation is the rule and exemption the
exception, and therefore, he who claims
exemption must be able to justify his claim or
right thereto, by a grant expressed in terms “too
plain to be mistaken and too categorical to be
misinterpreted.”
Exceptions:
a.! When the law itself expressly provides for a
liberal construction, that is, in case of doubt, it
shall be resolved in favor of exemption; and
b.! When the exemption is in favor of the
government itself or its agencies, or of religious,
charitable, and educational institutions because
the general rule is that they are exempt from tax.
c.! When the exemption is granted under special
circumstances to special classes of persons.
d.! If there is an express mention or if the taxpayer
falls within the purview of the exemption by clear
legislative intent, the rule on strict construction
does not apply. [Comm. v. Arnoldus Carpentry
Shop, Inc., G.R. No. 71122 (1988)].
3.!Tax Rules and Regulations
General Rule: The Secretary of Finance, upon
recommendation of the CIR, shall promulgate all
needful rules and regulations for the effective
enforcement of the provisions of the NIRC. [Sec. 244,
NIRC]
It is an elementary rule in administrative law that
administrative regulations and policies enacted by
administrative bodies to interpret the law which they
are entrusted to enforce have the force of law and
entitled to great respect. They have in their favor a
presumption of legality [Gonzales v. Land Bank, G.R.
No. 76759 (1990)]
Requisites for validity and effectivity of regulations
U.P. LAW BOC TAXATION I
a.! Reasonable;
b.! Within the authority conferred;
c.! Not contrary to law and the Constitution [Art. 7,
NCC]; and
d.! Must be published.
Tax regulations whose purpose is to enforce of
implement existing law must comply with the
following requisites to be effective [RP v. Pilipinas
Shell Petroleum Corp., G.R. No. 173918 (2008)]:
a.! Be published in a newspaper of general
circulation [Art. 2, NCC]; AND
b.! Filed with the UP Law Center Office of the
National Administrative Register (ONAR) [Ch 2,
Book VII, EO 292]
Note: Administrative rules and regulations must
always be in harmony with the provisions of the law.
In case of conflict with the law or the Constitution,
the administrative rules and regulations are null and
void. As a matter of policy, however, courts will
declare a regulation or provision thereof invalid only
when the conflict with the law is clear and
unequivocal.
Administrative interpretations and opinions
The power to interpret the provisions of the Tax Code
and other tax laws is under the exclusive and original
jurisdiction of the Commissioner of Internal Revenue
subject to review by the Secretary of Finance [Sec. 4,
par.1, NIRC].
Revenue regulations are the formal interpretation of
the provisions of the NIRC and other laws by the
Secretary of Finance upon the recommendation of
the Commissioner of Internal Revenue.
General rule: The Commissioner has the sole
authority to issue rulings but he also has the power to
delegate said authority to his subordinates with the
rank equivalent to a division chief or higher.
Exceptions: The Commissioner may not delegate the
following:
a.! The power to recommend the promulgation of
rules and regulations by the Secretary of
Finance;
b.! The power to issue rulings of first impression or
to reverse, revoke, or modify any existing ruling
of the Bureau; and
c.! The power to compromise or abate any tax
liability as provided by Sec. 204 and 205 of the
NIRC
Exception to the exception: BUT assessments issued
by RDOs involving (a) Php500,000 or less, and (b)
minor criminal violations as determined by the
Page 24 of 270
TAXATION LAW
Secretary of Finance as recommended by the
Commissioner, may be compromised by a Regional
Evaluation Board (CHAIRMAN: Regional Director;
MEMBERS: Assistant Regional Director, heads of the
Legal, Assessment and Collection Divisions, and the
Revenue District Officer having jurisdiction over the
taxpayer.) [Sec. 7, NIRC].
Decisions of the Supreme Court applying or
interpreting existing tax laws are binding on all
subordinate courts and have the force and effect of
law. As provided for in Article 8 of the Civil Code,
they “form part of the law of the land”.
The same is also true with respect to decisions of the
Court of Tax Appeals. However, by the nature of its
jurisdiction, the decisions of this court are still
appealable to the Supreme Court by a petition for
review on certiorari (Rule 45). [Sec. 11, RA 9282]
4.!Penal Provisions of Tax
Laws
Penal provisions of tax laws must be strictly
construed. It is not legitimate to stretch the language
of a rule, however beneficent its intention, beyond the
fair and ordinary meaning of its language.
A penal statute should be construed strictly against
the State and in favor of the accused. The reason for
this principle is the tenderness of the law for the
rights of individuals and the object is to establish a
certain rule by conformity to which mankind would be
safe, and the discretion of the court limited. [People v.
Purisima, G.R. No. L-42050-66 (1978)].
5.!Non-Retroactive
Application of Tax Laws to
Taxpayers
General rule: Tax laws are prospective in operation.
The reason is that the nature and amount of the tax
could not be foreseen and understood by the
taxpayer at the time the transaction which the law
seeks to tax was completed.
Exception: Tax laws may be applied retroactively
provided it is expressly declared or clearly the
legislative intent. [Lorenzo v. Posadas, supra].
Exception to the exception: a tax law should not be
given retroactive application when it would be so
harsh and oppressive for in such case, the
U.P. LAW BOC TAXATION I TAXATION LAW

constitutional limitation of due process would be

violated [Republic v. Fernandez, supra]. ! Doctrines! of! Taxation
1.! Prospectivity of Tax Laws
General rule: Tax laws are prospective in operation.

Reason: Nature and amount of the tax under tax laws

enacted after the transaction could not have been
foreseen and understood by the taxpayer at the time
of the transaction.

Exception: Tax laws may be applied retroactively

provided it is expressly declared or it is clearly the
legislative intent (e.g., increase taxes on income
already earned) except when retroactive application
would be so harsh and oppressive. [Republic v.
Fernandez, G.R. No. L-9141 (1956)]

It is a cardinal rule that laws shall have no retroactive

effect, unless the contrary is provided (Art. 4, Civil
Code). [Hydro Resources v. CA, G.R. No. 80276
(1990)]

The language of the statute must clearly demand or

press that it shall have a retroactive effect. [Lorenzo v.
Posadas, supra]

Exception to the exception:

Collection of interest in tax cases is not penal in
nature; it is but a just compensation to the State. The
constitutional prohibition against ex post facto laws
is not applicable to the collection of interest on back
taxes. [Central Azucarera v. CTA, G.R. No. L-23236
(1967)]

Non-retroactivity of rulings [Sec. 246, NIRC]

General rule: Rulings do not have retroactive
application if the revocation, modification, or reversal
will be prejudicial to the taxpayer.

Exceptions:
a.! Taxpayer’s deliberate misstatement or omission
of facts
b.! BIR’s gathered facts is materially different from
the facts from which the ruling was based on
c.! Taxpayer acted in bad faith

Note: The rule on non-retroactivity of rulings may be

applied only if the parties in the ruling involve the
taxpayer himself/itself. The taxpayer cannot invoke
the rulings granted in favor of the other taxpayers.

2.!Imprescriptibility of Taxes

Page 25 of 270
U.P. LAW BOC TAXATION I
Unless otherwise provided by law, taxes are
imprescriptible. [CIR v. Ayala Securities Corporation
G.R. No. L-29485 (1980)]
The law on prescription, being a remedial measure,
should be liberally construed in order to afford such
protection. As a corollary, the exceptions to the law
on prescription should perforce be strictly construed.
[Commissioner v. CA, G.R. No. 104171 (1999)]
Prescriptions found in statutes
a.! National Internal Revenue Code - statute of
limitations in the assessment and collection of
taxes therein imposed.
Summary of prescription on assessment and
collection:
Prescription of assessment AND
collection from the:
1.! prescribed last day of filing of
returns (even if return was filed
3 YEARS
earlier than the deadline); OR
2.! the day when the return was
actually filed if filed later than the
last day of filing [Sec. 203, NIRC]
Prescription of assessment in cases of:
1.! false or fraudulent return with
intent to evade tax; OR
10
2.! failure to file a return [Sec. 222,
YEARS
NIRC]
From the discovery of the fraud, falsity,
or omission.
Prescription of collection of tax if:
1.! assessed within the 3-year and 10-
year prescriptive periods
2.! assessed within the extended
5 YEARS period agreed upon by the
Commissioner and taxpayer (waiver
of the prescriptive period)
Collected by distraint, levy or by a
proceeding in court. [Sec. 222, NIRC]
Note: The prescriptive period from final
liquidation is three (3) years, except in cases of:
1.! tentative liquidation;
2.! payment under protest;
3.! fraud; and
4.! compliance audit.
b.! Customs Modernization and Tariffs Act (CMTA) –
repealed the Tariff and Customs Code (TCC).
Under Sec. 430, it provides that “[i]n the absence
of fraud and when the goods have been finally
assessed and released, the assessment shall be
conclusive upon all parties three (3) years from
the date of final payment or duties, or upon
completion of the post-clearance audit. (Note:
Page 26 of 270
TAXATION LAW
The same rule was provided under Sec. 1603 of
the TCC, but it was worded differently).
c.! Local Government Code – prescribes
prescriptive periods for the assessment from the
date they became due (5 years) and collection (5
years) of taxes (including Real Property Taxes)
from the date of assessment by administrative or
judicial action. The prescriptive period is 3 years
if the tax accrued before the effectivity of the
Local Government Code. [Sec. 194 and 270, RA
7160 or the LGC]. In case of fraud or intent to
evade the payment of taxes, fees, or charges, the
same may be assessed from discovery of the
fraud or intent to evade payment (10 years).
The prescriptive period is tolled when:
a.! The treasurer is legally prevented from making
the assessment or collection
b.! The taxpayer requests for a reinvestigation and
executes a waiver in writing before expiration of
the period within which to assess or collect; and
c.! The taxpayer is out of the country or otherwise
cannot be located.
3.!Double Taxation
Means taxing twice the same taxpayer for the same
tax period upon the same thing or activity, when it
should be taxed once, for the same purpose and with
the same kind of character of tax.
a.! Strict sense (Direct Duplicate Taxation)
1.! The same property must be taxed twice
when it should be taxed once;
2.! Both taxes must be imposed on the same
property or subject matter;
3.! For the same purpose;
4.! By the same State, Government, or taxing
authority;
5.! Within the same territory, jurisdiction or
taxing district;
6.! During the same taxing period; and
7.! Of the same kind or character of tax.
b.! Broad sense (Indirect Duplicate Taxation)
There is double taxation in the broad sense or
there is indirect duplicate taxation if any of the
elements for direct duplicate taxation is absent.
It extends to all cases in which there is a burden
of two or more pecuniary impositions. For
example, a tax upon the same property imposed
by two different states.
Double taxation, standing alone and not being
forbidden by our fundamental law, is not a valid
U.P. LAW BOC TAXATION I
defense against the legality of a tax measure
[Pepsi Cola v. Mun. of Tanauan, G.R. No. L-31156
(1976)]. But from it might emanate such defenses
against taxation as oppressiveness and
inequality of the tax.
Constitutionality of double taxation
There is no constitutional prohibition against double
taxation in the Philippines. It is something not
favored, but is permissible, provided some other
constitutional requirement is not thereby violated.
[Villanueva v. City of Iloilo, G.R. No. L-26521 (1968)]
If the tax law follows the constitutional rule on
uniformity, there can be no valid objection to taxing
the same income, business or property twice. [China
Banking Corp. v. CA, G.R. No. 146749 (2003)]
Double taxation in its narrow sense is undoubtedly
unconstitutional but that in the broader sense is not
necessarily so. (De Leon, citing 26 R.C.L 264-265).
Where double taxation (in its narrow sense) occurs,
the taxpayer may seek relief under the uniformity rule
or the equal protection guarantee. (De Leon, citing
84 C.J.S.138).
International Double Taxation
Double taxation usually takes place when a person is
resident of a contracting state and derives income
from, or owns capital in, the other contracting state
and both states impose tax on that income or capital.
In order to eliminate double taxation, a tax treaty
resorts to several methods. [CIR v. SC Johnson &
Sons, Inc., G.R. No. 127105 (1999)]
The purpose of these international agreements is to
reconcile the national fiscal legislations of the
contracting parties in order to help the taxpayer avoid
simultaneous taxation in two different jurisdictions.
More precisely, the tax conventions are drafted with a
view towards the elimination of international juridical
double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and
for identical periods.
The apparent rationale for doing away with double
taxation is to encourage the free flow of goods and
services and the movement of capital, technology
and persons between countries, conditions deemed
vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly
predictable and reasonable international investment
climate and the protection against double taxation is
crucial in creating such a climate. [CIR v. SC Johnson
& Sons, Inc., supra]
Page 27 of 270
TAXATION LAW
Modes of eliminating double taxation
a.! Allowing reciprocal exemption either by law or by
treaty;
b.! Allowance of tax credit for foreign taxes paid;
c.! Allowance of deductions such as for foreign taxes
paid, and vanishing deductions in estate tax; OR
d.! Reduction of Philippine tax rate.
4.!Power to Tax Involves
Power to Destroy
According to Chief Justice John Marshall, "the power
to tax involves the power to destroy." [McCulloch v.
Maryland, 17 U.S. [4 Wheat.] 316-428, 4L. ed. 579.]
To say, however, that 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 extent to which it
may be employed in order to raise revenues. (see 1
Cooley 178.) Thus, even if a tax should destroy a
business, such fact alone could not invalidate the tax.
(84 C.J.S. 46.)
Incidentally, our Constitution mandates that "the rule
of taxation shall be uniform and equitable." In a case,
our Supreme Court said: "The power of taxation is
sometimes called also the power to destroy.
Therefore, it should be exercised with caution to
minimize injury to the proprietary rights of the
taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kills the 'hen that lays
the golden eggs.' And in order to maintain the
general public's trust and confidence in the
government, this power must be used justly and not
treacherously." [Roxas v. Court of Tax Appeals, G.R.
No. L-25043 (1968); Philex Mining Corp. vs. Comm.
of Internal Revenue, G.R. No. 125704 (1998)]
Note: Justice Holmes once said: “The power to tax is
not the power to destroy while this Court (the
Supreme Court) sits.” The two limitations on the
power of taxation are the inherent and constitutional
limitations which are intended to prevent abuse on
the exercise of the otherwise plenary and unlimited
power. It is the Court’s role to see to it that the
exercise of the power does not transgress these
limitations.
5.!Escape from Taxation
a.! Shifting of Tax Burden
Shifting - the transfer of the burden of a tax by the
original payer or the one on whom the tax was
assessed or imposed to someone else. What is
transferred is not the payment of the tax but the
U.P. LAW BOC TAXATION I TAXATION LAW

burden of the tax. All indirect taxes may be shifted;

direct taxes cannot be shifted. Meaning of impact and incidence of taxation
Impact of taxation is the point on which a tax is
Ways of shifting the tax burden originally imposed. In so far as the law is concerned,
1.! Forward shifting - When the burden of the tax is the taxpayer, the subject of tax, is the person who
transferred from a factor of production through must pay the tax to the government.
the factors of distribution until it finally settles on
the ultimate purchaser or consumer. Examples: Incidence of taxation is that point on which the tax
VAT, percentage tax. burden finally rests or settles down. It takes place
2.! Backward shifting - When the burden of the tax is when shifting has been effected from the statutory
transferred from the consumer or purchaser taxpayer to another.
through the factors of distribution to the factor of
production. Example: Consumer or purchaser may Impact Distinguished from Incidence
shift tax imposed on him to retailer by purchasing Impact Incidence
only after the price is reduced, and from the latter Ultimate burden of the
to the wholesaler, and finally to the manufacturer Initial burden of tax
tax
or producer. At the point of At the point of
3.! Onward shifting - When the tax is shifted two or imposition settlement
more times either forward or backward. Falls upon the person
Rests on the person
from whom the tax is
Factors determining tax shifting who pays it eventually
collected
1.! Elasticity of demand and supply - The more the Cannot be shifted
elasticity, the lower the incidence on the sales.
The higher the incidence on supply. Incidence is the end of
2.! Nature of markets – In an oligopolistic market the shifting process.
(i.e. sellers and many buyers) tax shifting to Sometimes, however,
buyers is high since few sellers can team up to when no shifting is
determine the market price. In a situation where May be shifted
possible, as in the case
there are many buyers and sellers, a large of income tax or such
portion of tax will be borne by sellers. For a other direct taxes, the
monopolistic market, the entire tax burden falls impact coincides with
on the shoulders of the buyer. incidence on the same
3.! Government policy on pricing – In the case of person.
government price control, the supplier cannot
increase prices, hence cannot shift tax burden to Notes: Suppose a tax — excise duty — is imposed on
buyers and vice versa. soap. Its impact is on the producers, in the first
4.! Geographical location – If taxes are imposed on instance, as they are liable to pay it to the
certain regions, it is hard to shift them to government. But, the producers may succeed in
consumers because consumers will move to collecting it from the consumers by raising the price
regions with low taxes. of soap by the amount of tax. In that case, consumers
5.! Nature of tax (Direct or Indirect tax) – Direct tax eventually pay the tax and so the incidence falls upon
e.g. PAYE (pay-as-you-earn) cannot be shifted them.
whatsoever while indirect taxes can be shifted
through increase in prices. Relationship between Impact, Shifting, and Incidence
6.! Rate of tax – If too high, shifting can occur of a Tax
backwards or forwards, if too low, it may be Impact Shifting Incidence
absorbed by the manufacturer. Initial Intermediate
7.! Time available for adjustment – The person who Result
phenomenon process
can adjust faster (buyer or seller) will be able to Setting or
shift tax e.g. if the buyer cash shift to substitute Imposition of Transfer of the
coming to rest
goods, the seller will bear the tax burden. the tax tax
of the tax
8.! The tax point
Example: Impact in VAT is on the producer who shifts
Taxes that can be shifted
the burden to the customer who finally bears the
1.! Value-added Tax
incidence of the tax
2.! Percentage Tax
3.! Excise Tax

Page 28 of 270
U.P. LAW BOC
b.! Tax Avoidance (Tax
Minimization)
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. It is politely called “tax
minimization” and is NOT punishable by law.
Example: A person refrains from engaging in some
activity or enjoying some privilege in order to avoid
the incidental taxation or to lower his tax bracket for
a taxable year.
c.! Tax Evasion (Tax Dodging)
Tax Evasion - is the use by the taxpayer of illegal or
fraudulent means to defeat or lessen the payment of
a tax. It is also known as “tax dodging.” It is
punishable by law.
Example: Deliberate failure to report a taxable
income or property; deliberate reduction of income
that has been received; overstatement of expenses.
Elements of Tax Evasion
1.! The end to be achieved. Example: the payment of
less than that known by the taxpayer to be
legally due, or in paying no tax when such is due.
2.! An accompanying state of mind described as
being “evil,” “in bad faith,” “willful” or
“deliberate and not accidental.”
3.! A course of action (or failure of action) which is
unlawful.
Since fraud is a state of mind, it need not be proved
by direct evidence but may be inferred from the
circumstances of the case. Thus:
1.! The failure of the taxpayer to declare for taxation
purposes his true and actual income derived
from his business for two consecutive years has
been held as an indication of his fraudulent
intent to cheat the government of its due taxes.
[Republic v. Gonzales, G.R. No. L-17962 (1965)]
2.! The substantial underdeclaration of income in
the income tax returns of the taxpayer for four (4)
consecutive years coupled with his intentional
overstatement of deductions justifies the finding
of fraud. [Perez v. CTA and Collector, G.R. No. L-
10507 (1958)].
Tax Avoidance v. Tax Evasion
Tax Avoidance Tax Evasion
Tax
Also called as Tax Dodging
Minimization
Means Legal Illegal
Page 29 of 270
TAXATION I TAXATION LAW
Outcome of tax Outcome of tax
planning fraud
Punishable? No Yes
Merely
minimize Entirely escape
Purpose payment of payment of
taxes (tax taxes
savings)
d.! Transformation
Method of escape in taxation whereby the
manufacturer or producer upon whom the tax has
been imposed pays the tax and endeavors to recoup
himself by improving his process of production
thereby turning out his units of products at a lower
cost. The taxpayer escapes by a transformation of the
tax into a gain through the medium of production.
6.!Exemption from Taxation
Meaning of exemption from taxation
The grant of immunity to particular persons or
corporations or to person or corporations of a
particular class from a tax which persons and
corporations generally within the same state or
taxing district are obliged to pay. It is an immunity or
privilege; it is freedom from a financial charge or
burden to which others are subjected. It is strictly
construed against the taxpayer.
Taxation is the rule; exemption is the exception. He
who claims exemption must be able to justify his
claim or right thereto, by a grant expressed in terms
“too plain to be mistaken and too categorical to be
misinterpreted.” If not expressly mentioned in the law,
it must at least be within its purview by clear
legislative intent.
Grounds for Tax Exemption
a.! It may be based on contract.
b.! It may be based on some ground of public policy.
c.! It may be created in a treaty on grounds of
reciprocity or to lessen the rigors of international
or multiple taxation.
But equity is NOT a ground for tax exemption.
Exemption from tax is allowable only if there is a
clear provision. While equity cannot be used as a
basis or justification for tax exemption, a law may
validly authorize the condonation of taxes on
equitable considerations.
Nature of tax exemption
a.! Mere personal privilege - cannot be assigned or
transferred without the consent of the
U.P. LAW BOC TAXATION I
legislature. The legislative consent to the
transfer may be given either in the original act
granting the exemption or in a subsequent law
b.! General rule: Revocable by the government.
Exception: If founded on a contract which is
protected from impairment. But the contract
must contain the essential elements of other
contracts. An exemption provided for in a
franchise, however, may be repealed or amended
pursuant to the Constitution [Art. XII, Sec. 11,
1987 Constitution]. A legislative franchise is a
mere privilege.
c.! Implies a waiver on the part of the government of
its right to collect taxes due to it, and, in this
sense, is prejudicial thereto. Hence, it exists only
by virtue of an express grant and must be strictly
construed.
d.! Not necessarily discriminatory, provided it has
reasonable foundation or rational basis. Where,
however, no valid distinction exists, the
exemption may be challenged as violative of the
equal protection guarantee or the uniformity rule.
Kinds of tax exemption
a.! Express or Affirmative - either entirely or in part,
may be made by provisions of the Constitution,
statutes, treaties, ordinances, franchises, or
contracts.
b.! Implied or Exemption by Omission - when a tax is
levied on certain classes without mentioning the
other classes. Every tax statute, in a very real
sense, makes exemptions since all those not
mentioned are deemed exempted. The omission
may be either accidental or intentional.
Exemptions are not presumed, but when public
property is involved, exemption is the rule, and
taxation is the exception.
c.! Contractual - The legislature of a State may, in
the absence of special restrictions in its
constitution, make a valid contract with a
corporation in respect to taxation, and that such
contract can be enforced against the State at the
instance of the corporation [Casanovas v. Hord,
G.R. No. 3473 (1907)].
In the real sense of the term and where the non-
impairment clause of the Constitution can rightly
be invoked, this includes those agreed to by the
taxing authority in contracts, such as those
contained in government bonds or debentures,
lawfully entered into by them under enabling
laws in which the government, acting in its
private capacity, sheds its cloak of authority and
waives its governmental immunity.
Page 30 of 270
TAXATION LAW
These contractual tax exemptions, however, are
not to be confused with tax exemptions granted
under franchises. A franchise partakes the nature
of a grant which is beyond the purview of the
non-impairment clause of the Constitution.
[Manila Electric Company v. Province of Laguna,
G.R. No. 131359 (1999)]
Rationale of Tax Exemption
Such exemption will benefit the body of the people
and not particular individuals or private interest and
that the public benefit is sufficient to offset the
monetary loss entailed in the grant of the exemption.
Principles of Tax Exemption:
a.! As the power of taxation is a high prerogative of
sovereignty, the relinquishment is never
presumed and any reduction or diminution
thereof with respect to its mode or its rate, must
be strictly construed, and the same must be
couched in clear and unmistakable terms in
order that it may be applied. [Floro Cement v.
Gorospe, G.R. No. L-46787 (1991)]
b.! When granted, they are strictly construed against
the taxpayer [Luzon Stevedoring Co. v. CTA, G.R.
No. L-30232 (1988)]
c.! Tax exemptions are strictly construed against the
taxpayer, they being highly disfavored and may
almost be said “to be odious to the law.” [Manila
Electric Company v. Vera, G.R. No. L-29987
(1975)]
Revocation of Tax Exemption
General Rule: Revocable by the government.
Exception: Contractual tax exemptions may not be
unilaterally so revoked by the taxing authority
without thereby violating the non-impairment clause
of the Constitution.
7.!Doctrine of Equitable
Recoupment
A claim for refund barred by prescription may be
allowed to offset unsettled tax liabilities. The doctrine
finds NO application in this jurisdiction.
8.!Compensation and Set-Off
General rule: Internal revenue taxes cannot be the
subject of set-off or compensation [Republic v.
Mambulao Lumber, G.R. No. L-17725 (1962)]
Reasons:
U.P. LAW BOC TAXATION I
a.! This would adversely affect the government
revenue system [Philex Mining v. CA, G.R. No.
125704 (1998)].
b.! Government and the taxpayer are not creditors
and debtors of each other. The payment of taxes
is not a contractual obligation but arises out of a
duty to pay. [Republic v. Mambulao Lumber,
supra]
Exception: If the claims against the government have
been recognized and an amount has already been
appropriated for that purpose. Where both claims
have already become:
a.! due
b.! demandable, and
c.! fully liquidated,
compensation takes place by operation of law under
Art. 1200 in relation to Articles 1279 and 1290 of the
NCC, and both debts are extinguished to the
concurrent amount. [Domingo v. Garlitos, G.R. No. L-
18994 (1963)]
9.!Compromise and Tax
Amnesty
COMPROMISE
a.! A contract whereby the parties, by making
reciprocal concessions avoid litigation or put an
end to one already commenced. (Art. 2028, Civil
Code). It involves a reduction of the taxpayer’s
liability.
b.! Requisites of a tax compromise:
1.! The taxpayer must have a tax liability.
2.! There must be an offer (by the taxpayer or
Commissioner) of an amount to be paid by
the taxpayer.
3.! There must be acceptance (by the
Commissioner or the taxpayer, as the case
may be) of the offer in settlement of the
original claim.
TAX AMNESTY
Definition
A tax amnesty partakes of an absolute forgiveness or
waiver by the Government of its right to collect what
otherwise would be due it, and in this sense,
prejudicial thereto, particularly to give tax evaders,
who wish to relent and are willing to reform a chance
to do so and become a part of the new society with a
clean slate. [Republic v. IAC, G.R. No. L-69344 (1991)]
A tax amnesty, much like a tax exemption, is never
favored nor presumed in law. If granted, the terms of
the amnesty, like that of a tax exemption, must be
construed strictly against the taxpayer and liberally in
favor of the taxing authority.
Page 31 of 270
TAXATION LAW
The State cannot strip itself of the most essential
power of taxation by doubtful words. He who claims
an exemption (or an amnesty) from the common
burden must justify his claim by the clearest grant of
organic or state law. It cannot be allowed to exist
upon a vague implication. If a doubt arises as to the
intent of the legislature, that doubt must be resolved
in favor of the state. [CIR v. Marubeni Corp., G.R. No.
137377 (2001)].
Amnesty distinguished from tax exemption
Tax amnesty is immunity from all criminal and civil
obligations arising from non-payment of taxes. It is a
general pardon given to all taxpayers. It applies to
past tax periods, hence of retroactive application.
[People v. Castañeda, G.R. No. L-46881 (1988)]
Tax exemption is immunity from all civil liability only.
It is an immunity or privilege, a freedom from a
charge or burden of which others are subjected.
[Greenfield v. Meer, C.A. No.-156 (1946)]. It is
generally prospective in application (Dimaampao,
2005, p. 111).
Tax Amnesty v. Tax Exemption
Tax Amnesty Tax Exemption
Immunity from
civil, criminal,
Immunity from
administrative
civil liability
Benefit liability arising
(relief from
from non-
paying taxes)
payment of
taxes
Past tax Future tax
Coverage
liability liability
Actual Revenue
Yes None
Loss
10.! Taxpayer’s Suit
Nature and Concept
Taxpayer’s suit – refers to a case where the act
complained of directly involves the illegal
disbursement of public funds derived from taxation.
[Kilosbayan v. Guingona, Jr. (1994)]
As distinguished from a citizen’s suit
The plaintiff in a taxpayer's suit is in a different
category from the plaintiff in a citizen's suit. In the
former, the plaintiff is affected by the expenditure of
public funds, while in the latter, he is but the mere
instrument of the public concern. [De Castro v.
Judicial and Bar Council, G.R. No. 191002 (2010)]
U.P. LAW BOC TAXATION I
Requisites of a Taxpayer’s suit challenging the
constitutionality of a tax measure or act of taxing
authority
a.! Concept of locus standi as applied in taxation
The doctrine of locus standi is the right of
appearance in a court of justice. The doctrine
requires a litigant to have a material interest in
the outcome of a case. In private suits, locus
standi requires a litigant to be a "real party in
interest," which is defined as "the party who
stands to be benefited or injured by the judgment
in the suit or the party entitled to the avails of the
suit."
In public suits, this Court recognizes the difficulty
of applying the doctrine especially when plaintiff
asserts a public right on behalf of the general
public because of conflicting public policy issues.
On one end, there is the right of the ordinary
citizen to petition the courts to be freed from
unlawful government intrusion and illegal official
action. At the other end, there is the public policy
precluding excessive judicial interference in
official acts, which may unnecessarily hinder the
delivery of basic public services.
The Court has adopted the "direct injury test" to
determine locus standi in public suits. In People v.
Vera, it was held that a person who impugns the
validity of a statute must have "a personal and
substantial interest in the case such that he has
sustained, or will sustain direct injury as a
result." the "direct injury test" in public suits is
similar to the "real party in interest" rule for
private suits under section 2, Rule 3 of the 1997
Rules of Civil Procedure. [Planter’s Products, Inc.
v. Fertiphil Corporation, G.R. No. 166006 (2008)]
It is well-stated that the validity of a statute may
be contested only by one who will sustain a direct
injury in consequence of its enforcement. Yet,
there are many decisions nullifying, at the
instance of taxpayers, laws providing for the
disbursement of public funds, upon the theory
that "the expenditure of public funds by an
officer of the state for the purpose of
administering an unconstitutional act constitutes
a misapplication of such funds," which may be
enjoined at the request of a taxpayer. [Pascual v.
Secretary of Public Works (1960)]
A taxpayer is allowed to sue where there is a
claim that public funds are illegally disbursed, or
that the public money is being deflected to any
improper purpose, or that there is wastage of
public funds through the enforcement of an
invalid or unconstitutional law. A person suing as
Page 32 of 270
TAXATION LAW
a taxpayer, however, must show that the act
complained of directly involves the illegal
disbursement of public funds derived from
taxation. He must also prove that he has
sufficient interest in preventing the illegal
expenditure of money raised by taxation and that
he will sustain a direct injury because of the
enforcement of the questioned statute or
contract. In other words, for a taxpayer’s suit to
prosper, two requisites must be met:
1.! public funds derived from taxation are
disbursed by a political subdivision or
instrumentality and in doing so, a law is
violated or some irregularity is committed
and
2.! the petitioner is directly affected by the
alleged act. [Mamba v. Lara, G.R. No.
165109 (2009)]
b.! Doctrine of transcendental importance
Recognizing that a strict application of the
"direct injury" test may hamper public interest,
this court relaxed the requirement in cases of
"transcendental importance" or with "far
reaching implications." being a mere procedural
technicality, it has also been held that locus
standi may be waived in the public interest.
[Ibid.]
Planters Products, Inc. v. Fertiphil Corp.: even
assuming arguendo that there is no direct injury,
We find that the liberal policy consistently
adopted by this court on locus standi must apply.
The issues raised by Fertiphil are of paramount
public importance. It involves not only the
constitutionality of a tax law but, more
importantly, the use of taxes for public purpose.
Former President Marcos issued LOI no. 1465
with the intention of rehabilitating an ailing
private company. This is clear from the text of the
LOI. PPI is expressly named in the LOI as the
direct beneficiary of the levy. Worse, the levy was
made dependent and conditional upon PPI
becoming financially viable. The LOI provided
that "the capital contribution shall be collected
until adequate capital is raised to make PPI
viable."
c.! Ripeness for judicial determination
“Ripeness for judicial determination” means that
litigation is inevitable or there is no adequate
relief available in any other form or proceeding.
CJH Development Corp. v. BIR [(G.R. No. 172457
(2008)]: However, CJH is not left without
recourse. The tariff and customs code provides
for the administrative and judicial remedies
U.P. LAW BOC TAXATION I TAXATION LAW

available to a taxpayer who is minded to contest

an assessment, subject of course to certain
reglementary periods. The TCC provides that a
protest can be raised provided that payment first
be made of the amount due. The decision of the
Collector can be reviewed by the Commissioner
of Customs who can approve, modify or reverse
the decision or action of the Collector. If the party
is not satisfied with the ruling of the
Commissioner, he may file the necessary appeal
to the Court of Tax Appeals. Afterwards, the
decision of the Court of Tax Appeals can be
appealed to this Court.

Page 33 of 270
U.P. LAW BOC TAXATION I
II.! NATIONAL INTERNAL
REVENUE CODE
(NIRC) OF 1997, AS
AMENDED
! 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 (Sec.
244, NIRC)
The Secretary of Finance, upon recommendation of
the CIR, shall promulgate all needful rules and
regulations for effective enforcement of the
provisions of the Code.
b.! Specific Provisions to be
Contained in Rules and
Regulations (Sec. 245,
NIRC)
1.! 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;
2.! 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;
3.! 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;
4.! The conditions to be observed by revenue officers
respecting the institutions and conduct of legal
actions and proceedings;
Page 34 of 270
TAXATION LAW
5.! 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;
6.! 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 CIR, 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;
7.! 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;
8.! 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 CIR may consider
suitable for the enforcement of the said Title III;
9.! 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;
10.! 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 CIR may, by rules and regulations require
U.P. LAW BOC TAXATION I
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 CIR can exercise this
power within six (6) years from the approval of
RA 7646 or the completion of its comprehensive
computerization program, whichever comes
earlier:
Provided, finally, That separate venues for the
Luzon, Visayas and Mindanao areas may be
designated for the filing of tax returns and
payment of taxes by said large taxpayers.
For the purpose of this Section, 'large taxpayer'
means a taxpayer who satisfies any of the
following criteria:
a.! Value-Added Tax (VAT) - Business
establishment with VAT paid or payable of at
least P100,000 for any quarter of the
preceding taxable year;
b.! Excise tax - Business establishment with
excise tax paid or payable of at least
P1,000,000 for the preceding taxable year;
c.! Corporate Income Tax - Business
establishment with annual income tax paid
or payable of at least P1,000,000 for the
preceding taxable year; and
d.! Withholding tax - Business establishment
with withholding tax payment or remittance
of at least P1,000,000 for the preceding
taxable year.
Provided, however, That the Secretary of
Finance, upon recommendation of the CIR,
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 shall be
imposed on any violation of the rules and regulations
issued by the Secretary of Finance, upon
recommendation of the CIR, prescribing the place of
filing of returns and payments of taxes by large
taxpayers.
RA 7646 – An Act Authorizing the CIR to Prescribe
the Place for Payment of Internal Revenue Taxes by
Large Taxpayers
2.!Jurisdiction, Power and
Functions of the
Page 35 of 270
TAXATION LAW
Commissioner of Internal
Revenue
a.! Powers and Duties of the
Bureau of Internal Revenue
(Sec. 2, NIRC)
1.! To assess and collect national internal taxes,
fees, and charges;
2.! To enforce all forfeitures, penalties and fines
connected therewith;
3.! To execute judgment in all cases decided in its
favor by the CTA and the ordinary courts; and
4.! To effect and administer the supervisory and
police powers conferred upon it by the Tax Code
or other special laws.
b.! Power of the Commissioner
to Interpret Tax Laws and to
Decide Tax Cases
Power to Interpret
The power to interpret provisions of the NIRC and
other tax laws shall be under the exclusive and
original jurisdiction of the CIR, subject to review by
the Secretary of Finance. (Sec. 4, NIRC)
A ruling by the CIR that interpret provisions of the
NIRC and other tax laws shall be presumed valid
unless modified, reversed or superseded by the
Secretary of Finance. A taxpayer who receives an
adverse ruling from the CIR may, within thirty (30)
days from the date of receipt of such ruling, seek its
review by the Secretary of Finance. The Secretary of
Finance may also review the rulings motu proprio.
(DOF ORDER 7-02)
Power to Decide Tax Cases
The power to decide (1) disputed assessments, (2)
refunds of internal revenue taxes, fees, charges and
penalties, or (3) other matters arising under the NIRC
or other laws administered by the BIR is vested in the
CIR, subject to the exclusive appellate jurisdiction of
the CTA. (Sec. 4, NIRC)
c.! Non-retroactivity of rulings
(Sec. 246, NIRC)
General Rule: Any revocation, modification or
reversal of (1) rules and regulations promulgated in
accordance with the NIRC, or (2) any rulings or
circulars promulgated by the CIR shall not be given
U.P. LAW BOC TAXATION I TAXATION LAW

retroactive application if the prejudicial to the

taxpayers.

Exceptions:
1.! Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by the BIR;
2.! Where the facts subsequently gathered by the
BIR are materially different from the facts on
which the ruling is based; or
3.! Where the taxpayer acted in bad faith.

The general rule is that a void law or administrative

act cannot be the source of legal rights or duties. The
doctrine of operative fact is an exception to the
general rule; it is incorporated in Sec. 246 of the
NIRC. Under Sec. 246, taxpayers may rely upon a rule
or ruling issued by the CIR from the time the rule or
ruling is issued up to its reversal by the CIR or this
Court. The reversal is not given retroactive effect.
There must, however, be a rule or ruling issued by the
Commissioner that is relied upon by the taxpayer in
good faith. A mere administrative practice, not
formalized into a rule or ruling, will not suffice
because such a mere administrative practice may not
be uniformly and consistently applied. [CIR v. San
Roque, G.R. No. L-187485 (2013)].

Page 36 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

III.! INCOME TAXATION Resident Citizen

Non-resident Citizen and OCW
!
!
!
X
Resident and Non-resident ! X
! Income! Tax Alien
Domestic Corporation ! !
Foreign Corporation ! X
1.! Definition, Nature and
General Principles 2.!Income Tax Systems
Definition a.! Global Tax System
Income Tax is defined as a tax on all yearly profits Under a global tax system, it did not matter whether
arising from property, professions, trades, or offices, the income received by the taxpayer is classified as
or as a tax on the person’s income, emoluments, compensation income, business or professional
profits and the like. It may be succinctly defined as a income, passive investment income, capital gain, or
tax on income, whether gross or net, realized in one other income. All items of gross income, deductions,
taxable year. [De Leon citing CJS and AmJur] and personal and additional exemptions, if any, are
reported in one income tax return, and one set of tax
Nature rates are applied on the tax base.
Income tax is generally classified as an excise tax. It is
not levied upon persons, property, funds or profits b.! Schedular Tax System
but upon the right of a person to receive income or Different types of incomes are subject to different
profits. [De Leon] sets of graduated or flat income tax rates. The
applicable tax rate(s) will depend on the
General Principles (Sec. 23, NIRC) classification of the taxable income and the basis
Income Tax Law aims to mitigate the evils arising could be gross income or net income. Separate
from the inequalities of wealth by a progressive income tax returns (or other types of return
scheme of taxation which places the burden of applicable) are filed by the recipient of income for the
taxation on those best able to pay [Madrigal v. particular types of income received.
Rafferty & Concepcion, G.R. No. L-12287 (1918)].
a.! A resident citizen of the Philippines is taxable on Global System Schedular System
all income derived from sources within and It is a personal tax based
without the Philippines; Tax on income producing
on the income of the
b.! A nonresident citizen is taxable only on income activities.
taxpayer.
derived from sources within the Philippines Emphasizes the burden Emphasizes on revenue
c.! An individual citizen of the Philippines who is allocation aspects. and administrative
working and deriving income from abroad as an aspects.
overseas contract worker is taxable only on Because of its multiple
income derived from sources within the Most equitable system
rates, the tax burden of a
Philippines: Provided, That a seaman shall be yet developed for
person does not
treated as an overseas contract worker if he is a: distributing tax burden.
correspond to his income
(1) citizen of the Philippines; and (2) receives The burden of an
but rather fall
compensation for services rendered abroad as a individual is closely d
fortuitously on the type
member of the complement of a vessel engaged related to his resources
of his income. It is fixed
exclusively in international trade and his ability to pay.
and final.
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.

Taxpayer Within Without

Page 37 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

It serves as a means for principle and is consistent with Sec. 28, Art. VI,
redistributing income 1987 Constitution.
and wealth. Big income c.! Comprehensive – The Philippines has adopted
earners are subject to the most comprehensive system of imposing
higher taxes than small This function is alien to income tax by adopting the citizenship principle,
income earners it serves schedular system where the residence principle, and the source principle.
as an automatic counter- in times of plenty or in Any of the three principles is enough to justify the
cyclical device to times of need, people imposition of income tax on the income of a
generate more revenues pay the same fixed tax on resident citizen and a domestic corporation that
from people in times of their income. are taxed on a worldwide income.
expanding economies d.! Semi-Schedular or Semi-Global Tax System –
and at the same time to The Philippines follows the semi-schedular or
collect less from them in semi-global system of income taxation, although
times of depression. certain passive investment incomes and capital
It serves as a gains from sale of capital assets (namely: (a)
supplementary device to shares of stock of domestic corporations, and (b)
accomplish non-fiscal real property) are subject to final taxes at
goals of the government, preferential tax rates.
such as, to encourage The schedular system
desired activities. By
adjusting the rates, for
cannot perform any of
these functions.
4.!Criteria in Imposing
instance, it can promote Philippine Income Tax
saving or consumer's
demand, or encourage CITIZENSHIP OR NATIONALITY PRINCIPLE
donations worthy causes. A citizen of the Philippines is subject to Philippine
Administration is not income tax:
quite as easy as The administration is a.! On his worldwide income, if he resides in the
schedular because one simple, being confined to Philippines; or
has to consider all each transaction or b.! Only on his income from sources within the
income from whatever activity. Philippines, if he qualifies as a nonresident
source. citizen.

c.! Semi-schedular or Semi-global Tax System RESIDENCE PRINCIPLE

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 the NIRC, follows a
semi-schedular and semi-global tax system.
3.!Features of the Philippine
Income Tax Law
a.! Direct Tax – The tax burden is borne by the
income recipient upon whom the tax is imposed.
b.! Progressive – The tax rate increases as the tax
base increases. It is founded on the ability to pay
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 non-resident 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.
5.!Types of Philippine Income
Tax
a.! Graduated income tax on individuals
b.! Normal corporate income tax on corporations
c.! Minimum corporate income tax on corporations
d.! Special income tax on certain corporations

Page 38 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

e.! Capital gains tax on sale or exchange of shares of d.! If the taxpayer is an individual [Sec. 43, NIRC].
stock of a domestic corporation classified as
capital assets
f.! Capital gains tax on sale or exchange of real
7.!Kinds of Taxpayers
property classified as capital asset
g.! Final withholding tax on certain passive Taxpayer – any person subject to tax imposed by Title
investment income paid to residents II of the Tax Code [Sec. 22(N), NIRC].
h.! Final withholding tax on income payments made
to non-residents Person – means an individual, a trust, estate or
i.! Fringe benefits tax on fringe benefits of corporation [Sec. 22(A), NIRC].
supervisory or managerial employees
j.! Branch profit remittance tax For income tax purposes, taxpayers are classified
k.! Tax on improperly accumulated earnings of generally as follows:
corporations a.! Individuals
b.! Corporations
c.! Estates and Trusts
6.!Taxable Period d.! Partnerships (General Partnership and General
Professional Partnerships)
"Taxable year" means the calendar year, or the fiscal
year ending during such calendar year, upon the Primary
Sub-Classification(s)
basis of which the net income is computed. Taxable Classification
year includes, in the case of return made for a Citizens of Residents citizens
fractional part of a year under the provisions of Title II the
(Tax on Income), the period for which such return is Non-resident citizens
Philippines
made [Sec. 22 (P), NIRC]. Residents
Engaged in
a.! Calendar Year - Accounting period of 12 months Trade or
ending on the last day of December. Instances Business in
when the Calendar Year is used for the the
computation of income: Philippines
b.! Fiscal Year - Accounting period of 12 months Aliens Non-
Individuals Not
ending on the last day of any month other than residents
Engaged in
December [Sec. 22(Q), NIRC]. Trade or
c.! Short Period - Accounting period which starts Business in
after the first month of the tax year or ends the
before the last month of the tax year (less than 12 Philippines
months). Instances whereby short accounting
period arises: Special
1.! When a corporation is newly organized. Classes of Minimum Wage Earner
2.! When a corporation is dissolved. [Sec 52(c), Individuals
NIRC]
3.! When a corporation changes accounting Domestic Corporations
period. [Sec 46, NIRC] Resident
4.! When the taxpayer dies. Corporations
Corporations
Foreign Corporations Non-
General rule: Taxable income shall be computed resident
based on the taxpayer’s annual accounting period, Corporations
which may be fiscal year or calendar year Estates and
Trusts
Exception: Taxable income shall be computed based General Partnership
on the basis of calendar year only if: Partnerships
General Professional Partnership
a.! If the taxpayer's annual accounting period is
other than a fiscal year; or
b.! If the taxpayer has no annual accounting period; a.! Individual Taxpayers
or
c.! If the taxpayer does not keep books of accounts; CITIZENS
or 1.! Resident Citizens (RC)
2.! Non-resident Citizens (NRC) [Sec. 22 (E)]

Page 39 of 270
U.P. LAW BOC TAXATION I
a.! PH citizen who establishes to the
satisfaction of the CIR the fact of his physical
presence abroad with a definite intention to
reside therein.
b.! PH citizen who leaves the Philippines during
the taxable year to reside abroad, either as
an immigrant or for employment on a
permanent basis.
c.! PH citizen 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 (183
DAYS).
d.! PH citizen previously considered as non-
resident citizen and who arrives during the
taxable year to reside permanently in the
Philippines ! Treated as NRC with respect
to his income derived from sources abroad
until his arrival in the Philippines
ALIENS
1.! Resident Alien – An alien actually present in the
Philippines who is not a mere transient or
sojourner is a resident for income tax purposes.
a.! 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.
b.! 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
a.! 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.
b.! 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
1.! worker in the private sector paid the statutory
minimum wage; or
2.! employee in the public sector with compensation
income not more than the statutory minimum
wage in the non-agricultural sector where he/she
Page 40 of 270
TAXATION LAW
is assigned. [Sec. 22 (HH), NIRC]
b.! Corporations
Includes all types of corporations, partnerships (no
matter how created or organized), joint stock
companies, joint accounts (cuentas en participacion),
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
(1) undertaking construction projects or (2) engaging
in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium
agreement under a service contract with the
government. [Sec. 22 (B), NIRC]
Domestic corporations
A corporation created and organized in the
Philippines or under its laws (the law of incorporation
test). [Sec. 22 (C), NIRC]
Foreign corporations
A corporation which is not domestic. [Sec. 22 (D),
NIRC]
1.! Resident foreign corporations – Foreign
corporation engaged in trade or business within
the Philippines. [Sec. 22 (H), NIRC]
2.! Non-resident foreign corporations – Foreign
corporation not engaged in trade or business
within the Philippines. [Sec. 22 (I), NIRC]
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
Includes (1) soliciting orders, service contracts, (2)
opening offices, whether called "liaison" offices
or branches; (3) appointing representatives or
distributors domiciled in the Philippines or who
in any calendar year stay in the country for a
period totalling 180 days or more; (4)
participating in the management, supervision or
control of any domestic business, firm, entity or
corporation in the Philippines.
Excludes (1) mere investment as a shareholder in
domestic corporations, and/or the exercise of
rights as such investor; (2) having a nominee
director or officer to represent its interests in
such corporation; (3) appointing a representative
or distributor domiciled in the Philippines which
U.P. LAW BOC TAXATION I TAXATION LAW

transacts business in its own name and for its
own account. [RA 7042, Foreign Investments
Act]
c.! Estates and Trusts
Income tax imposed on individuals shall apply to
income of estates or of any kind of property held in
trust. [Sec. 60 (A), NIRC]
Exceptions: (1) Employee’s trust [Sec. 60, NIRC]; (2)
Revocable trusts [Sec. 63, NIRC]; (3) Income for
Benefit of Grantor [Sec. 64, NIRC]
Taxable income of the estate or trust is computed in
the same manner as an individual, subject to certain
special rules [Sec 61, NIRC]
Estate
Refers to all the property, rights and obligations of a
person which are not extinguished by his death and
those which have accrued thereto since the opening
of the succession. [De Leon citing Art 776 and 781
NCC]
necessarily of capital but by way of services, skill,
knowledge, material or money;
2.! Profits must be shared among the parties;
3.! There must be a joint proprietary interest and
right of mutual control over the subject matter of
the enterprise;
4.! There is a single business transaction.
Co-ownership
There is co-ownership whenever the ownership of an
undivided thing or right belongs to different persons.
[Art. 484, NCC]
Co-ownerships are not subject to tax if the activities
of the co-owners are limited to the preservation of the
property and the collection of the income therefrom,
in which case each co-owner is taxed individually on
his distributive share in the income of the co-
ownership. [De Leon citing Sec. 210 Regs]

Trust
An arrangement created by will or an agreement
under which legal title to property is passed to
another for conservation or investment with the
income therefrom and ultimately the corpus
(principal) to be distributed in accordance with the
directions of the creator as expressed in the
governing instrument. [De Leon]

d.! Partnerships, Joint Ventures,

Co-ownership
General Partnerships
A partnership which is not a general professional
partnership. Treated as a corporation.

General Professional Partnerships (GPP)

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. [Sec. 22 (B), NIRC]

The partners themselves, not the partnership, shall

be liable for income tax in their separate and
individual capacities. Each partner shall report as
gross income his distributive share, actually or
constructively received, in the net income of the
partnership. [Sec. 26, NIRC]

Joint venture and consortium

Essential factors of a joint venture or consortium:
1.! Each party must make a contribution, not

Page 41 of 270
U.P. LAW BOC
! Income
1.! Definition and Nature
a.! 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. [De Leon
citing Rev Regs]
b.! 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(1961)]
c.! Income may be received in the form of cash,
property, service, or a combination of the three.
Income v. Capital
"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."[Madrigal v. Rafferty, supra]
Income Capital
Denotes a flow of Fund or property
wealth during a definite existing at one distinct
period of time. point in time.
Service of wealth Wealth itself
Return of capital is not
Subject to tax
subject to tax
Fruit Tree
2.!When Income is Taxable
a.! Existence of Income
Requisites for income to be taxable [De Leon]
1.! There is INCOME, gain or profit
2.! RECEIVED or REALIZED during the taxable year
3.! NOT EXEMPT from income tax
b.! Realization of Income
Income is realized when there is a gain or profit
derived from a closed and completed transaction.
The realization of gain may take the form of actual
receipt of cash or may occur as a constructive receipt
of income. [Valencia and Roxas]
A mere increase in the value of property is not income,
but merely unrealized increase in capital. Mere
Page 42 of 270
TAXATION I TAXATION LAW
increase in the value of property without actual
realization, either through sale or other disposition, is
not taxable. [De Leon]
Actual v. Constructive receipt
1.! Actual receipt – Income is actually reduced to
possession. The realization of gain may take the
form of actual receipt of cash.
2.! 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:
1.! Interest credited on savings bank deposit
2.! Matured interest coupons not yet collected by
the taxpayer
3.! Dividends applied by the corporation against the
indebtedness of a stockholder
4.! Share in the profit of a partner in a general
professional partnership, although not yet
distributed, is regarded as constructively
received; or
5.! 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]
The “As If” Theory of Constructive Income is designed
to prevent a cash basis taxpayer to delay reporting of
income. It also presumes the existence of income on
transactions supposedly not subject to tax. [Valencia
and Roxas]
c.! Recognition of Income
Income realized pertains to the accrual basis of
accounting.
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
U.P. LAW BOC TAXATION I TAXATION LAW

Personal Property Real Property

Generally, trade and manufacturing businesses use Dealer
accrual method while servicing businesses use cash •! Installment
method. If the service business opted to report on method
accrual basis, such method can only be applied when •! Person who •! Installment
it comes to reporting of expense. To prevent tax regularly method if initial
evasion, individual taxpayers whose business consists sells/disposes of payments do not
of the sale of inventories cannot use cash method. personal property exceed 25% of
[Valencia and Roxas] on instalment selling price
plan •! Deferred payment
d.! Cash Method of Accounting •! Held as ordinary method if initial
v. Accrual Method of asset payments exceed
•! Regardless of 25%
Accounting amount of •! Held as inventory
percentage of
Principal Methods: initial payments
1.! Cash method – income, profits and gains earned Casual Sale
are not included in gross income until received,
•! Installment
and expenses are not deducted until paid. [De
method if :(1)
Leon]
Selling price
N.B. “received” here includes actual and
exceeds P1k and
constructive receipt.
(2) Initial
2.! Accrual method – income, profits and gains are
payments do not
included in gross income when earned whether
exceed 25% of
received or not, and expenses are allowed as
selling price
deductions when incurred, although not yet paid.
It is the right to receive and not the actual receipt •! Deferred payment
that determines the inclusion of the amount in method if neither
gross income. [De Leon] of the 2
3.! Hybrid method – income and expenses are conditions are
reported by employing the combination of cash met
and accrual method. Example: where a taxpayer •! Personal property
is engaged in more than one trade or business, not considered
he may use a different method of accounting for inventory
each trade or business. [De Leon] Sale by Individuals
•! Installment
Other Methods: method provided,
N.B. not included in Bar Syllabus initial payments
do not exceed
1.! Installment Basis [Sec. 49, NIRC] 25% of selling
Taxpayer reports as income only a part of the gross price
profit to be realized from the sale on the instalment •! Held as capital
plan equivalent to that proportion of the instalments asset
received every year which the gross profit realized or
to be realized when payment is completed bears to Initial payments means the payments received in
the contract price. cash or property (other than evidences of
indebtedness of the purchaser) by the seller during
Gross the taxable year of the disposition of the real property.
Income to be
Instalment Profit [Sec 49 (B), NIRC]
reported for the = ×
Received Contract
year
Price Deferred Payment Sales
a.! Applicable when the initial payments exceed
Installment basis is available to: Dealers in personal 25% of the selling price
property [Sec 49 (A), NIRC]; Casual Sellers of b.! The income to be reported during the year of sale
personal property [Sec 49 (B), NIRC]; and Sellers of is the difference between the selling or contract
real property [Sec 49 (B) & (C) , NIRC] price and the cost of the property, even though

Page 43 of 270
U.P. LAW BOC
the entire purchase price has not been actually
received in the year of sale.
c.! The obligations of the purchaser received by the
vendor are considered as equivalent of cash.
2.! Percentage of completion [Sec. 48, NIRC]
Income from long-term contracts is reported for tax
purposes on the basis of percentage of completion.
“Long-term contracts” means building, installation
or construction contracts covering a period in excess
of 1 year.
Gross income already earned though not yet received,
based on estimates of architects or engineers duly
certified by them, is reported in a taxable year; and
all deductions relating to such gross income for the
taxable year, even if not yet paid are taken into
account. [De Leon]
Completed contract method – No longer allowed
since January 1, 1998 as per RA 8424. Cost of the
contract is accumulated during the years of
construction, and deducted from the income of the
contract in the year it is completed.
3.! Crop Year Basis
Expenses in the production of crops are deducted in
the year the gross income from the crop has been
realized. Applicable only to farmers engaged in
producing crops which take more than a year from
planting to gathering and disposal. [De Leon citing
Sec 75, Regs.]
3.!Tests in Determining
Whether Income is Earned
for Tax Purposes
a.! 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, 252 U.S. 189, 190 (1920)]. 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, supra].
b.! Claim of Right Doctrine
a.k.a. Doctrine of Ownership, command, or control
Page 44 of 270
TAXATION I TAXATION LAW
In the claim-of-right doctrine, if a taxpayer receives
money or other property and treats it as its own under
the claim of right that the payments are made
absolutely and not contingently, such amounts are
included in the taxpayer's income, even though the
right to the income has not been perfected at that
time. It does not matter that the taxpayer's title to the
property is in dispute and that the property may later
be recovered from the taxpayer. [CIR v Meralco, C.T.A.
EB No. 773 (2012)]
c.! 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).
d.! Severance Test
Under the doctrine of severance test of income, in
order that income may exist, it is necessary that there
be a separation from capital of something of
exchangeable value. The income requires a
realization of gain.
e.! All Events Test
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.
“All events test” requires: (1) fixing a right to income
or liability to pay; and (2) the availability of
reasonably accurate determination of such income or
liability. [CIR v Isabela Cultural Corporation, G.R. No.
172231 (2007)]
All of the above tests are followed in the Philippines
for purposes of determining whether income is
received by the taxpayer or not during the year
[Mamalateo].
4.!Classification of Income
U.P. LAW BOC TAXATION I TAXATION LAW

a.! Compensation Income

The gain derived from labor, especially employment ! Gross! Income!
(earned form employer-employee relationship) such
as salaries and commissions. 1.! Definition
b.! Profession or Business Income 2
Gross Income [Sec. 32(A)] – CG IR DAP
2 3
The value derived from an exercise of profession,
business or utilization of capital including profit and Gross Income means all income derived from
gain derived from sale or conversion of assets. whatever source, including (but not limited to) the
Examples are net income from business and gain following items:
from the sale of assets used in trade or business. a.! Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages,
c.! Passive Income commissions, and similar items;
An income in which the taxpayer merely waits for the b.! Gross income derived from the conduct of trade
amount to come in. Examples are royalty, interest, or business or the exercise of a profession;
prizes, and winnings. c.! Gains derived from dealings in property;
d.! Interests;
d.! Capital Gain e.! Rents;
An income derived from sale of assets not used in f.! Royalties;
trade or business. Examples are sale of family home g.! Dividends;
and other capital assets. [Valencia and Roxas] h.! Annuities;
i.! Prizes and winnings;
5.!Situs of Income Taxation j.! Pensions; and
k.! Partner's distributive share from the net income
Income Situs of the general professional partnership.
Interest Residence of the debtor
Dividends Residence of the corporation The list here is NOT exclusive
Services Place of performance
Rentals Location of the property The definition of gross income is broad enough to
include all passive income subject to specific rates or
Royalties Place of exercise
final taxes. However, since these passive incomes are
Sale of Real Location of realty
already subject to different rates and taxed finally at
Property
source, they are no longer included in the
Sale of a.! Tangible computation of gross income which determines
Personal •! Purchase and sale: taxable income. [CIR v PAL, GR 160628 (2006)]
Location of Sale
•! Manufactured w/in and The term “gross income” whenever used without
sold w/o: Partly w/in qualification is comprehensive, as defined above, and
and partly w/o is different from the limited meaning of gross income
•! Manufactured w/o and for purposes of minimum corporate income tax or the
sold w/in: Partly w/in gross income tax of corporations. Gross income
and partly w/o includes gross profit from ordinary business and
b.! Intangible other income not subject to passive income tax or
•! General rule: Place of final withholding tax.
Sale
•! Exception: Shares of Gross income means income, gain, or profit subject to
stock of domestic income tax. It includes the compensation for personal
corporations: Place of services, business income, profits, and income
incorporation derived from any source whatever (whether legal or
illegal), unless it is exempt from income tax under the
Constitution, tax treaty, or statute or it is subject to
final withholding income tax in accordance with the
semi-global or semi-schedular tax system adopted by
the Philippines.
It is the difference between gross sales/revenue and
the cost of goods sold/services. The definition of
gross income is broad and comprehensive to include

Page 45 of 270
U.P. LAW BOC
proceeds from sales of transport documents.
(Mamalateo)
2.!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.)
3.!Gross Income vis-à-vis Net
Income vis-à-vis Taxable
Income
Gross income – The total income of a taxpayer
subject to tax. It includes the gains, profits, and
income derived from whatever source, whether legal
or illegal. (Sec. 32(A), NIRC) It does not include
income excluded by law, or which are exempt from
income tax. (Sec. 32(B), NIRC)
Net income – Means gross income less statutory
deductions and exemptions. (Sec. 31, NIRC)
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). It is synonymous
to the term “net income.” (Valencia and Roxas)
4.!Sources of Income Subject
to Tax
Source is ascribed to the place wherein the income is
earned. It is governed by the situs of taxation. This
classification of income is necessary to determine
whether such income is subject to tax or not. Income
may be:
a.! Derived Entirely from
Sources Within the
Philippines [Sec. 42(A),
NIRC]
Examples:
Page 46 of 270
TAXATION I TAXATION LAW
1.! compensation for labor or service performed in
the Philippines;
2.! interest on bonds, notes, deposits and the like
earned in the Philippines;
3.! dividends declared by domestic corporations;
4.! rentals and royalties from property located
within the Philippines; and
5.! gains, profits and income from sale of real
property as well as from personal property in the
Philippines.
As a rule, incomes earned within the Philippines are
taxable.
b.! Derived Entirely from
Sources without the
Philippines [Sec. 42(C),
NIRC]
Examples:
1.! compensation for labor or service rendered by
overseas contract workers;
2.! interest on bonds, notes, deposits and the like
earned abroad;
3.! dividends declared by non-resident foreign
corporation;
4.! rental and royalties from property located
outside the Philippines; and
5.! gains, profits and income from sale of real
property as well as from personal property
located outside the Philippines.
As a rule, income earned from outside the Philippines
are not taxable except for resident citizens and
domestic corporations.
c.! Derived from Sources Partly
within and Partly without the
Philippines [Sec. 42(E),
NIRC]
Examples:
1.! gains, profits and income from transportation or
other services rendered partly within and partly
outside, and dividend received by a resident
citizen from a resident foreign corporation. (Sec.
43(E), NIRC).
2.! In general, when an income is earned partly from
within and partly from without, only income
within is taxable in the Philippines, except if the
taxpayer is a resident citizen or a domestic
corporation.
U.P. LAW BOC TAXATION I
3.! A Filipino citizen or a domestic corporation
whose income is derived from within and without
the Philippines is generally subject to tax.
5.!Classification of Income
Subject to Tax
The following sources of income subject to tax are the
following.
a.! Compensation income;
b.! Fringe benefits;
c.! Professional income;
d.! Income from business;
e.! Income from dealings in property;
f.! Passive investment income;
g.! Annuities, proceeds from life insurance or other
types of insurance;
h.! Prizes and awards;
i.! Pensions, retirement benefits, or separation pay.
a.! Compensation Income
All remunerations for services performed by an
employee for his employer under an employer-
employee (ER-EE) relationship, unless excepted
under the provisions of the NIRC are considered as
compensation income. [RR No. 02-98, Sec 2.78.1]
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, such as 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:
1.! For agricultural labor paid entirely in products of
the farm where the labor is performed
2.! For domestic service in a private home
Page 47 of 270
TAXATION LAW
3.! For casual labor not in the course of the
employer's trade or business
4.! For services by a citizen or resident of the
Philippines for a foreign government or an int’l
organization. [Sec. 78(A), NIRC]
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
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
U.P. LAW BOC TAXATION I
receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in
excess of the allowable statutory amount of P82,000
[RA 10653], 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
1.! Cash – If compensation is paid in cash, the full
amount received is the measure of the income
subject to tax.
2.! 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.
Living quarters or meals
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 need NOT be included as part of compensation
income.
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.
Convenience of the Employer Rule
Page 48 of 270
TAXATION LAW
Allowances in kind furnished to the employee for and
as necessary incident to the performance of his duties
are not taxable [Valencia and Roxas].
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 the employee’s work or position, the
value of that privilege need not be included as
compensation [Henderson v. Collector, G.R. No. L-
12954 (1961)]
The amount of “de minimis” benefits confirming to
the ceiling prescribed shall not be considered in
determining the P82,000 [RA 10653] 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 P82,000 ceiling, Provided,
further, that MWEs receiving, ‘other benefits’
exceeding the P82,000 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 or 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, e.g., monthly salary of
an employee
Wages – earnings received usually according to
specified intervals of work, as by the hour, day, or
week, e.g., a carpenter’s wage.
Backwages are subject to income tax and
withholding tax on wages [BIR Ruling No. DA-073-
2008]
Honoraria – payments given in recognition for
services performed for which the established practice
discourages charging a fixed fee, e.g., honorarium of
a guest lecturer
U.P. LAW BOC TAXATION I
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
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 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:
1.! It is for ordinary and necessary traveling and
representation or entertainment expenses
paid or incurred by the employee in the
pursuit of the employer’s trade, business or
profession; and
2.! The employee is required to account or
liquidate for the foregoing expenses.
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 Sec.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
are 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.
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.
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
Page 49 of 270
TAXATION LAW
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:
1.! SSS or GSIS retirement pays.
2.! Retirement pay (R.A. 7641) due to old age
provided the following requirements are met:
a.! The retirement program is approved by the
BIR Commissioner;
b.! It must be a reasonable benefit plan. (Its
implementation must be fair and equitable
for the benefit of all employees)
c.! The retiree should have been employed for
10 years in the said company;
d.! The retiree should have been 50 years old or
above at the time of retirement; and
e.! It should have been availed of for the first
time.
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 or
it 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.
Any payment made by an employer to an employer to
an employee on account of dismissal, constitutes
compensation regardless of whether the employer is
U.P. LAW BOC TAXATION I
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:
1.! 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]
2.! 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 vacation and sick leave
credits paid to government officials and
employees are NOT subject to income tax and to
the withholding tax. These are ‘de minimis’
benefits.’ [RR no. 5-2011, 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.
3.! 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 P82,000 [RA
10653] or less. Any amount exceeding P82,000 is
taxable. [Sec. 32(7)e, NIRC]
Fringe Benefits and De Minimis
Fringe Benefits – any good, service, or other benefit
furnished or granted by an employer, in cash or in
kind, in addition to basic salaries of an individual
employee [Sec. 33, NIRC]
De Minimis – privileges of relatively small value as
given by the employer to his employees.
Fringe Benefits and De Minimis are not considered
compensation subject to income tax and withholding
tax.
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.
Page 50 of 270
TAXATION LAW
Profit Sharing – the proportionate share in the profits
of the business received by the employee in addition
to his wages.
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.
b.! Fringe Benefits
1.! 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 AND 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.
U.P. LAW BOC TAXATION I
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.
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.
2.! Definition
Fringe benefit means any goods, services, or other
benefit furnished or granted in cash or in kind, in
addition to basic salaries, to an individual employee,
except a rank and file employee (RR No. 03-98, Sec
2.23b)
Fringe benefit means includes but not limited to the
following:
a.! Housing
b.! Expense Account
c.! Vehicle of any kind
d.! Household personnel, such as maid, driver and
others
e.! Interest on loan at less than market rate to the
extent of the difference between the market rate
and actual rate granted.
f.! Membership fees, dues and other expenses
borne by the employer for the employee in social
and athletic clubs and similar organizations
g.! Expenses for foreign travel
h.! Holiday and vacation expenses
i.! Educational assistance to the employee or his
dependents; and
j.! Life or health insurance and other non-life
insurance premiums or similar amounts 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.
Rate is generally 32%, since this is the headline or
the highest tax rate for individual income taxpayers.
FBT is calculated using the GMV multiply by the 32%.
GMV represents
a.! the whole amount of income realized by the
employee which includes the net amount of
Page 51 of 270
TAXATION LAW
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 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%].
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.
3.! Taxable and non-taxable fringe benefits
Fringe Benefits NOT subject to Tax
a.! Fringe benefits not considered as gross income –
if it is required or necessary to the business of
employer; if it is for the convenience or
advantage of employer
U.P. LAW BOC TAXATION I
b.! Fringe Benefit that is not taxable under Sec. 32
(B) – Exclusions from Gross Income
Fringe benefits not subject to Fringe Benefit Tax:
a.! Fringe Benefits which are authorized and
exempted from income tax under the Code or
under special laws;
b.! Contributions of the employer for the benefit of
the employee for retirement, insurance and
hospitalization benefit plans;
c.! Benefits given to the rank-and-file employees,
whether granted under a collective bargaining
agreement or not; and
d.! Fringe benefits granted for the convenience of
the employer;
e.! De minimis benefits
The exemption of any Fringe Benefit from the FBT
shall not be interpreted to mean exemption from any
other income tax imposed under the Tax Code except
if the same is likewise expressly exempt from any
other income tax imposed under the Tax Code or
under any other existing law. Thus, if the Fringe
Benefit is exempted from the FBT, the same may,
however, still form of the employee’s gross
compensation income which is subject to income tax;
hence, likewise subject to withholding tax on
compensation income payment.
De Minimis Benefits
De Minimis Benefits are facilities an privileges
furnished or offered by an employer to his employees
that are relatively small value and are offered or
furnished by the employer merely as means of
promoting health, goodwill, contentment, and
efficiency of his employees (RR No. 3-98, Sec 2.23c)
These De Minimis Benefits are exempt from income
tax and withholding tax on compensation income of
BOTH managerial and rank and file EEs. [as provided
by R.R. No. 5-2011 / R.R. No. 8-2012 and R.R. No. 1-
2015]:
a.! Monetized unused vacation leave credits of
PRIVATE employees not exceeding ten (10) days
during the year. Note that the monetization of
unused VL credits in excess of 10 days and
monetization of SL even if not exceeding 10 days
are subject to tax; (RR No. 5-2011)
b.! Monetized value of vacation and sick leave
credits paid to GOVERNMENT officials and
employees. Note that there is no limit as to the
number of credits; (RR No. 5-2011)
c.! Medical cash allowance to dependents of
employees, not exceeding P750 per employee
per semester or P125 per month; (RR No. 5-2011)
Page 52 of 270
TAXATION LAW
d.! Rice subsidy of P1,500 or one (1) sack of 50 kg.
rice per month amounting to not more than
P1,500; (RR No. 5-2011)
e.! Uniform and Clothing allowance not exceeding
P5,000 per annum; (RR No. 8-2012)
f.! Actual medical assistance, e.g. medical
allowance to cover medical and healthcare needs,
annual medical/executive check-up, maternity
assistance, and routine consultations, not
exceeding P10,000.00 per annum; (RR No. 5-
2011)
g.! Laundry allowance not exceeding P300 per
month; (RR No. 5-2011)
h.! Employees achievement awards, e.g., for length
of service or safety achievement, which must be
in the form of a tangible personal property other
than cash or gift certificate, with an annual
monetary value not exceeding P10,000 received
by the employee under an established written
plan which does not discriminate in favor of
highly paid employees; (RR No. 5-2011)
i.! Gifts given during Christmas and major
anniversary celebrations not exceeding P5,000
per employee per annum; (RR No. 5-2011)
j.! Daily meal allowance for overtime work and
night/graveyard shift not exceeding twenty-five
percent (25%) of the basic minimum wage on a
per region basis; (RR No. 3-98)
k.! Benefits received by an employee by virtue of a
collective bargaining agreement (CBA) and
productivity incentive schemes provided that the
total monetary value received from both CBA and
productivity incentive schemes combined do not
exceed P10,000.00 per employee per taxable
year. (RR No 1-2015)
All other benefits given by employers which are not
included in the above enumeration shall NOT be
considered as "de minimis" benefits and hence, shall
be subject to withholding tax on compensation (rank
and file employees) and FBT (managerial/supervisory
employees).
Housing
Fringe Benefit Tax
Housing Privilege Base (Monetary
Value)
MV= 50% of lease
payments
LEASE of residential property
for the residential use of
where MV =
employees
monetary value of
the FB
Assignment of residential MV= [5% (FMV or
property owned by employer ZV, whichever is
for use of employees higher) x 50%]
Purchase of residential MV= 5% x
U.P. LAW BOC TAXATION I TAXATION LAW

Fringe Benefit Tax Compensation Compensation

Housing Privilege Base (Monetary Holiday Pay, OT, Nightshift Pay, Hazard Pay
Value) Taxable Taxable
Exempt
property in installment basis acquisition cost Compensation Compensation
th
for the use of the employee exclusive of interest x 13 Month Pay up to P82,000
50% Exempt Exempt Exempt
Purchase of residential Other Benefit in Excess of P82,000
property and ownership is MV= FMV or ZV, N/A (with Taxable Taxable
transferred in the name of whichever is higher caveat) Compensation Compensation
the employee Fringe Benefit
ZV = Zonal Value = value of the land or improvement, Taxable Subject to Fringe
as declared in the Real Property Declaration Form Compensation Benefit Tax
FMV = Fair Market Value = FMV as determined by the N/A
Tax shouldered Tax shouldered
Commissioner of Internal Revenue by employEE by employER
Non-taxable housing fringe benefit: De Minimis Benefit
a.! Housing privilege of the Armed Forces of the Exempt Exempt Exempt
Philippines (AFP) officials – i.e, those of the
Philippine Army, Philippine Navy, or Philippine
Air Force c.! Professional Income
b.! A housing unit, which is situated inside or
adjacent to the premises of a business or factory Refers to fees received by a professional from the
– maximum of 50 meters from perimeter of the practice of his profession, provided that there is NO
business premises employer-employee relationship between him and
c.! Temporary housing for an employee who stays in his clients.
housing unit for three months or less
It includes the fees derived from engaging in an
Motor Vehicle endeavour requiring special training as professional
Fringe Benefit Tax as means of livelihood, which includes, but is not
Motor Vehicle Base (Monetary limited to, the fees of CPAs, doctors, lawyers,
Value) engineers, and the like (RR No. 2-98).
Purchased in the name of
MV= acquisition cost The existence of employee-employer relationship is
the employee
Cash given to employee to MV= cash received by the distinguishing factor between compensation
purchase in his own name employee income versus professional income.
Purchase on installment, in MV= acquisition cost
the name of employee exclusive of interest d.! Income from Business
Employee shoulders part of
MV= amount
the purchase price, Any income derived from doing business.
shouldered by
ownership in the name of Doing business: The term implies a continuity of
employer commercial dealings and arrangements, and
employee
Employer owns and contemplates, to that extent, the performance of acts
maintains a fleet of motor or works or the exercise of some of the functions
MV= (AC/5) x 50% normally incident to, and in progressive prosecution
vehicles for use of the
business and of employees of, the purpose and object of its organization.
Employer leases and
maintains a fleet for the use MV= 50% of rental e.! Income from Dealings in
of the business and of payment
employees
Property
Dealings in property such as sales or exchanges may
Pure Compensation Earner result in gain or loss. The kind of property involved
(Minimum Wage Earner, Rank & File, Executive) (i.e., whether the property is a capital asset or an
Minimum ordinary asset) determines the tax implication and
Managerial or income tax treatment, as follows:
Wage Rank and File
Supervisory Net Capital Gains
Earner Taxable
Ordinary (other than those
Basic Compensation Net
= Net Income + subject to final
Exempt Taxable Taxable Income
CGT)

Page 53 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

If the asset involved is classified as ordinary, the

Ordinary Asset Capital Asset entire amount of the gain from the transaction shall
Gain from sale, exchange or other disposition be included in the computation of gross income [Sec
Ordinary Gain (part of 32(A)], and the entire amount of the loss shall be
Capital Gain deductible from gross income. [Sec 34(D)]. (See
Gross Income)
Loss from sale, exchange, or other disposition Allowable Deductions from Gross Income - Losses
Ordinary Loss (part of If the asset involved is a capital asset, the rules on
Allowable Deductions Capital Loss capital gains and losses apply in the determination of
from Gross Income) the amount to be included in gross income. (See
Excess of Gains over Losses Capital Gains and Losses).
Part of Gross Income Net Capital Gain
Excess of Losses over Gains These rules do not apply to:
Part of Allowable i.! real property with a capital gains tax (final
Deductions from Gross Net Capital Loss tax), or
Income ii.! shares of stock of a domestic corporation
with a capital gains tax (final tax).
1.! Types of Properties
Capital v. Ordinary Asset Also, sale of shares of stock of a domestic corporation,
held as capital assets, through the stock exchange by
Ordinary Assets Capital Assets
either individual or corporate taxpayers, is subject to
a.! Stock in trade of the Property held by the
½ of 1% percentage tax based on gross selling price.
taxpayer/ other taxpayer, whether or
property of a kind not connected with his
The following percentages of the gain or loss
which would properly trade or business which
recognized upon the sale or exchange of a capital
be included in the is not an ordinary asset.
asset shall be taken into account in computing net
inventory of the
capital gain, net capital loss, and net income:
taxpayer if on hand at Generally, they include:
i.! If the taxpayer is an individual –
the close of the a.! stocks and
taxable year. securities held by •! 100% if the capital asset has been
b.! Property held by the taxpayers other held for not more than 12 months;
taxpayer primarily for than dealers in and
sale to customers in securities •! 50% of the capital asset has been
the ordinary course of b.! real property not held for more than 12 months
his trade or business. used in trade or ii.! If the taxpayer is a corporation –
c.! Property used in the business, such as •! 100%, regardless of the holding
trade or business of a residential house period of the capital asset (Sec.
character which is and lot, idle or 39(B), NIRC)
subject to the vacant land or
allowance for building The tax rules for the gains or losses from sales or
depreciation, or c.! investment exchanges of capital assets over ordinary assets are
d.! Real property used in property, such as as follows:
the trade or business interest in a i.! Net capital gain is added to ordinary gain
of the taxpayer, partnership, stock but net capital loss is not deductible from
including property investment ordinary gain.
held for rent. d.! Personal or non- ii.! Net ordinary loss is deductible from ordinary
business properties, gain.
such as family car, iii.! Capital losses are deductible only to the
home appliances, extent of the capital gain.
jewelry. iv.! There is a net capital loss carry-over on the
Note in ordinary assets, that the list is EXCLUSIVE. net capital asset’s loss in a taxable year
The actual use determines whether a property is an which may be deducted as a short-term
ordinary assets or a capital assets. (BIR Ruling No. capital loss from the net capital gain of the
DA 212-07, April 3, 2007) subsequent taxable year; provided that the
following conditions shall be observed:
2.! Types of Gains from dealings in property v.! The taxpayer is other than a corporation;
vi.! The amount of loss does not exceed the
a.! Ordinary income vis-à-vis Capital gain. – income before exemptions at the year when
the loss was sustained; and

Page 54 of 270
 U.P. LAW BOC TAXATION I
vii.! 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:
i.! There is no holding period; hence, there is no
net capital loss carry-over.
ii.! Capital gains and losses are recognized to
the extent of their full amount.
iii.! Capital losses are deductible only to the
extent of capital gains.
iv.! 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% or
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. (RR 6-2008, c.4)
ii.! 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, he has to
pay the tax, even if he incurs an actual loss from the
sale thereof. (However, when the buyer is the
government, the individual seller has the option
whether to be taxed at the graduated income tax
rates or at 6% capital gains tax.)
Actual Gain: 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).
Computation of the amount of gain or loss
Amount realized from sale or other
disposition of property
Less: Basis or Adjusted Basis
NET GAIN (LOSS)
Page 55 of 270
TAXATION LAW
Note: Amount realized from sale or other disposition
of property = sum of money received + fair market
value of the property (other than money) received.
Note: When a taxpayer sells a real or personal
property, he should deduct its cost from its selling
price to measure the gain or loss from the sales
transaction (Sec. 40, NIRC).
iii.! Long term capital gain vis-à-vis Short term
capital gain
Long-term capital gain: Capital asset is held for more
than twelve months before it is sold. Only 50% of the
gain is recognized.
Short-term capital gain: Capital asset is held for 12
months or less, 100% of the gain is subject to tax.
iv.! Net Capital Gain vis-à-vis Net Capital Loss
Net Capital Gain: Excess of the gains over the losses
on sales or exchange of capital assets during the
taxable year.
Net Capital Loss: Excess of the losses over the gains
on sales or exchanges of capital assets during the
taxable year. [Sec. 39A, NIRC]
v.! Income tax treatment of capital loss
Capital loss limitation rule (applicable to both
corporations and individuals)
General Rule: Losses from sales or exchanges of
capital assets shall be allowed only to the extent of
the gains from such sales or exchanges (Sec. 39(C),
NIRC).
Exception for Banks and Trust Companies: If a bank
or trust company incorporated under the laws of the
Philippines, a substantial part of whose business is
the receipt of deposits, sells any bond, debenture,
note, certificate or other evidence of indebtedness
issued by any corporation (including one issued by a
government or political subdivision thereof) with
interest coupons or in registered form, any loss
resulting from such sale shall not be subject to the
foregoing limitation and shall not be included in
determining the applicability of such limitation to
other losses (Sec. 39(C), NIRC).
Net loss carry-over rule (applicable only to
individuals)
If an individual sustains in any taxable year a net
capital loss, such loss (in an amount not in excess of
the net income for the year) shall be treated in the
succeeding taxable year as a loss from the sale or
 U.P. LAW BOC
exchange of a capital asset held for not more than 12
months (Sec. 39(D), NIRC).
vi.! Dealings in real property situated in the
Philippines
Persons Liable and Transactions Affected:
i.! Individual taxpayers, estates and trusts
ii.! Sale or exchange or other disposition of real
property considered as capital assets.
iii.! Includes "pacto de retro sale" and other
conditional sale.
iv.! Domestic Corporation
v.! Sale or exchange or disposition of lands
and/or building which are not actually used
in business and are treated as capital asset.
Rate and Basis of Tax
A final withholding tax of 6% is based on the
i.! gross selling price; or
ii.! fair market value; or
iii.! zonal value whichever is higher.
Note: Gain or loss is immaterial, there being a
conclusive presumption of gain.
vii.! Dealings in shares of stock of Philippine
corporations
Persons Liable to the Tax:
i.! Individual taxpayer, whether citizen or alien;
ii.! Corporate taxpayer, whether domestic or
foreign; and
iii.! Other taxpayers not falling under (a) and (b)
above, such as estate, trust, trust funds and
pension funds, among others.
Persons not liable:
i.! Dealers in securities
ii.! Investor in shares of stock in a mutual fund
company
iii.! All other persons who are specifically
exempt from national internal revenue taxes
under existing investment incentives and
other special laws.
Shares listed and traded through the stock exchange
other than sale by a dealer in securities
½ of 1% of the gross selling price of the stock or gross
value in money of the shares of stock sold, bartered,
exchanged or otherwise disposed which shall be
assumed and paid by the seller or transferor through
the remittance of the stock transaction tax by the
seller or transferor’s broker.
Note: In the nature of percentage tax and not income
tax; exempt from income tax per Section 127 (d): “Any
Page 56 of 270
TAXATION I TAXATION LAW
gain derived from the sale, barter, exchange or other
disposition of share of stock under this section shall
be exempt from taxes imposed in Sections 24(C),
27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of this Code and
from the regular individual or corporate income tax.”
Note: Percentage tax under Sec. 127 is NOT
DEDUCTIBLE for income tax purposes.
Shares not listed and traded through the stock
exchange
Net capital gains derived during the taxable year
from sale, exchange, or transfer shall be taxed as
follows (on a per transaction basis):
Amount of Capital Gain Tax Rate
Not over P 100,000 5%
On any amount in excess 10%
of P 100,000
viii.! Sale of principal residence
Principal residence: the family home of the individual
taxpayer (RR 14-2000)
Disposition of principal residence (capital asset) is
exempt from Capital Gains Tax, provided:
i.! Sale or disposition of the old principal
residence;
ii.! By natural persons - citizens or aliens
provided that they are residents taxable
under Sec. 24 of the Code (does not include
an estate or a trust);
iii.! The proceeds of which is fully utilized in (a)
acquiring or (b) constructing a new principal
residence within eighteen (18) months from
date of sale or disposition;
iv.! Notify the Commissioner within thirty (30)
days from the date of sale or disposition
through a prescribed return of his intention
to avail the tax exemption;
v.! Can only be availed of only once every ten
(10) years;
vi.! The historical cost or adjusted basis of his
old principal residence shall be carried over
to the cost basis of his new principal
residence
vii.! If there is no full utilization, the portion of
the gains presumed to have been realized
shall be subject to capital gains tax.
viii.! Portion of presumed gains subject to CGT:
(Unutilized/GSP) x (higher of GSP or FMV)
3.! Tax free exchanges [Sec. 40 (c)(2)]
a.! Merger or consolidation
No gain or loss shall be recognized if in pursuance of
a plan of merger or consolidation
U.P. LAW BOC TAXATION I
i.! A corporation, which is a party to a merger or
consolidation, exchanges property solely for
stock in a corporation, which is a party to the
merger or consolidation; or
ii.! A shareholder exchanges stock in a
corporation, which is a party to the merger or
consolidation, solely for the stock of another
corporation also a party to the merger or
consolidation; or
iii.! A security holder of a corporation, which is a
party to the merger or consolidation,
exchanges his securities in such corporation,
solely for stock or securities in such
corporation, a party to the merger or
consolidation.
Both corporations in the aforementioned cases must
be parties to a merger or consolidation.
Merger occurs when one corporation acquires all or
substantially all the properties of another corporation.
Consolidation occurs when two or more corporations
merge to form one corporation. Securities include
debentures but does not include notes of whatever
class or duration.
Substantially all the properties of another
corporation means the acquisition of at least 80% of
the assets, including cash, of another corporation
which has the element of permanence and not merely
momentary holding [Banggawan citing BIR Gen.Circ.
V-253 (1957)]
b.! Initial acquisition of control
No gain or loss shall also be recognized if property is
transferred to a corporation by a person in exchange
for stock or unit of participation in such a corporation
of which as a result of such exchange said person,
alone or together with others, not exceeding four (4)
persons, gains control of said corporation: Provided,
That stocks issued for services shall not be
considered as issued in return for property.
f.! Passive Investment Income
Under Sec 24(B) of the Tax Code, a final tax is
imposed upon gross passive income of citizen and
resident aliens. An income is considered passive if the
taxpayer merely waits for it to be realized.
TAX TREATMENT
Passive income may be subject to either schedular
rates or final tax rate.
1.! Subject to schedular rates such as dividend
income received by a domestic corporation from
non-resident foreign corporation; and
Page 57 of 270
TAXATION LAW
2.! Subject to final tax rate such as interest, income
from foreign currency bank deposits by a resident
citizen.
SOURCES
The following are the sources of passive income
subject to final tax
a.! Interest income;
b.! Dividend Income;
c.! Royalty Income; and
d.! Rental Income.
Note that these income are NOT added to other
income in the determination of ordinary income tax
liability.
1.! Interest Income
An earning derived from depositing or lending of
money, goods or credits [Valencia and Roxas] e.g.,
interest income from government securities such as
Treasury Bills.
Unless exempted by law, interest income received by
the taxpayer, whether or not usurious, is subject to
income tax.
2.! Dividend Income
A form of earnings derived from the distribution
made by a corporation out of its earnings or profits
and payable to its stockholders, whether in money or
in property.
The following are the classification of dividends:
a.! Cash dividends
b.! Stock dividends
c.! Property dividends; and
d.! Liquidating dividends.
In general, dividends are subject to final tax under
the Tax Code.
Cash dividends
Dividends are subject to final tax under the NIRC.
However, dividends received by a domestic
corporation from another domestic corporation, and
a non-resident foreign corporation from a domestic
corporation is exempt from income tax.
Cash dividend is the most common form of dividend,
valued at the amount of money received by the
stockholder. Cash dividends and property dividends
are subject to income tax.
Stock dividends
Stock dividend is generally exempt from income tax,
EXCEPT:
i.! If a corporation cancels or redeems stock
issued as a dividend at such time and in such
U.P. LAW BOC TAXATION I TAXATION LAW

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. 73(B), NIRC); or
ii.! Where there is an option that some
stockholders could take cash or property
dividends instead of stock dividends; some
stockholders exercised the option to take
cash of property dividends; and the exercise
of option resulted in a change of the
stockholders’ proportionate share in the
outstanding share of the corporation.

Property dividends
Property dividends or dividends in the form of
property are subject to tax at preferential rate under
the NIRC.

Liquidating dividends
Represents distribution of all the property or assets of
a corporation in complete liquidation or dissolution. It
is strictly not dividend income, but rather is treated in
effect, a return of capital to the extent of the
shareholder’s investment. The difference between the
cost or other basis of the stock and the amount
received in liquidation of the stock is a capital gain or
a capital loss. Where property is distributed in
liquidation, the amount received is the FMV of such
property. The income is subject to ordinary income
tax rates. It is subject neither to the FWT on dividends
nor to the CGT on sale of shares.
3.! Royalty Income
Royalty is a valuable property that can be developed
and sold on a regular basis for a consideration; in
which case, any gain derived therefrom is considered
as an active business income subject to the normal
corporate tax.
Where a person pays royalty to another for the use of
its intellectual property, such royalty is generally a
passive income of the owner thereof subject to
withholding tax.

4.! Rental Income

Refers to earnings derived from leasing real estate as
well as personal property. Aside from the regular
amount of payment for using the property, it also
includes all other obligations assumed to be paid by
the lessee to the third party in behalf of the lessor
(e.g., interest, taxes, loans, insurance premiums, etc.)
[RR 19-86]

Rent income may be in the following forms:

a.! Cash, at the stipulated price
b.! Obligations of the lessor to third persons paid or
assumed by the lessee in consideration of the
contract of lease, e.g., real estate tax on the
property leased assumed by the lessee
c.! Advance payment

Page 58 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

If the advance payment is actually a loan to the lessor,
or an option money for the property, or a security
deposit for the faithful performance of certain
obligations of the lessee, such advance payment is
not income to the lessor.
However, a security deposit that is applied to rental is
taxable income to the lessor.
If the advance payment is, in fact, a pre-paid rental,
received by the lessor under a claim of right and
without restriction as to its use, then such payment is
income to the lessor.
Pre-paid rent must be reported in full in the year of
receipt, regardless of the accounting method used by
the lessor.
such tax to be withheld
and remitted by the
lessee in the Philippines
Tax Treatments
a.! Leasehold improvements by lessee
Rent Income from leasehold improvements:
i.! Outright method- lessor shall report as income
FMV of the buildings or improvements subject
to the lease in the year of completion.
ii.! Spread-out method- lessor shall spread over
the remaining term of the lease the estimated
depreciated (book) value of such buildings or
improvements at the termination of the lease,
and reports as income for each remaining term
of the lease an aliquot part thereof.

Lease of personal property Estimated BV at the end of the lease contract/

Rental income on the lease of personal property remaining lease term = Income per year
located in the Philippines and paid to a non-resident
taxpayer shall be taxed as follows: If for any reason than a bona fide purchase from the
NRA- lessee by the lessor, the lease is terminated, so that
NRFC
NETB the lessor comes into possession or control of the
Vessel 4.5% 25% property prior to the time originally fixed, lessor
Aircraft, machineries 7.5% 25% receives additional income for the year which the
and other Equipment lease is so terminated to the extent of the value of
Other assets 30% 25% such buildings or improvements when he became
entitled to such possession exceeds the amount
Lease of real property already reported as income on account of the
Lessor Tax Rate erection of such building or improvement. No
Citizen appreciation in value due to causes other than the
Resident Alien Net taxable income premature termination of lease shall be included (Sec.
Non-resident alien shall be subject to the 49, RR No. 2).
engaged in trade or graduated income tax
business in the rates If the building or other leasehold improvement is
Philippines destroyed before the expiration of the lease, the
Non-resident alien not Rental income from real lessor is entitled to deduct as a loss for the year when
engaged in trade or property located in the such destruction takes place, the amount previously
business in the Philippines shall be reported as income because of the erection of the
Philippines subject to 25% final improvement, less any salvage value, to the extent
withholding tax unless that such loss was not compensated by insurance
a lower rate is imposed (Sec. 49, RR No. 2),
pursuant to an effective
tax treaty b.! VAT added to rental/paid by the lessee
Domestic Corporation Net taxable income If the lessee is VAT-registered, treat VAT paid as
Resident Foreign shall be subject to 30% input VAT
Corporation corporate income tax or
its gross income will be If the lessee is not VAT-registered OR not liable to
subject to 2% MCIT VAT, treat VAT paid as additional rent expense
Non-resident Foreign Gross rental income deductible from gross income.
Corporation from real property
located in the c.! Advance Rental/ Long Term Lease
Philippines shall be Pre-paid rent must be reported in full in the year of
subject to 30% receipt, regardless of the accounting method used by
corporate income tax, the lessor.

Page 59 of 270
U.P. LAW BOC
g.! Annuities, Proceeds from
Life insurance or Other
Types of Insurance
It refers to periodic instalment payments of income or
pension by insurance companies during the life of a
person or for a guaranteed fixed period of time,
whichever is longer, in consideration of capital paid
by him. It is paid annually, monthly, or periodically,
computed upon the amount paid yearly, but
necessarily for life. [Peralta v. Auditor General, G.R.
No. L-8480 (1957)]
Annuities are installment payments received for life
insurance sold by insurance companies.
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]
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.
h.! Prizes and Awards
A prize is a reward for a contest or a competition. It
represents remuneration for an effort reflecting one’s
superiority.
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:
2.! The recipient was selected without any action on
his part to enter a contest or proceedings; and
3.! The recipient is not required to render
substantial future services as a condition to
receiving the prize or award.
4.! 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 associations
shall be EXEMPT from income tax.
i.! Pensions, Retirement
Benefit, or Separation Pay
Page 60 of 270
TAXATION I TAXATION LAW
Paid for past employment services rendered.
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. It is generally taxable unless the law
states otherwise. [VALENCIA, Income Taxation 5th ed.
(2009)]
j.! Income from Any Source
Whatever
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
Forgiveness of indebtedness
The cancellation or forgiveness of indebtedness may
have any of three possible consequences:
It may amount to payment of income. If, for example,
an individual performs services to or for a creditor,
who, in consideration thereof, cancels the debt,
income in that amount is realized by the debtor as
compensation for personal services.
It may amount to a gift. If a creditor wishes merely to
benefit the debtor, and without any consideration
therefore, cancels the debt, the amount of the debt is
a gift to the debtor and need not be included in the
latter’s report of income.
It may amount to a capital transaction. If a
corporation to which a stockholder is indebted
forgives the debt, the transaction has the effect of a
payment of dividend.
Tax Benefit Rule
This is a general principle in taxation which states
that is a taxpayer deducted an item on his income tax
return and enjoyed a tax benefit (reduced his income
tax) thereby, and in a subsequent year recovers all or
part of that item, he will recognize gross income in
the year the deducted item is recovered. The rule has
both an inclusionary and an exclusionary component,
i.e., the recovery is included in the taxpayer’s gross
income to the extent that the taxpayer obtained a tax
benefit from the prior year’s deduction, and the
recovery is excluded to the extent that the prior year’s
deduction did not provide a tax benefit.
3 deductions in Sec. 34 which makes reference to Tax
Benefit Rule are the following:
U.P. LAW BOC TAXATION I TAXATION LAW

•! Taxes [ Sec 34(C)(1)]

•! Abandonment Losses [Sec 34 (D)(7)(b)] In Case B, none of the P2,000 recovered would be
•! Bad Debts [Sec 34(E)(1)] recognized as gross income in Year 2. Note that even
without the write-off, the taxpayer would not have
Recovery of accounts previously written-off paid any income tax anyway. The “taxable income”
before the write-off was actually a net loss.
Bad debts claimed as a deduction in the preceding
year(s) but subsequently recovered shall be included In Case C, only P5,000 of the P6,000 recovered
as part of the taxpayer’s gross income in the year of would be recognized as gross income in Year 2. It was
such recovery to the extent of the income tax benefit only to this extent that the taxpayer benefited from
of said deduction. There is an income tax benefit the write-off. The taxpayer did not benefit from the
when the deduction of the bad debt in the prior year extra P1,000 because at this point, the P1,000 was
resulted in lesser income and hence tax savings for already a net loss.
the company. (Sec. 4, RR 5-99)
Receipt of tax refunds or credit
Illustration:
Case A Case B Case C General rule: A refund of a tax related to the business
Year 1 or the practice of profession, is taxable income (e.g.,
refund of fringe benefit tax) in the year of receipt to
Gross
500,000 400,000 500,000 the extent of the income tax benefit of said deduction
Income
(i.e., the tax benefit rule applies).
Less:
Allowable
Exceptions: However, the following tax refunds are
Deductions
not to be included in the computation of gross
(before
income:
write-off of (200,000) (480,000) (495,000)
1.! Philippine income tax, except the fringe benefit
Uncollectibl
tax
e
2.! Income tax imposed by authority of any foreign
Accounts/D
country, if the taxpayer claimed a credit for such
ebts)
tax in the year it was paid or incurred.
Taxable 3.! Estate and donor’s taxes
Income (Net 4.! Taxes assessed against local benefits of a kind
Loss) before 300,000 (60,000) 5,000 tending to increase the value of the property
write-off assessed (Special assessments)
Deduction 5.! Value Added Tax
for Accounts 6.! Fines and penalties due to late payment of tax
Receivable (2,000) (2,000) (6,000) 7.! Final taxes
written off 8.! Capital Gains Tax
Taxable
Income (Net Note: The enumeration of tax refunds that are not
298,000 (62,000) (1,000)
Loss) after taxable (income) is derived from an enumeration of
write-off tax payments that are not deductible from gross
Year 2 income.
Recovery of
Amounts 2,000 2,000 6,000 If a tax is not an allowable deduction from gross
Written Off income when paid (no reduction of taxable income,
Taxable hence no tax benefit), the refund is not taxable.
Income on
2,000 - 5,000
the Source rules in determining income from within and
Recovery without

In Case A, the entire amount recovered (P2,000) is The following items of gross income shall be treated
included in the computation of gross income in Year as gross income from sources WITHIN the
2 because the taxpayer benefited by the same extent. Philippines:
Prior to the write-off, the taxable income was 1.! Interests
P300,000; after the write-off, the taxable income
was reduced to P298,000.

Page 61 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

Derived from sources within the Philippines, and machinery or other apparatus purchased
interests on bonds, notes or other interest- from such nonresident person;
bearing obligation of residents. vi.! Technical advice, assistance or services
Ultimately, the situs of interest income is the rendered in connection with technical
residence of the debtor. management or administration of any
2.! Dividends scientific, industrial or commercial
Dividends received: undertaking, venture, project or scheme; and
from a domestic corporation; and from a foreign vii.! The use of or the right to use:
corporation, UNLESS less than 50% of its gross i.! Motion picture films;
income for the previous 3-year period was ii.! Films or video tapes for use in
derived from sources within the Philippines [in connection with television; and
which case it will be treated as income partly iii.! Tapes for use in connection with
from within and partly from without]. radio broadcasting.

The income which is considered as derived from As a rule, the situs of rental income is the place
within the Philippines is obtained by using the where the property is located. The situs of royalty
following formula: income is where the rights are exercised.
Philippine Gross Income* x Dividend = Income
Within Worldwide Gross Income* 5.! Sale of Real Property
* of the corporation giving the dividend As a rule, the situs of the income from sale of real
property is where the realty is located.
As a rule, the situs of dividend income is the
residence of the corporation declaring the 6.! Sale of Personal Property
dividend. General Rule: Gains, profits and income from the
sale of personal property, subject to the
3.! Services following rules:
Compensation for labor or personal services Place of Place of
Treatment**
performed in the Philippines: As a rule, the situs PURCHASE SALE
of compensation is the place of performance of Income from
Philippines Abroad
the services. Without
Income from
Abroad Philippines
4.! Rentals and Royalties Within
From property located in the Philippines or from ** in other words, the situs of the income from
any interest in such property, including rentals or the sale of personal property is the place of sale.
royalties for –
i.! The use of or the right or privilege to use in Exceptions:
the Philippines any copyright, patent, design a.! Gain from the sale of shares of stock in a
or model, plan, secret formula or process, domestic corporation
goodwill, trademark, trade brand or other b.! Treated as derived entirely from sources
like property or right; within the Philippines regardless of where
ii.! The use of, or the right to use in the the said shares are sold.
Philippines any industrial, commercial or c.! Gains from the sale of (manufactured)
scientific equipment; personal property:
iii.! The supply of scientific, technical, industrial d.! produced (in whole or in part) by the
or commercial knowledge or information; taxpayer within and sold without the
iv.! The supply of any assistance that is ancillary Philippines, or
and subsidiary to, and is furnished as a e.! produced (in whole or in part) by the
means of enabling the application or taxpayer without and sold within the
enjoyment of, any such property or right as is Philippines
mentioned in (a), any such equipment as is f.! Treated as derived partly from sources within
mentioned in (b) or any such knowledge or and partly from sources without the
information as is mentioned in (c); Philippines.
v.! The supply of services by a nonresident
person or his employee in connection with Place of Place of
the use of property or rights belonging to, or Treatment
PRODUCTION SALE
the installation or operation of any brand, Partly within,
Philippines Abroad
partly without

Page 62 of 270
U.P. LAW BOC
Partly within,
Abroad Philippines
partly without
7.! Shares of Stock of Domestic Corporation
Treated as derived entirely from sources within
the Philippines regardless of where the said
shares are sold.
6.!Exclusions from Gross
Income
Exclusions from gross income refer to income
received or earned but is not taxable as income
because it is exempted by law or by treaty. Such tax-
free income is not to be included in the income tax
return unless information regarding it is specifically
called for. Receipts which are not in fact income are,
of course, excluded from gross income.
The exclusion of income should not be confused with
the reduction of gross income by the application of
allowable deductions. While exclusions are simply
not taken into account in determining gross income,
deductions are subtracted from gross income to
arrive at net income. [De Leon]
Items of Exclusions representing return of capital
Amount of capital is generally recovered through
deduction of the cost or adjusted basis of the
property sold from the gross selling price or
consideration, or through the deduction from gross
income of depreciation relating to the property used
in trade or business before it is sold.
It may also related to indemnities, such as proceeds
of life insurance paid to the insured’s beneficiaries
and return of premiums paid by the insurance
company to the insured under a life insurance,
endowment or annuity contract.
Damages, in certain instances, may also be exempt
because they represent return of capital.
Items of Exclusion because it is subject to another
internal revenue tax
The value of property acquired by gift, bequest,
devise or descent is exempt from income tax on the
part of the recipient because the receipt of such
property is already subject to transfer taxes (estate
tax or donor’s tax)
Items of Exclusions because they are expressly
exempt from income tax
a.! Under the Constitution
b.! Under a tax treaty
c.! Under special laws
Page 63 of 270
TAXATION I TAXATION LAW
a.! Rationale for the Exclusions
The term “exclusions” refers to items that are not
included in the determination of gross income
because:
1.! They represent return of capital or are not
income, gain or profit;
2.! They are subject to another kind of internal
revenue tax;
3.! They are income, gain or profit expressly exempt
from income tax under the Constitution, tax
treaty, Tax Code, or a general or special law.
[Mamalateo]
b.! Taxpayers Who May Avail of
the Exclusions
Exclusion Taxpayer
All taxpayers since there
Return of capital
is no income.
All taxpayers unless
Already subject to
provided that income is
internal revenue tax
to be included.
Express exclusion As expressly provided.
c.! Exclusions Distinguished
from Deductions and Tax
Credit
Exclusions from gross income refer to flow of wealth
to the taxpayer which are not treated as part of gross
income for purposes of computing the taxpayer’s
taxable income, due to the following reasons: (1) it is
exempted by the Constitution or a statute; or (2) it
does not come within the definition of income.
Deductions, on the other hand, are the amounts
which the law allows to be subtracted from gross
income in order to arrive at net income.
Exclusions pertain to the computation of gross
income, while deductions pertain to the computation
of net income.
Exclusions are something received or earned by the
taxpayer which do not form part of gross income
while deductions are something spent or paid in
earning gross income.
Tax Credit refers to amounts subtracted from the
computed tax in order to arrive at taxes payable.
U.P. LAW BOC TAXATION I TAXATION LAW

d.! Exclusions Under the under such contract) exceed the aggregate premiums
of considerations paid (whether or not paid during
Constitution the taxable year), then the excess shall be included in
gross income. However, in the case of a transfer for
1.! Income derived by the government or its political valuable consideration, by assignment or otherwise,
subdivisions from the exercise of any essential of a life insurance, endowment , or annuity contract,
governmental function or any interest therein, only the actual value of such
2.! Also, all assets and revenues of a non-stock, consideration and the amount of the premiums and
non-profit private educational institution used other sums subsequently paid by the transferee are
directly, actually and exclusively for private exempt from taxation.
educational purposes shall be exempt from
taxation. 4.! Value of property acquired by gift, bequest,
devise or descent
e.! Exclusions Under the Tax
Gifts, bequests and devises (which are subject to
Code (Sec. 32(b), NIRC) estate or gift taxes) are excluded from gross income,
BUT not the income from such property. If the
1.! Proceeds of life insurance policies amount received is on account of services rendered,
whether constituting a demandable debt or not, or
General rule: The proceeds of life insurance policies the use or opportunity to use of capital, the receipt is
paid to his estate or to any beneficiary (but not a income [Pirovano v. Commissioner, G.R. No. L-
transferee for a valuable consideration), directly or in 19865, July 31, 1965]
trust, upon the death of the insured, are excluded
from the gross income of the beneficiary. However, if 5.! Amount received through accident or health
such amounts are held by the insurer under an insurance (Compensation for damages)
agreement to pay interest thereon, the interest As a rule, amounts received through accident or
payments received by the insured shall be included in health insurance or under workmen’s compensation
gross income. The interest income shall be taxed at acts, as compensation for personal injuries or
the graduated income tax rates. sickness, plus the amount of any damages received,
whether by suit or agreement, on account of such
2.! Return of premium paid injuries or sickness are excluded from gross income.
General rule: The amount received by the insured as a Examples of non-taxable and taxable damages
return of premiums paid by him under life insurance, recoveries are:
endowment, or annuity contracts, either during the
Non-taxable – Taxable – compensation
term or at the maturity of the term mentioned in the
contract or upon surrender of the contract is a return compensation for for damages on account
of capital and not income. damages on account of of
Personal (physical) Actual damages for loss
This refers to the cash surrender value of the contract. injuries or sickness of anticipated profits
Any other damages .Moral and exemplary
Exception: If the amounts received by the insured recovered on account of damages awarded as a
(when added to the amounts already received before personal injuries or result of break of
the taxable year under such contract) exceed the sickness contract
aggregate premiums or considerations paid (whether
Exemplary and moral
or not paid during the taxable year), then the excess
damages for out-of-court Interest for non-taxable
shall be included in gross income.
settlement, including damages above
attorney’s fees
3.! Amounts received under life insurance,
endowment or annuity contracts Alienation of affection, or Any damages as
breach of promise to compensation for
Amounts received (other than amounts paid by marry unrealized income
reason of the death of the insured and interest Any amount received as a
payments on such amounts) under a life insurance, return of capital or
endowment or annuity contracts are excluded from reimbursement of
gross income, but if such amounts (when added to expenses
amounts already received before the taxable year

Page 64 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

6.! Income exempt under tax treaty earnings and principal of the fund thus accumulated
by the trust in accordance with such plan (trust fund)
Income of any kind, to the extent required by any Further, it should be provided in the plan that at no
treaty obligation binding upon the Government of the time prior to the satisfaction of all liabilities with
Philippines. respect to employees under any trust, shall any part
of the corpus or income of the fund be used for, or be
7.! Retirement benefits, pensions, gratuities, etc. diverted to, any purpose other than for the exclusive
benefit of his employees.
These are:
a.! Retirement benefits under RA 7641, RA 4917, Terminal pay/Separation pay
and Section 60(B) of the NIRC Any amount received by an employee or by his heirs
b.! Terminal pay from the employer as a consequence of separation of
c.! Retirement Benefits from foreign government such official or employee from the service of the
agencies employer because of death, sickness, other physical
d.! Veterans benefits disability or for any cause beyond the control of the
e.! Benefits under the Social Security Act employee. The phrase “for any cause beyond the
f.! GSIS benefits control of the said official or employee” means that
the separation of the employee must be involuntary
Retirement benefits received under RA 7641(The and not initiated by him.
Retirement Pay Law) and those received by officials
and employees of private firms under a reasonable The separation must not be of his own making.
private benefit plan (RPBP) maintained by the
employer under RA 4917 (now Section 32(B)(6)(a) of Notes:
NIRC) are excluded from gross income subject to •! Sickness must be life-threatening or one which
income tax. renders the employee incapable of working
RA 7641 RPBP •! Retrenchment of the employee due to
Retiring employee must Retiring official or unfavorable business conditions or financial
be in the service of same employee must have reverses is considered as involuntary. However,
employer been in the service of the resignation or availment of an optional early
CONTINUOUSLY for at same employer for at retirement plan is voluntary and bars a claim
least five (5) years least ten (10) years. under this provision.
Retiring employee must •! BIR Ruling 143-98: The “terminal leave pay”
Retiring official or
be at least sixty (60) (amount paid for the commutation of leave
employee must be at
years old but not more credits) of retiring government employees is
least fifty (50) years old
than 65 years of age at considered not part of the gross salary, and is
at the time of retirement
the time of retirement exempt from taxes. The government recognizes
Retiring employee shall that for most public servants, retirement pay is
Availed of only once, and not have previously always less than generous if not meager and
only when there is no availed of the privilege scrimpy. Terminal leave payments are given not
RPBP under a retirement only at the same time but also for the same
benefit plan of the same policy considerations governing retirement
or another employer benefits. [Commissioner v. CA and Castaneda,
Plan must be reasonable. G.R. 96016 (1991)].
Its implementation must
be fair and equitable for Retirement BENEFITS from foreign government
the benefit of all agencies – The social security benefits, retirement
employees (e.g. from gratuities, pensions and other similar benefits
president to laborer) received by resident or non-resident citizens or aliens
Plan must be approved who come to reside permanently in the Philippines
by BIR from foreign government agencies and other
institutions, private or public;
A 'reasonable private benefit plan' means a pension,
gratuity, stock bonus or profit-sharing plan Payments of VETERANS benefits under U.S. Veterans
maintained by an employer for the benefit of some or Administration – Payments of benefits due or to
all of his employees wherein contributions are made become due to any person residing in the Philippines
by such employer, or employees, or both for the under the laws of the United States administered by
purpose of distributing to such employees the the United States Veterans Administration

Page 65 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

from income tax for income arising from the

Social Security Act benefits – Payments of benefits operation of the enterprise.
received under the Social Security Act of 1954 (RA
8282), as amended, e.g., Maternity Benefits

GSIS benefits – Benefits received from GSIS under

the GSIS Act of 1937, as amended, and the retirement
gratuity received by government officials and
employees are not taxable. [Sec. 32B6., NIRC; Sec. B1,
RR 2-98]

8.! Winnings, prizes and award, including those in

sports competitions

All prizes and awards granted to athletes in local and

international sports competitions and tournaments
whether held in the Philippines or abroad, AND
sanctioned by their national sports associations shall
not be included in gross income and shall be tax
exempt. [Sec. 32 B7d, NIRC]

Prizes and awards made primarily in recognition of

charitable, literary, educational, artistic, religious,
scientific, or civic achievement are not taxable,
provided Recipient was selected without any action
on his part to enter the contest or proceeding; and
Recipient is not required to render substantial future
services as a condition to receiving the prize or award

f.! Exclusions Under Special

Laws
Personal Equity and Retirement Account

Under R.A. 6657 (Comprehensive Agrarian Reform

Package Law), gain arising from the transfer of
agricultural property covered by the law shall be
exempt from capital gains tax.

Under R.A. 6938 (Cooperative Code of the

Philippines), as amended by R.A. 9520, cooperatives
transacting business with both members and non-
members shall not be subject to tax on their
transactions with members. In relation to this, the
transactions of members with the cooperative shall
not be subject to any taxes and fees, including but
not limited to final taxes on members' deposits.

Under R.A. 7916 (PEZA Law), as amended, PEZA-

registered enterprises are given income tax holidays
of six or four years from the date of commercial
operations, depending on whether their activities are
considered pioneer or non-pioneer.

Under R.A. 9178 (Barangay Micro Business

Enterprises Act of 2002), BMBEs shall be exempt

Page 66 of 270
U.P. LAW BOC
! Deductions! from! Gross!
Income
Deductions are items or amounts authorized by law
to be subtracted from the pertinent items of gross
income to arrive at taxable income.
Deductions from income tax purposes partake of the
nature of tax exemptions; hence, if tax exemptions
are to be strictly construed, then it follows that
deductions must also strictly construed. [CIR v
Isabela Cultural Co., G.R. No. 172231 (2007)]
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, RR 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., G.R. No. L-
22443 (1971)]
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, G.R. No. 71122 (1988)]
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.
Types of deductions
There are three (3) types of deductions from gross
income:
1.! itemized deductions in Section 34(A) to (J) and
(M) available to all kinds of taxpayers engaged in
Page 67 of 270
TAXATION I TAXATION LAW
trade or business or practice of profession in the
Philippines;
2.! 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;
and
3.! the special deductions in Sections 37 and 38 of
the NIRC, and in special laws like the BOI law
(E.O. 226).
1.! General Rules
a.! Deductions must be paid or incurred in
connection with the taxpayer’s trade, business or
profession
b.! Deductions must be supported by adequate
receipts or invoices (except standard deduction)
c.! Additional requirement relating to withholding
2.!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 not be 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. Reg. 2)
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 (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.
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.
Sale of services: Their entire gross receipts are
treated as part of gross income.
U.P. LAW BOC
3.!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.
Timing of Claiming Deductions
A taxpayer has the right to deduct all authorized
allowances for the taxable year. As a rule, if he does
not within any year deduct certain of his expenses,
losses, interest, taxes or other charges, he cannot
deduct them from the income of the next of any
succeeding year [Sec. 76, Income Tax Regulations]
a.! Expenses
Business expenses deductible from gross income
include the ordinary and necessary expenditures
directly connected with or pertaining to the
taxpayer’s trade or business. The cost of goods
purchased for resale, with proper adjustment for
opening and closing inventories, is deducted from
gross sales in computing gross income.
Includes:
1.! Salaries, wages, and other forms of
compensation for personal services actually
rendered, including the grossed-up monetary
value of fringe benefits furnished or granted by
the employer to the employee
2.! Travel expenses
3.! Rentals
4.! Entertainment, recreation and amusement
expenses
5.! Other expenses such as repairs or those incurred
by farmers and other persons in agribusiness
Requisites for deductibility of business expenses
1.! Ordinary AND necessary;
ORDINARY - normal and usual in relation to the
taxpayer's business and surrounding
circumstances; need not be recurring
NECESSARY - appropriate and helpful in the
development of taxpayer's business or are proper
for the purpose of realizing a profit or minimizing
a loss
2.! Paid or incurred during the taxable year;
Page 68 of 270
TAXATION I TAXATION LAW
3.! Paid or incurred in carrying on or which are
directly attributable to the development,
management, operation and/or conduct of the
trade, business or exercise of profession;
4.! Substantiated by adequate proof – documented
by official receipts or adequate records, which
reflect the amount of expense deducted and the
connection or relation of the expense to the
business/trade of the taxpayer);
5.! Legitimately paid (not a BRIBE, kickback, or
otherwise contrary to law, morals, public policy);
6.! If subject to withholding tax, the tax required to
be withheld on the expense paid or payable is
shown to have been properly withheld and
remitted to the BIR on time;
7.! Amount must be reasonable.
Note: The expenses allowable to a non-resident alien
or a foreign corporation consist of only such expenses
as are incurred in carrying on any business or trade
conducted within the Philippines exclusively. [Sec. 77
RR 2]
COHAN Rule: This relief will apply if the taxpayer has
shown that it is usual and necessary in the trade to
entertain and to incur similar kinds of expenditures,
there being evidence to show the amounts spent and
the persons entertained, though not itemized. In
such a situation, deduction of a portion of the
expenses incurred might be allowed even if there are
no receipts or vouchers. Absence of invoices, receipts
or vouchers, particularly lack of proof of the items
constituting the expense is fatal to the allowance of
the deduction [Gancayco v. Collector, G.R. No. L-
13325, (1961)]
Substantiation requirement – Sec. 34(A)(1)(b), NIRC:
No deduction from gross income shall be allowed
unless the taxpayer shall substantiate with sufficient
evidence, such as official receipts or other adequate
records: (1) the AMOUNT of the expense being
deducted, and (2) the DIRECT CONNECTION or
relation of the expense being deducted to the
development, management, operation and/or
conduct of the trade, business or profession of the
taxpayer.
When to ACCRUE expenses: “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.
Kinds of business expenses
These are:
U.P. LAW BOC TAXATION I
1.! Salaries, wages and other forms of compensation
for personal services actually rendered, including
the grossed-up monetary value of the fringe
benefit subjected to fringe benefit tax which tax
should have been paid
2.! Travelling expenses
3.! Cost of materials
4.! Rentals and/or other payments for use or
possession of property
5.! Repairs and maintenance
6.! Expenses under lease agreements
7.! Expenses for professionals
8.! Entertainment expenses
9.! Political campaign expenses
10.! Training expenses
11.! Others
Salaries, wages and other forms of compensation for
personal services actually rendered, including the
grossed-up monetary value of the fringe benefit
subjected to fringe benefit tax which tax should have
been paid
Given for personal services must be actually rendered
and reasonable.
For income payment to be allowed as deduction, the
withholding tax must have been paid [RR No. 12-
2013].
Bonuses are deductible when:
i.! made in good faith
ii.! given as additional compensation for
personal services actually rendered
iii.! such payments, when added to the
stipulated salaries, do not exceed a
reasonable compensation for the services
rendered
Traveling expenses
This include transportation expenses and meals and
lodging [Secs. 65 and 66, Rev. Reg. No. 2]
i.! Expenses must be reasonable and necessary.
ii.! Must be incurred or paid “while away from
home”
iii.! Tax home is the principal place of business,
when referring to “away from home”
iv.! Incurred or paid in the conduct of trade or
business.
Note: However, necessary transportation expenses of
the taxpayer (which are different from the
transportation expenses included in the term “travel
expenses”) in its “tax home” are deductible. Thus, a
taxpayer operating its business in Manila is allowed
transportation expenses from its office to its
customers’ place of business and back. But the
transportation expenses of an employee from his
Page 69 of 270
TAXATION LAW
residence to its office and back are not deductible as
they are considered personal expenses.
Cost of materials
Deductible only to the amount that they are actually
consumed and used in operation during the year for
which the return is made, provided that their cost has
not been deducted in determining the net income for
any previous year.
Rentals and/or other payments for use or possession
of property
Required as a condition for continued use or
possession of property.
For purposes of trade business or profession.
Taxpayer has not taken or is not taking title to the
property or has no equity other than that of lessee,
user, or possessor.
On the accrual basis, rent is deductible as expense
when liability is incurred during the period of use. On
cash basis, rent is deductible when it is incurred and
paid.
If the advance payment is a prepaid rental, such
payment is taxable income to the lessor in the year
when it was received. However, an advance payment
is not deductible expense of the lessee until the
period is used. [Valencia and Roxas]
Repairs and maintenance
Incidental or ordinary repairs are deductible. Repairs
which neither materially add to the value of the
property nor appreciably prolong its life, but keep it in
an ordinarily efficient working condition, may be
deducted as expenses, provided the plant or property
account is not increased by the amount of such
expenditure. The life of the asset referred to is the
probable, normal, useful life for the purpose of the
allowance for the return of the capital investment –
not what the life that would have been if no repairs
had been made after the property was damaged by a
casualty. Since the repairs prolonged the lives of the
said vessels of petitioners, the disallowance must be
sustained. [Visayan Transportation Co. v. CTA, CTA
Case No. 1119, (1964)]
Extraordinary repairs are not deductible – they are
capital expenditures
Repairs which add material value to the property or
appreciably prolong its life
Repairs in the nature of replacement, to the extent
that they arrest deterioration and appreciably
prolong the life of the property, should be charged
U.P. LAW BOC TAXATION I
against the depreciation reserves if such account is
kept. [Sec. 68, Rev. Regs. 2]
All maintenance expenses on account of non-
depreciable vehicles for taxation purposes are
disallowed in its entirely. [RR No. 12-2012]
Expenses under lease agreements
Requisites for deductibility:
i.! Required as a condition for continued use or
possession;
ii.! For purposes of the trade, business or
possession;
iii.! Taxpayer has not taken or is not taking title
to the property or has no equity other than
that of lessee, user, or possessor.
Expenses for professionals
Deductible in the year the professional services are
rendered, not in the year they are billed, provided
that the “all events” is present.
“All events test” requires:
i.! Fixing a right to income or liability to pay;
and
ii.! The availability of reasonably accurate
determination of such income or liability.
The “all-events test” does not demand that the
amount of income or liability be known absolutely; it
only requires that a taxpayer has at its disposal the
information necessary to compute the amount with
reasonable accuracy, which implies something less
than an exact or completely accurate amount.
[Commissioner v. Isabela Cultural Corporation, G.R.
No. 172231 (2007)]
A professional may claim as deductions the cost of
supplies used by him in the practice of his profession,
expenses paid in the operation and repair of
transportation equipment used in making
professional calls, dues to professional societies and
subscriptions to professional journals. [Mamalateo]
Entertainment/Representation expenses
These are entertainment, amusement and recreation
(EAR) expenses incurred or paid during the year that
are directly connected to the development,
management and operation of the trade, business or
profession of the taxpayer.
Requisites for deductibility:
i.! Reasonable in amount.
ii.! Paid or incurred during the taxable period.
iii.! Directly connected to the development,
management, and operation of the trade,
business or profession of the taxpayer, or
Page 70 of 270
TAXATION LAW
that are directly related to or in furtherance
of the conduct thereof.
iv.! Not to exceed such ceiling as the Secretary
of Finance prescribe (under RR 10-02, in no
case to exceed 0.50% of net sales for sellers
of goods or properties or 1% of net revenues
for sellers of services, including taxpayers
engaged in the exercise of profession and
use or lease of properties)
v.! Not incurred for purposes contrary to law,
morals, public policy or public order.
vi.! Must be substantiated with sufficient
evidence such as receipts and/or adequate
records.
Exclusions from EAR expenses:
i.! Expenses which are treated as compensation
or fringe benefits for services rendered under
an employer-employee relationship
ii.! Expenses for charitable or fund raising
events
iii.! Expenses for bona fide business meeting of
stockholders, partners or directors
iv.! Expenses for attending or sponsoring an
employee to a business league or
professional organization meeting
v.! Expenses for events organized for promotion
marketing and advertising, including
concerts, conferences, seminars, workshops,
conventions and other similar events; and
vi.! Other expenses of a similar nature.
Political campaign expenses
Amount expended for political campaign purposes or
payments to campaign funds are NOT deductible
either as business expenses or as contribution [CTA
Case No. 695, April 30, 1969, citing Mertens]
Training expenses
Under Section 30 of the Tax Code, as implemented
by Sec. 20 of the Revenue Regulations No. 2,
organization and pre-operating expenses of a
corporation (including training expenses) are
considered as capital expenditures and are therefore,
not deductible in the year they are paid or incurred.
But taxpayers who incur these expenses and
subsequently enter the trade or business to which the
expenditures relate can elect to amortize these
expenditures over a period not less than sixty (60)
months. [BIR Ruling 102-97, Sept. 29, 1997]
This rule, however, does not apply to a situation
where an existing corporation incurs these same
expenditures for the purpose of expanding its
business in a new line of trade, venture or activity.
Others
U.P. LAW BOC TAXATION I
i.! Expenses Allowable to Private Educational
Institutions
In addition to the expenses allowable as
deductions under the NIRC, a private
proprietary educational institution may at its
OPTION, elect either:
To deduct expenditures otherwise
considered as capital outlays or depreciable
assets incurred during the taxable year for
the expansion of school facilities, OR
To deduct allowances for depreciation
thereof.
Thus, where the expansion expense has
been claimed as a deduction, no further
claims for yearly depreciation of the school
facilities are allowed.
ii.! Advertising Expenses
The media advertising expenses which were
found to be inordinately large and thus, not
ordinary, and which were incurred in order to
protect the taxpayer’s brand franchise which
is analogous to the maintenance of goodwill
or title to one’s property, are not ordinary
and necessary expenses but are capital
expenditures, which should be spread out
over a reasonable period of time. [CIR v.
General Foods Phils. Inc, G.R. No. 143672
(2003)]
b.! Interest
Requisites for deductibility
1.! There is a valid and existing indebtedness.
2.! The indebtedness is that of the taxpayer
3.! The indebtedness is connected with the
taxpayer‘s trade, profession, or business.
4.! The interest must be legally due.
5.! The interest must be stipulated in writing.
6.! The taxpayer is LIABLE to pay interest on the
indebtedness.
7.! The indebtedness must have been paid or
accrued during the taxable year.
8.! The interest payment arrangement must not be
between related taxpayers
9.! The interest must not be incurred to finance
petroleum operations.
10.! In case of interest incurred to acquire property
used in trade, business or exercise of profession,
the same was not treated as a capital
expenditure,
Limitation: The taxpayer's allowable deduction for
interest expense shall be reduced by an amount
equal to 33% of the interest income subjected to final
Page 71 of 270
TAXATION LAW
tax (see chapter on taxation of passive income for
interest income); effective January 1, 2009.
Non-deductible interest expense
1.! Interest paid in advance by the taxpayer who
reports income on cash basis shall only be
allowed as deduction in the year the
indebtedness is paid.
2.! If the indebtedness is payable in periodic
amortizations, only the amount of interest which
corresponds to the amount of the principal
amortized or paid during the year shall be
allowed as deduction in such taxable year.
3.! Interest payments made between related
taxpayers.
4.! Interest on indebtedness incurred to finance
petroleum exploration.
Related Taxpayers
1.! Between members of the family, i.e. brothers and
sisters (whether by the whole or half-blood),
spouse, ancestor, and lineal descendants; or
2.! Except in case of distributions in liquidation,
between an individual and a corporation, where
the individual owns directly or indirectly more
than 50% of the outstanding stock of the
corporation
3.! Except in the case of distributions in liquidation,
between two corporations where:
i.! Either one is a personal holding company
of a foreign personal holding company
with respect to the taxable year preceding
the date of the sale of exchange; and
ii.! More than 50% of the outstanding stock of
each is owned, directly or indirectly, by or
for the same individual; or
4.! Between parties to a trust – Grantor and
Fiduciary; or
5.! Fiduciary of a trust and fiduciary of another trust
if the same person is a grantor with respect to
each trust; or
6.! Fiduciary and Beneficiary
Interest subject to special rules
1.! Interest paid in advance
No deduction shall be allowed if within the taxable
year an individual taxpayer reporting income on cash
basis incurs an indebtedness on which an interest is
paid in advance through discount or otherwise.
But the deduction shall be allowed in the year the
indebtedness is paid
2.! Interest periodically amortized
If the indebtedness is payable in periodic
amortizations, the amount of interest which
corresponds to the amount of the principal amortized
U.P. LAW BOC TAXATION I TAXATION LAW

or paid during the year shall be allowed as deduction Non-deductible taxes

in such taxable year General Rule: All taxes, national or local, paid or
incurred during the taxable year in connection with
3.! Interest expense incurred to acquire property for the taxpayer's profession, trade or business, are
use in trade/business/profession deductible from gross income
At the option of the taxpayer, interest expense on a
capital expenditure may be allowed as Exceptions:
i.! A deduction in full in the year when incurred; 1.! Philippine income tax, except Fringe Benefit
ii.! A capital expenditure for which the taxpayer Taxes;
may claim only as a deduction the periodic 2.! Income tax imposed by authority of any foreign
amortization of such expenditure. country, if taxpayer avails of the Foreign Tax
Should the taxpayer elect to deduct the interest Credit (FTC)
payments against its gross income, the taxpayer
cannot at the same time capitalize the interest Exception to exception: When the taxpayer does NOT
payments. In other words, the taxpayer is not entitled signify his desire to avail of the tax credit for taxes of
to both the deduction from gross income and the foreign countries, the amount may be allowed as a
adjusted (increased) basis for determining gain or deduction from gross income of citizens and
loss and the allowable depreciation charge. [Paper domestic corporations subject to the limitations set
Industries Corp. v. Commissioner, G.R. Nos. 106949- forth by law.
50 (1995)]
Treatments of surcharges/interests/fines for
4.! Reduction of interest expense/interest arbitrage delinquency
The taxpayer's allowable deduction for interest The amount of deductible taxes is limited to the basic
expense shall be reduced by an amount equal to 33% tax and shall not include the amount for any
of the interest income subjected to final tax; effective surcharge or penalty on delinquent taxes. However,
January 1, 2009. [RA 9337] interest on delinquent taxes, although not deductible
as tax, can be deducted as interest expense at its full
This limitation is apparently intended to counter the amount. [CIR v. Palanca, G.R. No. L-16626 (1966)]
tax arbitrage scheme where a taxpayer obtains an
interest-bearing loan and places the proceeds of such Although interest payment for delinquent taxes is not
loan in investments that yield interest income subject deductible as tax, the taxpayer is not precluded
to preferential tax rate of 20% final withholding tax. thereby from claiming said interest payment as
[Valencia and Roxas] deduction as such. [CIR v. Vda. de Prieto, G.R. No. L-
13912 (1960)]
c.! Taxes
Treatment of special assessment.
Taxes Proper: Refers to national and local taxes Special assessments and other taxes assessed
against local benefits of a kind tending to increase
Requisites for deductibility the value of the property assessed are non-deductible
Such tax must be: from gross income.
1.! Paid or incurred within the taxable year;
2.! Paid or incurred in connection with the taxpayer‘s Tax credit vis-à-vis deduction
trade, profession or business; Tax credit – amount allowed by law to reduce the
3.! Imposed directly on the taxpayer; Philippine income tax due, subject to limitations, on
4.! Not specifically excluded by law from being account of taxes paid or accrued to a foreign country
deducted from the taxpayer‘s gross income.
The following taxes are deductible: Tax Credit Tax Deduction
1.! Import duties; Taxes are deductible
2.! Business tax; Taxes are deductible
from gross income in
3.! Professional/occupation tax; from the Phil. Income tax
computing the taxable
4.! Privilege and excise tax; itself
income
5.! DST; Effect: Reduces Effect: Reduces taxable
6.! Motor vehicle registration fees; Philippine income tax income upon which the
7.! Real property tax; liability tax liability is calculated
8.! Electric energy consumption tax; and Sources: Only foreign Sources: Deductible
9.! Interest on delinquent taxes. income taxes may be taxes (e.g. business tax,
claimed as credits excise tax)

Page 72 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

against Philippine Formula:

income tax. Limit #1 Per Country Limit
Taxable
An amount subtracted from an individual's or entity's Income Per
tax liability to arrive at the total tax liability. A tax Foreign
credit reduces the taxpayer's liability, compared to a Country Limit on
deduction which reduces taxable income upon which Phil. Income
x = amount of
the tax liability is calculated. A credit differs from Tax
tax credit
deduction to the extent that the former is subtracted Worldwide
from the tax while the latter is subtracted from Taxable
income before the tax is computed. [CIR v. Bicolandia Income
Drug Corp., G.R. No. 148083 (2006)]

The following may claim tax credits: Limit #2 World Limit

1.! Resident citizens
2.! Domestic corporations, which include all Taxable
partnerships except general professional Income For
partnerships all Foreign
Limit on
3.! Members of general professional partnerships Countries Phil. Income
x = amount of
4.! Beneficiaries of estates or trusts Tax
tax credit

The following may NOT claim tax credits: Worldwide

1.! Non-resident citizens
2.! Aliens, whether resident or non-resident
3.! Foreign corporations, whether resident on non-
resident
Note: Tax credits for foreign taxes are allowed only
for income derived from sources outside the
Philippines. The above taxpayers are not entitled to
tax credit; they are taxable only on income derived
from Philippine sources.
Limitations on Tax Credit.
1.! [Per Country Limit] The amount of tax credit shall
not exceed the same proportion of the tax
against which such credit is taken, which the
taxpayer's taxable income from sources within
such country bears to his entire taxable income
for the same taxable year; and
2.! [Worldwide Limit] The total amount of the credit
shall not exceed the same proportion of the tax
against which such credit is taken, which the
taxpayer's taxable income from sources without
the Philippines taxable bears to his entire
taxable income for the same taxable year.
Taxable
Income
Note: Computation of FTC: Limit #2 applies where
taxes are paid to two or more foreign countries.
Allowable tax credit is the lower between the tax
credit computed under Limit #1 and that computed
under Limit#2.
FTC Limitations – lowest of the 3:
1.! Actual FTC
2.! For taxes paid to one foreign country
3.! For taxes paid to 2 or more foreign countries
d.! Losses
Requisites for deductibility
1.! Loss must be that of the taxpayer (e.g., losses of
the parent corp. cannot be deducted by its
subsidiary);
2.! Actually sustained and charged off within the
taxable year;
3.! Incurred in trade, business or profession;
4.! Of property connected with the trade, business,
or profession, if the loss arises from fires, storms,
shipwreck or other casualties, or from robbery,
theft, or embezzlement;
5.! Sustained in a closed and completed transaction;
6.! Not compensated for by insurance or other form
of indemnity;
7.! Not claimed as a deduction for estate tax
purposes;
8.! In case of casualty loss, filing of notice of loss
with the BIR within 45 days from the date of the
event that gave rise to the casualty; and

Page 73 of 270
U.P. LAW BOC
9.! The taxpayer must prove the elements of the loss
claimed, such as the actual nature and
occurrence of the event and amount of the loss.
In case a non-depreciable vehicle is sold at a loss, the
loss incurred from the sale of non- depreciable
vehicle is not allowed as a deduction. [RR No. 2-
2013]
No loss is recognized in the following.—
1.! Merger, consolidation, or control securities
(where no gains are recognized either);
2.! Exchanges not solely in kind;
3.! Related taxpayers (see above – (c) Interest
expense incurred to acquire property for use in
trade/business/profession)
4.! Wash sales;
5.! Illegal transactions
Other types of losses
1.! Capital losses
i.! Incurred in the sale or exchange of capital
assets (allowable only to the extent of
capital gains, except for banks and trust
companies under conditions in Sec. 39 of
NIRC where loss from such sale is not
subject to the foregoing limitation)
ii.! Resulting from securities becoming
worthless and which are capital assets
(considered loss from sale or exchange) on
last day of the taxable year
iii.! Losses from short sales of property;
iv.! Losses due to failure to exercise privileges
or options to buy or sell property.
2.! Securities becoming worthless
Loss in shrinkage in value of stock through
fluctuation in the market is not deductible from gross
income. (To be deductible, the loss must be actually
suffered when the stock is disposed of.)
Exception: If the stock of the corporation becomes
worthless, the cost or other basis may be deducted by
its owner in the taxable year in which the stock
became worthless, provided a satisfactory showing of
its worthlessness be made, as in the case of bad
debts.
3.! Losses on wash sales of stocks or securities
Wash Sale - a sale or other disposition of stock or
securities where substantially identical securities
(substantially the same as those disposed of) are
acquired or purchased (or there was an option to
acquire, and the acquisition or option should be by
purchase or exchange upon which gain or loss is
recognized under the income tax law) within a 61-day
Page 74 of 270
TAXATION I TAXATION LAW
period, beginning 30 days before the sale and ending
30 days after the sale
General rule: Not deductible from gross income
Exception: If by a dealer in securities in the course of
ordinary business, it is deductible.
4.! Wagering losses
Losses from wagering (gambling) are deductible only
to the extent of gains from such transactions. A
wager is made when the outcome depends upon
CHANCE.
5.! Net Operating Loss Carry Over (NOLCO)
Net operating loss (NOL) is the excess of allowable
deductions over gross income for any taxable year
immediately preceding the current taxable year.
NOLCO: The NOL of the business or enterprise which
had not been previously offset as deduction from
gross income shall be carried over as a deduction
from gross income for the next three (3) consecutive
taxable years immediately following the year of such
loss, provided however, that any net loss incurred in a
taxable year during which the taxpayer was exempt
from income tax shall not be allowed as a deduction.
[Sec. 34(3)(D), NIRC]
Exception: Mines other than oil and gas wells, where
a net operating loss without the benefit of incentives
provided for under EO No. 226 (Omnibus Investments
Code) incurred in any of the first ten (10) years of
operation may be carried over as a deduction from
taxable income for the next five (5) years immediately
following the year of such loss.
Requisites for NOLCO
i.! The taxpayer was not exempt from income
tax the year the loss was incurred;
ii.! There has been no substantial change in the
ownership of the business or enterprise
wherein:
iii.! AT LEAST 75% of nominal value of
outstanding issued shares is held by or on
behalf of the same persons; or
iv.! AT LEAST 75% of the paid up capital of the
corporation is held by or on behalf of the
same persons.
Taxpayers Entitled to NOLCO
i.! Individuals engaged in trade or business or
in the exercise of his profession (including
estates and trusts);
Note: An individual who avails of 40% OSD
shall not simultaneously claim deduction of
NOLCO. However, the three-year
U.P. LAW BOC
reglementary period shall continue to run
during such period notwithstanding the fact
that the aforesaid taxpayer availed of OSD
during the said period.
ii.! Domestic and resident foreign corporations
subject to the normal income tax (e.g.,
manufacturers and traders) or preferential
tax rates under the Code (e.g., private
educational institutions, hospitals, and
regional operating headquarters) or under
special laws (e.g., PEZA-registered
companies)
Note: Domestic and resident foreign
corporations taxed during the taxable year
with Minimum Corporate
Income Tax cannot enjoy the benefit of NOLCO.
However, the three-year period for the expiry of the
NOLCO is not interrupted by the fact that the
corporation is subject to MCIT during such three-year
period.
Other Losses
1.! Abandonment losses in petroleum operation
and producing well.
2.! Losses due to voluntary removal of building
incident to renewal or replacements are
deductible from gross income.
3.! Loss of useful value of capital assets due to
charges in business conditions is deductible
only to the extent of actual loss sustained (after
adjustment for improvement, depreciation and
salvage value)
4.! Losses from sales or exchanges of property
between related taxpayers are not recognized,
but the gains are taxable.
5.! Losses of farmers incurred in the operation of
farm business are deductible.
e.! Bad debts
Debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amounts due
the taxpayer actually ascertained to be worthless and
the corresponding receivable should have been
written off or charged off within the taxable year.
A debt is worthless when after taking reasonable
steps to collect it, there is no likelihood of recovery at
any time in the future.
Requisites for deductibility
1.! Valid and legally demandable debt due to the
taxpayer
2.! Debt is connected with the taxpayer's trade,
business or practice of profession;
Page 75 of 270
TAXATION I TAXATION LAW
3.! Debt was not sustained in a transaction entered
into between related parties;
4.! Actually ascertained to be worthless and
uncollectible as of the end of the taxable year
(taxpayer had determined with reasonably
degree of certainty that the claim could not be
collected despite the fact that the creditor took
reasonable steps to collect); and
5.! Actually charged off the books of accounts of the
taxpayer as of the end of the taxable year
General rule: Taxpayer must ascertain and
demonstrate with reasonable certainty the
uncollectibility of debt
Exceptions:
1.! Banks as creditors – BSP Monetary Board shall
ascertain the worthlessness and uncollectibility
of the debt and shall approve the writing off
2.! Receivables from an insurance or surety
company (as debtor) may be written off as bad
debts only when such company is declared
closed due to insolvency or similar reason
The taxpayer must show that the debt is indeed
uncollectible even in the future. He must prove that
he exerted diligent efforts to collect:
1.! Sending of statement of accounts
2.! Collection letters
3.! Giving the account to a lawyer for collection
4.! Filing the case in court [Phil. Refining Corp. v. CA,
G.R. No. 118794 (1996)]
In ascertaining the debt to be worthless, it is not
enough that the taxpayer acted in good faith. He
must show that he had reasonably investigated the
relevant facts from which it became evident, in the
exercise of sound, objective business judgment, that
there remained no practical, but only a vague
prospect that the debt would be paid [Collector v.
Goodrich, G.R. No. L-22265 (1967)]
Rev. Reg. No. 5-1999
“Actually ascertained to be worthless” –
Determination of worthlessness must depend upon
the particular facts and circumstances of the case. A
taxpayer may not postpone a bad debt deduction on
the basis of a mere hope of ultimate collection or
because of a continuance of attempts to collect,
where there is no showing that the surrounding
circumstances differ from those relating to other
notes which were charged off in a prior year.
Accounts receivable may be written off as bad debts
even without conclusive evidence that they had
definitely become worthless when:
1.! the amount is insignificant; and
U.P. LAW BOC
2.! collection through court action may be more
costly to the taxpayer.
“Actually charged off from the taxpayer’s book of
accounts” – Receivable which has actually become
worthless at the end of the taxable year has been
cancelled and written off. Mere recording in the
books of account of estimated uncollectible accounts
does not constitute a write-off.
Effect of recovery of bad debts
Tax Benefit Rule on Bad Debts
Bad debts claimed as deduction in the preceding
year(s) but subsequently recovered shall be included
as part of the taxpayer‘s gross income in the year of
such recovery the extent of the income tax benefit of
said deduction. Also called the equitable doctrine of
tax benefit.
Requisites:
1.! Allowance must be reasonable
2.! Charged off during the taxable year from the
taxpayer‘s books of accounts.
3.! Does not exceed the acquisition cost of the
property.
f.! Depreciation
An annual reasonable allowance to reduce the
wasteful value of the tangible fixed assets resulting
from wear and tear and normal obsolescence
For intangible assets, the annual allowance to reduce
their useful value is called amortization.
Requisites for Deductibility
1.! It must be reasonable.
2.! It must be charged off during the year.
3.! The asset must be used in profession, trade or
business.
4.! The asset must have a limited useful life.
The depreciable asset must be located in the
Philippines if the taxpayer is a nonresident alien or a
foreign corporation. [Valencia and Roxas]
No depreciation shall be allowed for yachts,
helicopters, airplanes and/or aircrafts, and land
vehicles which exceed the threshold amount of
P2,400,000, unless the taxpayer’s main line of
business is transport operations or lease of
transportation equipment and the vehicles purchased
are used in the operations. [RR No. 12-2012]
Methods of computing depreciation allowance
cost- salvage value
Straight-line
estimated life
Page 76 of 270
TAXATION I TAXATION LAW
(cost – depreciation) x
Declining balance Rate
estimated life
nth period x cost-
Sum-of-the-year-digit
salvage
(SYD)
SYD
Any other method which
may be prescribed by the
Secretary of Finance upon
the recommendation of
the CIR
g.! Charitable and other contributions
Requisites for deductibility
1.! Actually PAID or made to the ENTITIES or
institutions specified by law;
2.! Made within the TAXABLE year.
3.! It must be EVIDENCED by adequate receipts or
records.
4.! For Contributions Other than Money: The
amount shall be BASED on the acquisition cost
of the property (i.e., not the fair market value at
the time of the contribution).
5.! For Contributions subject to the statutory
limitation: It must NOT EXCEED 10% (individual)
or 5% (corporation) of the taxpayer‘s taxable
income before charitable contributions
Amount that may be deducted
Kinds of Contributions:
1.! Contributions deductible in full;
2.! Contributions subject to the statutory limit.
Contributions Deductible in Full:
1.! Donations to the Government of the Philippines,
or to any of its agencies, or political subdivisions,
including fully owned government corporations
2.! Exclusively to finance, provide for, or to be used
in undertaking priority activities in
3.! Education
4.! Health
5.! Youth and sports development
6.! Human settlements
7.! Science and culture, and
8.! Economic development
9.! in accordance with a National Priority Plan
determined by NEDA (otherwise, subject to
statutory limit)
10.! Donations to Certain Foreign Institutions or
International Organizations which are fully
deductible in compliance with agreements,
treaties or commitments entered into by the
Government of the Philippines and the foreign
institutions or international organizations or in
pursuance of special laws
U.P. LAW BOC TAXATION I
11.! Donations to Accredited Non-government
Organizations subject to conditions set forth in
RR No. 13-98 – NGO means a non-stock non-
profit domestic corporation or organization:
12.! Organized and operated exclusively for:
i.! scientific,
ii.! research,
iii.! educational,
iv.! character-building and youth and sports
development,
v.! health,
vi.! social welfare,
vii.! cultural or
viii.! charitable purposes, or
ix.! a combination thereof,
No part of the net income of which inures to the
benefit of any private individual
Directly utilizes contributions for the active conduct
of the activities constituting the purpose or function
for which it is organized, not later than 15th day of
the month following the close of its taxable year in
which contributions are received, unless an extended
period is granted by the Secretary of Finance, upon
recommendation of the CIR
Administrative expense ,on an annual basis, must not
exceed 30% of total expenses for the taxable year
Upon dissolution, its assets would be distributed to
another accredited NGO organized for a similar
purpose or purposes, OR to the State for public
purpose, OR would be distributed by a competent
court of justice to another accredited NGO to be used
in such manner as in the judgment of said court shall
best accomplish the general purpose for which the
dissolved organization was organized.
Contributions subject to the Statutory Limit:
These contributions are not deductible in full as
specified by the law or such deduction has not met
the requirements to be deducted in full.
Those made to:
1.! Government or any of its agencies or political
subdivisions exclusively for public purposes
(contributions for non-priority activities)
2.! Accredited domestic corporation or associations
organized exclusively for
3.! Religious
4.! Charitable
5.! Scientific
6.! youth and sports development
7.! cultural
8.! educational purposes or
9.! rehabilitation of veterans
Page 77 of 270
TAXATION LAW
10.! Social welfare institutions
11.! Non-government organizations: No part of the
net income of which inures to the benefit of any
private stockholder or individual
Statutory Limit:
1.! 10% in the case of an individual (individual
donor), and
2.! 5% in the case of a corporation (corporate donor),
of the taxpayer's/donor’s income derived from
trade, business or profession computed before
the deduction for contributions and donations
The amount deductible is the actual contribution or
the statutory limit computed, whichever is lower
h.! Contributions to pension trusts
Contribution to a pension trust may be claimed as
deduction as follows:
1.! Amount contributed for the present/normal
service cost – 100% deductible
2.! Amount contributed for the past service cost –
1/10 of the amount contributed is deductible in
year the contribution is made, the remaining
balance will be amortized equally over nine
consecutive years
General Rule: An employer establishing or
maintaining a pension trust to provide for the
payment of reasonable pensions to his employees
shall be allowed as a deduction, a reasonable
amount transferred or paid into such trust in excess
of the contributions to such trust made during the
taxable year.
Requisites for deductibility of payments to pension
trusts
1.! There must be a pension or retirement plan
established to provide for the payment of
reasonable pensions to employees;
2.! The pension plan is reasonable and actuarially
sound;
3.! It must be funded by the employer;
4.! The amount contributed must no longer be
subject to the employer’s control or disposition;
and
5.! The payment has not theretofore been allowed
before as a deduction.
i.! Deductions under special laws
1.! Special deductions for productivity bonus and
manpower training under the Productivity
Incentives Act of 1990
U.P. LAW BOC TAXATION I
2.! Deductions for training expenses of qualified
jewelry enterprises (Jewelry Industry
Development Act of 1998)
3.! Deductions under the Adopt-a-School Act of
1998
4.! Deductions under the Expanded Senior Citizens
Act of 2003. [Domondon]
4.!Optional Standard
Deduction
a.! Individuals, except non-resident aliens
May be taken by an individual in lieu of itemized
deductions except those earning purely
compensation income.
If an individual opted to use OSD, he is no longer
allowed to deduct cost of sales or cost of services.
Amount: 40% of gross sales or gross receipts (under
RA 9504, effective July 6, 2008)
Requisites:
1.! Taxpayer is a citizen or resident alien;
2.! Taxpayer’s income is not entirely from
compensation;
3.! Taxpayer signifies in his return his intention to
elect this deduction; otherwise he is considered
as having availed of the itemized deductions;
4.! Election is irrevocable for the year in which
made; however, he can change to itemized
deductions in succeeding years.
b.! Corporations, except non-resident foreign
corporations
The option to elect Optional Standard Deduction
granted is now granted to corporations (domestic
and resident foreign corporations) by virtue of RA
9504. The OSD is 40% of its gross income.
The domestic and resident foreign corporation shall
keep such records pertaining to his gross income as
defined in Sec. 32 of the NIRC during the taxable year,
as may be required by the rules and regulations
promulgated by the Secretary of Finance upon
recommendation of the CIR.
Corporations availing of OSD are still required to
submit their financial statements when they file their
annual ITR and to keep such records pertaining to its
gross income. (RR 2-2010).
c.! Partnerships
Page 78 of 270
TAXATION LAW
General Co-Partnership
For purposes of taxation, the Code considers general
co-partnerships as corporations. Hence, rules on
OSD for corporations are applicable to general co-
partnerships.
General Professional Partnerships (GPP)
If the GPP availed of itemized deductions, the
partners are not allowed to claim the OSD from their
share in the net income because the OSD is a proxy
for all the items of deductions allowed in arriving at
taxable income. This means that the OSD is in lieu of
the items of deductions claimed by the GPP and the
items of deduction claimed by the partners.
If the GPP avails of OSD in computing its net income,
the partners comprising it can no longer claim further
deduction from their share in the said net income for
the following reasons:
The partners’ distributive share in the GPP is treated
as his gross income not his gross sales/receipts and
the 40% OSD allowed to individuals is specifically
mandated to be deducted not from his gross income
but from his gross sales/receipts; and,
The OSD being in lieu of the itemized deductions
allowed in computing taxable income as defined
under Section 32 of the Tax Code, it will answer for
both the items of deduction allowed to the GPP and
its partners.
Since one-layer of income tax is imposed on the
income of the GPP and the individual partners where
the law had placed the statutory incidence of the tax
in the hands of the latter, the type of deduction
chosen by the GPP must be the same type of
deduction that can be availed of by the partners.
Accordingly, if the GPP claims itemized deductions,
all items of deduction allowed under Sec. 34 can be
claimed both at the level of the GPP and at the level
of the partner in order to determine the taxable
income. On the other hand, should the GPP opt to
claim the OSD, the individual partners are deemed to
have availed also of the OSD because the OSD is in
lieu of the itemized deductions that can be claimed in
computing taxable income.
If the partner also derives other gross income from
trade, business or practice of profession apart and
distinct from his share in the net income of the GPP,
the deduction that he can claim from his other gross
income would follow the same deduction availed of
from his partnership income as explained in the
foregoing rules. Provided, however, that if the GPP
opts for the OSD, the individual partner may still
claim 40% of its gross income from trade, business or
U.P. LAW BOC TAXATION I
practice of profession but not to include his share
from the net income of the GPP. (RR 2-2010)
5.!Personal and Additional
Exemptions
a.! Basic personal exemptions
According to RA 9504 (Minimum Wage Earner Law,
effective July 6, 2008) basic personal exemption is
Fifty thousand pesos (P50,000) for each individual
taxpayer, regardless of status, i.e., whether single,
married or head of the family.
But note Sec 35(A) of NIRC – In the case of married
individuals where only one of the spouses is deriving
gross income, only such spouse shall be allowed the
personal exemption.
b.! Additional exemptions for taxpayer with
dependents
An individual, whether single or married, shall be
allowed an additional exemption of P25,000 for each
qualified dependent child (QDC), provided that the
total number of dependents for which additional
exemptions may be claimed shall not exceed 4
dependents (depends on the number of qualified
dependent children)
Married Individuals: Additional exemptions for QDC
are claimed by only one spouse.
Generally, the spouse who is the gross compensation
earner is the claimant of the additional exemptions.
Where the husband and wife are both compensation
income earners: the husband is the proper claimant
of the additional exemptions EXCEPT if there is an
express waiver by the husband in favor of his wife, as
embodied in the application for registration (BIR
Form No. 1902) or in the Certificate of Update of
Exemption and of Employer’s and Employee’s
Information (BIR Form No. 2305), whichever is
applicable.
When the spouses have business and/or professional
income only: either may claim the additional
exemptions at the end of the year.
The employed spouse shall be automatically entitled
to claim the additional exemptions for children in the
following instances:
a.! spouse is unemployed
b.! spouse is a non-resident citizen deriving income
from foreign sources
Page 79 of 270
TAXATION LAW
Legally separated spouses: Additional exemptions
can be claimed by the spouse with custody of the
child or children (but the total amount for the
spouses shall not exceed the maximum of four). [Sec
35(B), NIRC]
If the taxpayer should have additional dependents
during the taxable year, he may claim the
corresponding additional exemption, as the case may
be, in full for such year.
Who is a dependent for purposes of additional
exemptions?
1.! A taxpayer’s child, whether legitimate,
illegitimate or legally adopted child
2.! Chiefly dependent for support upon on the
taxpayer
3.! Living with the taxpayer
4.! Not more than 21 years old, unmarried and not
gainfully employed or
5.! Regardless of age, is incapable of self-support
because of mental or physical defect. [Sec 35(B),
NIRC]
Note: Only children (not parents) may be considered
“dependent” for purposes of additional exemptions.
The definition of the term “dependent” under Section
35(B) of the NIRC now includes a “Foster Child” or a
child placed under planned temporary substitute
parental care by a Foster Parent or a Foster Family.
[RMC No. 41-20i3, Jan. 23, 2013]
Who may claim personal exemptions?
Citizens (whether resident or non-resident) and
resident aliens
Non-resident aliens engaged in trade or business are
entitled personal exemptions subject to reciprocity.
(See below)
c.! Status-at-the-end-of-the-year rule
Change of Status [Sec 35(C), NIRC]
1.! If taxpayer marries during taxable year, taxpayer
may claim the corresponding BPE in full for such
year (i.e., no need to pro-rate the exemption).
2.! If taxpayer should have additional dependent(s)
during taxable year, taxpayer may claim
corresponding AE in full for such year.
3.! If taxpayer dies during taxable year, his estate
may claim BPE and AE as if he died at the close
of such year.
4.! If during the taxable year spouse dies; or any of
the dependents dies or marries, turns 21 years
old or becomes gainfully employed, taxpayer
may still claim same exemptions as if the spouse
or any of the dependents died, or married, turned
U.P. LAW BOC TAXATION I
21 years old or became gainfully employed at the
close of such year.
Note: When it comes to change of status, the status
beneficial to the taxpayer is used for purposes of
claiming deductions as long as the taxpayer achieved
such status at any time during the taxable period.
d.! Exemptions claimed by non-resident aliens
Non-resident aliens engaged in trade or business are
entitled personal exemptions subject to reciprocity.
It means that NRA-ETB shall be allowed a personal
exemption only if the income tax law in his country
grants allowance for personal exemptions to the
citizens and residents of the Philippines as stipulated
in the reciprocity tax treaty with the Philippine
Government.
Limit of PE Allowed to NRAETB: An amount equal to
the exemptions allowed by the non-resident alien’s
country to Filipino citizens not residing therein but
deriving income therefrom, but not to exceed the
amount fixed by NIRC.(In other words, whichever is
lower)
6.!Items Not Deductible
General rule: In determining deductions, one of the
general rules is that deductions must be paid or
incurred in connection with the taxpayer’s trade,
business or profession. Capital expenditures (e.g.
acquisition cost of a building) are also not deductible,
because these are not expenses, but form part of
assets.
Exceptions: In computing taxable net income, no
deduction shall be allowed with respect to:
a.! Personal, living or family expenses (note: they
are not deductible from compensation and
business/professional income
b.! Any amount paid out for new buildings or for
permanent improvements (capital expenditures),
or betterments made to increase the value of any
property or estate
c.! Any amount expended in restoring property
(major repairs) or in making good the exhaustion
thereof for which an allowance [for depreciation
or depletion] is or has been made
d.! Premiums paid on any life insurance policy
covering the life of any officer, employee, or any
person financially interested in the trade or
Page 80 of 270
TAXATION LAW
business carried on by the taxpayer, individual or
corporate, when the taxpayer is directly or
indirectly a beneficiary under such policy
e.! Interest expense and bad debts between related
parties [Sec. 36(B), NIRC)]
f.! Losses from sales or exchanges of property
between related taxpayers.
g.! Non-deductible interest – should the taxpayer
elect to deduct interest payments against its
gross income, he cannot at the same time
capitalize such interest and claim depreciation
on the undepreciated cost which includes the
interest. [PICOP v. Commissioner, G.R. No.
106949-50 (1995)]
h.! Non –deductible taxes
i.! Non-deductible losses
j.! Losses on Wash Sales (except if by dealer in
securities in ordinary course of exempt
corporations) These are:
1.! Proprietary Educational Institutions and
hospitals
2.! Government owned and controlled
corporations
3.! Others
Related Parties [Sec. 34(B)]
a.! Between members of a family (which shall
include only his brothers and sisters, spouse,
ancestors and lineal descendants)
b.! Between an individual and a corporation more
than 50% in value of the outstanding stock of
which is owned, directly or indirectly, by or for
such individual – except in the case of
distributions in liquidation
c.! Between two corporations more than 50% in
value of the outstanding stock of each of which is
owned, directly or indirectly by or for the same
individual
d.! Between the grantor and the fiduciary of a trust
e.! Between the fiduciary of a trust and the fiduciary
of another trust if the same person is a grantor
with respect to each trust
f.! Between the fiduciary of a trust and a beneficiary
of such trust [Section 36(B), NIRC]
Relevant points regarding related taxpayers
•! Payment of interest is not deductible.
•! Bad debts are not deductible.
•! Losses from sales or exchanges of property are
not deductible.
U.P. LAW BOC TAXATION I TAXATION LAW

Summary Table for Taxation of Individuals (all individual taxpayers, including non-resident aliens)
Basic Personal Additional Personal
Classification Taxable Income Tax Rates
Exemption Exemption
Income from sources
Resident Citizen within and outside the Allowed Allowed 5%-32%
Philippines
Income from sources
Non-Resident Citizen Allowed Allowed 5%-32%
within the Philippines
Income from sources
Resident Alien Allowed Allowed 5%-32%
within the Philippines
Lower amount
between PE allowed
Non-resident Alien
Income from sources to Filipinos in the
Engaged in Trade or No specific provision 5%-32%
within the Philippines foreign country where
Business
he resides v. PE in the
Philippines
Non-resident Alien Not
Income from sources
Engaged in Trade or Not allowed Not allowed 25%
within the Philippines
Business

Page 81 of 270
U.P. LAW BOC TAXATION I
! Income! Tax! on! Individuals
1.! Income Tax on Resident
Citizens, Non-Resident
Citizens and Resident
Aliens
a.! Coverage – Income From All
Sources Within and Without
the Philippines; Exception
1.! Resident Citizens
A Filipino resident citizen is taxable on income
from all sources (within and without the
Philippines)
2.! Non-resident Citizens
A non-resident citizen is taxable only on income
derived from sources within the Philippines.
A non-resident citizen is a Filipino citizen who:
a.! Establishes to the satisfaction of the CIR the fact
of his physical presence abroad with a definite
intention to reside therein
b.! Leaves the Philippines during the taxable year to
reside abroad (as immigrant or for employment
on a permanent basis)
c.! Works and derives income from abroad and
whose employment requires him to be present
abroad most of the time during the taxable year
d.! Has been previously considered as a non-
resident and arrives in the Philippines at any time
during the taxable year to reside here
permanently (only with respect to his income
from sources abroad until the date of his arrival
in the country)
Other considerations:
a.! A Filipino citizen working and deriving abroad as
an Overseas Contract Worker is taxable only on
income from sources WITHIN the Philippines.
b.! OCW refers to Filipino citizens in foreign
countries, who are physically present in a foreign
country as a consequence of their employment in
that country. Their salaries and wages are paid
by an employer abroad and is not borne by an
entity or person in the Philippines. They must be
duly registered with the Philippine Overseas
Employment Administration (POEA) with valid
Overseas Employment Certificate (OEC).
c.! An OCW’s income arising out of his overseas
employment is exempt from income tax.
Page 82 of 270
TAXATION LAW
3.! Resident Aliens
A resident alien is taxable only on income from
sources WITHIN the Philippines.
A resident alien is an individual whose residence is in
the Philippines and who is not a Filipino citizen.
An alien actually present in the Philippine who is not
a mere transient or sojourner is a resident of the
Philippines for purposes of the income tax. Whether
he is a transient or not is determined by his intentions
with regard to the length and nature of his stay. A
mere floating intention indefinite as to time, to return
to another country is not sufficient to constitute him a
transient. If he lives in the Philippines and has no
definite intention to stay, he is a resident.
One who comes to the Philippines for a definite
purpose which, in its nature, may be promptly
accomplished is a transient. But if his purpose is of
such a nature that an extended stay may be
necessary for its accomplishment, and to that end the
alien makes his home temporarily in the Philippines,
he becomes a resident, though it may be his intention
at all times to return to his domicile abroad when the
purpose of which he came has been consummated or
abandoned. [Sec. 5, RR No. 2]
b.! 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.
1.! Inclusions
a.! Monetary compensation – If compensation is
paid in cash, the full amount received is the
measure of the income subject to tax.
i.! Regular salary/wage
Salary – earnings received periodically
for a regular work other than manual
labor, such as monthly salary of an
employee
Wages – all remuneration (other than
fees paid to a public official) for
services performed by an employee for
his employer, including the cash value
U.P. LAW BOC TAXATION I
of all remuneration paid in any
medium other than cash. [Sec. 78A,
NIRC]
ii.! Separation pay/retirement benefit not
otherwise exempt
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:
(1)! SSS or GSIS retirement pays.
(2)! Retirement pay (R.A. 7641) due to
old age provided the following
requirements are met:
(a)! The retirement program is
approved by the BIR
Commissioner;
(b)! It must be a reasonable
benefit plan. (fair and
equitable)
(c)! The retiree should have been
employed for 10 years in the
said company;
(d)! The retiree should have been
50 years old or above at the
time of retirement; and
(e)! It should have been availed of
for the first time.
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
iii.! Bonuses, 13th month pay, and other
benefits not exempt
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]
Thirteenth month pay and other
benefits - Not taxable if the total
Page 83 of 270
TAXATION LAW
amount received is P82,000 or less.
Any amount exceeding P82,000 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.
iv.! Directors’ fees
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.
b.! 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.
2.! Exclusions
a.! Fringe benefit subject to tax
(See Gross Income above for the discussion
of Taxable and Non-taxable fringe benefits)
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]
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]
Convenience of the ER Rule
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 the
employee’s work or position, the value of
U.P. LAW BOC TAXATION I
that privilege need not be included as
compensation [Henderson v. Collector
(1961)]
b.! De minimis benefits
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.
These are exempt from fringe benefit tax and
compensation income tax.
c.! 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 P82,000
(amounts in excess are considered
compensation income)
Benefits include:
i.! Benefits received by government
employees under RA 6686
ii.! Benefits received by employees
pursuant to PD 851 (13th Month Pay
Decree)
iii.! Benefits received by employees not
covered by PD 851 as amended by
Memorandum Order No. 28; and,
iv.! Other benefits such as productivity
incentives and Christmas bonus
3.! Deductions
d.! Personal and additional exemptions
(See Deductions above for the full discussion
of Personal and additional exemptions)
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.
Additional Exemptions
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]
Page 84 of 270
TAXATION LAW
Note: As a rule, the husband can claim
additional personal exemption unless
waived. In that case, the wife can claim the
additional personal exemption waived by her
husband.
e.! Health and hospitalization insurance
Premium Paid on Health or Hospitalization
Insurance [Sec.34 (M)]
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.
Requisites for Deductibility
i.! Insurance must have actually been
taken
ii.! The amount of premium deductible
does not exceed P2,400 per family
or P200 per month whichever is
lower during the taxable year.
iii.! That said family has a gross income
of not more than P250,000 for the
calendar year.
iv.! In case of married individual, only
the spouse claiming additional
exemption shall be entitled to this
deduction.
Note: The spouse claiming the additional
exemptions for qualified dependent children
shall be the same spouse to claim the
deductions for premium payments.
The following may avail of the deduction
i.! Individual taxpayers earning purely
compensation income during the
year.
ii.! Individual taxpayer earning
business income or in practice of his
profession.
Minimum wage earners shall be exempt
from the payment of income tax on their
taxable income per RA 9504.
MWEs receiving other 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 from their entire
income earned during the taxable year. This
rule, notwithstanding, the statutory
minimum wage, holiday pay, overtime pay,
night shift differential pay, and hazard pay
U.P. LAW BOC
shall still be exempt from withholding tax
(RR No. 10-2008).
c.! 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. (5-
32% For citizens, resident aliens & NRA Engaged in
trade or business; 25% in case of NRANETB)
d.! 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
4.! Prizes and other winnings
1.! 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
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:
4 years to less than 5 years 5%
3 years to less than 4 years 12%
less than 3 years 20%
2.! Royalties
(See summary table)
3.! Dividends from domestic corporation
Page 85 of 270
TAXATION I TAXATION LAW
a.! cash and/or property dividends actually or
constructively received by an individual from
b.! a domestic corporation
c.! a joint stock company
d.! insurance or mutual fund companies
e.! regional operating headquarters of
multinational companies
f.! 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
g.! 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
Rate:
a.! 10%for residents (RC, RA) and non-resident
citizens (NRC);
b.! 20% for NRAETB(non-resident aliens
engaged in trade or business)
A stock dividend representing the transfer of surplus
to capital account shall not be subject to tax.
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]
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.
On the other hand, a stock dividend constitutes
income if it gives the shareholder an interest different
from that which his former stockholdings represented.
4.! Prizes and other winnings
a.! Winnings, except Philippine Charity
sweepstakes / lotto winnings – 20%
b.! Prizes exceeding P10,000 – 20%
Prize, differentiated from winnings:
A prize is the result of an effort made (e.g., prize in a
beauty contest), while winnings are the result of a
transaction where the outcome depends upon chance
(e.g., betting).
For interest from foreign currency loans granted by
FCDUs to residents other than Offshore Banking
U.P. LAW BOC
Units (OBUs) or other depository banks under the
expanded system – tax rate is 10% if payors are
RESIDENTS, whether individuals or corporations.
For interest from foreign currency loans granted by
OBUs to residents other than OBUs or local
commercial banks, including branches of foreign
banks that may be authorized by the BSP to transact
business with OBUs - tax rate is 10% if payors are
RESIDENTS, whether individuals or corporations.
Gross income from all sources within the Philippines
derived by non-resident cinematographic film owners,
lessors or distributors – tax rate is 25% if payee is: (a)
non-resident alien individual, or (b) non-resident
foreign corporation. The term “cinematographic films”
includes motion picture films, films, tapes, discs and
other such similar or related products.
Informer’s reward given to persons who voluntarily
provide definite and sworn information that lead to or
was instrumental in the discovery of fraud or violation
of the provisions of the NIRC or special laws being
administered by the BIR and resulted in the actual
recovery or collection of revenues, surcharges and
fees and/or the conviction of the guilty party or
parties, and/or the imposition of any fine or penalty
or the actual collection of a compromise amount, in
case of amicable settlement, shall be subject to
income tax, collected as a final withholding tax, at
the rate of 10%, pursuant to Sec. 282 of the NIRC [RR
16-2010]
Passive income not subject to tax
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 BSP shall be exempt from tax
But should the holder of the certificate pre-terminate
the deposit or investment before the 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:
i.! Four (4) years to less than five (5) years - 5%;
ii.! Three (3) years to less than four (4) years -
12%; and
iii.! Less than three (3) years - 20%.
Any income of nonresidents, whether individuals or
corporations, from transactions with depository
banks under the expanded system shall be exempt
from income tax.
Page 86 of 270
TAXATION I TAXATION LAW
e.! Taxation of Capital Gains
1.! 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 stock of a domestic
corporation not listed and traded through a
local stock exchange, held as a capital asset
On the net capital gain:
i.! Not over P100,000 = Final Tax of 5%
ii.! On any amount in excess of P100,000
= plus Final Tax of 10% on the excess
Net capital gain: selling price less cost
Selling price: consideration on the sale OR
fair market value of the shares of stock at the
time of the sale, whichever is higher
Cost: original purchase price
2.! 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 of:
a.! Gross selling price, or
b.! Fair market value (determined in accordance
with Sec. 6(E), NIRC).
Exception:
U.P. LAW BOC
a.! In case of sales made to the government, any of
its political subdivisions or agencies, or to GOCCs,
it can be taxed either:
i.! Under Sec. 24(D)(1), NIRC – 6% CGT, or
ii.! Under Sec. 24(A), NIRC, at the option of
the taxpayer.
b.! In case of the sale of or disposition of their
principal residence by natural persons
Requirements:
i.! Sale or disposition by a natural person
of his principal residence,
ii.! The proceeds of which is fully utilized in
acquiring/constructing a new principal
residence,
iii.! Such acquisition/construction taking
place within 18 calendar months from
the date of sale or disposition,
iv.! The taxpayer notifies the Commissioner
within 30 days from the sale/disposition
through a prescribed return of his
intention to avail of the exemption,
v.! The tax exemption can only be availed of
once every 10 years.
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.
How taxable portion and tax determined:
!"#!$%&'(&#)'**&*+,,-./&0)-1+&
9:;<=>&<=<>?@?ABC
')& &7&[
DE;FF&FB@@?=G&HE?IB
234&@&*6,+
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.
Computation for the basis of new principal
residence:
Historical cost of old principal residence XXX
Add: Additional cost to acquire new
principal residence* XXX
Adjusted cost bases of the new principal
residence XXX
*Additional cost to acquire new principal
residence:
Cost to acquire new principal residence XXX
Less: Gross selling price of old principal
residence (XXX)
Additional cost to acquire new principal
residence XXX
Page 87 of 270
TAXATION I TAXATION LAW
3.! Income from the sale, exchange, or other
disposition of other capital assets
Other properties shall be subject to income tax
a.! At the graduated income tax rates, if the seller is
an individual;
b.! Long-term capital gains: only 50% is recognized.
c.! Short-term capital asset transactions: 100%
subject to tax. [Sec. 39(B), NIRC]
Determination of whether short- or long-term: Short-
term if held for 12 months or less; otherwise, it is a
long-term capital gain.
At 30% corporate income tax, if the seller is a
corporation.
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:
a.! 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
b.! Real property held by the taxpayer primarily for
] sale to customers in the ordinary course of his
trade or business; or
c.! Real property used in trade or business (i.e.,
buildings and/or improvements) of a character
which is subject to the allowance for depreciation
provided for under Sec. 34(F) of the Code; or
d.! Real property used in trade or business of the
taxpayer
2.!Income Tax on Non-
Resident Aliens Engaged in
Trade or Business
A non-resident alien is an individual whose residence
and citizenship is not in the Philippines.
One who comes to the Philippines for a definite
purpose which, in its nature, may be promptly
accomplished is a transient. But if his purpose is of
such a nature that an extended stay may be
necessary for its accomplishment, and to that end the
alien makes his home temporarily in the Philippines,
U.P. LAW BOC TAXATION I
he becomes a resident, though it may be his intention
at all times to return to his domicile abroad when the
purpose of which he came has been consummated or
abandoned. [Sec. 5, RR No. 2]
In general, 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 shall be deemed a non-resident alien
doing business in the Philippines.
Intended stay in the Philippines:
a.! Up to 180 days – Non-resident alien not engaged
in trade or business
b.! More than 180 days but less than 1 year – Non-
resident alien engaged in trade or business
c.! 1 year or more – Resident alien
General Rule: 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.
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 headquarter 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 co-
venturer;
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:
a.! The following Royalties shall be subject to a final
tax of ten percent (10%) on the total amount
thereof:
1.! On books as well as other literary works; and
2.! On musical compositions
Page 88 of 270
TAXATION LAW
b.! Cinematographic films and similar works shall be
subject to twenty-five percent (25%) of the gross
income
c.! 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 tax
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:
1.! Four (4) years to less than five (5) years - 5%;
2.! Three (3) years to less than four (4) years -
12%; and
3.! 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
3.!Income Tax on Non-
Resident Aliens Not
Engaged in Trade or
Business
a.! Alien individuals employed by:
1.! 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
U.P. LAW BOC TAXATION I
affiliates or subsidiaries or branch offices in
the Asia-Pacific Region and other foreign
markets.
2.! Offshore Banking Units (OBUs) established
in the Philippines
b.! 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.
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)
4.!Individual Taxpayers
Exempt from Income Tax
Individual Taxpayers exempt from income tax are:
a.! Senior Citizens (with qualifications)
b.! Minimum wage earners
c.! Exemptions granted under international
agreements
All individuals and entities claiming exemption from
imposition of taxes on income and, consequently,
from withholding taxes are required to provide a copy
of a valid, current and subsisting tax exemption
certificate or ruling, as per existing administrative
issuances and any issuance that may be issued from
time to time, before payment of the related income.
The tax exemption certificate or ruling must explicitly
recognize the grant of tax exemption, as well as the
corresponding exemption from imposition of
Page 89 of 270
TAXATION LAW
withholding tax. Failure on the part of the taxpayer to
present the said tax exemption certificate or ruling as
herein required shall subject him to the payment of
appropriate withholding taxes due on the transaction.
[RMC No. 8-2014]
a.! Senior Citizens
Generally, Senior Citizens are still taxable individual.
However, if they are considered as MWEs, rules on
MWE will apply.
Who are covered: any resident citizen—
1.! At least 60 years old,and
2.! 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).
b.! 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 P82,000,
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.
[T]he treatment of bonuses and other benefits that [a
minimum wage earner] receives from the employer in
excess of the [₱82,000] ceiling cannot but be the
same as the prevailing treatment prior to R.A. 9504 -
anything in excess of ₱30,000 is taxable; no more,
no less. The treatment of this excess cannot operate
to disenfranchise the MWE from enjoying the
exemption explicitly granted by R.A. 9504. [Soriano v.
Secretary of Finance, G.R. No. 184450 (2017)]
Taxation of compensation income of a minimum
wage earner
1.! Statutory minimum wage – earner shall refer to
rate fixed by the Regional Tripartite Wage and
Productivity Board, as defined by the Bureau of
Labor and Employment Statistics (BLES) of the
Department of Labor and Employment. [Sec.22
GG, as amended by RA 9504]
2.! Minimum wage earner – shall refer to a worker in
the private sector paid the statutory minimum
wage, or to an employee in the public sector with
compensation income of not more than the
statutory minimum wage in the non-agricultural
U.P. LAW BOC TAXATION I TAXATION LAW

sector where he/she is assigned. [Sec.22 HH, as

amended by RA 9504]

The minimum wage shall be exempt from the

payment of income tax on their taxable income:
Provided, further, That the holiday pay, overtime
pay, night shift differential pay and hazard pay
received by such minimum wage earners shall
likewise be exempt from income tax

3.! Income also subject to tax exemption: holiday

pay, overtime pay, night shift differential, and
hazard pay

Compensation income including overtime pay,

holiday pay and hazard pay, earned by minimum
wage earners who has no other returnable
income are NOT taxable and not subject to
withholding tax on wages [RA 9504]

c.! Exemptions Granted Under

International Agreements
See 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.

The Government of the Philippines is a signatory of

certain international agreements and a party to
different tax treaties which specifically provide for the
exemption of certain persons or entities from taxes
imposed by the Philippines.

Examples of these tax exemptions are those accorded

to diplomats or ambassadors of other countries here
in the Philippines. The World Health Organization is
also tax exempt upon an international agreement
[CIR v. Gotamco, G.R. No. L-31092 (1987)]

Page 90 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

Summary Tables of Rates

Citizens,
Interest, Royalties, Prizes and Other Winnings NRAETB NRAETB
Residents
Interest from any currency bank deposit 20% 20% 25%
Yield or any other monetary benefit from deposit substitute 20% 20% 25%
Yield or any other monetary benefit from trust funds and similar
20% 20% 25%
arrangements
Royalties, in general 20% 20% 25%
Royalties on books as well as other literary works and musical
10% 10% 25%
compositions
Prizes exceeding P10,000 20% 20% 25%
Other winings (other than Philippine Charity Sweepstakes and
20% 20% 25%
Lotto winnings)
7½%
Interest incomes received from a depositary bank under expanded Note: NRC –
Exempt Exempt
foreign currency deposit system exempt (RR 1-
2011)
Interest income from long-term deposit or investment evidenced
by certificates prescribed by BSP. If preterminated before fifth
year, a final tax shall be imposed based on remaining maturity Exempt Exempt 25%
4 years to less than 5 years 5% 5% 25%
3 years to less than 4 years 12% 12% 25%
Less than 3 years 20% 20% 25%
Citizens,
Cash and/or Property Dividends NRAETB NRANETB
Residents
Cash and/or property dividends actually or constructively received
from a domestic corp. or from a joint stock corp., insurance or
10% 20% 25%
mutual fund companies and regional operation headquarters of
multinational companies (beginning Jan. 1, 2000)
Share of an individual in the distributable net income after tax of a
PARTNERSHIP (other han a general professional partnership) 10% 20% 25%
(beginning Jan. 1, 2000)
Share of an individual in the net income after tax of an
ASSOCIATION, a JOINT ACCOUNT, or a JOINT VENTURE or
10% 20% 25%
CONSORTIUM taxable as a corporation, of which he is a member
or a co-venturer (beginning Jan. 1, 2000)

Sec. 24 (C). Capital Gains Tax from Sale of Shares of Stock of a domestic Citizens,
NRAETB NRANETB
corporation NOT TRADED in the Stock Exchage Residents
Tax base: Net Capital Gain
Tax Rate: Not over P100,000 5% 5% 5%
Amount in excess of P100,000 10% 10% 10%

Sec. 24 (D). Capital Gains Tax from Sale of Real Property Classified as Capital Citizens,
NRAETB NRANETB
Asset Residents
Tax base: Gross selling price or current fair market value, whichever is higher
Tax Rate 6% 6% 6%

Page 91 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

Resident Non-Resident
Category of Citizen Alien Citizen NRAETB NRANETB
income Within the Within the Within the Within the
All sources
Philippines Philippines Philippines Philippines
Compensation/
Business/
Based on Taxable (i.e. Net) Income
Profession
Schedular Income Tax Rates (i.e. 5% to 32% (Sec. 24, NIRC)
Prizes of
P10,000 or less
Interest from any
currency bank
deposit, etc.

Royalties, in
general Gross Income Within the Philippines (GIW) – 20% Final Withholding Tax

Winnings/ Prizes
(except prizes
P10,000 and
below)
Royalties from
books, literary
GIW – 10% Final Withholding Tax
works, musicial
GIW – 25%
compositions
Interest from
long-term
EXEMPT; However:
deposit or
In case of pre-termination, with remaining maturity of:
investment
4 years to less than 5 years -5% on entire income
certificates,
3 years to less than 4 years – 12% on entire income
which have a
less than 3 years – 20% on entire income
maturity of 5
years or more
Cash/ Property
Dividends from a
domestic
corporation, etc.,
OR share in the
distribute net GIW – 10% Final Withholding Tax GIW – 20%
income after tax
of a partnership
(except a general
professional
partnership), etc.
Interest
(Expanding
GIW – 7 ½% Final Withholding Tax Exempt
Foreign Currency
Deposit System)
Winnings on
Philippine
Exempt
Sweepstakes/
Lotto
Capital Gains on Net capital gains within:
Sale of Shares of Not over P100,000 – 5% Final Tax
Domestic Corp Amoun in Excess of P100,000 – plus 10% Final Tax on the excess

Page 92 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

(not traded in a
domestic stock
exchange
Capital Gains on
Sale of Real
Gross Selling Proce or FMV, whichever is higher – 6% Final Withholding Tax
Property in the
Philippines
Sale of Shares of
Domestic Corp. ½ of 1% of the Selling Price (Stock Transaction Tax)
(traded in a
domestic stock Note: Stock Transaction Tax is not an income tax, but a business (percentage) tax
exchange)
Sale of Real
Property located
Abroad
Sale of Shares of Schedular Income Tax Rates (i.e. 5% to 32%) (Sec. 24, NIRC)
Foreign Corp.
Passive Income
from Abroad

COMPUTATIONS

Pure Compensation Income

Gross Compensation Income xx

Less:
Personal and additional Exemptions, and
Hospitlization/Health Insurance Premium xx
Taxable Income xx
x Rate
Income Tax xxx
Less
Creditable Withholding Tax on Compensation Income xx
Tax Payable xx

Mixed-income (i.e. compensation income and business income/income from the practice of profession)

Gross Compensation Income xx

Less:
Personal and additional Exemptions, and
Hospitlization/Health Insurance Premium xx
Taxable Income xx
Add: Gross Business Income and/or
Income from Practice of Profession xx
Less: Allowable Deduction (itermized or optional deduction) xx
x Rate
Income Tax xxx
Less
Creditable Withholding Tax on Compensation Income/
Other Allowable Tax Credit xx
Tax Payable xx

Page 93 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

Pure Business/Professional Income

Gross Business Income and/or

Income from Practice of Profession xx
Less: Allowable Deduction (itemized or optional deduction)

Personal and Additional Exemptions, and

Hospitalizations/Health insurance premium xx
Taxable Income xx
x Rate
Income Tax xxx
Less
Creditable Withholding Taxon Compensation Income/
Other Allowable Tax Credit xx
Tax Payable xx

Page 94 of 270
U.P. LAW BOC TAXATION I
! Income! Tax! on!
Corporations
1.! Income Tax on Domestic
Corporations and Resident
Foreign Corporations
Domestic Corporations
a.! A corporation created and organized in the
Philippines or under its laws (the law of
incorporation test). [Sec. 22 (C), NIRC]
b.! Taxable on all income derived from sources
within and without the Philippines; and
Resident Foreign Corporations
a.! A corporation organized under the laws of a
foreign country, which is engaged in trade or
business in the Philippines. [See “Doing Business”
definition under the FIA above]
b.! Taxable only on income derived from sources
within the Philippines.
c.! A Philippine branch of a foreign corporation duly
licensed by the SEC is considered a resident
foreign corporation. Thus, only the income of the
Philippine branch from sources within the
Philippines is subject to Philippine income tax.
d.! As general rule, the head office of a foreign
corporation is the same juridical entity as its
branch in the Philippines following the single
entity concept. Thus, the income from sources
within the Philippines of the foreign head office
shall thus be taxable to the Philippine branch.
But, when the head office of a foreign
corporation independently and directly invested
in a domestic corporation without the funds
passing through its Philippine branch, the
taxpayer, with respect to the tax on dividend
income, would be the non-resident foreign
corporation itself and the dividend income shall
be subject to the tax similarly imposed on non-
resident foreign corporations. [Marubeni v.
Commissioner, G.R. No. 76573 (1989)]
a.! Regular Tax
Default income tax. Except as otherwise provided,
income tax of 30% is imposed on taxable income.
Applies equally to both: (a) Domestic corporations
(on income from within and without the Philippines)
and (b) Resident Foreign Corporations (on income
from within the Philippines)
Page 95 of 270
TAXATION LAW
Normal Corporate Income Tax Rate: 30% of Taxable
Income (effective January 1, 2009)
Gross Income xxx
Less: Allowable Deductions xxx
Taxable Income xxx
Optional gross income tax (GIT)
Section 27 (A), NIRC provides for an optional gross
income tax of 15% based on gross income.
The President, upon the recommendation of the
Secretary of Finance, may allow corporations the
option to be taxed at 15% of gross income as defined
therein, after the following conditions have been
satisfied:
Tax effort ratio 20% of GNP
Ratio of income tax collection
40%
to total tax revenues
VAT tax effort 4% of GNP
Ratio of Consolidated Public
Sector Financial Position 0.90%
(CPSFP) to GNP
At present, the OGIT has not been implemented in
the Philippines.
The option of GIT is available to corporation whose
ratio of Cost of Sales to Gross Sales does not exceed
55%. The election of GIT by a corporation is
irrevocable for 3 consecutive taxable years during
which it is qualified under the scheme.
Note: Gross income for GIT is the same as Gross
income for MCIT [see infra] except in GIT of sale of
service, cost of services is not deducted.
b.! Minimum Corporate Income
Tax (MCIT)
1.! Applies to domestic corporations and RFCs
whenever such corporations (i) have zero or
negative taxable income, or whenever the (ii)
MCIT is greater than the normal income tax due.
2.! Imposed beginning the fourth taxable year from
the taxable year the corporation commenced its
business operations. For purposes of MCIT, the
taxable year in which business operations
commenced shall be the year when the
corporation registers with the BIR (not in which
the corporation started commercial operations).
3.! Tax rate: 2% of Gross Income
U.P. LAW BOC TAXATION I TAXATION LAW

Gross Income of facilities directly utilized in providing the service

1.! Merchandising and Manufacturing such as depreciation or rental of equipment used and
cost of supplies. In the case of banks, it includes
Gross Sales xxx interest expense.
Less: Sales Returns xxx
Pointers
Sales Discounts xxx MCIT is in the nature of a tax credit, not an allowable
Allowances xxx deduction. Its purpose is to prevent corporations from
Cost of Goods Sold xxx xxx escaping being taxed by including frivolous expenses
in their statement of income.
Gross Income xxx
Is the Minimum Corporate Income Tax (MCIT) an
addition to the regular or normal income tax?
If apart from deriving income from core business No, the MCIT is not an additional tax. The MCIT is
activities there are other items of gross income compared with the regular income tax, which is due
realized or earned by the taxpayer which are subject from a corporation. If the regular income is higher
to the normal corporate income tax, they must be than the MCIT, then the corporation does not pay the
included as part of gross income for computing MCIT. MCIT.
[Sec. 27 (E), NIRC; RR 12-2007]
Coverage
This means that the term “gross income” will also The MCIT covers domestic and resident foreign
include all items of gross income enumerated under corporations which are subject to the regular income
Section 32(A) of the NIRC, except: (a) income exempt tax. Corporations subject to a special corporate tax
from income tax, and (b) income subjected to FWT. system do not fall within the coverage of the MCIT.

Cost of goods sold
a.! In general – includes all business expenses
directly incurred to produce the merchandise to
bring them to their present location and use.
b.! Trading or merchandising – includes invoice cost
of the goods sold, plus import duties, freight in
transporting the goods to the place where the
goods are actually sold including insurance while
the goods are in transit.
c.! manufacturing – include all costs of production
of finished goods, such as raw materials used,
direct labor and manufacturing overhead, freight
cost, insurance premiums and other costs
incurred to bring the raw materials to the factory
or warehouse.
2.! Sale of Service
Gross Receipts xxx
Less: Sales Returns xxx
Sales Discounts xxx
Allowances xxx
Cost of Services xxx xxx
Gross Income xxx
Direct cost of services all direct costs and expenses
necessarily incurred to provide the services required
by the customers and clients including (i) salaries and
employee benefits of personnel, consultants and
specialists directly rendering the service and (ii) cost
These special corporations are those in G.3. Income
Tax on Special Corporations. These include:
Proprietary educational institutions, nonprofit
hospitals, OBUs, FCDUs, ROHQs, firms registered in
PEZA/BCDA/other ecozones, International Carriers
For corporations whose operations or activities are
partly covered by regular income tax and special
income tax system, MCIT shall apply on operations
covered by the regular corporate income tax system.
What amount of income tax is paid by the corporation
to the BIR?
Whichever is higher between the normal tax and the
minimum corporate income tax
Illustration:
E Co., a domestic trading corporation, in its fourth
year of operations had a gross profit from sales of
P300,000 and net taxable income of P100,000. How
much was the income tax paid by the corporation for
the year?
MCIT (P300,000 x 2%) P6,000
Normal Income Tax (P100,000 x 30%) P30,000
Income Tax to be paid for the year
(whichever is higher) P30,000
Carry forward of excess minimum tax
Any excess of the minimum corporate income tax
over the normal income tax shall be carried forward

Page 96 of 270
U.P. LAW BOC TAXATION I TAXATION LAW

on an annual basis. The excess can be credited to which carried forward, the normal tax should be
against the normal income tax in the next three (3) higher than the MCIT.
succeeding taxable years. [Sec. 27(E)(2)] In the year

Sample Computation of MCIT Carry Forward:

A domestic corporation had the following data on computations of the normal tax (NT) and the minimum corporate
income tax (MCIT) for five years.

Yr 4 Yr 5 Yr 6 Yr 7 Yr 8
MCIT 80K 50K 30K 40K 35K
NT 20K 30K 40K 20K 70K

The excess MCIT over NT carried-forward as follows:

Year 4 Year 5 Year 6 Year 7 Year 8

MCIT 80,000 50,000 30,000 40,000 35,000
NT 20,000 30,000 40,000 20,000 70,000

Excess MCIT over NT

(a) (b) (c)
(MCIT – NT) 60,000 20,000 n/a 20,000 n/a

Income Tax to be paid

(Higher of MCIT or NT) 80,000 50,000 40,000 40,000 70,000
(a) (a)
Less: MCIT carry forward n/a n/a (40,000) n/a (20,000)
(b)
(20,000)
Tax Due 80,000 50,000 0 40,000 30,000

(a) 60k excess MCIT from year 4 is credited against the normal tax to be paid in year 6 and 8.
(b) 20k excess MCIT from year 5 is credited against the normal tax to be paid in year 8.
(c) 20k excess MCIT from year 7 will be credited against future normal tax to be paid.

Relief from MCIT (Sec. 27 (E)(3), NIRC)
The Secretary of Finance may suspend imposition of
MCIT on any corporation which sustained substantial
losses on account of (LMB):
1.! Prolonged labor dispute (losses from a strike
staged by employees that lasts for more than 6
months and caused the temporary shutdown of
operations), or
2.! Force majeure (acts of God and other calamity;
includes armed conflicts like war or insurgency),
or
3.! Legitimate business reverses (substantial losses
due to fire, robbery, theft or other economic
reasons).
Quarterly MCIT Computation
The computation and the payment of MCIT shall
likewise apply at the time of filing the quarterly
corporate income tax. In the computation of the tax
due for the taxable quarter, if the quarterly MCIT is
higher than the quarterly normal income tax, the tax
due to be paid for such taxable quarter at the time of
filing the quarterly corporate income tax return shall
be the MCIT.
Items allowed to be credited against quarterly MCIT
due: (a) CWT, (b) Quarterly income tax payments
under the normal income tax; and (c) MCIT paid in
the previous taxable quarter(s).
Excess MCIT from the previous taxable year/s shall
not be allowed to be credited against the quarterly
MCIT tax due.
Annual Income Tax Computation.
The final comparison between the normal income tax
payable and the MCIT shall be made at the end of the
taxable year. The payable or excess payment in the
Annual Income Tax Return shall be computed taking
into consideration corporate income tax payment
made at the time of filing of quarterly corporate

Page 97 of 270
U.P. LAW BOC
income tax returns whether this be MCIT or normal
income tax.
In the computation of annual income tax due, if the
normal income tax due is higher than the computed
annual MCIT, the following shall be allowed to be
credited against the annual income tax: (a) quarterly
MCIT payments, (b) quarterly normal income tax
payments, (c) excess MCIT in the prior year/s (subject
to the prescriptive period allowed for its creditability),
(d) CWTs in the current year, (d) excess CWTs in the
prior year.
If in the computation of annual income tax due, the
computed annual MCIT due is higher than the annual
normal income tax due, the following may be
credited against the annual income tax: (a) quarterly
MCIT payments of current taxable quarter, (b)
quarterly normal income tax payments in current year,
(c) CWTs in the current year, (d) excess CWTs in the
prior year.
Excess MCIT from the previous taxable year/s shall
not be allowed to be credited against the annual
MCIT due as the same can only be applied against
normal income tax.
Manner of Filing and Payment.
The MCIT shall be paid in the same manner
prescribed for the payment of the normal corporate
income tax which is on a quarterly and on a yearly
basis.
c.! Branch Profit Remittance
Tax [Sec. 28 (A) (5), NIRC]
1.! Applies to non-resident foreign corporations.
Imposed on profits remitted by the Philippine
branch to the head office.
2.! Collected as Final Withholding Tax [Sec.57,
NIRC]
Taxable transaction – any profit remitted by a branch
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 (except those
activities registered with PEZA).
The following are not treated as branch profits unless
effectively connected with the conduct of trade or
business in the Philippines:
1.! Interests, dividends, rents, royalties (including
remuneration for technical services),
2.! salaries, wages,
Page 98 of 270
TAXATION I TAXATION LAW
3.! premiums, annuities, emoluments , or
4.! other fixed or determinable annual, periodic or
casual gains, profits, income and capital gains
received during each taxable year from all
sources within the Philippines
d.! Allowable Deductions
1.! Itemized Deductions
a.! Expenses
b.! Interest
c.! Taxes
d.! Losses
e.! Bad debts
f.! Depreciation
g.! Depletion of oil and gas wells and mines
h.! Charitable and other contributions
i.! Research and development
j.! Pension trusts
2.! Optional Standard Deductions (OSD)
In lieu of itemized deductions, standard deduction of
40% of gross income.
e.! Taxation of Passive Income
Interest from deposits and yield or any other
monetary benefit from deposit substitutes and from
trust funds and similar arrangements and royalties
1.! 20% final tax on: (i) interest on any currency
bank deposit, (ii) yield or any other monetary
benefit from deposit substitutes, trust funds and
similar arrangements, and (iii) royalties
2.! same for Domestic Corporations and Resident
Foreign Corporations
3.! Collected as Final Withholding Tax [Sec.57,
NIRC]
Interest Income derived from depository bank under
the expanded foreign currency deposit system
1.! 7.5% final income tax
2.! same for Domestic Corporations and Resident
Foreign Corporations
3.! Collected as Final Withholding Tax [Sec.57,
NIRC]
Inter-corporate dividends
1.! Exempt – dividends received from a domestic
corporation by a domestic corporation/resident
foreign corporation
2.! same for Domestic Corporations and Resident
Foreign Corporations
f.! Taxation of Capital Gains
U.P. LAW BOC TAXATION I
Capital gain from sale of shares of stock not traded in
the stock exchange
1.! Final tax on net capital gains realized during the
taxable year from the sale, barter, exchange or
other disposition of shares of stock in a domestic
corporation not listed and traded through a local
stock exchange:
a.! First P100k – 5%
b.! Amount in excess of P100k – 10%
2.! same for Domestic Corporations, Resident
Foreign Corporations, and Nonresident Foreign
Corporations
Capital gains realized from the sale, exchange, or
disposition of lands and/or buildings
1.! 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 price, or
the current fair market value at the time of the
sale, whichever is higher, a final tax of 6%
2.! 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.
3.! applicable to domestic corporations onl
4.! Tax treatment is similar to that of individuals
2.!Income Tax on Non-
Resident Foreign
Corporations [Sec. 28 (B),
NIRC]
Non-Resident Foreign Corporations
a.! A corporation organized under the laws of a
foreign country, which is not engaged in trade or
business in the Philippines. [See “Doing Business”
definition under the FIA in B.7.2. Corporations]
b.! Taxable only on income derived from sources
within the Philippines.
c.! Income taxes on nonresident foreign
corporations are collected as Final Withholding
Tax under Sec.57, NIRC.
General rule
a.! Except as otherwise provided, the tax is 30% of
gross income received during each taxable year
from all sources within the Philippines
b.! This includes: interests, dividends, rents,
royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed
or determinable annual, periodic or casual gains,
Page 99 of 270
TAXATION LAW
profits and income, and capital gains (except
capital gains on the sale of shares not traded in
the stock exchange)
Tax on certain Nonresident Owners, Lessors or
Distributors:
a.! Non-resident cinematographic film owner, lessor
or distributor – 25% of gross income from all
sources within the Philippines
b.! Non-resident owner or lessor of vessels chartered
by Philippine nationals – 4.5% of gross rentals,
lease or charter fees from leases or charters to
Filipino citizens or corporations, as approved by
the Maritime Authority
c.! Non-resident owner or lessor of aircraft,
machineries and other equipment – 7.5% of
gross rentals, charters or other fees
Tax on Interest on foreign loans: contracted on or
after August 1, 1986 – 20% [Sec. 28 (B) (5) (a), NIRC]
Tax on Intercorporate dividends
a.! Intercorporate Dividend – 15% on dividends
received from domestic corporations, if the
country in which the nonresident foreign
corporation is domiciled allows a tax credit of at
least 15% for taxes “deemed paid” in the
Philippines
b.! 15% foreign tax credit 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, the tax is 30% on
dividends received from a domestic corporation.
Tax on Capital gain from sale of shares of stock not
traded in the stock exchange
a.! Final tax on net capital gains realized during the
taxable year from the sale, barter, exchange or
other disposition of shares of stock in a domestic
corporation not listed and traded through a local
stock exchange:
1.! First P100k – 5%
2.! Amount in excess of P100k – 10%
b.! same for Domestic Corporations, Resident
Foreign Corporations, and Nonresident Foreign
Corporations
3.!Income Tax on Special
Corporations
a.! Domestic Corporations
U.P. LAW BOC TAXATION I
1.! Proprietary Educational Institutions and Non-
profit Hospitals [Sec. 27 (B), NIRC]
Tax Rate and Base –10% tax on taxable 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]
2.! Government-owned or Controlled Corporations,
Agencies or Instrumentalities [Sec. 27 (C), NIRC]
GOCCs
General rule: GOCCs are taxable as any other
corporation engaged in similar business, industry or
activity
Exceptions:
a.! Government Service Insurance System (GSIS)
b.! Social Security System (SSS)
c.! Philippine Health Insurance Corporation (PHIC)
d.! Local water districts (LWDs)
e.! Philippine Charity Sweepstakes Office (PCSO)
[Sec. 27(C), NIRC]
Government agencies or instrumentalities
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,
G.R. No. 120082 (1996)]
3.! Depositary Banks (Foreign Currency Deposit
Units) [Sec. 27 (D) (3), NIRC]
Page 100 of 270
TAXATION LAW
Income derived by a depository bank under the
expanded foreign currency deposit system from:
a.! foreign currency transactions with nonresidents,
offshore banking units in the Philippines, local
commercial banks, including branches of foreign
banks authorized by the BSP to transact business
with foreign currency depository system units
and other depository banks under the EFCDS –
exempt from income tax
except net income from transactions specified by
the Secretary of Finance upon recommendation
by the Monetary Board – subject to regular
income tax payable by banks
b.! foreign currency loans granted to residents
(other than offshore banking units in the
Philippines)– interest income subject to a final
tax of 10%
c.! income of nonresidents, individuals or
corporations, from transactions with depository
banks under the EFCDS – exempt from income
tax
d.! same for Domestic Corporations and Resident
Foreign Corporations
e.! similar treatment to OBUs
b.! Resident Foreign
Corporations
1.! International Carrier Doing Business in the
Philippines
Tax Rate and Base – 2.5% on Gross Philippine
Billings (GPB)
International Air Carriers, GPB means:
a.! gross revenue derived from (a) carriage of
persons, excess baggage, cargo and mail (b)
originating from the Philippines in a continuous
and uninterrupted flight, (c) irrespective of the
place of sale or issue and the place of payment of
the ticket or passage document
b.! tickets revalidated, exchanged and/or indorsed
to another international airline – part of GPB if
passenger boards a plane in a port or point in the
PH
c.! flights which originate from the PH, but
transshipment of passenger takes place at a port
outside PH on another airline – part of GPB only
the aliquot portion of the cost of the ticket
corresponding to the leg flown from the PH to
transshipment point [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
U.P. LAW BOC TAXATION I
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.
International Shipping, GPB means:
Gross revenue for (a) passenger, cargo or mail (b)
originating from the Philippines up to final
destination, (c) regardless the place of sale or
payments of the passage or freight documents.
2.! Off-shore Banking Units[Sec. 28 (A) (4), NIRC]
Income derived by a OBUs authorized by the BSP
from:
a.! foreign currency transactions with nonresidents,
other OBUs, local commercial banks, including
branches of foreign banks authorized by the BSP
to transact business with OBUs – exempt from
income tax
except net income from transactions specified by
the Secretary of Finance upon recommendation
by the Monetary Board – subject to regular
income tax payable by banks
b.! foreign currency loans granted to residents
(other than offshore banking units in the
Philippines)– interest income subject to a final
tax of 10%
c.! income of nonresidents, individuals or
corporations, from transactions with OBUs –
exempt from income tax
d.! similar treatment to FCDUs
3.! Resident Depositary Banks (Foreign Currency
Deposit Units)
Income derived by a depository bank under the
expanded foreign currency deposit system from:
a.! foreign currency transactions with nonresidents,
offshore banking units in the Philippines, local
commercial banks, including branches of foreign
banks authorized by the BSP to transact business
with foreign currency depository system units
and other depository banks under the EFCDS –
exempt from income tax
except net income from transactions specified by
the Secretary of Finance upon recommendation
by the Monetary Board – subject to regular
income tax payable by banks
b.! foreign currency loans granted to residents
(other than offshore banking units in the
Page 101 of 270
TAXATION LAW
Philippines)– interest income subject to a final
tax of 10%
c.! income of nonresidents, individuals or
corporations, from transactions with depository
banks under the EFCDS – exempt from income
tax
d.! same for Domestic Corporations and Resident
Foreign Corporations
e.! similar treatment to OBUs
4.! Regional or Area Headquarters and Regional
Operating Headquarters of Multinational
Companies [Sec. 28 (A) (6), NIRC]
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
[Sec. 22 (DD), NIRC]
b.! not subject to income tax
Regional operating headquarters
a.! branch established in the Philippines by
multinational companies which are engaged in
any of the following services: (i) general
administration and planning; (ii) business
planning and coordination; (iii) sourcing and
procurement of raw materials and components;
(iv) corporate finance advisory services; (v)
marketing control and sales promotion; (vi)
training and personnel management; (vii) logistic
services; (viii) research and development services
and product development; (ix) technical support
and maintenance; (x) data processing and
communications; and (xi) business development.
[Sec. 22 (EE), NIRC]
b.! tax of 10% of their taxable income
U.P. LAW BOC TAXATION I TAXATION LAW

Summary of Tax Bases and Rates of Special Corporations

Tax
Type of Corporation Tax Base
Rate
Domestic Corporations
Proprietary Educational Institutions and Hospitals (Non-profit) Taxable income from all sources 10%
Depository Banks (Foreign Currency Deposit Units)
1.! With respect to income derived under the expanded foreign Exempt (except that net income from
currency deposit system from certain foreign currency such transactions is subject to the
transactions regular income tax payable by banks)
2.! With respect to interest income from foreign currency loans
to residents other than offshore banking units in the
Philippines or other depository banks under the expanded
system Amount of interest income 10%
Resident Foreign Corporation
International Carriers Gross Philippines Billings 2.5%
Offshore Banking Units Exempt (except that net income from
1.! With respect to income derived by offshore banking units such transactions is subject to the
from certain foreign currency transactions regular income tax payable by banks)
2.! With respect to interest income derived from foreign
currency loans granted to residents other than offshore
banking units or local commercial banks Amount of interest income 10%
Resident Depository Banks (Foreign Currency Deposit Units)
1.! With respect to income derived under the expanded foreign Exempt (except that net income from
currency deposit system from certain foreign currency such transactions is subject to the
transactions regular income tax payable by banks)
2.! With respect to interest income from foreign currency loans
to residents other than offshore banking units in the
Philippines or other depository banks under the expanded
system Amount of interest income 10%
Taxable income from within the
Regional Operation Headquarters of Multinational Companies 10%
Philippines
Non-Resident Foreign Corporation
Non-resident cinematographic film owners, lessors or
Gross income from the Philippines 25%
distributors
Non-resident owner or lessor of vessels charted by Philippines Gross rentals, lease and charter fees
4.5%
nationals from the Philippines
Non-resident owner or lessor of aircraft, machineries or other Gross rentals, lease and charter fees
7.5%
equipment from the Philippines

4.!Improperly Accumulated Rationale: It is a tax in the nature of a penalty to the

Earnings Tax corporation for the improper accumulation of its
earnings, and a deterrent to the avoidance of tax
[Sec. 29, NIRC, as implemented by RR 2-2001] upon shareholders who are supposed to pay
dividends tax on the earnings distributed to them.
Rule: In addition to other income taxes, there is
imposed for each taxable year a tax equal to 10% of The touchstone of the liability is the purpose behind
the improperly accumulated taxable income. the accumulation of the income and not the
consequences of the accumulation.
Applies to every corporation formed or availed 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 being divided or distributed.

Page 102 of 270

U.P. LAW BOC TAXATION I TAXATION LAW

Sample computation (RMC No. 35-2011)

Taxable Income for the Year xxxx

Add:
(a) Income subjected to Final Tax xxxx
(b) NOLCO xxxx
(c) Income exempt from tax xxxx
(d) Income excluded from gross income xxxx xxxx
xxxx
Less:
Income Tax paid xxxx
Dividends declared/paid xxxx xxxx
Total xxxx
Add: Retained Earnings from prior years xxxx
Accumulated Earnings as of end of current year xxxx
Less: Amount that may be retained (100% of Paid-Up
Capital) xxxx
IATI xxxx
Multiply by: IAET Rate 10%
IAET xxxx

b.! Definite corporate expansion projects requiring

Effect of imposition of IAET
a.! Once the profit has been subjected to IAET, the
same shall no longer be subjected to IAET in
later years even if not declared as dividend.
b.! Profits which have been subjected to IAET, when
finally declared as dividends, shall nevertheless
be subject to tax on dividends.
c.! In applying the above rules, dividends shall be
deemed to have been paid out of the most
recently accumulated profits (LIFO: last in, first
out).
Reasonable needs of the business: The use of
undistributed earnings and profits for the reasonable
needs of the business would generally not make the
accumulated or undistributed earnings subject to the
tax.
Immediacy Test: The term "reasonable needs of the
business" means (1) the immediate needs of the
business, including (2) reasonably anticipated needs.
The corporation should be able to prove (1) an
immediate need for the accumulation of the earnings
and profits, or (2) the direct correlation of anticipated
needs to such accumulation of profits.
Accumulation for Reasonable needs under RR 2-
2001
a.! Accumulation of earnings up to 100% of paid-up
capital;
considerable capital expenditure (approved by
Board of Directors or equivalent body);
c.! Building, Plant or Equipment Acquisition
(approved by Board of Directors or equivalent
body)
d.! compliance with any Loan Covenant or pre-
existing obligation (established under a
legitimate business agreement);
e.! required by Law or applicable regulations to be
retained;
f.! in case of subsidiaries of foreign corporations in
the Philippines, undistributed earnings reserved
for Investments within the Philippines
Coverage:
a.! IAET applies to: domestic corporations classified
as closely- held corporations.
b.! IAET does not apply to:
1.! Banks and other non-bank financial
intermediaries;
2.! Insurance companies;
3.! Publicly-held corporations;
4.! Taxable partnerships;
5.! General professional partnerships;
6.! Non- taxable joint ventures; and
7.! Enterprises registered with PEZA (RA 7916),
BCDA (RA 7227), and other special economic
zones declared by law which enjoy a special
tax rate in lieu of other taxes.
Closely-held corporations are those:
a.! at least 50% in value of the outstanding capital
stock; or

Page 103 of 270

U.P. LAW BOC
b.! at least 50% of the total combined voting power
of all classes of stock entitled to vote
c.! is owned directly or indirectly by or for not more
than 20 individuals. Domestic corporations not
falling under the aforesaid definition are,
therefore, publicly- held corporations.
N.B. the same definition and rules as in Tax on IPO in
Sec. 127 (B), NIRC; not the same as close corporation
under The Corporation Code]
Rules in determining if a corporation is closely-held:
a.! Stock Not Owned by Individuals. - Stock owned
directly or indirectly by or for a corporation,
partnership, estate or trust shall be considered
as being owned proportionately by its
shareholders, partners or beneficiaries.
b.! Family and Partnership Ownership. - An
individual shall be considered as owning the
stock owned, directly or indirectly, by or for his
family, or by or for his partner. ‘Family of an
individual’ includes his siblings (whether by
whole or half-blood), spouse, ancestors and
lineal descendants.
c.! Option to Acquire Stocks. - If any person has an
option to acquire stock, such stock shall be
considered as owned by such person. An option
to acquire such an option and each one of a
series of option shall be considered as an option
to acquire such stock.
d.! Constructive Ownership as Actual Ownership. -
Stock constructively owned by reason of the
application of (a) or (c) shall, for purposes of
applying (1) or (2), be treated as actually owned
by such person. But stock constructively owned
by the individual by reason of the application of
(b) shall NOT be treated as owned by him for
purposes of again applying such paragraph in
order to make another the constructive owner of
such stock.
BIR Ruling 025-02
The ownership of a domestic corporation for
purposes of determining whether it is a closely held
corporation or a publicly held corporation is
ultimately traced to the individual shareholders of the
parent company.
Where at least 50% of the outstanding capital stock
or at least 50% of the total combined voting power of
all classes of stock entitled to vote in a corporation is
owned directly or indirectly by at least 21 or more
individuals, the corporation is considered as a
publicly-held corporation, thus, exempt from IAET.
Determination of Purpose to Avoid Income Tax
Page 104 of 270
TAXATION I TAXATION LAW
a.! Being a holding or investment company is prima
facie evidence of purpose to avoid dividend tax.
Holding or investment company – corporation
having practically no activities except holding
property, and collecting the income therefrom or
investing the same;
b.! Accumulation in excess of reasonable needs is
determinative of the purpose to avoid dividend
tax. Prima facie instances of this include: (i)
investment of substantial earnings and profits in
unrelated business or in stock or securities of
unrelated business; (ii) investment in
bonds and other long-term securities; (iii)
accumulation of earnings in excess of 100%
of paid-up capital
c.! The controlling intention of the taxpayer is that
which is manifested at the time of accumulation,
not subsequently declared intentions which are
merely the product of afterthought.
d.! A speculative and indefinite purpose will not
suffice. Definiteness of plan/s coupled with
action/s taken towards its consummation are
essential.
5.!Exemption from Tax on
Corporations
Tax exempt corporations [Sec. 30, NIRC]
a.! Labor, agricultural or horticultural organization –
non-profit
b.! mutual savings bank or cooperative bank – non-
stock, non-profit, operated for mutual purposes
c.! Beneficiary society, order, or association –
operating for the exclusive benefits of their
members; includes: fraternal organization
operating under the lodge system; or mutual aid
association or a nonstock corporation organized
by employees providing life, sickness, accident,
or other benefits exclusively to the members
d.! Cemetery company – owned and operated
exclusively for the benefit of its members
e.! Non-stock corporation or association organized
and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes or for the
rehabilitation of veterans, provided that no part
of its income or asset belong to or inure to the
benefit of any individual
f.! Business league, chamber of commerce, or board
of trade – Non-profit; no part of net income
inures to the benefit of an individual
g.! Civic league or organization – Non-profit;
operating exclusively for the promotion of social
welfare
h.! Non-stock and non-profit educational
institutions
i.! Government educational institutions
U.P. LAW BOC TAXATION I
j.! Organizations of a purely local character whose
income consists solely of assessment, duties and
fees collected from their members to meet
expenses; includes: farmers’ or other mutual
typhoon or fire insurance company, mutual ditch
or irrigation company and mutual or cooperative
telephone company
k.! Farmers’, fruit growers’, and like association –
whose primary function is to market the product
of their members
Notwithstanding the provisions in the preceding
paragraphs, the income of the foregoing
organizations from (1) their properties, real or
personal, or from (2) their activities conducted for
profit regardless of the disposition made of such
income, shall be subject to tax imposed under the
NIRC.
N.B. this means capital gains tax, tax on passive
income, etc. applies to these otherwise exempt
organizations.
6.!Tax on General
Partnerships, General
Professional Partnerships,
Co-Ownerships, Joint
Ventures and Consortiums
a.! General Partnerships
Partnerships where all or part of their income is
derived from the conduct of trade or business. It is
treated as a corporation. [Sec.22 (B), NIRC].
General rule: The partnership is subject to the same
rules and rates as corporations.
Exceptions: A partner’s share in the partnership’s
distributable net income is deemed actually or
constructively received by the partners in the same
taxable year. [Sec. 73(D), NIRC]. Consequently:
1.! such share will be subjected to dividend tax
(10%) whether actually distributed or not.
2.! there can never be an instance of improperly
accumulated taxable income; note that RR 2-
2001 provides that IAET does not apply to
taxable partnerships.
Distributable net income of the partnership is its
taxable income less the normal corporate income tax
(30%).
Page 105 of 270
TAXATION LAW
A Partner’s contribution to the general partnership
fund is a capital investment and is not taxable
income of the partnership.
b.! General Professional
Partnerships
Partnerships 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. [Sec 22 (B), NIRC]
Rules
1.! A GPP as such shall not be subject to the income
tax. It is not a taxable entity for income tax
purposes.
2.! The partners shall be liable for income tax only in
their separate and individual capacities.
3.! Each partner shall report as gross income his
distributive share in the net income of the GPP,
actually or constructively received.
4.! In computing the distributive share of the
partners, the net income of the GPP shall be
computed in the same manner as a corporation.
[Sec. 26, NIRC]
5.! If the partnership sustains a net operating loss,
the partners shall be entitled to deduct their
respective shares in the net operating loss from
their individual gross income.
GPP is not a taxable entity
The GPP is deemed to be no more than a mere
mechanism or a flow-through entity in the generation
of income by, and the ultimate mechanism
distribution of such income to the individual partners.
[Tan v. Commissioner, G.R. No. 109289 (1994)]
But the partnership itself is required to file income
tax returns for the purpose of furnishing information
as to the share in the gains or profits which each
partner shall include in his individual return. [RR 2-
1998]
The share of an individual partner in the net profit of
a general professional partnership is deemed to have
been actually or constructively received by the
partner in the same taxable year in which such
partnership net income was earned, and shall be
taxed to them in their individual capacities, whether
actually distributed or not, at the graduated income
tax ranging from 5% to 32%.
Because the principle of constructive receipt is
applied to undistributed profits of GPPs, the actual
distribution to the partners of such tax-paid profits in
U.P. LAW BOC TAXATION I TAXATION LAW

another year should no longer be liable to income tax.

[Mamalateo]
c.! Co-ownerships
There is co-ownership whenever the ownership of an
undivided thing or right belongs to different persons.
[Art. 484, NCC] It may be created by succession or
donation.
When Co-ownership is not subject to tax
When the co-ownership’s activities are limited merely
to the preservation of the co-owned property and to
the collection of the income from the property. Each
co-owner is taxed individually on his distributive
share in the income of the co-ownership. [De Leon
citing Regs]
When Co-ownership is subject to tax
The following circumstances would render a co-
ownership subject to a corporate income tax:
1.! When a co-ownership is formed or established
voluntarily, or upon agreement of the parties;
2.! When the individual co-owner reinvested his
share, and
3.! When the inherited property remained undivided
for more than ten years, and no attempt was ever
made to divide to same among the co-heirs, nor
was the property under administration
proceedings nor held in trust, the property
should be considered as owned by an
unregistered partnership. [Valencia and Roxas,
citing a 1959 BIR Ruling]
General rule: An unincorporated joint venture is taxed
like a corporation. The share of the joint venture
partners will no longer be taxable to them because
they partake in the nature of intercorporate dividends.
Exception: an unincorporated joint venture formed for
the purpose of undertaking a construction project or
engaging in petroleum operations pursuant to the
consortium agreement with the Philippine
Government is not subject to the corporate income
tax. Only the joint venture partners will be taxed on
their respective shares in the income of the joint
ventures. [Sec. 22(B), NIRC]
Two elements necessary to exempt a joint venture or
consortium from tax
1.! The joint venture must be an unincorporated
entity formed by two or more persons
2.! The joint venture was formed for the purpose of
undertaking a construction project, or engaging
in the petroleum and other energy operations
with operating contract with the government.

Automatically converted into an unregistered

partnership the moment the said common properties
and/or the incomes derived from them are used as a
common fund with intent to produce profits for the
heirs in proportion to their respective shares in the
inheritance as determined in a project partition either
duly executed in an extrajudicial settlement or
approved by the court in the corresponding testate or
intestate proceeding. [Ona v. CIR, G.R. No. L-19342
(1972)]

d.! Joint Ventures and

Consortiums
To constitute a” joint venture,” certain factors are
essential. Each party to the venture must make a
contribution, not necessarily of capital, but by way of
services, skill, knowledge, material or money,; profits
must be shared among the parties; there must be a
joint proprietary interest and right of mutual control
over the subject matter of the enterprise; and usually,
there is single business transaction.

Page 106 of 270

U.P. LAW BOC TAXATION I
! Filing! of! Returns! and!
Payment! of! Income! Tax!
1.! Definition of a Tax Return
and Information Return
Tax Return
Tax return refers to a formal report prepared by the
taxpayer or his agent in a prescribed form showing an
enumeration of taxable amounts and description of
taxable transactions, allowable deductions, amount
of tax and tax payable to the government.
Examples of tax returns are:
a.! BIR Form Nos. 1700 and 1701 – Annual Income
Tax Returns for Individual
b.! BIR Form No. 1702 – Annual Income Tax Return
for Corporations and Partnerships
c.! BIR Form No. 1800 – Donor’s Tax Return
d.! BIR Form No. 1801 – Estate Tax Return
Information Return
Any individual not required to file an income tax
return may nevertheless be required to file an
information return pursuant to rules and regulations
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. [Sec. 51(A)(3),
NIRC]
Every withholding agent required to deduct and
withhold taxes under Section 57 shall submit to the
Commissioner an annual information return
containing the list of payees and income payments,
amount of taxes withheld from each payee and such
other pertinent information as may be required by the
Commissioner. [Sec. 58(C), NIRC]
Every employer required to deduct and withhold the
taxes in respect of the wages of his employees shall,
on or before January thirty-first (31st) of the
succeeding year, submit to the Commissioner an
annual information return containing a list of
employees, the total amount of compensation
income of each employee, the total amount of taxes
withheld therefrom during the year, accompanied by
copies of the statement referred to in the preceding
paragraph, and such other information as may be
deemed necessary. [Sec. 83(B), NIRC]
2.!Period to File Income Tax
Return of Individuals and
Corporations
Page 107 of 270
TAXATION LAW
a.! Individuals
Income tax return of an individual shall be filed on or
before April 15 of each year covering income of the
preceding taxable year. [Sec. 51 (C)(1), NIRC]
Individuals subject to capital gains tax [Sec. 51 (C)(2),
NIRC]:
1.! Sale of shares not traded thru a local stock
exchange – file a return within 30 days from the
transaction, and a final consolidated return on or
before April 15 of each year covering all stock
transactions of the preceding taxable year
2.! Sale of real property – file a return within 30 days
from each sale
Individuals deriving self-employment income (as sole
source of income or mixed) – must file quarterly
return of summary declaration of gross income and
deductions, and a final or adjustment
Period Due Date for Filing Return
Q1 Return April 15 of the same year
Q2 Return August 15 of the same year
November 15 of the same
Q3 Return
year
Annual Return April 15 of the following year
Self-employment income consists of earnings derived
by the individual from the practice of profession or
conduct of trade or business, as a sole proprietor or
as a member in a general professional partnership.
[Sec. 74, NIRC]
Filing of these returns shall be in lieu of filing of a
declaration of estimated income under Sec. 74, NIRC,
primarily for the reason that the procedure prescribed
in Sec. 74 may not reasonably approximate the
correct amount of tax to be paid. [De Leon citing Rev.
Regs. No. 2-93]
b.! Corporations
Domestic corporations and resident foreign
corporations shall file quarterly corporate income tax
returns within 60 days after the end of the calendar
or fiscal quarter used, and annual corporate income
th
tax return on or before the 15 day of the fourth
month following the close of the calendar year or
fiscal year, as the case may be [Sec. 74, NIRC].
The filing of the tax returns by a corporation using the
calendar year:
Period Due Date for Filing Return
Q1 Return May 31 of the same year
U.P. LAW BOC
Q2 Return August 31 of the same year
Q3 Return November 30 of the same
year
Annual Return April 15 of the following year
Return of Corporation Contemplating Dissolution or
Reorganization. – within 30 days after the adoption
of the plan for dissolution or reorganization
(including corporations notified of possible
involuntary dissolution by the SEC), render a correct
return to the CIR, verified under oath, setting forth
the terms of such plan and such other information
required by rules and regulations. Prior to the
issuance by the SEC of the Certificate of Dissolution
or Reorganization, the corporation shall secure a
certificate of tax clearance from the BIR which shall
be submitted to the SEC. [Sec. 52 (C), NIRC]
Return on Capital Gains Realized from Sale of Shares
of Stock not Traded in the Local Stock Exchange – file
a return within 30 days from the transaction, and a
th
final consolidated return on or before the 15 day of
the fourth month following the close of the taxable
year [Sec. 52 (D), NIRC]
Payment of Income Tax
General rule: The total amount of tax imposed by this
Title (Tax on Income) shall be paid by the person
subject thereto at the time the return is filed.
Exception: When the tax due is in excess of P2k, the
taxpayer other than a corporation may elect to pay
the tax in 2 equal installments: the first installment
paid at the time the return is filed and the second
installment, on or before July 15 following the close of
the calendar year. [Sec. 56 (A), NIRC]
3.!Persons Liable to File
Income Tax Returns
a.! Individual Taxpayers
1.! General Rule and Exceptions (Sec. 51(A), NIRC)
General Rule: The following are required to file
income tax return:
a.! Resident citizen
b.! Non-resident citizen, on income from sources
within the Philippines
c.! Resident alien, on income from sources within
the Philippines
d.! Non-resident alien engaged in trade or business
or in the exercise of profession in the Philippines,
on income from sources within the Philippines
Page 108 of 270
TAXATION I TAXATION LAW
Exceptions: The following shall not be required to file
income tax return:
a.! Individuals whose gross income does not exceed
his total personal and additional exemptions;
except citizen and alien individuals engaged in
business or practice of profession within the
Philippines who shall file income tax returns
regardless of the amount of gross income.
b.! Individuals with respect to pure compensation
income from sources within the Philippines, the
income tax on which has been withheld; except
when such compensation has been derived from
more than one employer.
c.! Individuals whose sole income has been
subjected to final withholding tax (pursuant to
Sec. 57(A), NIRC).
d.! Minimum wage earner (as defined in Sec.
22(HH), NIRC)
e.! Individuals who are exempt from income tax
pursuant to the provisions of the Tax Code and
other laws.
Special Provisions
Married individuals (whether citizens, resident or
nonresident aliens) who do not derive income purely
from compensation, shall file only one consolidated
return to cover the income of both spouses for the
taxable year, but where it is impracticable for the
spouses to file one return, each spouse may file a
separate return of income but the returns so filed
shall be consolidated by the BIR for verification. [Sec.
51 (D), NIRC]
The income of unmarried minors is a tax liability of
the minor but where such income is derived from
property received from a living parent, the income
shall be included in the return of the parent except
(a) when the donor’s tax has been paid on such
property, or (b) when the transfer of such property is
exempt from the donor’s tax. [Sec. 51 (E), NIRC]
If the taxpayer is unable to make his return, such as
when he suffers from disability, the return may be
made by his duly authorized agent or representative
or by the guardian or other person charged with the
care of the taxpayer or his property; the principal and
his representative or guardian assuming
responsibility for penalties for erroneous, false or
fraudulent returns. [Sec. 51 (F), NIRC]
2.! Substituted Filing
Applicable to individual taxpayers:
a.! receiving purely compensation income,
regardless of amount
b.! from only one employer in the Philippines for the
calendar year, and
U.P. LAW BOC TAXATION I TAXATION LAW

c.! the income tax of which has been withheld
correctly by the employer
The Annual Information Return (of Income Taxes
Withheld on Compensation and Final Withholding
Taxes) filed by their respective employers shall be
tantamount to the substituted filing of income tax
returns by the employee. [De Leon citing Rev. Regs.]
b.! Corporate Taxpayers [Sec.
52(A), NIR]
All corporations subject to income tax shall render
quarterly income tax returns and a final or
adjustment return, except foreign corporations not
engaged in trade or business in the Philippines.
b.! Willful neglect to file the return: a penalty
equivalent to 50% of the tax or deficiency tax.
[Sec. 248(B), NIRC]
c.! Failure to file information returns: P1k for each
failure upon notice and demand by the CIR
unless due to reasonable cause not willful
neglect provided the aggregate amount for all
such failures during the calendar year shall not
exceed P25k. [Sec. 250, NIRC]

The return shall be filed by the President, Vice-

President or other principal officer, and shall be
sworn to by such officer and by the treasurer or
assistant treasurer.

4.!Where to File Income Tax

Returns
a.! Individuals
Except in cases where the CIR otherwise permits, the
return shall be filed with an authorized agent bank,
Revenue District Officer, Collection Agent or duly
authorized Treasurer of the city or municipality in
which such person has his legal residence or principal
place of business in the Philippines, or if there be no
legal residence or place of business in the Philippines,
with the Office of the Commissioner [Sec. 51(B),
NIRC]

b.! Corporations
Except in cases where the CIR otherwise permits, the
return shall be filed with an authorized agent bank,
Revenue District Officer, Collection Agent or duly
authorized Treasurer of the city or municipality
having jurisdiction over the place where the
corporation’s principal office is located and where its
books of accounts and other data are kept; otherwise,
the returns shall be filed and the tax paid thereon
with the Office of the Commissioner of Internal
Revenue. [Sec. 77(A), NIRC]

5.!Penalties for Non-Filing of

Returns
a.! Failure to file any return and pay the tax due: a
penalty equivalent to 25% of the amount due.
[Sec. 248(A)(1), NIRC]

Page 109 of 270

U.P. LAW BOC
! Withholding! of! Taxes
1.! 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.
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]
The withholding tax system was devised for three
primary reasons: first, to provide the taxpayer a
convenient manner to meet his probable income tax
liability; second, to ensure the collection of income
tax which can otherwise be lost or substantially
reduced through failure to file the corresponding
returns and third, to improve the governments cash
flow. This results in administrative savings, prompt
and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort
to collect taxes through more complicated means
and remedies. [Chamber of Real Estate and Builders’
Assoc., Inc. v. Romulo, G.R. No. 160756 (2010)]
2.!Kinds of Withholding Taxes
In General
Page 110 of 270
TAXATION I TAXATION LAW
a.! Final Withholding tax – The amount of income
tax withheld by the withholding agent is
constituted as a full and final payment of the
income tax due from the payee on the said
income.
The liability for payment of the tax rests primarily
on the payor as withholding agent. Thus, in case
of his failure to withhold the tax or in case of
under withholding, the deficiency tax shall be
collected from the payor/withholding agent. The
payee is not required to file an income tax return
for the particular income.
b.! Creditable Withholding tax – 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.
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. Taxes withheld on
income payments covered by the expanded
withholding tax and compensation income are
creditable in nature.
Withholding Taxes in the NIRC
a.! Withholding tax at source [Sec 57, NIRC]
Withholding of final tax of certain income – Subject
to rules and regulations the Secretary of Finance may
promulgate, upon the recommendation of the CIR,
the tax imposed or prescribed by the NIRC on certain
specified items of income shall be withheld by payor-
corporation and/or person.
N.B. Sec. 57 contains an extensive list of taxes. This
items of income include taxes on certain passive
incomes (interest, dividends), capital gains tax
(shares not traded, real property), branch profit
remittance tax, certain payments to nonresident
aliens/foreign corporations.]
Withholding of creditable tax at source – The
Secretary of Finance may, upon the recommendation
of the CIR, 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 1% but not more than 32%,
which shall be credited against the income tax
liability of the taxpayer for the taxable year.
b.! Withholding tax on wages [Sec 79(A), NIRC]
Except in the case of minimum wage earner, every
employer making payment of wages shall deduct and
U.P. LAW BOC TAXATION I TAXATION LAW

withhold upon such wages a tax determined in

accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon
recommendation of the CIR.

c.! Withholding of VAT [Sec 114 (C), NIRC]

The government (political subdivisions,
instrumentalities, agencies, GOCCs) shall deduct and
withhold final VAT of 5% of gross payment on
purchase of goods and services subject to VAT. If the
payment is for lease or use of properties to a
nonresident owner, withholding tax shall be 12%

Page 111 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

TAXATION II
Taxation Law

Page 112 of 270

U.P. LAW BOC TAXATION II
IV.! TRANSFER TAXES
! Estate! Tax
1.! Basic Principles, Concept,
and Definition
Death is the source of the taxing power. It is the
power to transmit or the transmission from the dead
to the living on which the tax is based. The tax
accrues as of the death of the decedent by operation
of law. [Lorenzo v. Posadas, G.R. No. L-43082 (1937)]
a.! Estate tax accrues at the time of the decedent’s
death, but the obligation to pay the same is
different and is fixed by law. The tax is measured
by the value of the property AT THE TIME OF
DEATH.
b.! Estate tax is measured (i.e., tax base) by the
value at that time of such property as passes to
him (i.e., death). Subsequent appreciation or
depreciation is immaterial;
c.! Estate taxation is governed by the statute in
force at the time of the death of the decedent.
Tax laws cannot be given retroactive effect
unless they explicitly provide for it. [Sec. 5, RR-2-
2003]
Inheritance taxes, which were imposed on the right of
the heirs to receive property upon the death of the
decedent (Act No. 2601 effective on July 1, 1916), were
repealed by PD 69 on January 1, 1973 and were
integrated into the estate tax. They are no longer
imposed under the current NIRC.
Estate tax is an excise tax on the right of transmitting
property at the time of death and on the privilege
that a person is given in controlling to a certain
extent the disposition of his property to take effect
upon death. [VITUG and ACOSTA at 211]
2.!Nature, Purpose, and
Object
It is a transfer tax (i.e. an excise tax on the right of
transmitting property), not a property tax. Compared
to old inheritance, it is a tax on the right to transfer
and not the right to inherit property.
Purpose: To tax the shift of economic benefits and
enjoyment of property from the dead to the living.
Taxable objects/subjects:
Page 113 of 270
TAXATION LAW
a.! Right/privilege of the deceased person to
transmit his/her estate to his/her lawful heirs
and beneficiaries at the time of death;
b.! Certain transfers, during his lifetime, which are
made by law as equivalent to testamentary
disposition.
Justification Theories for the Imposition of Estate
Tax
a.! Benefits-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.
b.! 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.
c.! Ability-to-pay theory – Receipt of inheritance,
which is in the nature of unearned wealth or
windfall, places assets into the hands of the heirs
and beneficiaries. This creates an ability to pay
the tax and thus contributes to government
income.
d.! Redistribution of wealth theory – The imposition
of estate tax reduces the property received by the
successor, which helps promote a more equitable
distribution of wealth in society. The taxes paid
by the rich are programmed for disbursement by
Congress for the benefit of the poor in terms on
social services, education, health, etc.
3.!Time and Transfer of
Properties
The rights to the succession are transmitted from the
moment of the death of the decedent. [Art. 777, Civil
Code]
The decedent’s estate includes property to the extent
of the interest therein of the decedent at the time of
his death. [Sec. 85(A)]
N.B. It is the interest of the decedent on the property,
not the actual property itself. In some cases, however,
they may be the same.
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.
U.P. LAW BOC TAXATION II
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,
RR 2-2003]
N.B. Note that in transfers for insufficient
consideration, the value to be included in the estate
is the excess of the FMV at time of death over the
value of the consideration received at the time of
transfer.
The executor or administrator shall not deliver a
distributive share to any party interested in the estate
despite the transfer of properties and rights at the
time of death, unless there is a certification from CIR
that estate tax has been paid. [Sec.94, NIRC]
Time of death governs:
a.! The determination of the extent of the decedent’s
interest for computing his gross estate.
b.! The statute that governs estate taxation.
c.! The accrual of the estate tax.
Taxable Transfers
Taxable transfers are complete when the transferor
divests himself of all economic beneficial interest in
himself or his estate.
a.! Transfers Mortis Causa. These are gratuitous
transfers that take effect after death, either
testate or intestate. These transfers are subject
to estate tax.
A donation which purports to be one inter
vivos but withholds from the donee the right to
dispose of the donated property during the
donor's lifetime is in truth one mortis causa. In a
donation mortis causa, the right of disposition is
not transferred to the donee while the donor is
still alive. The requisites of a testamentary
disposition should be fulfilled. [Maglasang v
Heirs of Cabatingan, G.R. No. 131953 (2002)]
Characteristics:
1.! It conveys no title or ownership to the
transferee before the death of the transferor;
or what amounts to the same thing, that the
transferor should retain the ownership (full
or naked) and control of the property while
alive;
2.! That before his death, the transfer should be
revocable by the transferor at will, ad nutum;
but revocability may be provided for
indirectly by means of a reserved power in
the donor to dispose of the properties
conveyed;
Page 114 of 270
TAXATION LAW
3.! That the transfer should be void if the
transferor should survive the transferee.
[Maglasang v Heirs of Cabatingan, supra.]
b.! Transfers Inter Vivos. Gratuitous transfers that
take effect during the lifetime of the donor. (See
Donor’s Tax for requisites)
General Rule: Donation Inter Vivos are subject to
Donor’s Tax.
Exceptions: Donation Inter Vivos are subject to
Estate Tax when it is treated by law as substitutes
for testamentary dispositions (i.e., transfers
which are inter vivos in form but mortis causa in
substance)
1.! Transfers in Contemplation of Death [Sec.
85(B), NIRC]
2.! Revocable transfers [Sec. 85(C), NIRC]
3.! Transfers of property arising under general
power of appointment [Sec. 85(D), NIRC]
4.! Transfers for insufficient consideration [Sec.
85(G), NIRC]
Note: These transfers would be included in the
computation of the gross value of estate. See
further discussion in the valuation of Gross
Estate.
4.!Classification of Decedent
Estate Tax applies only to individuals. The decedent
may be classified into:
a.! Citizen (RC/NRC)
b.! Resident alien (RA); or
c.! Non-resident alien (NRA).
Concept of residence
For purposes of estate taxation, “residence” refers to
domicile, the permanent home or the place to which
whenever absent, one intends to return (animus
revertendi), and depends on facts and circumstances,
in the sense that they disclose intent. It is therefore,
not necessarily the actual place of residence. [Corre v
Tan Corre, G.R. No. L-10128 (1956)]
Situs of Intangible Personal Properties
General Rule: Mobilia Sequuntur Personam
Principle: Taxation of intangible personal properties
(such as credits, bills, bank deposits promissory notes,
and corporate stocks) follows the residence/domicile
of owner thereof. Situs is the domicile or residence of
the owner. [Collector v Fisher, G.R. No. L-11622 (1961)]
Exceptions:
a.! Rule of Reciprocity
U.P. LAW BOC TAXATION II TAXATION LAW

b.! When it is inconsistent with express provisions of
law
c.! When justice does not demand that it should be,
as where the property in fact has a situs
elsewhere
Intangible Properties which are considered situated in
the Philippines [Sec 104, NIRC]
a.! Franchise which must be exercised in the
Philippines
b.! Shares, obligations or bonds issued by any
corporation or sociedad anonima organized or
constituted in the Philippines in accordance with
its laws
c.! Shares, obligations or bonds issued by any
foreign corporation 85% of the business of which
is located in the Philippines
d.! Shares, obligations or bonds issued by any
foreign corporation if such shares, obligations or
bonds have acquired a business situs in the
Philippines
e.! Shares or rights in any partnership, business or
industry established in the Philippines
Rule of Reciprocity
There is reciprocity if the foreign country of which the
decedent was a citizen and resident at the time of his
death:
a.! Did not impose a transfer tax of any character, in
respect of intangible personal property of
citizens of the Philippines not residing in that
foreign country; OR
b.! Allowed a similar exemption from transfer tax in
respect of intangible personal property owned by
citizens of the Philippines not residing in that
country
If there is reciprocity, the intangible personal property
of an NRA shall not be included in his gross estate. If
there is no reciprocity, such intangible personal
property will be included. [Sec. 104]

5.!Gross Estate vis-à-vis Net Estate

Gross Estate Net Estate
Value at the time of death of all the decedent’s property Value of the estate after all deductions have been made
wherever situated against the gross estate; subject to the graduated tax
HOWEVER, in the case of a NRA at the time of his death, rates. [Sec. 6, RR 2-2003]
only that part of the entire gross estate which is situated
in the Philippines shall be included in his taxable estate. This is the TAX BASE.
[Sec 85, NIRC]

Formula for Estate Tax

Gross Estate (Sec. 85)
Less: Deductions (Sec. 86)
-------------------------------------------------------
Net estate before share of surviving spouse (if married)
Less: Net share of the surviving spouse in the conjugal property (Sec. 86(C))
-------------------------------------------------------
= Net taxable estate
Multiply by: Tax rate (Sec. 84)
-------------------------------------------------------
= Estate Tax Due
Less: Tax Credit, if any (Sec. 86(E), or 110 (B))
-------------------------------------------------------
= Estate Tax Due, if any

6.!Determination of Gross Estate and Net Estate (and

Composition)
Summary of the Composition of the Gross Estate and Exclusions, Deductions therefrom
RC/NRC/RA NRA
Composition and Determination of GROSS Estate [Sec. 85, NIRC]

Page 115 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

The value of the following at the time of the decedent’s

death:
The value of the following at the time of the decedent’s
a.! Real property located in the Phil.
death:
b.! Tangible personal property located in the Phil.
a.!Real property wherever situated
c.! Intangible personal property with a situs in the Phil.
b.!Tangible personal property wherever situated
(subject to the rule of reciprocity)
c.! Intangible personal property wherever situated
Note: If there is reciprocity, intangible assets are excluded
from gross estate
Exclusions from Gross Estate [Sec 85(H) and Sec 87]
a.! Separate property of the surviving spouse [Sec. 85 (H), NIRC]
b.! GSIS proceeds/ benefits
c.! Accruals from SSS
d.! Proceeds of life insurance where the beneficiary is irrevocably appointed
e.! Proceeds of life insurance under a group insurance taken by employer
f.! War damage payments and Benefits received from US Veterans Administration
g.! Transfer by way of bona fide sales
h.! Transfer of property to the National Government or to any of its political subdivisions
i.! Merger of usufruct in the owner of the naked title [Sec. 87 (A), NIRC]
j.! Properties held in trust by the decedent. Transmission of inheritance or legacy by fiduciary heir or legatee to the
fideicommissary [Sec. 87 (B), NIRC]
k.! Transmission from the first heir, legatee, or done in favor of another beneficiary, in accordance with the desire
of their predecessor [Sec. 87 (C), NIRC]
l.! Acquisition and/or transfer expressly declared as not taxable
m.! Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, provided that not
more than 30% of said transfer shall be used for administration purposes [Sec. 87 (D), NIRC]
Deductions from GROSS estate to arrive at the NET estate
Ordinary deductions 1
Ordinary deductions
a.! Expenses, losses, indebtedness, taxes. (ELIT) 2
a.! Proportionate deductions for (ELIT)
1.! Funeral expenses
1.! Funeral expenses
2.! Judicial expenses
2.! Judicial expenses
3.! Claims against the estate
3.! Claims against the estate
4.! Claims against insolvent persons
4.! Claims against insolvent persons
5.! Unpaid mortgage and debt
5.! Unpaid mortgage and debt
6.! Taxes
6.! Taxes
7.! Losses
7.! Losses
b.! Vanishing deductions
b.! Vanishing deductions
c.! Transfers for public use
c.! Transfers for public use
d.! Amounts received under R.A. 4917
Special deductions
No Amounts received under R.A. 4917
a.! Family home
No special deductions
b.! Standard deduction
c.! Medical expenses
Share in conjugal property
Share in conjugal property

1
No deduction shall be allowed for NRA, if the executor, administrator, or anyone of the heirs, DID NOT include 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. [Sec. 86 (D), NIRC; Sec 7, RR 2-2003]
2 Gross! Estate! Phil
Formula for Proportionate Deductions of NRA: Allowable Deduction = ! x! ELIT
Gross! Estate! World

Page 116 of 270

U.P. LAW BOC TAXATION II
VALUATION OF GROSS ESTATE (Sec 88)
General Rule: Gross Estate = FMV at the time of the
decedent’s death
Real Property
a.! Appraised value, whichever is higher between:
1.! FMV, as determined by the Commissioner of
Internal Revenue (CIR) (zonal value) or
2.! FMV, as shown in the schedule of values
fixed by the Provincial or City Assessor.
If there is no zonal value, the taxable base is
the FMV that appears in the latest tax
declaration.
b.! If there is an improvement, the value of
improvement is the construction cost per
building permit or the fair market value per latest
tax declaration.
Personal Property
a.! FMV at the time of death.
b.! If none, acquisition cost for recently acquired
properties or the current market price for the
previously acquired properties. (Sec 40(B)
c.! Stocks, bonds, and other securities.
1.! If listed and traded stocks = value is the
mean between the highest and lowest
quoted selling prices at the date of death; if
none, nearest the date of death (Sec 5, RR
02-2003)
2.! If unlisted stocks = book value at time of
death (ordinary common shares) or par
value (preferred shares)
N.B: Bonds, mortgages, and Certificates of
Stocks are taxable at the place where they are
physically located.
d.! Proceeds of Life Insurance with Revocable
Beneficiary: face value of policy (not cash
surrender value)
Right to Usufruct use or habitation, and annuity
Probable life of the beneficiary in accordance with the
latest basic standard mortality table shall be taken
into account.
7.!Items to be Included in
Gross Estate
Items to be included in the Gross Estate
[Sec. 85, NIRC]
a.! Property owned by the decedent actually and
physically present in his estate at the time of his
death;
b.! Decedent’s interest;
c.! Properties not physically in the estate, such as:
Page 117 of 270
TAXATION LAW
1.! Transfers in contemplation of death [Sec.
85(B), NIRC];
2.! Transfers with retention or reservation of
certain rights [Sec. 85(B), NIRC];
3.! Revocable transfers [Sec. 85(C), NIRC];
4.! Property passing under general power of
appointment [Sec. 85(D), NIRC];
5.! Transfers for insufficient consideration [Sec.
85(G), NIRC];
6.! Proceeds of life insurance [Sec. 85(E), NIRC];
7.! Claims against insolvent persons [Sec.
86(A)(d)]; and
8.! Capital of the surviving spouse [Sec. 85(H),
NIRC].
DECEDENT’S INTEREST (Sec. 85(A))
This includes any interest having value or capable of
being valued which is owned by the decedent
existing at the time of death, such as dividend
declared on or before death, but is received by the
estate after death, partnership profits which have
accrued before his death, but received after death.
This also includes those transferred by the decedent
at the time of his death.
Note: When decedent had relinquished his interest
BEFORE his death, he could not be deemed to have
transmitted interest in such property at his death.
TRANSFERS IN CONTEMPLATION OF DEATH (Sec.
85(B))
The term “in contemplation of death”, as used in
estate taxation, does not refer to the general
expectation of death. The words mean that it is the
thought of death, as a controlling motive, which
induces the disposition of the property for the
purpose of avoiding the tax. The decedent’s motive is
a question of fact. Thus, the imminence of death
may afford convincing evidence of the impelling
cause of transfer. However, it is a contemplation of
death and not necessarily contemplation of imminent
death to which the statute refers. These transfers
should be without or with insufficient considerations.
The law does not specify the number of years prior to
a decedent’s death within which a transfer can be
considered in contemplation of death. (De leon)
TRANSFERS WITH RETENTION OR RESERVATION
OF CERTAIN RIGHTS
These are transfers with retention or reservation of
certain rights that result to the incapacity of
transferee to freely enjoy and dispose of the property
until the transferor’s death, and the transfer may be
regarded as having been intended to take effect in
possession or enjoyment at the transferor’s death.
U.P. LAW BOC
These do not include bona fide sale for an adequate
and full consideration.
REVOCABLE TRANSFERS (Sec. 85(C))
General Rule: A transfer is a revocable transfer where:
a.! There is a transfer by trust or otherwise,
b.! The 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 death.
Exception: Bona fide sale for an adequate and full
consideration in money or money’s worth
Note: The power to alter, amend or revoke shall be
considered to exist on the date of the decedent’s
death even though:
a.! The exercise of the power is subject to a
precedent giving of notice, or
b.! The alteration, amendment or revocation takes
effect only on the expiration of a stated period
after the exercise of the power, whether or not on
or before the date of the decedent’s death notice
has been given or the power has been exercised.
If notice has not been given or the power has not
been exercised before the date of his death, such
notice shall be considered to have been given, or the
power exercised, on the date of his death.
TRANSFER OF PROPERTY UNDER GENERAL
POWER OF APPOINTMENT (Sec. 85(D))
Power of Appointment – the right to designate the
person or property who shall enjoy and possess
certain property from the estate of a prior decedent.
(Domondon)
a.! General Power of Appointment: when it gives to
the decedent the power to appoint any person he
pleases including himself. He had a power
exercisable in favor of himself, his creditors or
creditors of his estate (AmJur)
b.! Special Power of Appointment: when the
decedent
1.! can appoint only among a designated class
of persons other than himself, his estate, the
creditors of his estate, or
2.! if the power of appointment is expressly not
exercisable in favor of the decedent, his
estate, his creditors, or creditors of his estate.
Page 118 of 270
TAXATION II TAXATION LAW
General Rule: Property over which the decedent held a
power of appointment is excluded in his gross estate
Exception: Included in the gross estate if the property
arises under a general power of appointment
exercised by the decedent:
a.! By will; or
b.! By deed executed in contemplation of or
intended to take effect in possession or
enjoyment at or after his death; or
c.! By deed under which he has retained for his life
or any period not ascertainable without reference
to his death or for any period which does not in
fact end before his death –
1.! The possession or enjoyment of, or the right
to the income from the property; or
2.! The right either alone or in conjunction with
any person, to designate the persons who
shall enjoy or possess the property or the
income therefrom.
TRANSFERS FOR INSUFFICIENT CONSIDERATION
(Sec. 85(G))
Transfers, trusts, 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, but is NOT 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.
Example:
Case A: If bona fide sale – no value shall be included
in the gross estate
Case B: If not a bona fide sale - the excess of the fair
market value at the time of death over the value of
the consideration received by the decedent shall form
part of his gross estate.
Case C: If inter vivos transfer is proven
fictitious/simulated – total value of the property at
the time of death included in the gross estate.
Case Case Case
Over
A B C
FMV, transfer 2,000 1,500 2,500
FMV, death 2,500 2,000 2,000
Consideration received 2,000 800 0
Value included in the Gross 0 1,200 2,000
Estate
U.P. LAW BOC TAXATION II
The transfer for insufficient consideration must fall
under any of the following:
a.! Transfer in contemplation of death;
b.! Revocable transfer, or
c.! Property passing under a GPA.
Otherwise, the tax imposed is donor’s tax.
PROCEEDS OF LIFE INSURANCE (Sec. 85(E))
Inclusion of proceeds of life insurance to the gross
estate depends on i) designated beneficiary; ii)
revocability of the insurance; iii) period and source of
funds used in premiums.
When included in the gross estate
Proceeds of life insurance taken out by the decedent
on his own life shall be included in the gross estate in
the following cases:
a.! Beneficiary is the estate of the deceased, his
executor or administrator, irrespective of whether
or not the insured retained the power of
revocation; or
b.! Beneficiary is other than the decedent’s estate,
executor or administrator, when designation of
beneficiary is not expressly made irrevocable.
When not taxable
a.! Irrevocably designated; how done –
1.! By expressly stating it in the policy (the
designation of a beneficiary is PRESUMED to
be revocable);
2.! By not changing the beneficiary during the
lifetime of the insured. This was added in Sec.
11, RA 10607 (2013) which provides that,
“The insured shall have the right to change
the beneficiary he designated in the policy
(i.e., it’s revocable), unless he has expressly
waived this right in said policy.
Notwithstanding the foregoing, in the event
the insured does not change the beneficiary
during his lifetime, the designation shall be
deemed irrevocable.”
b.! Accident insurance proceeds as the Tax Code
specifically mentions only life insurance policies
c.! Proceeds of a group insurance policy taken out
by a company for its employees.
d.! Amount receivable by any beneficiary irrevocably
designated in the policy of insurance by the
insured. The transfer is absolute and the insured
did not retain any legal interest in the insurance
e.! Amount receivable by any beneficiary irrevocably
designated in the policy of insurance by the
insured. The transfer is absolute and the insured
did not retain any legal interest in the insurance
Page 119 of 270
TAXATION LAW
f.! Proceeds of insurance policies issued by the GSIS
to government officials and employees, which
are exempt from all taxes; (PD 1146)
1.! Benefits accruing under the SSS law (RA
1161)
g.! Proceeds of life insurance payable to heirs of
deceased members of military personnel (RA
360)
CAPITAL OF THE SURVIVING SPOUSE [Sec.85(H),
NIRC]
It is NOT part of the gross estate of the deceased
spouse.
To determine the conjugal or separate character of
proceeds, the following factors are considered:
a.! Policy was taken before marriage – Source of
funds determines ownership of the proceeds of
life insurance
b.! Policy was taken during marriage
1.! Beneficiary is estate of the insured –
Proceeds are presumed conjugal; hence,
one-half share of the surviving spouse is not
taxable
2.! Beneficiary is third person – Proceeds are
payable to beneficiary even in premiums
were paid out of the conjugal
CLAIMS AGAINST INSOLVENT PERSONS
For estate tax purposes, an insolvent is a person
whose properties are not sufficient to satisfy, whether
fully or partially, his debts. A judicial declaration of
insolvency is not required but the incapacity of the
debtor should be proven. As a rule, regardless of the
amount the debtor is unable to pay, the full amount
of the claim against the insolvent person should be
included in the gross estate of the decedent. The
portion of the claim which is not collectible should be
allowed as a deduction from the gross estate.
8.!Deductions and Exclusions
from Estate
Deductions and/or losses already deducted from
gross income can no longer be deducted from gross
estate. Further, deductions should not be
compensated for by any insurance or extrajudicial
settlement. Otherwise, they are not valid deductions.
ORDINARY DEDUCTIONS
a.! Expenses, Losses, Indebtedness and Taxes, Etc.
(ELIT)
1.! FUNERAL EXPENSES [Sec. 86 (A)(1)(a)]
Actual funeral expenses shall mean:
i.! those which are actually incurred;
U.P. LAW BOC TAXATION II
ii.! in connection with, and before the
interment or burial of the deceased;
iii.! must be paid out of the estate and not
by another person or out of
contributions from friends and
relatives; and
iv.! must be duly supported by receipts or
invoices or other evidence to show
that they were actually incurred.
Includes:
i.! The mourning apparel of the surviving
spouse and unmarried minor children
of the deceased bought and used on
the occasion of the burial;
ii.! Expenses for the deceased’s wake,
including food and drinks;
iii.! Publication charges for death notices;
iv.! Telecommunication expenses incurred
in informing relatives of the deceased;
v.! Cost of burial plot, tombstones,
monument or mausoleum but not
their upkeep. In case the deceased
owns a family estate or several burial
lots, only the value corresponding to
the plot where he is buried is
deductible;
vi.! Interment and/or cremation fees and
charges; and
vii.! All other expenses incurred for the
performance of the rites and
ceremonies incident to interment.
[Sec. 6(A)(1), RR 02-2003]
Limitation: Allowable deduction is not to
exceed P200,000 and lower of:
i.! Actual funeral expenses (whether
paid or not) up to the time of
interment, or
ii.! An amount equal to 5% of the gross
estate.
The unpaid portion of the funeral expenses
incurred which is in excess of the P200,000
threshold is NOT allowed to be claimed as a
deduction under “claims against the estate”.
[Sec. 6(A)(1), RR 02-2003]
N.B. – Compare (1) ACTUAL, (2) 5% GROSS,
or (3) 200K and pick whichever is lower.
Not included are:
i.! Expenses incurred after the interment,
such as for prayers, masses,
entertainment, or the like are not
deductible.
Page 120 of 270
TAXATION LAW
ii.! Any portion of the funeral and burial
expenses borne or defrayed by
relatives and friends of the deceased
are not deductible.
iii.! Medical expenses as of the last illness
will not form part of funeral expenses
but should be claimed as medical
expenses.
[Sec. 6, RR 2-2003]
Illustrations
I.! If five percent (5%) of the gross estate
is P220,000 and the amount actually
incurred is P215,000, the maximum
amount that may be deducted is only
P200,000;
II.! If five percent (5%) of the gross estate
is P 100,000 and the total amount
incurred is P150,000 where P20,000
thereof is still unpaid, the only
amount that can be claimed as
deduction for funeral expenses is
P100,000. The entire P50,000 excess
amount consisting of P30,000 paid
amount and P20,000 unpaid amount
can no longer be claimed as
FUNERAL EXPENSES. Neither can the
P20,000 unpaid portion be deducted
from the gross estate as CLAIMS
AGAINST THE ESTATE.
2.! JUDICIAL EXPENSES OF ESTAMENTARY
AND INTESTATE PROCEEDINGS [Sec. 86
(A)(1)(b)]
Expenses allowed as deduction:
I.! Those incurred in the inventory-taking
of assets comprising the gross estate,
their administration, the payment of
debts of the estate, as well as the
distribution of the estate among the
heirs.
II.! They are incurred during the
settlement of the estate but not
beyond the last day prescribed by law,
or the extension thereof, for the filing
of the estate tax return. [Sec. 86
(A)(2), RR 2-2003].
These expenses must be:
i.! for the benefit of the estate, and
ii.! substantiated by receipts OR if
unpaid, should be supported by a
sworn statement of account issued
and signed by the creditor.
Judicial expenses may include:
U.P. LAW BOC TAXATION II
i.! Fees of executor or administrator
ii.! Attorney’s fees – These refer to the
notarial fee paid for the extrajudicial
settlement is deductible since such
settlement effected a distribution of
the decedent’s estate to his lawful
heirs. [CIR v. CA, G.R. No. 123206.
(2000)]
iii.! Court fees
iv.! Accountant’s fees
v.! Appraiser’s fees
vi.! Clerk hire
vii.! Costs of preserving and distributing
the estate
viii.! Costs of storing or maintaining
property of the estate
ix.! Brokerage fees for selling property of
the estate
[Sec. 6(A)(2), NIRC]
Not deductible
i.! Compensation paid to a trustee of
the decedent’s estate for his services
rendered for the purpose of
managing the decedent’s real estate
for the benefit of the testamentary
heirs [Lorenzo v. Posadas, G.R. No. L-
43082 (1937)]
ii.! Expenses incurred by the
presumptive heir and that of her
witnesses for appearance at the trial
to oppose the probate of a will.
iii.! Attorney’s fees incident to litigation
incurred by the heirs in asserting
their respective rights, or claims as to
who are entitled to the estate left by
the deceased.
iv.! Premiums paid by the administrator
on his bond, being exclusively used
for his account, since the giving of
the bond is in the nature of a
qualification for the office and not
necessary in the settlement of his
estate.
3.! CLAIMS AGAINST THE ESTATE [Sec. 86
(A)(1)(c)]
“Claims” generally mean: (i) debts or
demands of a pecuniary nature (ii) which
could have been enforced against the
deceased in his lifetime and could have been
reduced to simple money judgements. These
are liabilities of the estate or indebtedness of
such (iii) arising out of: contract, tort, or
operation of law. [Dizon v CTA, G.R. No.
140944 (2008)]
Page 121 of 270
TAXATION LAW
Requisites for Deductibility of Claims
Against the Estate: [Sec. 86 (A)(3)(i), RR 2-
2003].
i.! The liability represents a personal
obligation of the deceased existing at
the time of his death except unpaid
obligations incurred incident to his
death such as unpaid funeral
expenses (i.e., expenses incurred up to
the time of internment) and unpaid
medical expenses which are classified
under a different category of
deductions.
ii.! The liability was contracted in good
faith and for adequate and full
consideration in money or money’s
worth
iii.! The claim must be a debt or claim
which is valid in law and enforceable
in court;
iv.! The indebtedness must not have been
condoned by the creditor or the action
to collect from the decedent must not
have prescribed.
v.! They must be reasonably certain in
amount, and substantiated.
Substantiation Requirements [Sec. 86
(A)(2)(ii), RR 2-2003].
In case of simple loan (including advances):
i.! The debt instrument must be duly
notarized at the time the
indebtedness was incurred, such as
promissory note or contract of loan,
except for loans granted by financial
institutions where notarization is not
part of the business practice/policy of
the financial institution-lender.
ii.! Duly notarized Certification from the
creditor as to the unpaid balance of
the debt, including interest as of the
time of death. If the creditor is:
CORPORATION: sworn certification
should be signed by the President, or
Vice-President, or other principal
officer of the corporation.
PARTNERSHIP: sworn certification
should be signed by any of the general
partners.
BANK/FINANCIAL INSTITUTIONS:
Certification shall be executed by the
branch manager of the bank/financial
U.P. LAW BOC TAXATION II
institution which monitors and
manages the loan of the decedent-
debtor.
INDIVIDUAL: sworn certification
should be signed by him.
In any of these cases, the one who
should certify must not be a relative
th
of the borrower within the 4 civil
degree, either by consanguinity or
affinity, except when a copy of the
promissory note or other evidence of
the indebtedness must is filed with
the RDO having jurisdiction over the
borrower within 15 days from the
execution thereof.
iii.! Proof of financial capacity of the
creditor to lend the amount at the
time the loan was granted, as well as
its latest audited balance sheet with
a detailed schedule of its receivable
showing the unpaid balance of the
decedent-debtor
In case the creditor is an individual
who is no longer required to file ITRs
with the Bureau, a duly notarized
declaration by the creditor of his
capacity to lend at the time when the
loan was granted without prejudice to
verification that may be made by the
BIR to substantiate such declaration
of the creditor.
If the creditor is a non-resident, the
executor/ administrator or any of the
legal heirs must submit a duly
notarized declaration by the creditor
of his capacity to lend at the time
when the loan was granted,
authenticated or certified to as such
by the tax authority of the country
where the non-resident creditor is a
resident
iv.! A statement under oath executed by
the administrator or executor of the
estate reflecting the disposition of the
proceeds of the loan if it was
contracted within 3 years prior to the
death of the decedent.
If the unpaid obligation arose from purchase
of goods or services:
i.! Pertinent documents evidencing the
purchase of goods or service, such as
sales invoice/delivery receipt (for sale
Page 122 of 270
TAXATION LAW
of goods), or contract for the services
agreed to be rendered (for sale of
services), as duly acknowledged,
executed and signed by decedent-
debtor and creditor, and statement of
account given by the creditor as duly
received by the decedent-debtor
ii.! Duly notarized certification from the
creditor as to the unpaid balance of
the debt, including interest as of the
time of death.
iii.! Certified true copy of the latest
audited balance sheet of the creditor
with a detailed schedule of its
receivable showing the unpaid
balance of the decedent-debtor.
Moreover, a certified true copy of the
updated latest subsidiary
ledger/records of the debtor-
decedent, should likewise be
submitted.
Where the settlement is made
through the Court in a testate or
intestate proceeding, pertinent
documents filed with the Court
evidencing the claims against the
estate, and the Court Order approving
the said claims, if already issued, in
addition to the documents mentioned
in the preceding paragraphs.
4.! CLAIMS AGAINST INSOLVENT PERSONS
[Sec. 86 (A)(1)(d)]
These are claims of the estate (i) against
insolvent persons (ii) which are not
collectible. To be deductible from the gross
estate:
Additional Requirements:
i.! The incapacity of the debtor to pay his
obligation should be proven, although
a judicial declaration of insolvency is
not required;
ii.! The full amount owed by the insolvent
must first be included in the
decedent’s gross estate; and
iii.! If the insolvent could only pay a
partial amount, the full amount owed
shall be included in the gross estate,
and the amount uncollectible shall be
allowed as a deduction.
N.B. – Unpaid claims on funeral expenses in
excess of 200K cannot be designated as
claims against the estate.
U.P. LAW BOC TAXATION II
5.! UNPAID MORTGAGES, LOSSES AND
TAXES [Sec. 86(A)(1)(e)]
Unpaid Mortgages
Requisites for Deductibility [Sec. 6(A)(5)(a),
RR 2-2003]
i.! The value of the decedent’s interest
therein, undiminished by such
mortgage or indebtedness, is included
in the value of the gross estates.
ii.! The mortgages were contracted bona
fide and for an adequate and full
consideration in money or money’s
worth.
In case the loan of the decedent is only an
accommodation loan where the loan
proceeds went to another person, the value
of the unpaid loan must be included as a
receivable of the estate. If there is a legal
impediment to recognize the same as a
receivable of the estate, the said unpaid
obligation shall not be allowed as a
deduction. In all instances, the mortgaged
property, to the extent of the decedent’s
interest therein, should always form part of
the taxable gross estate. [Sec. 6(5), RR 2-
2003]
Unpaid Taxes
Requisites for Deductibility
i.! Taxes which have accrued as of or
before the death of the decedent (if it
was incurred after, it is chargeable to
the income of the estate), and
ii.! Unpaid as of the time of his death,
regardless of whether or not it was
incurred in connection with trade or
business
Not included:
i.! Income tax upon income received
after death, or
ii.! Property taxes not accrued before his
death, or
iii.! The estate tax due from the
transmission of his estate
Casualty Losses
Requisites for Deductibility
i.! Incurred during the settlement of the
estate
ii.! Arising from fires, storms, shipwreck,
or other casualties from robbery, theft,
or embezzlement
iii.! Not compensated by insurance or
otherwise
Page 123 of 270
TAXATION LAW
iv.! At the filing of the estate tax return,
such losses have not been claimed as
a deduction for income tax purposes
in an income tax return
v.! Incurred not later than the last day for
the payment of the estate tax as
prescribed by law. ! 6 MONTHS (or
+30 days if an extension is granted)
after death. Therefore, all casualty
losses AFTER 6 months (or +30 days)
are not deductible.
Casualty loss can be allowed as deduction in
one instance only, either for income tax
purposes or estate tax purposes. [Sec.
6(A)(5)), Rev. Reg 2-2003]
Note: See Formula for computing Ordinary
Deductions of NRA above.
b.! Property Previously Taxed [Sec. 86(A)(2)]
a.k.a. VANISHING DEDUCTIONS
This is an amount allowed to reduce the taxable
estate of a decedent where property:
1.! Received by him from a prior decedent by gift,
bequest, device, or inheritance
2.! Transferred to him by gift, has been the object of
previous transfer transaction, subject to transfer
tax, either donor’s tax or estate tax.
Conditions:
1.! There must be 2 deceased persons and the first
one is the donor
2.! The second decedent dies within 5 years after
the death of a prior decedent, or in case of gift,
the decedent-donee dies within the same period
after the date of the gift.
Requisites:
1.! Death – The present decedent died within 5
years from the date of the prior decedent OR
date of gift.
2.! Identity of the property– The property with
respect to which deduction is sought can be
identified as the one who received from prior
decedent, or from the donor, or as the property
acquired in exchange for the original property so
received.
3.! Inclusion of the property – The property must
have formed part of the gross estate situated in
the Philippines of the prior decedent, or have
been included in the total amount of the gifts of
the donor made within 5 years prior to the
present decedent’s death.
4.! Previous taxation of property – The estate tax
on the prior succession, or the donor’s tax on the
U.P. LAW BOC TAXATION II
gift must have been finally determined and
paid by the prior decedent or by the donor, as the
case may be.
5.! No previous vanishing deduction on the
property – No such deduction on the property, or
the property given in exchange therefor, was
allowed in determining the value of the net
estate of the prior decedent. This is intended to
preclude the application of the vanishing
deduction on the same property more than once.
Limitations:
1.! Value of property – The deduction is limited by
the value of property previously taxed or the
aggregate value of such property if more than
one item, as finally determined for the purpose of
the prior estate tax (or gift tax) or the value of
such property in present decedent’s gross estate,
whichever is lower.
2.! Deduction for mortgage or lien – The initial
value (in number 1 above) shall be reduced by the
total amount paid, if any, by the present
decedent on any mortgage or other lien on the
property where a deduction was allowed, by
reason of the payment, of such mortgage or
other lien from the gross estate of the prior
decedent, or gift or donor, in determining the
estate tax of the prior decedent or the donor’s tax.
3.! Deductions for expenses, etc. – The value as
reduced in #2 shall be further reduced by an
amount which bears the same ratio to the
amounts allowed as deductions for:
i.! Expenses, losses, indebtedness, and taxes
(ordinary deductions), and
ii.! Transfers for public use as the amount
otherwise deductible for property
previously taxed bears to the value of the
decedent’s gross estate; and
4.! Percentage of deductions – The vanishing
deduction shall be the value (final basis) in #3
multiplied by the ff. percentages:
VD
If received by inheritance or gift
Rate
Within 1 year prior to the death of the
100%
present decedent
More than 1 year but not more than 2 years
80%
prior to the death of the decedent
More than 2 years but not more than 3
60%
years prior to the death of the decedent
More than 3 years but not more than 4
40%
years prior to the death of the decedent
More than 4 years but not more than 5
20%
years prior to the death of the decedent
Page 124 of 270
TAXATION LAW
FORMULA FOR VANISHING DEDUCTIONS:
(please take note of the limitations above)
Value Taken of Property
Less: Mortgage debt paid, if any
= Initial Basis
Less: Proportionate Deduction**
= Final Basis
Multiplied by Deduction Rate
VANISHING DEDUCTION
**Proportionate Deduction
Initial Basis
x (ELIT+TPU)
Value of GE of present decedent
Note: Amount of Vanishing Deductions is NOT
subtracted from the value of the CPG to determine
the share of surviving spouse. It is deducted from the
exclusive property of the decedent.
c.! Transfers for Public Purpose [Sec. 86(A)(3)]
These are:
1.! dispositions in a last will and testament or
transfers to take effect after death
2.! in favor of the Government of the Republic of the
Philippines, or any political subdivision thereof,
for exclusively public purposes. The whole
amount of all the bequests, legacies, devises, or
transfers to or for the use of shall be deductible
from gross estate,
3.! provided such amount or value had been
included in the computation of the gross estate.
Thus, there is no limitation for the amount to be
deducted.
d.! Amounts Received by Heirs Under RA 4917 (An
Act Providing that Retirement Benefits of
Employees of Private Firms shall not be subject
to attachment, levy, execution or any tax
whatsoever) [Sec. 86(A)(7), NIRC]
Any amount received by the heirs from the decedent’s
employer as a consequence of the death of the
decedent-employee in accordance with RA 4917,
provided that such amount is included in the gross
estate of the decedent. These include:
1.! Retirement benefits from private firms with
private benefit plan, if the retiring employee is 50
years old or older. This can only be availed once.
2.! Benefits granted in case of separation beyond
the control of the employee.
U.P. LAW BOC TAXATION II
SPECIAL DEDUCTIONS
a.! Family Home [Sec. 6(D), RR 2-2003]
It is the dwelling house, including the land on which it
is situated, where the husband and wife, or a head of
the family, and members of their family reside, as
certified to by the Barangay Captain of the locality. It
is deemed constituted on the house and lot from the
time it is actually occupied as the family residence
and considered as such for as long as any of its
beneficiaries actually resides therein. [Arts. 152 and
153, Family Code]
Temporary absence from the constituted family home
due to travel or studies or work abroad, etc. does not
interrupt actual occupancy. The family home is
generally characterized by permanency, that is, the
place to which, whenever absent for business or
pleasure, one still intends to return. [Sec. 6(D), RR 2-
2003]
It must be part of the ACP or CPG, or the exclusive
properties of either spouse. It may also be constituted
by an unmarried head of a family on his or her own
property. [Sec. 6(D), RR 2-2003 citing Art. 156, FC].
For purposes of availing this deduction, a person may
constitute only one family home. [Sec. 6(D), RR 2-
2003 citing Art. 161, FC]
Requisites for Deductibility [Sec. 6(D)(b), RR 2-
2003]
1.! The family home must be the actual residential
home of the decedent and his family at the time
of his death, as certified by the barangay captain
of the locality.
2.! The total value of the family home must be
included as part of the gross estate of the
decedent
3.! Allowable deduction must be in an amount
equivalent to the current FMV of the family home
as declared or included in the gross estate, or the
extent of the decedent’s interest (whether
conjugal/community or exclusive property),
whichever is lower, but in no case shall the
deduction exceed P1,000,000.
4.! The decedent was married or if single, was a
head of the family.
5.! Along with the decedent, any of the beneficiaries
must be dwelling in the family home.
6.! The family home as well as the land on which it
stands must be owned by the decedent.
Therefore, the FMV of the family home should
have been included in the computation of the
decedent’s gross estate.
Page 125 of 270
TAXATION LAW
Beneficiaries of a Family Home [Sec. 6(D)(a), RR 2-
2003]
1.! The husband and wife, or an unmarried person
who is the head of a family; and
2.! Their parents, ascendants, descendants, brothers
and sisters, whether the relationship be
legitimate or illegitimate, who are living in the
family home and who depend upon the head of
the family for legal support.
Limitation: P1,000,000
b.! Standard Deduction [Sec. 86(A)(5), Sec. 6(E),
RR 2-2003]
An amount equivalent to one million pesos
(P1,000,000) shall be deducted from the gross
estate without need of substantiation.
c.! Medical Expenses [Sec. 86(A)(6); Sec. 6(F), RR
2-2003]
All medical expenses (cost of medicine, hospital bills,
doctors’ fees, etc.) incurred (whether paid or unpaid).
Requisites for Deductibility
1.! The expenses were incurred by the decedent
within 1 year prior to his death
2.! The expenses are duly substantiated with
receipts and other documents in support thereof
Limitation Provided, that in no case shall the
deductible medical expenses exceed Five Hundred
Thousand Pesos (P500,000).
Not allowed as deduction:
1.! Any amount of medical expenses incurred within
one year from death in excess of P500,000 shall
no longer be allowed as a deduction under this
subsection.
2.! Neither can any unpaid amount thereof in excess
of the P500,000 threshold nor
3.! any unpaid amount for medical expenses
incurred prior to the one-year period from date of
death be allowed to be deducted from the gross
estate under “Claims against the estate”. [Sec.
6(F), RR 2-2003]
NET SHARE OF SURVIVING SPOUSE IN CPG/ACP
[SEC. 86(C), NIRC IN RELATION TO SEC. 6(H), RR
2-2003]
(Compare with Capital of Surviving Spouse which is
excluded from the gross estate).
U.P. LAW BOC TAXATION II TAXATION LAW

The amount deductible is the net share of the

surviving spouse in the CPG. The net share is
equivalent to ½ of 50% of the conjugal property after
deducting the obligations chargeable to such
property. Net share of the surviving spouse is neither
an ordinary nor a special deduction.
N.B. – There are three deductions with ceilings: (1)
Funeral expenses at P200,000; (2) Medical expenses at
P500,000, and (3) Family home at 1M.
EXCLUSIONS
a.! Capital of the Surviving Spouse [Sec. 85(H),
NIRC]
Capital: property of the spouses brought into
marriage. Strictly speaking, capital under the Civil
Law refers to the property brought by the husband to
the marriage while that brought into the marriage by
the wife known is as paraphernal property.
(Domondon)

Exclusive Property of Each Spouse

If ACP governs property relations
The community of property shall consist of all the
property owned by the spouses at the time of the
celebration of the marriage or acquired thereafter. [Art.
91, Family Code]
a.! The following are excluded from the community gains or benefits obtained by either or both spouses shall
property:
1.! Property acquired by gratuitous title by either agreed in marriage settlements. [Art. 106, Family Code]
spouse, and the fruits as well as the income
thereof, if any, unless it is expressly provided by a.! The following are exclusive property of each
the donor, testator, or grantor that they shall
form part of the community property.
2.! Property for personal and exclusive use of either
spouse; however, jewelry shall form part of the
community property.
3.! Property acquired before the marriage by either
spouse who has legitimate descendants from a
former marriage, and the fruits as well as the
income, if any, of such property. [Art. 92 Family
Code]
b.! Property acquired during the marriage is presumed
to belong to the community, unless it is proved that b.! Property bought on instalments paid partly from
it is one of those excluded therefrom.
If CPG governs property relations
The husband and wife place in a common fund the
proceeds, products, fruits, and income from their
separate properties and those acquired by either or both
spouses through their efforts or by chance, and, upon
dissolution of the marriage or of the partnership, the net
be divided equally between them, unless otherwise
spouse:
1.! That which is brought to the marriage as his or
her own
2.! That which each acquires DURING the marriage
by gratuitous title
3.! That which is acquired by right of redemption,
by barter or by exchange with property
belonging to only one of the spouses
4.! That which is purchased with exclusive money
of the wife or the husband [Art. 109, Family
Code]
exclusive funds of either or both spouses and partly
from conjugal funds belong to the buyer or buyers if
full ownership was vested BEFORE the marriage
subject to reimbursement advanced by the conjugal
partnership or by either or both spouses. [Art. 118,
Family Code]
c.! Whenever an amount or credit payable within a
period of time belongs to one of the spouses, the
sums collated during the marriage in partial
payments or by instalments on the principal are
considered the exclusive property of the spouse.
However, interest falling due during the marriage
on the principal belong to the conjugal partnership.
d.! All property acquired during the marriage whether
the acquisition appears to have been made,
contracted or registered in the name of one or both
spouses,, is presumed to belong to the conjugal
partnership, unless it is proved that it pertains
exclusively to the husband or to the wife.

Page 126 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

If separation of property governs property relations

Separation of property:
•! present or future property or both;
•! total or partial.
In the latter case, the property not agreed upon as separate shall pertain to the absolute community. [Art. 144,
Family Code]

To each spouse shall belong all earnings from his or her profession, business or industry, and all fruits, natural,
industrial, or civil, due or received during the marriage from his or her separate property. [Art. 145, Family Code]

Exemptions:
a.! Where net estate does not exceed P200,000. [Sec. 84, NIRC]
b.! The following transmissions shall not be taxed:
1.! Merger of the usufruct in the owner of the naked title
2.! Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicomissary
3.! The transmission from the first heir, legatee, or done in favor of another beneficiary in accordance with the
desire of the predecessor
4.! All bequests, devises, legacies, or transfers to social welfare, cultural and charitable institutions, no part of
the net income of which inures to the benefit of any individual, and provided that not more than 30% of
the said bequests, etc. shall be used by such institution for administration purposes.

Note: Effectivity of Family Code (Aug 3, 1988)
b.! Exemptions under special laws
1.! Benefits received by members from the GSIS
and the SSS by reason of death
2.! Amounts received from the Philippines and
US governments for damages suffered
during the last war.
3.! Benefits received by beneficiaries residing in
the Philippines under laws administered by
the US Veteran Administration
4.! Bequests, legacies, or donations mortis
causa to social welfare, cultural, or
charitable organizations. Bequests to be
used actually, directly and exclusively for
educational purposes are also exempt from
tax.
5.! Grants and donations to the Intramuros
Administration
9.!Tax Credit for Estate Taxes
Paid in a Foreign Country
It is a remedy against international double taxation.
To minimize the onerous effect of taxing the same
property twice, tax credit against Philippine estate
tax is allowed for estate taxes paid to foreign
countries.
General Rule: The estate tax imposed by the NIRC
shall be credited with the amounts of any estate tax
imposed by the authority of a foreign country.
Limitations on Credit
a.! For Estate Taxes paid to one foreign country
(Specific Country Limitation)
The amount of the credit in respect to the tax paid to
any country shall not exceed the same proportion of
the tax against which such credit is taken, which the
decedent's net estate situated within such country
taxable under the tax code bears to his entire net
estate.
Tax Credit Limit (Computation)
NET ESTATE FOREIGN COUNTRY
X PH ESTATE TAX
ENTIRE NET ESTATE
b.! For estate taxes paid to 2 or more foreign
countries (Global Limitation)
The total amount of the credit shall not exceed the
same proportion of the tax against which such credit
is taken, which the decedent's net estate situated
outside the Philippines taxable under the tax code
bears to his entire net estate.

Who may claim: RC/NRC/RA. Only the estate of a Tax Credit Limit (Computation)
decedent who was a citizen or a resident of the
Philippines at the time of his death can claim tax
credit for any estate tax paid to a foreign country.

Page 127 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

NET ESTATE FOREIGN COUNTRY 15,000)

X PH ESTATE TAX Actually paid to
ENTIRE NET ESTATE 1,400
Country H
Tax Credit allowed under
4,400
Compare the tax credit allowed under Limitation A Limitation a
and Limitation B. The lower of the two amounts is the
final allowable tax credit. In this case, the amount Solution – Limitation b:
computed under Limitation A (4,400) is lower, thus it 1.! Apply Formula b. The result after applying the
becomes the final allowable tax credit. formula above is compared to the tax actually
paid in total to foreign countries.
If there is only one foreign country involved, both 2.! The lower of the two amounts will be added to
limitations will yield the same answer. get the total tax credit allowed under Limitation
b.
The resulting amount will be compared to the actual
tax paid to the foreign country. The lower amount will
be the final allowable tax credit. 450/1500 x 4,500
15,000
Illustration: Total foreign 6,400
income taxes
Net Estate – Philippines (reduced P1,050,000 paid
by all allowable deductions, except
Tax credit 4,400
standard deduction)
allowed under
Country G Net Estate 300,000 Limitation a
Country H Net Estate 150,000
Tax paid/incurred: 10.!F iling of Notice of Death
Philippines 15,000
Country G 5,000 [Sec. 89, NIRC]
Country H 1,400
Net Estate – Philippines (reduced P1,050,000 Notice of Death
by all allowable deductions, except When needed:
standard deduction) a.! in all cases of transfers subject to tax; or
b.! where, though exempt from tax, the value of the
Net taxable estate is P500,000 (1,050,000 + gross estate exceeds P20,000.
300,000 + 150,000 – 1,000,000 standard
deduction). The Philippine estate tax on P500,000 is Period of sending notice: A written Notice of Death
P15,000. must be given to the BIR.
a.! Within 2 months after the death of the decedent
Solution – Limitation a or
1.! Apply Formula a. The result after applying the b.! Within 2 months after the executor or
formula above is compared to the tax actually administrator or executor qualifies as such.
paid for each foreign country.
2.! The lower of the two amounts for each foreign Who will file: executor, administrator, or any of the
country will be added to get the total tax credit legal heirs, as the case may be.
allowed under Limitation a.
11.! Estate Tax Return
Amount allowed
(whichever is lower) [Secs. 90-91, NIRC]
Country G
(300/1500 x 3,000 When Required (Copies in duplicate) [Sec. 90 (A),
15,000) 3,000 NIRC]
Actually paid to a.! When the estate is subject to estate tax, OR
5,000
Country G b.! When, though exempt from tax, the gross value
Country H of the estate exceeds Two hundred thousand
1,500 1,400
(150/1500 x pesos (P200,000), OR

Page 128 of 270

U.P. LAW BOC TAXATION II
c.! Regardless of the gross value of the estate, when
the said estate consists of registered or
registrable property such as real property, motor
vehicle, shares of stock or other similar property
for which a clearance from the Bureau of Internal
Revenue is required as a condition precedent for
the transfer of ownership thereof in the name of
the transferee.
Contents [Sec. 90 (A), NIRC]
The executor, or the administrator, or any of the legal
heirs, as the case may be, shall file a return under
oath in duplicate, setting forth:
a.! The value of the gross estate of the decedent at
the time of his death, or in case of a nonresident,
not a citizen of the Philippines, of that part of his
gross estate situated in the Philippines;
b.! The deductions allowed from gross estate in
determining the net taxable estate; and
c.! Such part of such information as may at the time
be ascertainable and such supplemental data as
may be necessary to establish the correct taxes.
d.! For estate tax returns showing a gross value
exceeding P2,000,000 - there must be a
statement duly certified to by a Certified Public
Accountant containing the following:
1.! Itemized assets of the decedent with their
corresponding gross value at the time of his
death, or in the case of a non-resident, not a
citizen of the Philippines, of that part of his
gross estate situated in the Philippines;
2.! Itemized deductions from gross estate
allowed in Section 86; and
3.! The amount of tax due whether paid or still
due and outstanding.
Remember:
P20,000 – File Notice of Death
P200,000 – File Estate Tax Return
P2,000,000 – Statement duly certified by CPA
Period for Filing [Sec. 90 (B), NIRC]
General Rule: Filed within 6 months from the
decedent's death.
Exception [Sec. 90 (C), NIRC]
The CIR shall have authority to grant, in meritorious
cases, a reasonable extension not exceeding 30 days
for filing the return.
Who will file: executor, administrator, or any of the
legal heirs, as the case may be, under oath. If there is
no executor or administrator appointed, qualified,
and acting within the Philippines, any person in
actual or constructive possession of any property of
the decedent may file this return.
Page 129 of 270
TAXATION LAW
Where to file the estate tax return and pay the tax
due [Sec. 9, RR 2-2003]
Resident Citizen (RC and RA)
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 file the estate tax return and
pay the corresponding estate tax with:
a.! An authorized agent bank (AAB), or
b.! Revenue District Officer (RDO), or
c.! Collection Officer, or
d.! Duly authorized Treasurer of the city or
municipality in which the decedent was
domiciled at the time of his death
Non-resident decedent (NRA/NRC) 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 for
the estate shall be secured from the RDO having
jurisdiction over the executor or administrator’s legal
residence.
Non-resident decedent does not have an 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 Office of the
Commissioner through RDO 39 QC.
The foregoing provisions notwithstanding, the CIR
may continue to exercise his power to allow a
different venue/place in the filing of tax returns.
Payment: Pay as you file
At the time the return is filed by the executor,
administrator or the heirs.
The executor or administrator, or if there is none
appointed, qualified, and acting within the
Philippines, then any person in actual or constructive
possession of any property of the decedent. The
estate tax shall be paid by the executor or
administrator before the delivery of the distributive
share in the inheritance to any heir or beneficiary.
Exception: In meritorious cases, the CIR may grant a
reasonable extension not exceeding 30 days from
filing.
Extension of Payment [Sec. 9(E), RR 2-2003]
The CIR may allow an extension of payment, if he
finds that the payment on the due date of the estate
U.P. LAW BOC TAXATION II TAXATION LAW

tax or of any part thereof would impose undue The extent of his liability, however, shall in no case
hardship upon the estate or any of the heirs: exceed the value of his share in the inheritance.
a.! Extension not to exceed 5 years, in case the
estate is settled judicially, or Claims for taxes, whether assessed before or after the
b.! 2 years in case the estate is settled death of the deceased, can be collected from the
extrajudicially. heirs even after the distribution of the properties of
the decedent, xxx. The heirs shall be liable therefor,
Where the taxes are assessed by reason of in proportion to their share in the inheritance.
negligence, intentional disregard of rules and [Marcos v. CA, G.R. No. 120880 (1997)]
regulations, or fraud on the part of the taxpayer, no
extension will be granted by the CIR. Tax deficiency after distribution of properties
a.! Sue all the heirs and collect from each of them
If extension granted, the CIR may require the the amount of tax proportionate to the
executor, or administrator, or beneficiary, as the case inheritance received
may be, to furnish a bond in such amount, not b.! By virtue of a lien created under Sec 219, sue only
exceeding double the amount of the tax and with one heir and subject the property he received
such sureties as the CIR deems necessary, from the estate to the payment of estate tax.
conditioned upon the payment of the said tax in Such heir may go against the other heirs.
accordance with the terms of the extension.
Tax Rates
Effects of granting an extension If the Net Estate is
a.! Payment of the amount in respect of which the Of the
But not The Tax
extension is granted on or before the date of the Over Plus Excess
Over Shall be
expiration of the period of the extension Over
b.! Suspension of the running of statute of 200,000 Exempt
limitations for deficiency assessment for the 200,000 500,000 0 5% 200,000.
period of any extension 500,000 2M 15,000 8% 500,000
c.! Any amount paid after the statutory due date of 2M 5M 135,000 11 % 2M
the tax, but within the extension period, shall be 5M 10M 465,000 15 % 5M
subject to interest but not to surcharge. 10M 1.215M 20 % 10M

Can estate tax be paid in installments? Yes! Exempt: If net taxable estate ≤ 200,000
In case the available cash of the estate is not
sufficient to pay its total estate tax liability, the estate
may be allowed to pay the tax by installment and a
clearance shall be released only with respect to the
property the corresponding/computed tax on which
has been paid. [Sec. 9(F), RR 2-2003]

Who are liable for the payment of estate taxes

Primarily, the estate, through the executor or
administrator.
a.! Payment shall be made before the delivery of the
distributive share in the inheritance to any heir or
beneficiary.
b.! If there are two or more executors or
administrators, all of them are severally liable
for the payment of the tax.
c.! The estate tax clearance issued by the CIR or the
RDO having jurisdiction over the estate, will
serve as the authority to distribute the remaining
properties/share in the inheritance to the heir or
beneficiary.

Subsidiarily, heirs or beneficiaries, for the payment of

that portion of the estate which his distributive share
bears to the value of the total net estate.

Page 130 of 270

U.P. LAW BOC TAXATION II
! Donor’s! Tax
1.! Basic Principles, Concept,
and Definition
A donor’s tax is levied, assessed, collected and paid
upon the transfer by any person, resident or
nonresident, of the property by gift. [Sec. 98(A),
NIRC]. It shall apply whether the transfer is in trust or
otherwise, whether the gift is direct or indirect, and
whether the property is real or personal, tangible or
intangible. [Sec. 98(B), NIRC]
It is the tax on donations. Thus, it is a tax on –
a.! An act of the donor disposing gratuitously of a
thing/right in favor of a donee located within the
Philippines; and
b.! Sales, exchanges or other transfers of properties,
other than real property (defined in Sec. 24D)
classified as capital asset within the Philippines,
for less than an adequate and full consideration
3
in money or money’s worth. ([Sec. 100, NIRC]
Donor’s tax is not a property tax but a tax imposed on
the transfer of property by way of gift inter vivos. [Sec
11, RR 2-2003 citing Lladoc v. CIR (1965)] It
supplements the estate tax by preventing the
avoidance of the latter through the device of
donating the property during the lifetime of the
deceased. [Sec. 11, RR 2-2003]
2.!Nature, Purpose, and
Object
a.! To supplement estate tax by preventing its
avoidance through the device of donating the
property during the lifetime of the deceased;
b.! To prevent avoidance of income tax through the
device of splitting income among numerous
donees, who are usually members of a family or
into many trusts, with the donor thereby
escaping the effect of the progressive rates of
income tax.
3"Note: In the RR for Train Law, there is added
provision:
Provided, that the sale, exchange or other transfer of
property is not made in the ordinary course of
business (i.e. at arm’s length and free of donative
intent). [Sec. 16, RR 12-2018]"
Page 131 of 270
TAXATION LAW
3.!Time and Transfer of
Properties
Donor’s tax shall not apply unless and until there is a
completed gift. The transfer of property by gift is
perfected from the moment the donor knows of the
acceptance by the donee; it is completed by delivery,
either actually or constructively, of the donated
property, to the donee. Thus, the law in force at the
time of the perfection/completion of the donation
shall govern the imposition of the donor’s tax. [Sec. 11,
RR 2-2003]
4
A gift that is incomplete because of reserved powers
becomes complete when either:
a.! the donor renounces the power OR
b.! his right to exercise the reserved power ceases
because of the happening of some event or
contingency or the fulfillment of some condition,
other than because of the donor’s death. [Sec. 11,
RR 2-2003]
4.!Requisites of Valid
Donation
Art. 725, NCC. Donation is an act of liberality
whereby a person disposes gratuitously of a thing
or right in favor of another, who accepts it.
Requisites of a VALID and COMPLETE donation
5
a.! Donative intent of the donor
b.! Capacity of the donor
c.! Delivery of the donated property
d.! Acceptance of the donee
e.! Donation must be in the proper form
1.! Movable: orally or in writing if value is equal
to or less than P5,000. Otherwise, it shall be
in writing.
2.! Immovable: must be made in a public
document.
Re: Acceptance [Sec. 11, RR 2-2003]
a.! For movables exceeding 5K – Acceptance shall
be in writing (Art. 748, Civil Code)
b.! For immovable (Art. 749, Civil Code) –
1.! Must be in the same deed of donation; or
2.! In a separate public document – the donor
shall be notified thereof in an authentic form,
4"The same is provided for in RR 12-2018""
5
Note: The transfers which may be constituted as
donation is exempt from the donative intent
requirement.
U.P. LAW BOC
and this step shall be noted in both
instruments
3.! But it shall not take effect unless it is done
during the lifetime of the donor.
5.!Transfers which May be
Constituted as Donation
a.! Sale, Exchange or Transfer
of Property for Insufficient
Consideration
Where property, other than real property referred to
in Section 24(D), is transferred for less than an
adequate and full consideration, then the amount by
which the fair market value of the property exceeded
the value of the consideration shall be deemed a gift,
and shall be included in computing the amount of
gifts made during the calendar year. [Sec. 100,
NIRC]
6 or exchanged is greater than the amount of
b.! Condonation or Remission of
Debt Where the Debtor Did
Not Render Service in Favor
of the Creditor
Condonation or remission of debt is defined as an act
of liberality, by virtue of which, without receiving any
equivalent, the creditor renounces the enforcement of
the obligation, which is extinguished in its entirety or
in that part or aspect of the same to which the
remission refers. It is an essential characteristic of
remission that it be gratuitous, that there is no
equivalent received for the benefit given; once such
equivalent exists, the nature of the act changes. It
may become dation in payment when the creditor
receives a thing different from that stipulated; or
novation, when the object or principal conditions of
the obligation should be changed; or compromise,
when the matter renounced is in litigation or dispute
and in exchange of some concession which the
creditor receives. [Dizon v CTA, G.R. No. 140944,
2008]
c.! Others
6"NB.!Provided,!that!the!sale,!exchange!or!other!
transfer!of!property!is!not!made!in!the!ordinary!course!
of!business!(i.e.!at!arm’s!length!and!!free!of!donative!
intent).![Sec.!16,!RR!12G2018]"
Page 132 of 270
TAXATION II TAXATION LAW
1.! Renunciation in favor of other heirs (Sec 11, RR 2-
2003)
a.! Renunciation by the surviving spouse of
their share in the ACP/CPG after the
dissolution of the marriage in favor of heirs
of the deceased spouse or any other
person/s
b.! Renunciation by an heir, specifically and
categorically in favor of identified heir/s to
the exclusion or disadvantage of the other
co-heirs in the hereditary estate
However, general renunciation by an heir,
including the surviving spouse, of their share
in the hereditary estate left by the decedent
is NOT subject to DT [Sec 11, RR 2-2003]
2.! Sale of shares not listed and traded in a local
stock exchange below FMV.
Sec. 7.c.1.4, RR 6-2008 provides: “In case the fair
market value of the shares of stock sold, bartered,
money and/or fair market value of the property
received, the excess of the fair market value of
the shares of stock sold, bartered or exchanged
over the amount of money and the fair market
value of the property, if any, received as
consideration shall be deemed a gift subject to
the donor’s tax under Sec. 100 of the Tax Code,
as amended.”
6.!Transfer for Less Than
Adequate and Full
Consideration
A transfer of real or personal property will be
considered a donation and subject to donor’s tax
when:
a.! The transfer was for less than adequate and full
consideration;
b.! Such transfer was effective during his lifetime
(inter vivos); and
c.! Other than real property classified as capital
asset within the Philippines as defined in Sec.
24(D). [Sec. 100, NIRC]
In this case, the amount by which the fair market
value of the property exceed the value of the
consideration shall be considered a gift.
7.!Classification of Donor
Donor’s Tax applies to individuals and corporations
(in their secondary purpose). They may be classified
into:
U.P. LAW BOC TAXATION II TAXATION LAW

a.! Residents (RC/RA/DC/RFC)
b.! Non-Residents (NRC/NRA/NRFC)
Such classification is important in determining the
deductions from the gross gift of the donor, and in
filing the return.
If donor is:
a.! RC/NRC/RA = liable for donor’s tax
REGARDLESS of where the gift was made or
where property is located
b.! NRA = liable for donor’s tax only if the property
donated is within the Philippines.
Situs of Intangible Personal Properties
General Rule: Mobilia Sequuntur Personam Principle:
Taxation of intangible personal properties (such as
credits, bills, bank deposits promissory notes, and
corporate stocks) follows the residence/domicile of
owner thereof. Situs is the domicile or residence of
the owner. (Collector v. Fisher, supra.]
Exceptions:
a.! When it is inconsistent with express provisions of
law
b.! When justice does not demand that it should be,
as where the property in fact has a situs
elsewhere
Rule of Reciprocity
Same as in Estate Tax. See discussion above.

8.!Determination of Gross Gift (including Composition of Gross

Gift)
RC/NRC/RA NRA
Composition and Determination of Gross Gift
a.! Real property located in the Phil.
b.! Tangible personal property located in the Phil.,
a.! Real property wherever situated c.! Intangible personal property with a situs in the Phil.
b.! Tangible personal property wherever situated (subject to the rule of reciprocity)
c.! Intangible personal property wherever situated
Note: If there is reciprocity, intangible assets are excluded
from gross gifts
Deductions and Exemptions from GROSS gift to arrive at NET Gifts
Deductions (These are exempt donations but are
deductible from, and not treated as exclusions from the
gross gift): Dowries or donations made:
a.! On account of marriage
b.! Before its celebration or within one year thereafter
c.! By parents to each of their legitimate, recognized
natural, or adopted children
d.! To the extent of the first P10,000
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.
Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution,
accredited nongovernment organization, trust or philanthropic organization or research institution or organization,
Provided not more than 30% of said gifts will be used by such donee for administration purposes.

For the purpose of this exemption, a 'non-profit educational and/or charitable corporation, institution,
accredited nongovernment organization, trust or philanthropic organization and/or research institution or
organization' is a :
a.! school, college or university and/or charitable corporation,
b.! accredited nongovernment organization, or;
c.! trust or philanthropic organization and/or research institution or organization, that is:
1.! incorporated as a non-stock entity,
2.! paying no dividends,

Page 133 of 270

U.P. LAW BOC TAXATION II
3.! governed by trustees who receive no compensation, and
4.! devoting all its income, whether students' fees or gifts, donation, subsidies or other forms of philanthropy,
to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation.
Common Exemptions
a.! Encumbrances on the property donated if assumed by the donee in the deed of donation.
b.! Donations made to entities exempted under special laws
NOT SUBJECT TO DONOR’S TAX
a.! Contributions to candidate or political party for
campaign purposes duly reported to COMELEC
b.! Gift to Parish Priest or Church (applies only to
real property tax)
c.! Onerous Donations or Donations in exchange for
goods/services (since they are subject to income
tax)
SUBJECT TO DONOR’S TAX
Gratuitous Donations to Homeowners’ Association
9.!Valuation of Gifts Made in
Property
Taxable Base:
Net gifts i.e., net economic benefit from the transfer
that accrues to the donee AT THE TIME OF
DONATION
a.! If gift is personal property = FMV at the time of
donation
b.! If gift is real property = whichever is HIGHER
1.! FMV as determined by the CIR (Zonal Value)
or
2.! FMV in the latest schedule of values fixed by
the provincial and city assessor (MV per Tax
Declaration) [Sec. 102 in relation to Sec.
88(B), NIRC]
Note: Real property considered as capital assets
under the Tax Code are exempted from this rule
because the taxable value taken into account in
the computation of tax is the higher of either the
zonal value or the assessor’s value; not the
consideration. Therefore, the insufficiency and
inadequacy of the consideration paid would not
affect the computation of the tax due and
payable [Sec. 100 in relation to Sec. 24(d), NIRC]
Under Section 24(d), the fair market value itself,
if higher than the gross selling price, is the basis
for computing the capital gains tax imposed
upon the sale of such capital assets.
c.! If there is an improvement = construction cost
(based on the building permit and/or occupancy
permit) + 10% per year after the year of
Page 134 of 270
TAXATION LAW
construction; or the FMV based on the latest tax
declaration.
d.! If unlisted stocks = Adjusted Net Asset Method
shall be used whereby all assets and liabilities
are adjusted to fair market values. The net of
adjusted asset minus the adjusted liability value
is the indicated value of the equity.
Note:
Where property is transferred for less than an
adequate and full consideration in money or
money’s worth, then the amount by which the FMV
of the property at the time of the execution of the
Contract to Sell or execution of the Deed of Sale
which is not preceded by a Contract to Sell exceeded
the value of the agreed or actual consideration or
selling price shall be deemed a gift, and shall be
included in computing the amount of gifts made
during the calendar year. [Sec. 11, RR 2-2003]
N.B. – Applies also to sale, barter, or exchange of
shares of stock not listed and traded in a local stock
exchange at prices below the FMV. [Sec. 7, RR 6-
2008]
However, where the consideration is fictitious, the
entire value of the property shall be subject to
donor’s tax.
Donation to a Political Candidate
Prior to RA 7166, a donation for a political candidate
was subject to donor’s tax. [ACCRA v CIR, G.R. No.
120721 (2005)]
Under RA 7166, contributions duly reported to the
BIR are not subject to donor’s tax, as long as it is
utilized in his campaign. Unutilized/excess campaign
funds, that is, campaign contributions net of the
candidate’s campaign expenditures, shall be
considered as subject to income tax and as such,
must be included in the candidate’s taxable income
as stated in his/her ITR filed for the subject taxable
year [Sec. 2, RR 7-2011]
U.P. LAW BOC
10.!Tax Credit for Donor’s
Taxes Paid in a Foreign
Country
Who may claim the tax credit
a.! Resident citizen
b.! Non-resident citizen
c.! Resident alien
Per Country Limit
Net Gift Foreign Country
x Philippine Donor's Tax&
Entire Net Gift
Worldwide Limit
Net Gift All Countries
x Philippine Donor's Tax&
Entire Net Gift
11.!E xemptions of Gifts from
Donor’s Tax
a.! Encumbrances on the property donated if
assumed by the donee in the deed of donation.
b.! Donations made to entities exempted under
special laws.
1.! Aquaculture Department of the Southeast
Asian Fisheries Development Center of the
Philippines
2.! Development Academy of the Philippines
3.! Integrated Bar of the Philippines
4.! International Rice Research Institute
5.! National Museum
6.! National Library
7.! National Social Action Council
8.! Ramon Magsaysay Foundation
9.! Philippine Inventor’s Commission
10.! Philippine American Cultural Foundation
11.! Task Force on Human Settlement on the
donation of equipment, materials and
services
12.! Person liable
Every person, whether natural or juridical, resident or
non-resident, who transfers or causes to transfer
property by gift, whether in trust or otherwise,
whether the gift is direct or indirect and whether the
property is real or personal, tangible or intangible.
[Sec. 98, NIRC]
Page 135 of 270
TAXATION II TAXATION LAW
DONOR’S TAX RETURN
Separate return is filed for each gift made on
different dates during the year reflecting therein any
previous net gifts made in the same calendar year. In
case of donation to relatives, only one return shall be
filed for several gifts by the donor to the different
donees on the same date. If the gift involves CPG,
each spouse shall file separate return with respect to
his/her respective share in the CPG.
Contents
a.! Each gift made during the calendar year which is
to be included in computing net gifts;
b.! The deductions claimed and allowable;
c.! Any previous net gifts made during the same
calendar year;
d.! The name of the donee;
e.! Relationship of the donor to the done;
f.! Such further information as the CIR may require.
[Sec.13, RR 2-2003]
Period for Filing
General Rule: The return must be filed within 30 days
after the date when the gift was made or completed.
The tax due thereon shall be paid at the same time
that the return is filed.
Who will file: Any person who made a gift, such must
be filed under oath.
Where to file the donor’s tax return and pay the tax
due [Sec. 13, RR 2-2003]
Resident
Unless the CIR permits otherwise, the return shall be
filed and tax paid to:
a.! To Authorized Agent Bank (AAB) or the Revenue
District Officer having jurisdiction over the place
of the domicile of the donor at the time of the
transfer.
b.! If no AAB = to the Revenue Collection Officer or
duly Authorized City or Municipal Treasurer
where the donor was domiciled at the time of the
transfer,
c.! if no legal residence in Phil or NRA = with
Revenue District No. 39 - South Quezon City or
with the Philippine Embassy or Consulate in the
country where donor is domiciled at the time of
the transfer.
Non-residents
a.! The Philippine Embassy or Consulate in the
country where he is domiciled at the time of the
transfer, or
U.P. LAW BOC TAXATION II TAXATION LAW
7
b.! Directly with the Office of the Commissioner. General Formula
Gross Gifts
Payment: Pay as you file. Less: Deductions from gross gifts
-----------------------------------------------------
Notice of donation to donee institutions duly Net gifts
accredited by the Philippine Council for NGO Multiply by: Tax rate
Certification, Inc. (PCNC) -----------------------------------------------------
= Estate Tax Due
Requisites to be exempt from donor’s tax and to claim Less: Tax Credit, if any
full deduction: -----------------------------------------------------
a.! Donor must give notice if donation is at least = Donor’s Tax Due, if any
P50K
b.! Notice is given to RDO which has jurisdiction over If there are several gifts during the year
place of business Gross Gifts made on a certain date
c.! Notice must be given within thirty (30) days after Less: Deductions from gross gifts
receipt of Certificate of Donation -----------------------------------------------------
d.! Certificate of Donation must be attached to the Net gifts made on a certain date
Notice Add: Prior Net gifts during the year
e.! Notice must state that not more than thirty -----------------------------------------------------
percent (30%) of the donation shall be used by =Aggregate Net Gifts
done institution (qualified-donee institution) for Multiply by: Tax rate
administration purposes [Sec. 13 (C ), RR 2- -----------------------------------------------------
2003] = Donor’s Tax on Aggregate Net Gifts
Less: Donor’s Tax Paid on Prior Net Gifts
13.! Tax Basis -----------------------------------------------------
Donor’s Tax Due on the Net Gifts to Date
The tax for each calendar year shall be computed on Less: Tax Credit, if any
the basis of the total net gifts made during the -----------------------------------------------------
calendar. (Sec. 99, NIRC) = Donor’s Tax Due, if any

“Net Gifts”
a.! The net economic benefit from the transfer that
accrues to the donee.
b.! Accordingly, if a mortgaged property is
transferred as a gift, but imposing upon the
donee the obligation to pay the mortgage
liability, then the net gift is measured by
deducting from the fair market value of the
property the amount of the mortgage assumed.
[Sec. 11, RR 2-2003]

7 "Note:! the! term! “OFFICE! OF! THE! COMMISSIONER”! shall!

refer! to! the! Revenue! District! Office! (RDO)! having! jurisdiction!
over!the!BIRGNational!Office!Building!which!houses!the!Office!
of! the! Commissioner,! or! ! presently,! to! the! Revenue! District!
Office!No.!39!–!South!Quezon!City"

Page 136 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

Tax Rate

IF NOT A STRANGER
Net Gift Over But not Over The Tax Shall be Plus Of the Excess Over
100,000.00 Exempt
100,000.00 200,000.00 0 2% 100,000.00
200,000.00 500,000.00 P 2,000.00 4% 200,000.00
500,000.00 1,000,000.00 14,000.00 6% 500,000.00
1,000,000.00 3,000,000.00 44,000.00 8% 1,000,000.00
3,000,000.00 5,000,000.00 204,000.00 10% 3,000,000.00
5,000,000.00 10,000,000.00 404,000.00 12% 5,000,000.00
10,000,000.00 and over 1,004,000.00 15% 10,000,000.00

IF A STRANGER: 30%
a.! Rate applicable shall be based on the law prevailing at the time of donation.
b.! When the gifts are made during the same calendar year but on different dates, the donor's tax shall be
computed based on the total net gifts during the year.

Donation made to a stranger is subject to 30% of the net gift. A stranger is a person who is not a:
•! Brother, sister (whether by whole or half blood), spouse, ancestor and lineal descendants; or
•! Relative by consanguinity in the collateral line within the fourth degree of relationship.

SUMMARY OF TRANSFER TAXES

TRANSFER TAXES
Estate Tax Donor’s Tax
Time for filing a return and payment of tax
FILED: within six (6) months from the decedent's death. NOTE: separate return is filed for each gift made on
E: not exceeding 30 days (in meritorious cases) different dates during the year reflecting therein any
previous net gifts made in the same calendar year.
N.B.: Written notice of death to CIR w/in 2 mos. After
death FILED: within thirty (30) days after the gift (donation) is
made
PAID: before the delivery of the distributive share in the
inheritance to any heir or beneficiary; upon filing of In case of donation to relatives, only one return shall be
return. filed for several gifts by the donor to the different donees
on the same date.
Extension: (when payment on the due date would
impose undue hardship) not to exceed: If the gift involves CPG, each spouse shall file separate
•! 15 years, in case the estate is settled through the return with regard to his/her respective share in the CPG.
courts; or
•! 2 years in case the estate is settled extra-judicially.
N.B. when extension is granted, a bond may be required
by CIR ≤ 2x amount of tax
Where to file and to whom paid
General Rule: to the Authorized Agent Bank (AAB), Resident
Revenue Collection Officer (RCO) or duly authorized General Rule: to AAB of the RDO having jurisdiction over
Treasurer of the city or municipality in the Revenue the place of the domicile of the donor at the time of the
District Office having jurisdiction over the place of transfer.
domicile of the decedent at the time of his death

Exception: If NRA/NRC, Exception:

•! If w/ Administrator (Aor), Executor (Eor) in Phil = to
the AAB of the RDO where such Aor, Eor is
registered/domiciled, if not yet registered with the
BIR.
•! If w/o Aor,Eor in Phil = to AAB under the jurisdiction
•! If no AAB = to the RCO or duly Authorized City or
Municipal Treasurer where the donor was domiciled
at the time of the transfer,
•! If no legal residence in Phil or NRA = with Revenue
District No. 39 - South Quezon City or with the

Page 137 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

of RDO No. 39 Philippine Embassy or Consulate in the country

where donor is domiciled at the time of the transfer.

Non-resident
•! The Philippine Embassy or Consulate in the country
where he is domiciled at the time of the transfer, or
•! Directly with the Office of the Commissioner.
Who should file
a.! The Eor/Aor or any of the legal heirs of the Any person, natural or juridical, resident or non-resident,
decedent, whether resident or non-resident of the who transfers or causes to transfer property by gift,
Philippines, under any of the following situations: whether in trust or otherwise, whether the gift is direct or
1.! In all cases of transfers subject to estate tax; indirect and whether the property is real or personal,
2.! Where though exempt from estate tax, the tangible or intangible.
gross value of the estate exceeds two hundred
thousand (P200,000) pesos; or
3.! Regardless of the gross value of the estate,
where the said estate consists of registered or
registrable property such as real property,
motor vehicle, shares of stock or other similar
property for which a clearance from the BIR is
required as a condition precedent for the
transfer of ownership therof in the name of the
transferee; or
b.! If there is no executor or administrator appointed,
qualified, and acting within the Philippines, then
any person in actual or constructive possession of
any property of the decedent.

N.B: Eor/Aor has the primary obligation to pay the

estate tax but the heir or beneficiary has subsidiary
liability for the payment of that portion of the estate
which his distributive share bears to the value of the
total net estate. The extent of his liability, however, shall
in no case exceed the value of his share in the
inheritance.

Page 138 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

ESTATE TAX

EXCLUSIVE COMMUNITY TOTAL

8
Gross Estate
Add:
Taxable Transfers & Others
Revocable Transfers/Donation Mortis Causa Value Taken of Property
Transfers in contemplation of death Less: Mortgage debt paid, if any
Property passing under GPoA
9 Initial Basis
Transfers for insufficient consideration Less: Proportionate Deduction
10
Decedent’s Interest Accrued
Proceeds of Life Insurance w/ Final Basis
11
revocable beneficiary Multiplied by Deduction Rate
Family Home
12
Claims against an Insolvent Person VANISHING DEDUCTION
Amount received by heirs
**Proportionate Deduction
Initial&Basis
Less: (Ordinary Deductions) = &x&(ELIT+TPU)
13 Value&of&GE&of&present&decedent
7 ELIT
Vanishing Deductions
Transfers for Public Use
Retirement Benefits received by heirs

Net Estate
14
Less: (Special Deductions )
Standard Deduction
Family Home
Medical Expenses
Amounts received by heirs If only 1 country is involved: (whichever is lower)

Net Taxable Estate (before share of surviving spouse) Net&EState&in&the&Foreign&Country

Estate Tax Credit = &x&Philippine&Estate&Tax
Less: Share of Surviving Spouse World&Net&Estate
Net Taxable Estate
OR actual estate tax paid to foreign country
Multiply by Tax Rate
If two or more countries are involved: (whichever is lower)
Estate Tax Due
15
Less: Tax Credit , if any Net&Estate&per&Foreign&Country
ESTATE TAX DUE Estate Tax Credit = &x&Philippine&Estate&Tax
Entire&Net&Estate

Net&Estate&of&ALL&Foreign&Country
OR &x&Philippine&Estate&Tax
Entire&Net&Estate

! OR!actual!estate!tax!paid!to!foreign!country!
!

8
DO NOT INCLUDE: Exemptions
9
Amount included in the GE = FMV at the time of death – consideration amount
10
Accrued before his death but only received after his death, e.g., dividends declared on/before, and received after
death; partnership’s profit earned on/before and received after, accrued interest and rents on/before and collected
after death
11
Beneficiary must be the estate of the decedent, E/Aor or a third person. If premiums are paid using conjugal funds,
part of conjugal funds.
12
Full amount of the receivable. However, the uncollectible amount may be deducted from GE under ELIT.
13 Philippine! Gross! Estate
If NRA, Allowable Deduction wrt ELIT = ! x! ELIT!
World! Gross! Estate
14
These are not allowable deductions when TP is NRA.
15
Applies only to RC/NRC/RA

Page 139 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

DONOR’S TAX

ON FIRST DONATION

Gross Gift xxx

Less: Deductions (those not beneficial
to the done e.g., mortgage) xxx

Net Gift xxx

Less: Exemptions, if applicable xxx

Net Taxable Gift xxx

Multiply by Tax Rate xx%

Donor’s Tax Due xxx

16
Less: Tax Credit , if any xxx
DONOR’S TAX DUE xxx If only 1 country is involved: (whichever is lower)

Net&Donations&outside&Phil
ON SUBSEQUENT DONATIONS w/in the same calendar year Tax Credit = &x&Philippine&Donor' s&Tax
Net&Dontations&w/in&and&w/o

Gross Gift xxx If two or more countries are involved: (whichever is lower)
Less: Deductions (those not beneficial
Net&Donation&per&Foreign&Country
to the done e.g., mortgage) xxx Tax Credit = &x&Philippine&Donor's&Tax
Net&Dontations&w/in&and&w/o

Net Gift xxx OR

Less: Exemptions, if applicable xxx &
Net&Donation&w/o
&x&Philippine&Donor' s&Tax
Net&Dontations&w/in&and&w/o
Net Taxable Gift xxx ! !
! OR!actual!donor’s!tax!paid!to!foreign!country!
Add: All previous net gifts during the year !
xxx
Aggregate Net Gifts xxx
Multiply by Tax Rate xx%

Donor’s Tax on Aggregate Net Gifts xxx

Less: Donor’s tax on previous net gifts during the year xxx

Donor’s Tax Due xxx

17
Less: Tax Credit , if any xxx
DONOR’S TAX DUE xxx

16
Applies only to RC/NRC/RA
17
Applies only to RC/NRC/RA

Page 140 of 270

 U.P. LAW BOC TAXATION II TAXATION LAW

ESTATE TAX

DEATH GR: w/in 6m after death

E: extension of 30d ESTATE TAX
RETURN + CANCEL(TIN(
PAYMENT
(NB: Date of
payment may
Prepare the LIST of assets be extended, Transfer(
NOTICE OF DEATH to RDO and liabilities and their 5yrs or 2yrs), if properties( to(
by Eor/Aor supporting documents estate exceeds the(heirs(
Get TIN for ESTATE 200,000php

DONOR’S TAX

Full Exemption NO TAX RETURN

NECESSARY
COMPLETION/ Exempt
PERFECTION OF
DONATION Partial Exemption
w/in 30d after
gift was made DONOR’S TAX No Notice of
RETURN + PAYMENT Donation
(NB: Date of payment Necessary
may be extended ≤ 6
months)
Liable

Page 141 of 270

U.P. LAW BOC TAXATION II
V.! VALUE-ADDED TAX
(VAT) AND
PERCENTAGE TAXES
! VAT
1.! Concept, Characteristics/
Elements of VAT-taxable
Transactions
VAT is a consumption tax imposed at every stage of
distribution process on (i) the sale, barter, exchange,
or lease of goods or properties and (ii) rendition of
services in the course of trade or business, or the (iii)
importation of goods, whether such imported goods
are for use in business or non-business purposes. (Sec.
4.105-2, RR 16-2005)
The taxpayer (seller) determines his tax liability by
computing the tax on the gross selling price or gross
receipt (output tax), and subtracting or crediting the
earlier VAT on the purchase or importation of goods
or on the purchase of service (input tax) against the
tax due on his own sale
CONSTITUTIONALITY OF VAT
ABAKADA Guro Party List, et. al. v. Ermita, G.R. No.
168056 (2005):
a.! The validity of raising the VAT rate from 10% to
12% by the President was upheld by SC.
b.! With respect to Sec. 8, amending Sec. 110 (A),
which provides for 60-month amortization of the
input tax on capital goods purchased: It is not
oppressive, arbitrary, and confiscatory. The
taxpayer is not permanently deprived of his
privilege to credit the input tax. For whatever is
the purpose, it involves executive economic policy
and legislative wisdom in which the Court cannot
intervene.
c.! The tax law is uniform: it provides a standard rate
of 0% or 10% (or 12% now) on all goods or
services. The law does not make any distinction as
to the type of industry or trade that will bear the
70% limitation on the creditable input tax, 5-year
amortization of input tax on purchase of capital
goods, or the 5% final withholding tax by the
government.
d.! It is equitable: The law is equipped with a
threshold margin (P1.5M). Also, basic marine and
agricultural products in their original state are
still not subject to tax. Congress also provided for
Page 142 of 270
TAXATION LAW
mitigating measures to cushion the impact of the
imposition of the tax on those previously exempt.
Excise taxes on petroleum products and natural
gas were reduced. Percentage tax on domestic
carriers was removed. Power producers are now
exempt from paying franchise tax.
e.! VAT, by its very nature, is regressive. BUT the
Constitution does not really prohibit the
imposition of indirect taxes (which is essentially
regressive).
f.! What it simply provides is that Congress shall
“evolve a progressive system of taxation”.
Tolentino v. Secretary of Finance, G.R. No. 115455
(1995):
a.! Regressivity is not a negative standard for courts
to enforce. What Congress is required by the
Constitution to do is to “evolve a progressive
system of taxation.”
This provision is placed in the Constitution as
moral incentives to legislation, not as judicially
enforceable rights.
b.! Direct taxes are to be preferred, and as much as
possible, indirect taxes should be minimized but
not avoided entirely because it is difficult, if not
impossible, to avoid them.
c.! The regressive effects are corrected by the zero
rating of certain transactions and through the
exemptions.
CHARACTERISTICS/ELEMENTS OF A VAT-
TAXABLE TRANSACTION
General Characteristics/Nature:
a.! Privilege/Percentage Tax – imposed by law
directly not on the thing or service but on the ACT
(sale, barter, exchange, lease, importation, or
performance of service)
b.! Ad Valorem Tax – the amount is based on the
gross selling price or gross value in money of the
goods or service, including the use or lease or
properties.
c.! Indirect Tax – The seller is the one statutorily
liable for the payment of the tax but the amount
of the tax may be shifted or passed on to the
buyer, transferee or lessee of the goods,
properties or services.
d.! Excise Tax - a tax on the privilege of engaging in
the business of selling goods or services, or in the
importation of goods
Nature – VAT is a tax on consumption levied on the
sale, barter, exchange or lease of goods or properties
and services in the Philippines and on importation of
goods into the Philippines.
This rule shall likewise apply to existing contracts of
sale or lease of goods, properties or services at the
U.P. LAW BOC TAXATION II
time of the effectivity of RA No. 9337. However, in the
case of importation, the importer is the one liable for
the VAT. (Sec. 4.105.2, RR 16-2005)
General Features:
a.! VAT uses the Tax Credit Method
b.! All goods, properties and services (except exempt
transactions) including goods subject to excise
taxes, and use or lease of properties, whether real
or personal, are subject to tax at all levels of
distribution.
c.! Although tax is levied at all stages, the
cumulative effect is that the final value of the
goods sold to the ultimate consumers is taxed
only once.
d.! VAT, as a general rule, follow the destination
principle (goods and services are taxed only in the
country where they are consumed). Therefore, no
VAT shall be imposed to form part of the cost of
goods destined for consumption outside the
territorial border of the taxing authority.
Elements of a VAT-taxable transaction in general
a.! There must be a sale, barter, exchange, or lease
in the Philippines
b.! The subject matter must be taxable goods or
properties or services
General rule: The sale must be made by a taxable
person in the course of trade or business or in the
furtherance of their profession.
Exception: In the case of importation of goods,
the transaction is taxable whether or not done in
the course of business.
Meaning of “in the course of trade or business”
Means the regular conduct of 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
nonstock, nonprofit 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.
N.B. – Services rendered by non-resident foreign
persons shall be considered as being rendered in the
course of trade or business, even if the performance of
services is not regular (Section 4.105-3, RR No. 16-
2005)
2.!Impact and Incidence of Tax
Impact Incidence
The statutory taxpayer, One who bears the
the one from whom the burden of taxation
Page 143 of 270
TAXATION LAW
government collects.
Seller/Importer –
Buyer/Final Consumer –
Seller/Importer is the
the buyer is the one who
one who collects the tax
bears the burden of the
and pays to the
taxation.
government
3.!Tax Credit Method
A taxpayer’s tax payable is the excess of output tax
over input tax:
OUTPUT VAT – INPUT VAT = VAT PAYABLE
Under the VAT method of taxation, which is invoice-
based, an entity can subtract from the VAT charged
on its sales or outputs the VAT it paid on its purchases,
inputs and imports. [CIR v. Seagate (2005)].
4.!Destination Principle/
Cross Border Doctrine
As a general rule, the VAT system uses the
destination principle as a basis for the jurisdictional
reach of the tax. Goods and services are taxed only in
the country where they are consumed. Thus, exports
are zero-rated, while imports are taxed. [CIR v.
American Express International, G.R. No. 152609
(2005)]
N.B. – 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 & Dev. Corp. v. CIR, G.R.
No.s 141104 and 148763 (2007): Actual export of
goods and services from the Philippines to a foreign
country must be free of VAT, while those destined for
use or consumption within the Philippines shall be
imposed with 12% VAT.
18
Exception to destination principle – Sec. 108(b)(2)
18
Services other than those mentioned in the
preceding paragraph rendered to a person engaged
in business conducted outside the Philippines or a
nonresident person not engaged in business who is
outside the Philippines when the services were
performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP.
U.P. LAW BOC TAXATION II
Sec. 108(b)(2), which subjects certain services
rendered in the Philippines to a zero-rated VAT, is an
exception under the destination principle. The Court
in CIR v. AMEX (2005) enumerated the requisites to
fall under that provision.
a.! The service is performed in the Philippines;
b.! the service falls under any of the categories
19
provided in Section 102(b) of the Tax Code; and
c.! it is paid for in acceptable foreign currency that is
accounted for in accordance with the regulations
of the BSP.
In that case, the Court held that a ruling providing
that the service must be “destined for consumption
outside of the Philippines” in order to qualify for zero
rating contravenes both the law and the regulations
issued pursuant to it. The Court held that such ruling
was ultra vires and therefore void.
The law neither makes a qualification nor adds a
condition in determining the tax situs of a zero-rated
service. Under this criterion, the place where the
service is rendered determines the jurisdiction to
impose the VAT. Performed in the Philippines, such
service is necessarily subject to its jurisdiction, for the
State necessarily has to have “a substantial
connection” to it, in order to enforce a zero rate. The
place of payment is immaterial; much less is the
place where the output of the service will be further
or ultimately used. [CIR v. American Express
International (2005)]
5.!Persons Liable
Transactions subject to VAT:
a.! Sale, Barter or Exchange of Goods or Properties
b.! Sale of Services, including Lease or use of
Properties
c.! Importation of Goods.
Persons Liable:
a.! Any person who sells, barters, exchanges, or
leases goods or properties, or who renders
services, in the course of trade or business
Exceptions:
1.! A non-VAT- registered person whose annual
gross sales or receipts does not exceed
20
P1,919,500 .
19
!Section!102(b)!of!RA!7716!has!been!amended!to!
Section!108(b)!of!RA!8424.!
20
!For!the!purposes!of!this!threshold,!husband!and!wife!
shall!be!considered!separate!taxpayers.!
Page 144 of 270
TAXATION LAW
2.! Franchise grantees under Sec 119 of this code
and are not VAT-registered.
b.! Any person who imports goods, whether or not in
the course of business
c.! Any person who voluntarily registers its business
under the VAT system, regardless of level of sales.
The term “person” refers to any individual, trust,
estate, partnership, corporation, joint venture,
cooperative or association (Sec. 4.105-1, RR 16-2005).
General Rule: VAT and Percentage Tax cannot be
charged together. It’s either the transaction is under
VAT or Other Percentage Tax.
Exception: When one erroneously declares himself to
VAT registered.
6.!Imposition of VAT
a.! On Sale of Goods or
Properties
Sale of goods or properties in general
Rate: 12% VAT beginning 1 February 2006 [RMC No.
7-06]
Transactions:
1.! Every sale, barter or exchange (actual sale and in
the course of trade or business)
2.! Transactions “deemed sale” of taxable goods or
properties (RR 16-2005) (See also Sec. J, infra)
Basis: Gross selling price or gross value in money of the
goods or properties sold, bartered or exchanged.
Who Pays: Paid by SELLER/TRANSFEROR.
(Sec. 106, NIRC); N.B. – the end-user is the one who is
actually burdened with the tax since the tax is passed
on to him.
Meaning of goods or properties
Goods or properties – all tangible and intangible
objects which are capable of pecuniary estimation,
including:
1.! Real properties held primarily for sale to
customers or held for lease in the ordinary course
of trade or business;
2.! The right or the privilege to use patent, copyright,
design, or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like
property or right;
U.P. LAW BOC TAXATION II TAXATION LAW

3.! The right or the privilege to use in the Philippines receive in cash or property (other than evidence of
of any industrial, commercial or scientific indebtedness of the purchaser) during the
equipment; taxable year when the sale or disposition of the
4.! The right or the privilege to use motion picture real property was made. It covers any down
films, films tapes and discs; payment made and includes all payments
5.! Radio, television, satellite transmission and cable actually or constructively received during the year
television time. of sale, the aggregate of which determines the
limit set by law.
Goods/Personal Properties 2.! Installment sales
1.! Actual/deemed sale for a valuable consideration a.! Meaning of installment sale – initial
2.! For use or consumption in the Phil (regardless of payments of which in the year of sale ≤ 25%
the payment arrangements) GSP
3.! Not exempt from VAT (NIRC, special law, special b.! Effect – VAT is recognized based on
agreement) collection, including interest and penalties,
actually and/or constructively received by the
Special rules seller.
Sale of Real Properties (RP) 3.! Deferred sales
Casual sale (Capital a.! Meaning – initial payments exceed 25% of
Subject to CGT (6%) the GSP
Assets)
Regular sales b.! Effect – VAT will be recognized outright in
(Ordinary Assets): full at the time of sale as though the sale was
Commercial a cash sale.
Property Subject to 12% VAT 4.! Tax free exchanges under Sec. 40[C][2] are not
(Sale/Lease) subject to VAT.
[Sec. 4.106-3, RR 16-2005]
•! If monthly rental ≤ 12,800
= VAT and OPT-exempt
Meaning of GSP – total amount of money or its
•! If monthly rental > 12,800 equivalent which the purchaser pays or is obligated to
but aggregate annual pay to the seller in consideration of the sale, barter or
Residential Units rentals ≤1,919,500 = exchange of the goods or properties, excluding VAT.
(Lease) subject to OPT The excise tax, if any, on such goods or properties
•! If monthly rental > 12,800 shall form part of the gross selling price.
and aggregate annual
rentals > 1,919,500 = In the case of sale, barter or exchange of real property
subject to VAT subject to VAT, GSP shall mean:
•! If SP > 1,919,500.00 = 1.! The consideration stated in the sales document
subject to VAT or
Residential Lot
•! If SP ≤ 1,919,500.00 = 2.! The fair market value (FMV) whichever is higher.
VAT-exempt
•! If SP > 3,199,200.00 = Meaning of FMV – Whichever is higher of the
Residential subject to VAT following:
House and Lot •! If SP ≤ 3,199,200.00 = 1.! The fair market value as determined by the CIR
VAT-exempt (zonal value) or
2.! The fair market value as shown in schedule of
Sales of real properties subject to VAT – Sale of real values of the Provincial and City Assessors (real
properties held primarily for sale to customers or held property tax declaration).
for lease in the ordinary course of trade or business of
the seller shall be subject to VAT. (Sec. 4.106-3, RR General Rule: GSP is the total amount of money paid
16-2005) in consideration of sale, barter, exchange, or lease.

Types of sales of real estate; Effects Excludes: VAT, sales discounts and, allowances and
1.! Cash sale – entire selling price taxable in the returns (See Section on Allowable Discounts)
month of the sale.
Note: “Initial payments” means payment or
payments which the seller receives before or
upon execution of the instrument of sale and
payments which he expects or is scheduled to

Page 145 of 270

U.P. LAW BOC TAXATION II TAXATION LAW
21
Includes: Excise tax paid, initial payments , interests property, i.e., irrevocable transfer of corpus
and penalties (if instalment), commission income (if and/or irrevocable designation of beneficiary.
exported), purchase price, charges for packing, 7.! Transfer to corporation in exchange of shares of
delivery and insurance stocks (see Sec. 40, NIRC for Tax-free exchange)
8.! Security deposits for lease agreements provided
If goods/personal properties, it does not form part of Gross Receipt or Official
23
GSP = amount paid in consideration Receipt. (See RMC 16-2013)
IF DEEMED SALE: FMV at the time of the transaction
Allowable Deductions from GSP
N.B. in retirement/cessation, inventory (raw materials, The following are deductible from the gross selling
finished goods, machinery, equipment, furniture, price:
fixture), tax base = whichever is lower, 1.! Sales returns and allowances – the selling price
1.! acquisition cost of the goods or properties returned and not sold
2.! current market price of goods necessarily reduces the gross sales on which the
rate is applied.
N.B.: CIR has the power to determine the appropriate a.! Sales returns and allowances for which a
tax base in 1) SBE in deemed sales and 2) when GSP is proper credit/refund was made during the
22
unreasonably lower than AMV month or quarter to the buyer for sales
previously recorded as table sales are
Not taxable: [Sec. 109 (P)(Q)] allowed as a deduction in the period when
1.! Not primarily held for sale or lease in the course they are made. Excess may be carried over to
of trade or business the succeeding period.
2.! Low cost or socialized housing b.! The value of goods or properties sold and
3.! Residential lot when value does not exceed subsequently returned or for which
P1,919,500 allowances were granted by a VAT-registered
4.! House and lot/other residential dwelling < person may be deducted from the gross sales
P3,199,200 or receipts for the quarter in which a refund is
5.! Lease (rental per unit < 12,800/month and total made or a credit memorandum is issued.
rental from all units < P1,919,500/ year)
6.! Transmission to a trustee (Except: transmission is 2.! Sales Discounts – bona fide or regular discounts
deemed sale transaction) given to purchasers, which are ascertainable and
definitely agreed upon between the vendor and
General Rule: Transmission of property to a the vendee at the time of sale are deductible from
trustee shall NOT be subject to VAT if the the GSP.
property is to be merely held in trust for the a.! If given after the sale or are in the nature of a
trustor and/or beneficiary. rebate or partial remission of indebtedness,
they will not be allowed as a deduction from
Exception: However, if the property transferred is the GSP.
originally intended for sale, lease or use in the
ordinary course of trade or business AND the
transfer constitutes a completed gift, the transfer
is subject to VAT as a deemed sale transaction.
23##
The transfer is a completed gift if the transferor
divests himself absolutely of control over the SUBJECT TO VAT NOT SUBJECT TO
VAT
Loan to the lessor
from the lessee
21
Initial payments does not include the amount of Pre-Paid Rental Option money for the
mortgage on RP sold (except excess when mortgage property
exceeds the cost of the property), notes and other Security deposit Security deposit to
evidence of indebtedness issued by the purchaser at when applied to the insure the faithful
the time of the sale rental performance of
22
GSP is unreasonably lower than the actual market certain obligations of
value if it is lower than 30% of AMV of the same the lessee to the
goods of the same quantity or quality sold in the lessor, if not part of
immediate locality or the nearest date of sale. Gross Receipt.
#

Page 146 of 270

U.P. LAW BOC TAXATION II
b.! Furthermore the discount must be expressly
indicated in the sales invoice and the amount
forming part of the gross sales duly recorded
in the books of accounts.
c.! Credits for allowances to cover roll back in
prices and other adjustments are not
deductible.
b.! On Importation of Goods
Rate: 12% VAT
Basis: total value used by the Bureau of Customs in
determining tariff and customs duties, plus customs
duties, excise taxes, if any, and other charges (such as
postage, commission).
Where the customs duties are determined on the
basis of the quantity or volume of the goods, VAT
shall be based on the landed cost plus excise taxes, if
any.
Who Pays: IMPORTER prior to the release of such
goods from customs custody (Sec. 107 (A), NIRC)
Importer: any person who brings goods into the
Philippines, whether or not made in the course of his
trade or business, including non-exempt persons or
entities who acquire tax-free imported goods from
exempt persons, entities or agencies (RR 16-2005)
Importation of Goods
Importation of goods BEGINS when the carrying
vessel/aircraft enters the Philippine jurisdiction with
an intention to unload its cargoes. It ENDS when
there is already payment of duties/taxes/other
charges and issuance of permit to withdraw.
Note: Importation of goods to bonded warehouse for
processing is not importation. Importation connotes
permanency and gain. Thus, if goods are only for
exhibit, such goods are VAT-exempt.
Customs duty – amount of customs duty legally due
and paid by the importer. Therefore, if importer is
entitled to 90% customs duty exemption, the 10%
duty paid should be the base in computation of the
VAT.
Other similar chargers – specific charges which an
importer has to pay.
1.! Other taxes (special import tax)
2.! Bank charges
3.! Arrastre charges
4.! Wharfage dues
5.! Brokerage fees
6.! All other charges or expenses
Page 147 of 270
TAXATION LAW
Landed Cost - invoice amount including costs of
loading, shipping and unloading, customs duties,
freight, insurance, other charges, excise tax (if any)
Expenses incurred after the release of the goods such
as those incurred in delivering goods do not form part
of the landed cost.
Transfer of Goods by Tax-Exempt Persons:
1.! If importer is tax-exempt, the subsequent
purchasers, transferees or recipients of such
imported goods shall be considered as importers
who shall be liable for the tax on importation.
2.! The tax due on such importation shall constitute
a lien on the goods superior to all charges or liens
on the goods, irrespective of the possessor
thereof. (As amended by RA 9337)
c.! On Services
[Sec 108]
Rate: 12%
Basis: Gross receipts derived from the sale or
exchange of services, including the use or lease of
properties.
Gross Receipts - the total amount of money or its
equivalent representing the contract price,
compensation, service fee, rental or royalty, including
the amount charged for materials supplied with the
services and deposits and advanced payments
actually or constructively received during the taxable
quarter for the services performed or to be performed
for another person, excluding VAT. (Sec. 108 (A),
NIRC)
“Constructive receipt” occurs when the money
consideration or its equivalent is placed at the control
of the person who rendered the service without
restrictions by the payor.
1.! Deposit in banks which are made available to the
seller of services without restrictions
2.! Issuance by the debtor of a notice to offset any
debt or obligation and acceptance thereof by the
seller as payment for services rendered
3.! Transfer of the amounts retained by the
contractee to the account of the contractor. (RR
16-2005)
Requisites for taxability
1.! The service must be performed or is to be
performed (which may be performed by a
subcontractor) in the course of trade or business
in the Philippines;
U.P. LAW BOC TAXATION II
2.! For a valuable consideration actually or
constructively received; and
3.! The service is not exempt under the Tax Code,
special law or international agreement
4.! Person selling or rendering service is liable to
VAT
“Sale/Exchange of Services”: means the
performance of all kinds of services in the Philippines
for others for a fee, remuneration or consideration.”
[Sec 108; Diaz v Secretary of Finance, G.R. No. 193007
(2011)] It includes:
1.! Construction and service contractors
2.! Stock, real estate, commercial, customs and
immigration brokers
3.! Lessors of property, whether personal or real24
4.! Persons engaged in warehousing service.
5.! Lessors or distributors of cinematographic films
6.! Persons engaged in milling, processing,
manufacturing or repacking goods for others are
subject to VAT, EXCEPT palay into rice, corn into
corn grits, and sugarcane into raw sugar (not
subject to VAT)
7.! Proprietors, operators, or keepers of hotels,
motels, rest houses, pension houses, inns, resorts,
theaters, and movie houses
8.! Proprietors or operators of restaurants,
refreshment parlors, cafes and other eating
places, including clubs and caterers
9.! Dealers in securities including pre-need
companies
“Gross receipts” means gross selling price less
cost of the securities sold.
10.! Lending investors: All persons OTHER than banks,
non-bank financial intermediaries, finance
companies and other financial intermediaries
NOT performing quasi-banking functions who
make a practice of lending money for themselves
or others at interest.
11.! Transportation contractors on their transport of
goods or cargoes, including persons who
transport goods or cargoes for hire and other
domestic common carriers by land relative to
their transport of goods or cargoes
12.! Common carriers by air and sea relative to their
transport of passengers, goods or cargoes from
one place in the Philippines to another place in
the Philippines
13.! Sales of electricity by generation, transmission,
and/or distribution companies
Page 148 of 270
TAXATION LAW
EXCEPT sale of power or fuel generated through
renewable sources of energy, such as, but not
limited to, biomass, solar, wind hydropower,
geothermal, ocean energy, and other emerging
energy sources using technologies such as fuel
cells and hydrogen fuels, which shall be subject
to 0% rate of VAT (zero-rated).
14.! Franchise grantees of electric utilities, telephone
and telegraph, radio and/or television
broadcasting and all other franchise grantees
(including PAGCOR and its licensees/franchisees)
EXCEPT franchise grantees of radio and/or
television broadcasting whose annual gross
receipts of the preceding year do not exceed Ten
Million Pesos (P10,000,000.00) (which shall be
subject to 3% franchise tax under Sec. 119,
subject to optional registration), and franchise
grantees of gas and water utilities (under Sec.
109, subject to 2% franchise tax)
With respect to franchise grantees of telephone
and telegraph services, amounts received for
overseas dispatch, message, or conversation
originating from the Philippines are subject to the
percentage tax under Sec. 120 and hence exempt
from VAT
15.! Non-life insurance companies including surety,
fidelity, indemnity and bonding companies;
EXCEPT crop insurance, life and disability
insurance, and health and accident insurance
Insurance and reinsurance commissions, as
opposed to premiums, whether life or non-life,
are subject to VAT while non-life insurance
premiums are subject to VAT.
16.! Similar services regardless of whether or not the
performance thereof calls for the exercise or use
of the physical or mental faculties
“Lease of Properties“: subject to the VAT imposed
irrespective of the place where the contract of lease or
licensing agreement was executed if the property is
leased or used in the Philippines.
1.! The lease or the use of or the right or privilege to
use any copyright, patent, design or model, plan
secret
2.! formula or process, goodwill, trademark, trade
brand or other like property or right
3.! The lease of the use of, or the right to use of any
industrial, commercial or scientific equipment
4.! The supply of scientific, technical, industrial or
commercial knowledge or information
5.! The supply of any assistance that is ancillary and
subsidiary to and is furnished as a means of
U.P. LAW BOC
enabling the application or enjoyment of any
such property, or right as is mentioned in #2 or
any such knowledge or information as is
mentioned in #3
6.! The supply of services by a nonresident person or
his employee in connection with the use of
property or rights belonging to, or the installation
or operation of any brand, machinery or other
apparatus purchased from such nonresident
person
7.! The supply of technical advice, assistance or
services rendered in connection with technical
management or administration of any scientific,
industrial or commercial undertaking, venture,
project or scheme
8.! The lease of motion picture films, films, tapes and
discs
9.! The lease or the use of or the right to use radio,
television, satellite transmission and cable
television time
Additional services subject to VAT:
1.! Services performed in the exercise or practice of
profession or calling by individuals subject to
professional tax under the LGC, and professional
services rendered by general professional
partnerships (GPPs);
2.! Services performed by actors/actresses, talents,
singers, emcees, radio/television broadcasters,
choreographers,
musical/radio/movie/television/stage directors,
and professional athletes;
3.! Services rendered by customs, real estate, stock,
immigration and commercial brokers;
4.! Services rendered by doctors, and lawyers.
5.! Association dues or membership fees and other
assessment or charges for the beneficial services
of the homeowner’s association (RMC No. 9-
2013)
6.! Lease/use of sports facilities and equipment (RA
6847)
The performance of the services should not be in
pursuit of an employer-employee relationship
between the service-provider and the service-recipient.
7.!Transactions Deemed Sale
Rate: 12% VAT
Basis: Market value of the goods deemed sold as of
the time of the occurrence of the transactions or as
the CIR shall prescribe. In the case of
retirement/cessation of business, the tax base shall
be the acquisition cost or the current market price of
Page 149 of 270
TAXATION II TAXATION LAW
the goods or properties, whichever is lower. In the
case of a sale where the gross selling price is
unreasonably lower than the fair market value, the
actual market value shall be the tax base. The gross
selling price is unreasonably lower than the actual
market value if it is lower by more than 30% of the
actual market value of the same goods of the same
quantity and quality sold in the immediate locality on
or nearest the date of sale. (RR 16-2005)
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
Example: when a VAT-registered person withdraws
goods from his business for his personal use. (RR 16-
2005)
b.! Distribution or Transfer to
Shareholders, Investors or
Creditors
As regards distribution to shareholders or investors as
share in the profits of the VAT-registered persons,
property dividends which constitute stocks in trade or
properties primarily held for sale or lease declared out
of retained earnings on or after Jan. 1, 1996 and
distributed by the company to its shareholders shall
be subject to VAT based on the zonal value or FMV at
the time of the distribution, whichever is applicable.
(RR 16-2005)
c.! Consignment of Goods
Consigned goods returned by the consignee within
the 60-day period are not deemed sold. (RR 16-2005)
d.! Retirement from or
Cessation of Business with
Respect to Inventories on
Hand
With respect to ALL goods on hand, whether capital
goods, stock-in-trade, supplies or materials, as of the
date of such retirement or cessation, whether or not
the business is continued by the new owner or
successor ARE CONSIDERED DEEMED SALES
U.P. LAW BOC TAXATION II
Examples: change of ownership of the business (e.g.,
when a sole proprietorship incorporates, or the
proprietor sells his entire business) and dissolution of
a partnership and creation of a new partnership which
takes over the business. (RR 16-2005)
e.! Transmission of Property to a
Trustee
IF:
1.! Property is for sale, lease or use in the ordinary
course of business
2.! The transfer is a completed gift (transferor
divested from himself absolute control of
property)
8.!Change or Cessation of
Status as VAT-Registered
Person (Sec 106[C])
Rate: 12% VAT
Basis: the acquisition cost or the current market price
of the goods or properties, whichever is LOWER.
VAT shall apply to goods disposed of or existing as of
a certain date if under the circumstances to be
prescribed in rules and regulations to be promulgated
by the Secretary of Finance, upon recommendation of
the CIR, the status of a person as a VAT-registered
person changes or is terminated.
a.! Subject to VAT (RR 16-2005,
Sec. 4.106 (b))
12% VAT is applicable to goods/properties originally
intended for sale or use in business and capital goods
which are existing as of the occurrence of the
following:
1.! Change of business activity from VAT taxable
status to VAT-exempt status – Example: A VAT-
registered person engaged in a taxable activity
like wholesaler or retailer who decides to
discontinue such activity and engages 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
3.! Approval of request for cancellation of
registration due to desire to revert to exempt
Page 150 of 270
TAXATION LAW
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)
b.! Not Subject to VAT
Goods or properties existing as of the occurrence of
the following:
a.! Change of control of a corporation by acquisition
of the controlling interest of such corporation by
another stockholder (individual or corporate) or
group of stockholders.
Note: Exchange of goods or properties including
the real estate properties used in business or held
for sale or for lease by the transferor, for shares of
stocks, whether resulting in corporate control or
not, is SUBJECT TO VAT (RR 10-2011)
b.! Change in the trade or corporate name of the
business
c.! Merger or consolidation of corporations: The
unused input tax of the dissolved corporation, as
of the date of merger or consolidation, shall be
absorbed the surviving or new corporation.
Note: The INPUT VAT of the dissolved corporation
will be absorbed by the surviving corporation
9.!Zero-Rated Sales of Goods
or Properties, and
Effectively Zero-Rated
Sales of Goods or
Properties
Rate: 0% Output VAT; 12% Input VAT
Transactions: Every sale, barter or exchange, or
transactions “deemed sale” of taxable goods or
properties (RR 16-2005)
Concept – A zero-rated sale of goods or properties by
a VAT-registered person is a taxable transaction for
VAT purposes, but shall not result in any output tax.
However, the input tax on purchases of goods,
properties or services, related to such zero-rated sale,
shall be available as tax credit or refund.
Transaction is subject to VAT but at 0% instead of
12%.
U.P. LAW BOC TAXATION II
a.! Export Sales
b.! Foreign Currency Denominated Sales
c.! Sales of Goods or Property to persons or entities
who are tax-exempt/Effectively Zero-Rated Sales
Export Sales [Sec. 106(A)(2)(a), NIRC]
a.! The (i) sale and actual shipment of goods from
the Philippines to a foreign country AND (ii) paid
for in acceptable foreign currency or its
equivalent in goods or services, AND (iii)
accounted for in accordance with the rules and
regulations of the BSP
b.! (i) Sale of raw materials or packaging materials to
a nonresident buyer (ii) for delivery to a resident
local export-oriented enterprise (iii) to be used in
manufacturing, processing, packing or repacking
in the Philippines of the said buyer's goods AND
(iv) paid for in acceptable foreign currency AND
(v) accounted for in accordance with the rules and
regulations of the BSP.
c.! Sale of raw materials or packaging materials to
export-oriented enterprise (iii) whose export sales
exceed seventy percent (70%) of total annual
production.
Any enterprise whose export sales exceed 70% of
the total annual production of the preceding
taxable year shall be considered an export-
oriented enterprise upon accreditation under the
rules & regulations of Export Development Act,
RA 7844 (RR 7-95)
d.! Sale of gold to the Bangko Sentral ng Pilipinas
(BSP)
e.! The sale of goods, supplies, equipment and fuel
to persons engaged in international shipping or
international air transport operations (RA 9337)
1.! Limited to goods, supplies, equipment and
fuel pertaining to or attributable to the
transport of goods and passengers from a
port in the Phil. directly to a foreign port
without docking or stopping at any other port
in the Phil.
2.! If any portion of such fuel, goods, or supplies
is used for purposes other than that
mentioned, such portion of fuel, goods, and
supplies shall be subject to 12% VAT. (RR 16-
2005)
f.! Those considered export sales under the
Omnibus Investment Code of 1987, and other
special laws (ex. Bases Conversion &
Development Act of 1992)
Under Omnibus Investment Code (EO 226):
Considered Export Sales
a.! Phil. port FOB value of export products exported
directly by a registered export producer; OR
Page 151 of 270
TAXATION LAW
b.! 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 (only when
actually exported by the latter) evidenced by
landing certificates.
Constructive Exports (without actual exportation):
a.! Sales to bonded manufacturing warehouses of
export-oriented manufacturers;
b.! Sales to export processing zones (RA 7916);
c.! Sales to registered export traders operating
bonded trading warehouses supplying raw
materials in the manufacture of export products
(RA 7227)
d.! Sales to diplomatic missions and other agencies
and/or instrumentalities granted tax immunities,
of locally manufactured, assembled or repacked
products, whether paid for in foreign currency or
not.
e.! Sales by a VAT-registered supplier to a
manufacturer/producer whose products are
100% exported are considered export sales. A
certification to this effect must be issued by the
Board of Investment which shall be good for 1
year unless subsequently re-issued. (RR 16-2005)
Export sales of registered export traders shall
include commission income, and that exportation
of goods on consignment shall not be deemed
export sales until the export products consigned
are in fact sold by the consignee.
Foreign Currency Denominated Sale (FCDS)
a.! (i) Sale to a nonresident of goods (except those
mentioned in Sections 149 and 150 i.e.,
automobiles and non-essential goods like jewelry,
perfume, and yachts), (ii) assembled or
manufactured in the Philippines (iii) for delivery
to a resident in the Philippines (iv) paid for in
acceptable foreign currency AND (v) accounted
for in accordance with the rules and regulations
of the BSP.
b.! (i) Sales of locally manufactured or assembled
goods (ii) for household and personal use (iii) to
Filipinos abroad and other non-residents of the
Philippines as well as returning Overseas
Filipinos under the Internal Export Program of
the government (iv) paid for in convertible foreign
currency AND (v) accounted for in accordance
with the rules and regulations of the BSP shall
also be considered export sales. (RR 16-2005)
Effectively Zero-Rated Sales
a.! Sales to persons or entities whose exemption
under special laws or international agreements to
U.P. LAW BOC TAXATION II
which the Philippines is a signatory effectively
subjects such sales to zero rate.
b.! (i) The local sale of goods and properties (ii) by a
VAT-registered person (iii) to a person or entity
who was granted indirect tax exemption under
special laws or international agreement. (RR 16-
2005)
ECOZONES
The ECOZONES shall be managed and operated by
the PEZA as separate customs territory. (Sec. 8, RA
7916 “Special Economic Zone Act of 1995”).
Consequently, sales made by a person in the customs
territory to a PEZA-registered entity are considered
exports to a foreign country and thus, zero-rated.
Conversely, sales by a PEZA-registered entity to a
person in the customs territory are deemed imports
from a foreign country.
Tax treatment of sales to & by PEZA-registered
enterprise within & without the ecozone [RMC 74-99]:
a.! Any sale of goods, property or services made by a
VAT registered supplier from the Customs
Territory to any registered enterprise operating in
the ecozone, REGARDLESS of the class or type of
the latter’s PEZA registration, is actually qualified
and thus LEGALLY ENTITLED TO THE 0% VAT.
“Customs Territory” shall mean the national
territory of the Philippines outside of the
proclaimed boundaries of the ECOZONES except
those areas specifically declared by other laws
and/or presidential proclamations to have the
status of special economic zones and/or free
ports. [Sec. 2(g), Rule 1, Part I, RA 7916-IRR]
b.! By a VAT-Exempt Supplier from the Customs
Territory to a PEZA registered enterprise
Sale of goods, property and services by VAT-
Exempt supplier from the Customs Territory to a
PEZA registered enterprise shall be treated
EXEMPT FROM VAT, regardless of whether or not
the PEZA registered buyer is subject to taxes
under the NIRC or enjoying the 5% special tax
regime.
c.! By a PEZA Registered Enterprise
1.! Sale of Goods by a PEZA registered
enterprise to a buyer from the Customs
Territory (i.e., domestic sales) -- this case
shall be treated as a technical
IMPORTATION made by the buyer. Such
buyer shall be treated as an IMPORTER
thereof and shall be imposed with the
corresponding VAT.
Page 152 of 270
TAXATION LAW
2.! Sale of Services by a PEZA registered
enterprise to a buyer from the Customs
Territory – this is NOT embraced by the 5%
special tax regime, hence, such seller shall
be SUBJECT TO 12% VAT.
3.! Sale of Goods by a PEZA registered
enterprise to Another PEZA registered
enterprise (i.e. Intra-ECOZONE Sales of
Goods) – this shall be EXEMPT from VAT.
d.! Sale of Services by ECOZONE enterprise, to
Another ECOZONE enterprise (Intra-ECOZONE
enterprise Sale of Service)
1.! if PEZA registered seller is subject to 5%
special tax regime - EXEMPT from VAT
2.! if PEZA registered seller is subject to taxes
under NIRC (i.e. not subject to 5% special tax
regime) – subject to 0% VAT pursuant to
“cross border doctrine”
Difference between Zero-rated and VAT-exempt
Zero-rated VAT-exempt
It is a taxable Not subject to output
transaction but does not tax
result in an output tax
The input VAT on the The seller in an exempt
purchases of a VAT- transaction is not
registered person with entitled to any input tax
zero-rated sales may be on his purchases despite
allowed as tax credits or the issuance of a VAT
refunded invoice or receipt;
Persons engaged in Registration is optional
transactions which are for VAT-exempt
zero-rated, being persons.
subject to VAT, are
required to register
10.!VAT-Exempt Transactions
a.! Vat-Exempt Transactions, in
General
1.! Sale of goods or properties and/or services 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.
2.! The person making the exempt sale of goods,
properties or services shall not bill any output tax
to his customers. (RR 16-2005)
3.! But, the VAT-registered person may elect that the
exemption not apply to its sale of goods or
properties or services; provided that the election
made shall be irrevocable for a period of three (3)
years from the quarter the election was made
(Sec. 109(2), NIRC).
U.P. LAW BOC
b.! Exempt Transactions,
Enumerated
[4.109-1 of RR 16-2005]
1.! Sale/import of agricultural and marine food
products in their original state, livestock and
poultry of a kind generally used as or yielding or
producing foods for human consumption and
breeding stock and genetic materials therefor;
•! Original state even if they have undergone
the simple processes of preparation or
preservation for the market, such as freezing,
drying, salting, broiling, roasting, smoking or
stripping. Also includes preservation using
advanced technological means of packaging,
such as shrink wrapping in plastics, vacuum
packing, tetra-pack, and other similar
packaging methods (RR 16-2005)
•! Polished and/or husked rice, corn grits, raw
cane sugar and molasses, ordinary salt, AND
COPRA shall be considered in their original
state
•! Livestock or poultry do not include fighting
cocks, race horses, zoo animals and other
animals generally considered as pets.
2.! Sale/ importation of fertilizers, seeds, seedlings
and fingerlings, fish, prawn, livestock and poultry
feeds including ingredients, whether locally
produced or imported, used in the manufacture
of finished feeds (EXCEPT specialty feeds for race
horses, fighting cocks, aquarium fish, zoo animals,
and other animals generally considered pets);
3.! Importation of personal and household effects
belonging to Philippine residents returning from
abroad and non-resident citizens coming to
resettle in the Philippines; provided, that such
goods are also exempt from customs duties
under the TCC (now CMTA)
4.! Importation of professional instruments and
implements, wearing apparel, domestic animals,
and personal household effects belonging to
persons coming to settle in the Philippines, for
their own use and not for sale, barter or exchange,
accompanying such persons, or arriving within 90
days before or after their arrival, upon production
of evidence satisfactory to the CIR that such
persons are actually coming to settle in the
Philippines and that the change of residence is
bona fide;
•! EXCEPT vehicles, vessels, aircrafts,
machineries, and other goods for use in
manufacturing and merchandise of any kind
in commercial quantity)
Page 153 of 270
TAXATION II TAXATION LAW
5.! Services subject to percentage tax under the
NIRC;
6.! Services by agricultural contract growers and
milling for others of palay into rice, corn into grits,
and sugar cane into raw sugar;
Note: RMC 10-2010: Toll processing that are VAT
exempt pertain only to services to clients from
which growing of animals were contracted.
7.! Medical, dental, hospital and veterinary services,
except those rendered by professionals:
•! Laboratory services are exempted. If the
hospital or clinic operates a pharmacy or
drug store, the sale of drugs and medicine is
subject to VAT. [RR 16-2005]
•! Note: RR-2004 granting VAT-exemption to
doctors registered with the PRC and lawyers
registered with the IBP was superseded by
RA 9337 and RR 16-2005.
8.! Educational services rendered by private
educational institutions, duly accredited by
DepED, CHED, TESDA, and those rendered by
government educational institutions;
•! “Educational services” does not include
seminars, in-service training, review classes
and other similar services rendered by
persons who are not accredited by the
DepED, CHED, and/or TESDA. [RR 16-2005]
9.! Services rendered by individuals pursuant to an
employer-employee relationship;
10.! Services rendered by regional or area
headquarters established in the Philippines by
multinational corporations which act as
supervisory, communications and coordinating
centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region and do not
earn or derive income from the Philippines;
11.! Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under special laws,
except those under PD No. 529 (Petroleum
Exploration Concessionaires under the Petroleum
Act of 1949);
12.! Sales by agricultural cooperatives duly registered
with the Cooperative Development Authority
(CDA) to their members, as well as sale of their
produce, whether it is original state or processed
form, to non-members; their importation of direct
farm inputs, machineries and equipment,
including spare parts thereof, to be used directly
and exclusively in the production and/or
processing of their produce.
•! Sale by agricultural cooperatives to non-
members can only be exempted from VAT if
the producer of the agricultural products sold
is the cooperative itself. If the cooperative is
not the producer (e.g., trader), then only
U.P. LAW BOC TAXATION II
those sales to its members shall be
exempted from VAT. [RR 16-2005]
13.! Gross receipts from lending activities by credit or
multi-purpose cooperatives duly registered with
the CDA
14.! Sales by non-agricultural, non- electric and non-
credit cooperatives duly registered and in good
standing with the CDA; Provided, that the share
capital contribution of each member does not
exceed P15,000 and regardless of the aggregate
capital and net surplus ratably distributed among
the members. BUT their importation of
machineries and equipment, including spare
parts thereof, to be used by them are SUBJECT to
VAT.
15.! Export sales by persons who are not VAT-
registered;
16.! Sale of real properties as follows:
a.! Sale of real properties NOT primarily held for
sale to customers or held for lease in the
ordinary course of trade or business.
•! However, even if the real property is not
primarily held for sale to customers or
held for lease in the ordinary course of
trade or business but the same is used in
the trade or business of the seller, the
sale thereof shall be subject to VAT
being a transaction incidental to the
taxpayer’s main business. [RR 4-2007]
b.! Sale of real properties utilized for low-cost
housing as defined by RA 7279, ("Urban
Development and Housing Act of 1992") and
other related laws, such as RA 7835 and RA
8763;
•! “Low-cost housing" refers to housing
projects intended for homeless low-
income family beneficiaries, undertaken
by the Government or private developers,
which may either be a subdivision or a
condominium registered and licensed by
the Housing and Land Use Regulatory
Board/Housing (HLURB) under BP 220,
PD 957 or any other similar law, wherein
the unit selling price is within the selling
price ceiling per unit of P750,000.00
under RA 7279, and other laws, such as
RA 7835 and RA 8763.
c.! Sale of real properties utilized for socialized
housing as defined under RA 7279, and other
related laws, such as RA 7835 and RA 8763,
wherein the price ceiling per unit is
P225,000 or as may from time to time be
determined by the HUDCC and the NEDA
and other related laws.
•! "Socialized housing" refers to housing
programs and projects covering houses
Page 154 of 270
TAXATION LAW
and lots or home lots only undertaken by
the Government or the private sector for
the underprivileged and homeless
citizens which shall include sites and
services development, long-term
financing, liberated terms on interest
payments, and such other benefits in
accordance with the provisions of RA
7279 and RA 7835 and RA 8763.
•! "Socialized housing" shall also refer to
projects intended for the underprivileged
and homeless wherein the housing
package selling price is within the lowest
interest rates under the Unified Home
Lending Program (UHLP) or any
equivalent housing program of the
Government, the private sector or non-
government organizations.
d.! Sale of residential lot valued at P1,919,500
and below, or house & lot and other
residential dwellings valued at P3,199,200
and below
•! If two or more adjacent residential lots
are sold or disposed in favor of one buyer,
for the purpose of utilizing the lots as
one residential lot, the sale shall be
exempt from VAT only if the aggregate
value of the lots does not exceed
P1,919,500. [RR 13-2012]
•! Adjacent residential lots, although
covered by separate titles and/or
separate tax declarations, when sold or
disposed to one and the same buyer,
whether covered by one or separate
Deed of Conveyance, shall be presumed
as a sale of one residential lot. [RR 16-
2005]
•! Sale, transfer or disposal within a 12-
month period of 2 or more adjacent
residential lots, house and lots or other
residential dwellings to one buyer,
whether from the same or from different
sellers shall be considered one single
transaction. Hence, the sale of the
adjacent lots shall be subject to VAT if
the aggregate value exceeds P1,919,500
for residential lots and P3,199,200 for
residential house lots or residential
dwellings, notwithstanding that the
value of the individual properties do not
exceed the VAT exemption thresholds.
•! Sale/purchase of parking lots shall not
be considered a sale of residential
lot/dwelling. Hence, it shall be subject to
VAT regardless of its selling price. [RR
13-2012]
U.P. LAW BOC TAXATION II
17.! Lease of residential units with a monthly rental
per unit not exceeding P12,800, regardless of
the amount of aggregate rentals received by the
lessor during the year.
•! Lease of residential units where the monthly
rental per unit exceeds P12,800 but the
aggregate of such rentals of the lessor during
the year do not exceed P1,919,500 shall
likewise be exempt from VAT, however, the
same shall be subjected to 3% percentage
tax.
•! In cases where a lessor has several
residential units for lease, some are leased
out for a monthly rental per unit of not
exceeding P12,800 while others are leased
out for more than P12,800 per unit, his tax
liability will be as follows:
(a)! The gross receipts from rentals not
exceeding P12,800 per month per unit
shall be exempt from VAT regardless of
the aggregate annual gross receipts.
(b)! The gross receipts from rentals
exceeding P12,800 per month per unit
shall be subject to VAT IF the aggregate
annual gross receipts from said units
only (not including the gross receipts
from units leased for not more than
P12,800) exceeds P1,919,500.
Otherwise, the gross receipts will be
subject to the 3% tax imposed under
Sec. 116 of the Tax Code.
•! The term 'residential units' shall refer to
apartments and houses & lots used for
residential purposes, and buildings or parts
or units thereof used solely as dwelling
places (e.g., dormitories, rooms and bed
spaces) except motels, motel rooms, hotels
and hotel rooms.
•! The term 'unit' shall mean an apartment unit
in the case of apartments, house in the case
of residential houses; per person in the case
of dormitories, boarding houses and bed
spaces; and per room in case of rooms for
rent. [RR 16-2005]
18.! Sale, importation, printing or publication of
books and any newspaper, magazine review or
bulletin which appears at regular intervals with
fixed prices for subscription and sale and which is
not devoted principally to the publication of paid
advertisements;
19.! Transport of passengers by international carriers
[Added by RA 10378 (2013)]
20.! Sale, importation or lease of passenger or cargo
vessels and aircraft, including engine,
equipment and spare parts thereof for domestic
Page 155 of 270
TAXATION LAW
or international transport operations [added by
RA 9337];
•! The exemption from VAT on the importation
and local purchase of passenger and/or
cargo vessels shall be limited to those of 150
tons and above, including engine and spare
parts of said vessels;
•! The vessels to be imported shall comply with
the age limit requirement, at the time of
acquisition counted from the date of the
vessel's original commissioning, as follows:
o! for passenger and/or cargo vessels, the
age limit is 15 years old,
o! for tankers, the age limit is 10 years old,
and
o! for high-speed passenger crafts, the age
limit is 5 years old [RR 16-2005]
21.! Importation of fuel, goods, and supplies by
persons engaged in international shipping or air
transport operations; [added by RA 9337]
•! The said fuel, goods and supplies shall be
used exclusively or shall pertain to the
transport of goods and/or passenger from a
port in the Philippines directly to a foreign
port without stopping at any other port in the
Philippines;
•! If any portion of such fuel, goods or supplies
is used for purposes other than that
mentioned in this paragraph, such portion of
fuel, goods and supplies shall be subject to
12% VAT starting Feb. 1, 2006. [RR 16-2005]
22.! Services of banks, non-bank financial
intermediaries performing quasi-banking
functions and other non-bank financial
intermediaries subject to Percentage Tax; and
23.! Sale or lease of goods or properties or the
performance of services other than the
transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of P1,919,500
•! For purposes of the threshold of P1,919,500,
the husband and the wife shall be considered
separate taxpayers. However, the
aggregation rule for each taxpayer shall
apply.
•! For instance, if a professional, aside from the
practice of his profession, also derives
revenue from other lines of business which
are otherwise subject to VAT, the same shall
be combined for purposes of determining
whether the threshold has been exceeded.
•! The VAT-exempt sales shall NOT be included
in determining the threshold. [RR 16-2005]
U.P. LAW BOC TAXATION II TAXATION LAW

Other Services Exempt from VAT – such services are
those subject to percentage tax (infra)
1.! Services rendered by domestic common carriers
by land for the transport of passengers and
keepers of garages;
2.! Services rendered by international air/shipping
carriers;
3.! Services rendered by franchise grantees of radio
and/or television broadcasting whose annual
gross receipts of the preceding year do not
exceed P10,000,000 and by franchise grantees
of gas and water utilities;
N.B. Compare with other franchise grantees
which are subject to VAT
4.! Services rendered for overseas dispatch, message,
by franchise grantees or conversation originating
from the Philippines;
5.! Services by any person, company or corporation
(except purely cooperative
6.! companies or associations) doing life insurance
business of any sort in the Philippines;
7.! Services rendered by fire, marine or
miscellaneous insurance agents of foreign
insurance companies;
8.! Services rendered by proprietors, lessees or
operators of cockpits, cabarets, night or day clubs,
boxing exhibitions, professional basketball
games, jai-alai and race tracks; and
9.! Receipts on sale, barter for exchange of shares of
stock listed and traded through the local stock
exchange or through initial public offering.

SUMMARY TABLE OF VAT-EXEMPTIONS (SEC. 109)

A Of agricultural and marine products in their original state

Sale or Of fertilizers; seeds, seedlings and fingerlings; prawn, livestock and poultry feeds.
B importation Exception: specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals,
and other animals generally considered pets.
Of personal and household effects belonging to the residents of the Philippines
C
returning from abroad
Importation Of professional instruments and implements, wearing apparel, domestic animals and
D personal household effects, belong to persons coming to settle for the first time in the
Philippines for their own use and not for sale, barter or exchange.
E Subject to percentage tax
By agricultural contract growers and milling for others of palay into rice, corn into grits
F
and sugarcane into raw sugar
Medical, dental, hospital and veterinary services
G
Services Exception: those rendered by professionals
Educational services rendered by private educational institutions duly accredited by
H
DepEd, CHED, and TESDA, and those by governmental educational institutions
I Rendered pursuant to an employer-employee relationship
J Rendered by a RAHQ established in the Philippines
Transactions which are exempt under international agreements to which the Philippines
K is a signatory or under special laws, except those under PD 529 (Petroleum
concessionaires)
L Sales By agricultural cooperatives duly registered with the CDA
Gross receipts from lending activities by credit or multi-purpose cooperatives duly
M Services
registered with the CDA whose lending is limited to members
By non-agricultural, non-electric, and non-credit cooperatives duly registered and in
N Sales good standing with the CDA. Provided, the share capital contribution of each member
does not exceed 15K
By persons who are not VAT-registered
O Export sales
Of real property not primarily held for sale to customers or held for lease in the ordinary
P Sales course of business or sales within the low-cost cap of below P1,919,500 for a residential
lot and P3,199,200 for a house and lot and other residential building
Q Lease Of a residential unit with a monthly rental not exceeding P12,800
Sale, Books and any newspaper, magazine, review or bulletin which appears at regular
R
importation, intervals with fixed prices for subscription and sale and is not devoted principally to

Page 156 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

printing, or publication of paid advertisements.

publication
S Transport of passengers by international carriers (RA 10378)
Sale,
Of passenger or cargo vessels and aircraft, including engine, equipment and spare parts
T importation,
thereof for domestic or international transport operations
or lease
Fuel, goods, and supplies by persons engaged in international shipping or air transport
U Importation
operations
Of banks, non-bank financial intermediaries performing quasi-banking functions and
V Services
other non-bank financial intermediaries
Sale or lease Of goods or properties
Performance of services other than the transactions mentioned in the preceding
W
Services paragraphs, the gross annual sales and/or receipts do not exceed the amount of
1,919,500

b.! For conversion into or intended to form part

11.!Input and Output Tax
a.! Definition
Input tax – the VAT due on or paid by a VAT-
registered person on importation of goods or local
purchases of goods, properties, or services, including
lease or use of properties, in the course of his trade or
business.
1.! It includes the transitional input tax and the
presumptive input tax as determined in
accordance with Section 111 of the Code.
2.! It includes input taxes which can be directly
attributed to transactions subject to the VAT plus
a ratable portion of any input tax which cannot be
directly attributed to either the taxable or exempt
activity.
3.! Input tax must be evidenced by a VAT invoice or
official receipt issued by a VAT-registered person
in accordance with Secs. 113 and 237 of the Code.
[RR 16-2005]
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 Section 236 of
the Code.
If at the end of any taxable month or quarter:
1.! The output tax exceeds the input tax, the excess
shall be paid by the VAT-registered person
2.! The input tax exceeds the output tax, the excess
shall be carried over to the succeeding quarter or
quarters [Sec. 110(B), NIRC]
of a finished product for sale including
packaging materials; or
c.! For use as supplies in the course of business;
or
d.! For use as materials supplied in the sale of
service; or
e.! For use in trade or business for which
deduction for depreciation or amortization is
allowed under the Code.
2.! Purchase of real properties for which VAT has
actually been paid
3.! Purchase of services in which VAT has actually
been paid
4.! Transactions deemed sale
5.! Presumptive Input Tax (Sec. 111(B))
Persons or firms engaged in the processing of
sardines, mackerel and milk, and in
manufacturing refined sugar and cooking oil and
packed noodle based instant meals, shall be
allowed a presumptive input tax, creditable
against the output tax, equivalent to FOUR
PERCENT (4%) of the gross value in money of
their purchases of primary agricultural products
which are used as inputs to their production.
“Processing” means pasteurization, canning and
activities which through physical or chemical
process alter the exterior texture or form or inner
substance of a product in such manner as to
prepare it for special use to which it could not
have been put in its original form or condition.
6.! Transitional Input Tax (Sec 111)

b.! Sources of Input Tax Who may avail: (i) By a person who becomes VAT-
liable for the 1st time, or (ii) any person who elects to
1.! Purchase or importation of goods (evidenced by be a VAT-registered person
VAT invoice/receipt)
a.! For sale; or Rate: 2% Input VAT of the value of the beginning

Page 157 of 270

U.P. LAW BOC
inventory on hand or actual VAT paid on such, goods,
materials and supplies, whichever is HIGHER, which
amount shall be creditable against the output tax of
VAT-registered person.
Tax base: The value allowed for income tax purposes
on inventories shall be the basis for the computation
of the 2% transitional input tax, EXCLUDING goods
that are exempt from VAT under Sec. 109 of the Tax
Code. (RR 16-2005)
Note: A real estate dealer is entitled to claim
transitional input VAT based on the value of the entire
(including the value of the land and the
improvements thereon) real property sold regardless
of whether there was in fact actual payment of VAT on
the purchase of the real property. At the time the
purchase was made, there was still no VAT imposed.
[Fort Bonifacio Development Corp. v. CIR, G.R. Nos.
158885 and 170680 (2009)]
c.! Persons Who Can Avail of
Input Tax Credit
Input tax on domestic purchase or importation of
goods or properties shall be creditable:
1.! To the purchaser upon consummation of sale and
on importation of goods or properties; and
2.! To the importer upon payment of the VAT prior to
the release of the goods from the custody of the
Bureau of Customs.
a.! The input tax on goods purchased or
imported in a calendar month for use in trade
or business for which deduction for
depreciation is allowed under the Code, shall
be spread evenly over the month of
acquisition and the fifty-nine (59) succeeding
months if the aggregate acquisition cost for
such goods, excluding the VAT component
thereof, exceeds One million pesos
(P1,000,000). If the aggregate acquisition
cost does not exceed P1,000,000, the total
input taxes will be allowable as credit
against output tax in the month of
25
acquisition.
b.! However, if the estimated useful life of the
capital good is less than five (5) years, as used
for depreciation purposes, then the input
VAT shall be spread over such a shorter
period
3.! To the purchaser of services or the lessee or
licensee upon payment of the compensation,
rental, royalty or fee.
25
Please refer below for the example.
Page 158 of 270
TAXATION II TAXATION LAW
Input tax on purchase of services, lease or use of
properties shall be creditable:
1.! To the purchaser upon payment of the
compensation, royalty or fee
2.! To lessee or licensee upon payment of the
compensation, royalty or fee
Claiming of input Tax on motor vehicles subject to
the following conditions:
1.! Purchase of vehicle must be substantiated with
official receipts and other records;
2.! Taxpayer has to prove the direct connection of
the motor vehicle to the business;
3.! Only one vehicle for land transport is allowed for
the use of an official/employee with value not
exceeding P2.4 million;
4.! No depreciation shall be allowed for yachts,
helicopters, airplanes
d.! Determination of
Output/Input Tax; VAT
Payable; Excess Input Tax
Credits
Output VAT – Input VAT = VAT Payable
Determination of output tax
(RR 16-2005)
Output VAT in a sale of goods/properties shall be
computed by multiplying the total amount indicated
in the invoice or receipt by 12%.
OUTPUT VAT=
Gross Selling Price x Rate of VAT or 12%
Output VAT in a sale of services shall be computed by
multiplying the total amount indicated in the invoice
or receipt by 12%.
OUTPUT VAT=
Gross Receipts x Rate of VAT or 12% !
Determination of input tax creditable
1.! The sum of the excess input tax carried over from
the preceding month or quarter and the input tax
creditable to a VAT-registered person during the
taxable month or quarter shall be reduced by the
amount of claim for refund or tax credit for value-
added tax and other adjustments, such as
U.P. LAW BOC TAXATION II
purchase returns or allowances and input tax
attributable to exempt sale.
2.! The claim for tax credit referred to includes not
only those filed with the BIR but also those filed
with other government agencies, such as the
Board of Investments the Bureau of Customs.
26
Allocation of input tax on mixed transactions
There are four possible transactions a VAT-registered
person may enter into:
1.! VAT taxable,
2.! VAT-exempt,
3.! zero-rated VAT and
4.! sale to governments.
A VAT-registered person who is also engaged in
transactions not subject to VAT shall be allowed to
recognize input tax credit on transactions subject to
VAT as follows:
1.! All the input taxes that can be directly attributed
to transactions subject to VAT may be recognized
for input tax credit. Input taxes that can be
directly attributable to VAT taxable 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
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
the ratable portion pertaining to transactions
subject to VAT may be recognized for input tax
credit.
Determination of the output tax and VAT payable
and computation of VAT payable or excess tax
credits
If at the end of any taxable month or quarter:
1.! The output tax exceeds the input tax, the excess
shall be paid by the VAT-registered person
2.! The input tax exceeds the output tax, the excess
shall be carried over to the succeeding quarter or
quarters [Sec. 110(B), NIRC]
Illustration:
For a given taxable quarter ABC Corp. has output VAT
of 100 and input VAT of 80. Since output tax exceeds
the input tax for such taxable quarter, all of the input
tax may be utilized to offset against the output tax.
Thus, the net VAT payable is 100 minus 80 = 20.
26
Please refer below for the example
Page 159 of 270
TAXATION LAW
12.!Substantiation of Input Tax
Credits
a.! INPUT TAXES must be substantiated and
supported by the following documents, and must
be reported in the information returns required to
be submitted to the Bureau:
1.! For the importation of goods = Import entry
or other equivalent document showing actual
payment of VAT on the imported goods.
2.! For the domestic purchase of goods and
properties = Invoice showing the information
required under Secs. 113 (Invoicing and
Accounting Requirements for VAT-
Registered Persons) and 237 (Issuance of
Receipts or Sales or Commercial Invoices) of
the Tax Code.
3.! For the purchase of real property = public
instrument i.e., deed of absolute sale, deed
of conditional sale, contract/agreement to
sell, etc., together with VAT invoice issued by
the seller.
4.! For the purchase of services = official receipt
showing the information required under Secs.
113 and 237 of the Tax Code.
A cash register machine tape issued to a
registered buyer shall constitute valid proof
of substantiation of tax credit only if it shows
the information required under Secs. 113 and
237 of the Tax Code.
b.! TRANSITIONAL INPUT TAX shall be supported
by an inventory of goods as shown in a detailed
list to be submitted to the BIR.
c.! Input tax on "deemed sale" transactions shall be
substantiated with the invoice required.
d.! Input tax from payments made to non-residents
(such as for services, rentals and royalties) shall
be supported by a copy of the Monthly
Remittance Return of Value Added Tax Withheld
(BIR Form 1600) filed by the resident payor in
behalf of the non-resident evidencing remittance
of VAT due which was withheld by the payor.
e.! Advance VAT on sugar shall be supported by the
Payment Order showing payment of the advance
VAT.
U.P. LAW BOC TAXATION II TAXATION LAW

Illustration: LBH Corporation sold capital goods on installment on October 1, 2008. It is agreed that the
selling price, including the VAT, shall be payable in five (5) equal monthly installments. The data pertinent to the sold
assets are as follows:

Selling Price 5,000,000.00 (exclusive of VAT)

Passed on VAT 600,000.00
Original Cost of Asset 3,000,000.00
Accumulated Depreciation 1,000,000.00
Unutilized Input Tax (Sold Asset) 100,000.00

Accounting:
SELLER BUYER
Oct. 1, 2008 Oct. 1, 2008
Cash 1,200,000.00 Asset 5,000,000.00
Installment Receivable 4,400,000.00 Input Tax 600,000.00
Accumulated Depreciation 1,000,000.00
Output Tax 600,000.00 Cash 1,200,000.00
Asset 3,000,000.00 Installment Payable 4,400,000.00
Gain on sale of asset 3,000,000.00

To Record VAT Liability:

Output Tax 600,000.00 ------------
Input Tax 100,000.00
VAT Payable 500,000.00

Periodic Receipt of Installment: Periodic Subsequent Payment:

Cash 1,100,000.00 Installment Payable 1,100,000.00
Installment Receivable 1,100,000.00 Cash 1,100,000.00

*The input tax of P 500,000.00 on the bought capital goods worth P 5,000,000.00 shall be spread evenly over
a period of 60 months starting the month of purchase.

If the depreciable capital good is sold/transferred within a period of five (5) years or prior to the exhaustion of
the amortizable input tax thereon, the entire unamortized input tax on the capital goods sold/transferred can be
claimed as input tax credit during the month/quarter when the sale or transfer was made but subject to the
limitation prescribed under the law.

Illustration: ERA Corporation has the following sales during the month:

Sale to private entities subject to 12% 100,000.00

Sale to private entities subject to 0% 100,000.00
Sale of exempt goods 100,000.00
Sale to government subjected to 5% final VAT (withholding) 100,000.00
Total sales for the month 400,000.00

The following input taxes were passed on by its VAT supplies:

Input tax on taxable goods (12%) 5,000.00
Input tax on zero-rated sales 3,000.00
Input tax on sale of exempt goods 2,000.00
Input tax on sale to government 4,000.00
Not attributable to any specific activity (monthly amortization for 60 months) 20,000.00

The creditable input tax for the month shall be computed as follows:

Page 160 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

Input tax on sale subject to 12% - 5,000.00

Input tax on zero-rated sale 3,000.00
Ratable portion of the input tax not directly attributable to any activity:

Taxable sales (0% and 12%) X Amount of input tax not directly attributable
Total Sales

100,000.00 X 20,000.00 - 5,000.00

400,000.00

Total input tax attributable to sales - 9,000.00

to government

The input tax attributable to sales to government for the month shall be computed as follows:
Input tax on sale to gov’t. - P 4,000.00
Ratable portion of the input tax not directly attributable to any activity:

Taxable sales to the government X Amount of input tax not directly attributable
Total Sales

P100,000.00 X P20,000.00 - 5,000.00

400,000.00

Total input tax attributable to sales - 9,000.00

to government

The input tax attributable to VAT-exempt sales for the month shall be computed as follows:
Input tax on VAT-exempt sales - 2,000.00
Ratable portion of the input tax not directly attributable to any activity:

VAT-exempt sales X Amount of input tax not directly attributable

Total Sales

P100,000.00 X P20,000.00 - 5,000.00

400,000.00

Total input tax attributable to - 7,000.00

VAT-exempt sales

Page 161 of 270

U.P. LAW BOC TAXATION II
13.!Refund or Tax Credit of
Excess Input Tax
a.! Who May Claim for
Refund/Apply for Issuance
of Tax Credit Certificate
Zero-Rated Sales (Sec. 112(A), NIRC)
1.! Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may apply for
the issuance of a tax credit certificate/refund of
creditable input tax due or paid attributable to
such sales, EXCEPT transitional input tax, to the
extent that such input tax has not been applied
against output tax, within two (2) years after the
close of the taxable quarter when the sales were
made. The input tax that may be subject of the
claim shall exclude the portion of input tax that
has been applied against the output tax.
2.! The acceptable foreign currency exchange
proceeds must have been duly accounted for in
accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP) in the case of
zero-rated transactions paid for in acceptable
foreign currency and requiring that such be
accounted for in accordance with BSP rules &
regulations (Secs. 106(A)(2)(a)(1) and (2), and Sec.
106(A)(2)(b) and Sec. 108(B)(1) and (2), NIRC).
3.! Where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or
exempt sale of goods of properties or services,
and the amount of creditable input tax due or
paid cannot be directly and entirely attributed to
any one of the transactions, it shall be allocated
proportionately on the basis of the volume of
sales.
4.! In the case of a person engaged in the transport
of passenger and cargo by air or sea vessels from
the Philippines to a foreign country, the input
taxes shall be allocated ratably between his
zero-rated sales and non-zero-rated sales (sales
subject to regular rate, subject to final VAT
withholding and VAT-exempt sales). (RR 16-
2005)
Requirements
a.! The claimant should be a VAT-registered person
b.! There should be an application filed with the BIR
or DOF center, as the case may be, within 2yrs
after close of taxable quarter.
c.! The claimed input tax must not have been
applied to any output tax during the period
covered and subsequent periods covered by the
claim.
Page 162 of 270
TAXATION LAW
d.! The claimed input tax must have been declared
from the VAT quarterly return.
e.! The claimed input tax are directly attributable to
0%-rated transactions.
f.! Acceptable foreign currency exchange proceeds
must have been duly accounted for
g.! Claimed input tax must be duly supported by
VAT invoices/receipts.
h.! VAT returns for the succeeding quarters must
have been submitted.
Cancellation of VAT Registration
1.! A person whose registration has been
cancelled due to (i) retirement from or cessation
of business, or due to changes in or (ii) cessation
of status under Section 106(C) of the Code may,
within two (2) years from the date of
cancellation, apply for the issuance of a tax
credit certificate for any unused input tax which
may be used in payment of his other internal
revenue taxes.
2.! He shall be entitled to a refund if he has no
internal revenue tax liabilities against which the
tax credit certificate may be utilized.
b.! Period to File Claim/Apply
for Issuance of Tax Credit
Certificate
This period must be distinguished from normal tax
refunds for erroneous payments where an
administrative claim and judicial claim may be made
together, and the reckoning point of the 2 years is
from the date of the erroneous payment.
1.! Application for issuance of tax credit certificate
or refund of creditable input tax (except
transitional input tax)
•! WITHIN 2 YEARS after the close of the
taxable quarter when the sales were made,
to apply for the issuance of a Tax Credit
Certificate or refund of creditable input tax
due or paid attributable to such sales.
•! If the VAT registration has been cancelled
due to retirement or cessation of business, or
change of status, the 2 year period shall be
after the date of cancellation
2.! Administrative Claim
•! The CIR shall grant the tax credit/refund
within 120 days from the date of submission
of complete documents, or from the date of
filing of the application, if the claimant-
taxpayer did not submit additional
documents. (RR 01-2017)
•! “Complete Documents” is determined by
taxpayer himself.
U.P. LAW BOC TAXATION II
•! Taxpayer may only resort to a Judicial Claim
within 30 days either after the end of the 120
day period or after a decision is made by the
Commission, whichever comes first.
3.! Judicial Claim
•! In case of denial of the application or the
expiry of the 120 days, the taxpayer may
appeal to the CTA within 30 days from the
receipt of said denial or inaction.
c.! Manner of Refund
Revenue Memorandum Circular no. 57-2013 (August
23, 2013): Unutilized creditable input taxes attributed
to zero-rated sales can only be recovered through the
application for refund or tax credit. There is no other
mode of recovering unapplied input taxes aside from
an application for refund or tax credit. The
Memorandum Circular also instructed the
disallowance of unutilized creditable input taxes
attributable to VAT zero-rated sales that is claimed
as a deduction for income tax purposes.
Refunds shall be made upon warrants drawn by the
CIR or by his duly authorized representative without
the necessity of being countersigned by the Chairman,
Commission on Audit, the provisions of the
Administrative Code of 1987 notwithstanding:
provided that refunds shall be subject to post audit
by the Commission on Audit. (Sec. 112(D), NIRC)
d.! Destination Principle/Cross-
Border Doctrine
See discussion above.
14.!Invoicing Requirements
[Sec 113, NIRC]
a.! In General
A VAT-registered person shall issue:
a.! A VAT invoice for every sale, barter or exchange
of goods or properties; and
b.! A 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 TIN followed by the word “VAT” in their invoice
or ORs. Said documents shall be considered as a
“VAT Invoice” or VAT official receipt. All purchases
covered by invoices/receipts other than VAT
Page 163 of 270
TAXATION LAW
Invoice/VAT OR shall not give rise to any input tax.
[RR 16-05]
Note: VAT component of all transactions shall be
separately indicated in the VAT invoice or receipt. (RR
18-2011)
Information Contained in the VAT Invoice or VAT
Official Receipt:
1.! A statement that the seller is a VAT-registered
person, followed by his taxpayer's identification
number (TIN);
2.! The total amount which the purchaser pays or is
obligated to pay to the seller with the indication
that such amount includes the VAT:
a.! The amount of the tax shall be shown as a
separate item in the invoice/receipt;
b.! If the sale is exempt from VAT, the term
"VAT-exempt sale" shall be written or
printed prominently on the invoice or receipt;
c.! If the sale is subject to zero percent (0%)
value-added tax, the term "zero-rated sale"
shall be written or printed prominently on
the invoice or receipt;
d.! If the sale involves goods, properties or
services some of which are subject to and
some of which are VAT zero-rated or VAT-
exempt, the invoice or receipt shall clearly
indicate the breakdown of the sale price
between its taxable, exempt and zero-rated
components, and the calculation of the
value-added tax on each portion of the sale
shall be shown on the invoice or receipt. The
seller has the option to issue separate
invoices or receipts for the taxable, exempt,
and zero-rated components of the sale.
3.! The date of transaction, quantity, unit cost and
description of the goods or properties or nature
of the service; and
4.! In the case of sales in the amount of one
thousand pesos (P1,000) or more where the sale
or transfer is made to a VAT-registered person,
the name, business style, if any, address and
taxpayer identification number (TIN) of the
purchaser, customer or client.
5.! Name of buyer and seller
U.P. LAW BOC TAXATION II TAXATION LAW

b.! In Deemed Sale Transactions

Transaction
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
Distribution or transfer to
shareholders/investors or creditors
Consignment of goods if actual sale is not made
within 60 days
Retirement from or cessation of business with
respect to all goods on hand
Invoicing Requirement
Memorandum entry in the subsidiary sales journal to record
withdrawal of goods for personal use
Invoice, at the time of the transaction, which should include
all the info prescribed above; data in the invoice shall be
duly recorded in the subsidiary sales journal
Invoice, at the time of the transaction, which should include
all the info prescribed above; data in the invoice shall be
duly recorded in the subsidiary sales journal
An inventory shall be prepared and submitted to the RDO
who has jurisdiction over the taxpayer’s principal place of
business not later than 30 days after retirement or cessation
from business. An invoice shall be prepared for the entire
inventory, which shall be the basis of the entry into the
subsidiary sales journal. The invoice need not
enumerate the specific items appearing in the inventory
regarding the description of the goods. 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.

c.! Consequences of Issuing 1.! the transaction shall become taxable and the
2.! issuer shall be liable to pay VAT thereon.
Erroneous VAT Invoice or 3.! The purchaser shall be entitled to claim an input
VAT Official Receipt tax credit on his purchase. [RR 16-05]

Issuance of a VAT Invoice or VAT Receipt by a non-VAT

person
If a person who is not a VAT-registered person issues
an invoice or receipt showing his Taxpayer
Identification Number (TIN), followed by the word
"VAT", the erroneous issuance shall result to the ff:
1.! The non-VAT person shall be liable to:
a.! Percentage taxes applicable to his
transactions;
b.! VAT due on transactions under Section 106
or 108 of the Code, without the benefit of any
input tax credit; and
c.! A 50% surcharge under Section 248 (B) of
the code;
2.! The VAT shall, if the other requisite information
required is shown on the invoice/receipt, be
recognized as an input tax credit to the
purchaser.
Issuance of a VAT Invoice or VAT Receipt on an Exempt
Transaction by a VAT-registered Person
If a VAT-registered person issues a VAT invoice or
VAT official receipt for a VAT-exempt transaction, but
fails to display prominently on the invoice or receipt
the term "VAT-exempt Sale:
15.!Filing of Return and
Payment
[Sec 114, NIRC]
VAT returns - VAT paid on a monthly basis.
Payments in the monthly VAT declarations shall 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.
a.! Filed by person liable to pay the VAT
b.! Quarterly return of the amount of his gross sales
or receipts within twenty-five (25) days after the
close of each taxable quarter prescribed for each
taxpayer.
c.! The monthly VAT Declarations of taxpayers
whether large or non-large shall be filed and the
taxes paid not later than the 20th day following
the end of each month.
Note: VAT paid on a monthly basis. Payments in the
monthly VAT declarations shall be credited in the
quarterly VAT return to arrive at the net VAT payable

Page 164 of 270

U.P. LAW BOC
or excess input tax/over-payment as of the end of a
quarter.
Administrative and Penal Provisions (Sec 115)
a.! Suspension of business operations. In addition to
other administrative and penal sanctions
provided for in the Tax Code and implementing
regulations, the CIR or his duly authorized
representative may order suspension or closure
of a business establishment for a period of not
less than five (5) days for any of the following
violations:
1.! Failure to issue receipts and invoices.
2.! Failure to file VAT return as required under
the provisions of Sec. 114 of the Tax Code.
3.! Understatement of taxable sales or receipts
by 30% or more of his correct taxable sales
or receipt for the taxable quarter.
4.! Failure of any person to register as required
under the provisions of Sec. 236 of the Tax
Code.
b.! Surcharge, interest and other penalties. The
interest on unpaid amount of tax, civil penalties
and criminal penalties imposed in Title XI of the
Tax Code shall also apply to violations of the
provisions of Title IV of the Tax Code (VAT).
16.!Withholding of Final VAT
on Sales to Government*
[RR 16-2005]
General Rule: Withholding tax does not apply on
transactions subject to VAT.
Exceptions:
a.! Gross payments by the government shall be
subject to the 5% final withholding tax;
b.! Gross payments by resident VAT-taxpayers to
non-resident foreign persons of rentals, royalties,
reinsurance premiums, and services done in the
Philippines—12% (Sec. 114(c), NIRC)
*Beginning Nov. 1, 2005, when R.A. 9337 became
effective, all sales of goods, properties, or services to
the government shall be subject to the 5% final
withholding tax. The government shall, before
making payment on account of each purchase of
goods and/or services taxed at 12% VAT (Sec. 106
and 108) deduct and withhold a final VAT due at the
rate of 5% of the gross payment thereof. (Mamalateo)
Sales to Government
The Government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs shall,
Page 165 of 270
TAXATION II TAXATION LAW
before making payment on account of each purchase
of goods and services which are subject to the VAT
(Secs. 106 and 108, NIRC), deduct and withhold a
final VAT due at the rate of five percent (5%) of the
gross payment thereof.
The payment for lease or use of properties or property
rights to nonresident owners shall be subject to 12%
withholding tax at the time of payment.
a.! The payor or person in control of the payment is
considered as the withholding agent.
b.! The VAT withheld shall be remitted within ten
(10) days following the end of the month the
withholding was made.
The 5% final VAT shall represent the net VAT payable
of the seller. The remaining 7% effectively accounts
for the standard input VAT, in lieu of the actual input
VAT directly attributable or ratably apportioned to
such sales. (This means that where the 5% final VAT
applies, the basic formula of output tax less input tax
does not apply.)
Should actual input VAT exceed 7% of the gross
payments, the excess may form part of the sellers’
expense or cost. On the other hand, if actual input
VAT is less than 7% of gross payment, the difference
must be closed to expense or cost, in effect reducing
it.
However, 12% final VAT shall be withheld with
respect to the following:
a.! Lease or use of properties or property rights
owned by non-residents;
b.! Services rendered to local insurance companies,
with respect to reinsurance premiums payable to
non-residents; and;
c.! Other services rendered in the Philippines by
non-residents
U.P. LAW BOC TAXATION II TAXATION LAW

VAT FORMULA (IN GENERAL)

Actual Sales/Receipts xxx
Add: Excise Tax xxx
Remaining Merchandise (Cessation of VAT-registered Status) xxx
Transactions Deemed Sale xxx xxx

Less: Sales Returns and Allowances xxx

Sales Discounts xxx xxx

Total Sales (Taxable Base) xxx

Multiplied by 12% 12%
Output VAT on sales or gross recipts xxx
Less: Input VAT on purchases and services xxx
Transitional Input VAT, if applicable xxx
Presumptive Input VAT, if applicable xxx
Input VAT Carry-over from previous period xxx
Creditable VAT withheld xxx xxx
Net VAT payable (refundable) xxx

MONTHLY RETURN
Gross Sales/Receipts for the Month xxx
Multiplied by VAT rate 12%
Output VAT xxx
Less Input Taxes:
Transitional/Presumptive Input Tax xxx
On taxable goods/services xxx xxx
Net VAT Payable xxx
Add Penalties:
Surcharge xxx
Interest xxx
Compromise xxx xxx
Total Amount Payable xxx

INVOLVING GOVERNMENT
When Actual Input VAT > Standard Input VAT: excess forms part of seller’s expense/cost
When Actual Input VAT < Standard Input VAT: difference is treated as taxable other income

Sales xxx
Output VAT (Sales x 12%) xxx
Purchases xxx
Input VAT (Purchases x 12%) xxx

OUTPUT VAT Payable:

Output VAT xxx
Less: Actual Input VAT xxx
Standard Input VAT (Sales x 7%) xxx xxx
Cost of sale/Expense (Income and expense summary) xxx
Net VAT Payable xxx
Less: Creditable Withholding Tax (Sales x 5%) xxx
Output VAT Payable xxx

Page 166 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

QUICK NOTES ON VAT 1.! Seller (w/n natural) executes contract to SBE
of RP
Transactions subject to VAT 2.! RP is in the Phil
General Requirements 3.! Seller is engaged in sale or exchange of RP
a.! Done in the course of trade or business (w/n or real estate (dealer, developer, lessor)
profit-oriented): rule of regularity + incidental 4.! RP is held primarily for sale/lease ICT/B or
thereto (including isolated) an ordinary asset used in T/B as an incident
EXCEPTION: to his vatable activity (NOT a capital asset)
1.! NRC/NRA who perform services in Phil, even
if no regularity not exempt from VAT (NIRC, special law,
2.! Importation of Goods may be for business or special agreement
non-business use b.! Sale of Services29
b.! Gross sales or receipts for the past 12 months or 1.! for a valuable consideration
the next 12 months > 1,919,500php (actually/constructively received)
OR there are reasonable grounds to believe 2.! performed ICTB in the Phil.
3.! not exempt from VAT (NIRC, special law,
Taxable Transactions and Specific Requirements special agreement)
a.! SBEL of Goods or Properties27 4.! person rendering service is VAT-liable
Goods/Personal Properties 5.! no ER-EE relationship
1.! Actual/deemed sale (4) for a valuable c.! Importation of Goods
consideration
2.! for use or consumption in the Phil (regardless Persons Liable to pay VAT
of the payment arrangements) a.! Any person who Sells, Barters, Exchanges or
3.! not exempt from VAT (NIRC, special law, Leases (SBEL) goods or properties
special agreement) if real property: persons engaged in real estate
28
Real Properties : business:
(i)! Any person who SBE real properties in
the course of trade or business (ICT/B)
27
Sec 106 (ii)! Real estate lessors/ sub-lessors
28 (iii)! NRA/NRC lessors when Real Property is
Casual sale (Capital in the Phil
Subject to CGT (6%) (iv)! Non-stock, non-profit corporations
Assets)
Regular sales engaged in SBE of real properties ICT/B,
(Ordinary Assets): regardless of disposition of income
Commercial (v)! Gov’t inc GOCCs in SBEL of RP ICT/B
Property Subject to 12% VAT b.! Renders services
(Sale/Lease) c.! Imports goods
•! If monthly rental ≤ 12,800 •! if importer is tax-exempt/VAT-exempt AND
= VAT and OPT-exempt goods are subsequently SBE to non-exempt
•! If monthly rental > 12,800 persons, purchasers/recipients = importer
but aggregate annual •! if the Philippine branch of an NRFC
Residential Units rentals ≤1,919,500 = “imported”, first local buyer = importer
(Lease) subject to OPT
•! If monthly rental > 12,800 Tax Bases of VAT
and aggregate annual a.! Gross (Sales) Selling Price: total amount of
rentals > 1,919,500 = money paid in consideration of SBEL
subject to VAT •! excludes: VAT, sales discounts 30 and,
•! If SP > 1,919,500.00 = allowances and returns (2)
Residential Lot
subject to VAT •! includes: Excise tax paid, initial payments31,
•! If SP ≤ 1,919,500.00 = interests and penalties (if instalment),
VAT-exempt
•! If SP > 3,199,200.00 =
29
Residential subject to VAT Sec 108
30
House and Lot •! If SP ≤ 3,199,200.00 = It should be determined at the time of the sale,
VAT-exempt indicated in the invoice and granting does not depend
on the happening of a future event

Page 167 of 270

U.P. LAW BOC TAXATION II
commission income (if exported), purchase
price, charges for packing, delivery and
insurance
o! If goods/personal properties,
!! GSP = amount paid in consideration
!! IF DEEMED SALE: FMV at the time
of the transaction
N.B. in retirement/cessation,
inventory (raw materials, finished
goods, machinery, equipment,
furniture, fixture), tax base =
whichever is lower, (i) acquisition
cost OR (ii) current market price of
goods
o! If real property,
!! GSP = amount higher:
•! consideration stated in the sales
document
•! FMV, whichever is higher of
o! Zonal value: FMV as
determined by CIR
o! Real Property Tax Value:
FMV as determined by
provincial & city assessors
b.! Gross Value in money of goods
c.! Gross Receipts derived from transaction: total
amount of money/equivalent = contract price +
compensation + service fee + rental fee +
royalties + amount charged for materials
supplied with the services + deposits and
advanced payments actually or constructively
received + costs items of construction projects –
(VAT + amounts earmarked for payments to
rd
unrelated 3 party + amounts received as
reimbursement + monies/receipts held in trust
w/c do not redound to the benefit of taxpayer +
universal charge passed on and collected by
distribution companies and electric coop (if sale of
electricity) + receivables + local taxes)
IF DEALER IN SECURITIES: gross selling price –
cost of securities sold
d.! Total Value/Landed Cost (determined on the
basis of quantity/volume of goods)
Total Value used by Customs: tariff and customs
duties + custom duties +excise tax + charges
Landed Cost: invoice amount inc. cost of loading,
shipping, unloading, + custom duties + freight +
31
Initial payments does not include the amount of
mortgage on RP sold (except excess when mortgage
exceeds the cost of the property), notes and other
evidence on=f indebtedness issued by the purchaser
at the time of the sale
Page 168 of 270
TAXATION LAW
insurance + other charges +excise tax – expenses
incurred after release of goods (e.g., cost of delivery)
•! Customs duty: amount of customs duty legally
due and paid by the importer
•! Charges: special import tax,foreign marginal fees,
bank and arrastre charges, wharfage dues, broker
fees, other charges paid to complete importation
Rates of VAT
a.! Output Tax (Sale/Barter/Exchange/Lease)
1.! 12% standard rate: applied directly to TB
2.! 0%: applied directly to TB
b.! Input Tax (Purchase from VAT-registered
businesses/Importation of goods)
1.! 12% standard rate: applied directly to TB
2.! 0%: applied directly to TB
3.! 2% transitional VAT (: applied to the
(inventory on hand) value of goods (exc. VAT-
exempt good) existing at the date a person
commences business and/or becomes liable
to VAT) or 12% actual input tax rate, higher
4.! 4% presumptive input tax rate: applies to
purchases of VAT-exempt goods used as
inputs by a VAT-registered person in
manufacturing or processing certain food
products
5.! 7% FWT (standard input VAT, when
government), 5% withholding
Creditable Input VAT Requirements
a.! Proper documentation
b.! No double input tax credit is allowed.
Input VAT on a particular purchase transaction
can be claimed once only upon consummation of
the sale of goods and based on the entire GSP
(whether paid on cash, credit or instalment)
c.! Ignore erroneous VAT rate. The correct rate of
input VAT can still be claimed.
d.! Transactions should have been made with VAT-
registered persons.
e.! IF MIXED TRANSACTIONS and input VAT cannot
be directly attributable:
Formula Input Tax Treatment
Untraceable Input VAT
(VAT taxable sales) Creditable Input VAT
x
Total Sales
Untraceable Input VAT Input VAT Credit,
(Zero-rated sales) eligible for tax refund
x or TCC
Total Sales
Untraceable Input VAT Cost of Sales or
(VAT-exempt sales)
x Operating Expense
Total Sales
Compare to Standard
Untraceable Input VAT Input VAT (Creditable
(Sale to Gov't)
against Standard
x
Total Sales
input VAT)
U.P. LAW BOC TAXATION II TAXATION LAW

N.B. Creditable Input VAT is 3.! amount of input VAT with regard to
a.! increased by any input VAT carried over from the uncollected portion of instalment receivable
preceding month or quarter in instalment sales
b.! decreased by
1.! amount of the claim for refund or tax credit
for VAT filed during the same period
2.! input tax attributable to exempt sales and
unauthorized input tax attributable of
depreciable capital goods
VAT-EXEMPT and 0% VAT

VAT-Exempt 0% VAT
•! Non-VAT taxable transaction •! Taxable transaction
•! Taxpayer is relieved from payment of VAT for w/c he
is directly liable
•! NO output and input VAT •! No output VAT, but input VAT is available as tax
•! Optional VAT Registration credit or refund
•! Partial relief •! Total relief
•! Only removes VAT at the exempt stage •! All VAT is removed at whatever stage
On Sales: On Sales:
•! No VAT •! No VAT
•! Not within the VAT system •! Still within the VAT system
•! Not subject to VAT •! Subject to 0% VAT
On Purchases: On Purchases:
•! VAT passed is on cost •! VAT passed on is input tax
•! Input tax is a cost component thus item of deduction •! Input tax is creditable against output tax thus
reducing only taxable income reducing VAT liability

SALE OF SERVICES

VAT-Exempt 0% VAT
N.B. There are 31 VAT-exempt sales of services (Sec. 109
and special laws)

a.! For lease of property =exempt

•! if advance payment = loan, option money,
security deposit a.! Processing, manufacturing, repacking goods to
non-resident
•! NB: if security deposit is applied to rental = VAT
b.! Processing, manufacturing, repacking goods to
b.! For persons engaged in milling, processing,
export-oriented
manufacturing or repacking goods = exempt
c.! Services other than processing, manufacturing,
•! if palay " rice; corn " corn grits; sugar cane "
repacking
raw sugar
d.! Services to exempted persons: effectively 0-rate
c.! For franchise grantees of electric utilities, telephone
e.! Sale of power/fuel-generated through renewable
and telegraph, radio and/or television broadcasting
resources
= exempt
f.! Services rendered to int’l shipping/air transport
•! if annual gross receipts <= 10M; g.! Transport of passengers and cargo by air from Phil
franchise grantees of gas and water to Foreign
utilities; of telephone & telegraph services, h.! Transactions of VAT-reg person to foreign
amounts received for overseas dispatch embassies
from Phil.
d.! For PREMIUMS of insurance companies = exempt IF
•! life and disability insurance;
crop insurance; health and accident insurance

Page 169 of 270

U.P. LAW BOC TAXATION II
(included are only those with exceptions)
a.! Sale/import of agricultural & marine food products
in their original state; livestock and poultry
(used/yield for human consumption); breeding stock
and genetic materials
b.! Import of professional instruments, implements,
wearing apparel, domestic animals, and personal
household effects
c.! Transactions exempt pursuant to special laws
d.! Cooperatives
e.! Residential lots ≥ 1,919,500 & lot & dwellings ≥
3,199,200
f.! lease of residential units,
•! if ≤ 12,800/unit/month (regardless of
aggregate amount);
•! if ≥ 12,800/unit/month (AND aggregate
amount is ≥ 1,919,500)
g.! importation of fuels, goods, supplies by
international shipping or air transport
SALE OF GOODS
VAT-Exempt
Real Property
a.! Not primarily held ICT/B
b.! Low-cost or socialized housing
c.! Residential lot <= 1,919,500
d.! House and/or other residential dwellings <=
3,199,200
e.! Lease (12,800/unit/year or total
1,919,500/year)
f.! Transmission to a trustee
Except: if transmission is deemed sale
g.! Transfer to corporation in exchange of SoS
h.! Advance payments/Security Deposits in lease
Except: if applied to the rent
As regards ecozones and PEZA-registered entities
a.! Made by VAT-exempt supplier from customs
territory to any registered enterprise inside b.! Sale of gold to BSP
ecozone
b.! Intra-ecozone enterprise sale of service, if PEZA
registered seller is subject to 5% special tax d.! Docking/Undocking services to foreign vessels
regime
c.! Intra-ecozone sales of goods
Effectively-zero rated sales
32
Under Omnibus Investment Code (EO226)
33
Ibid
34
RA7227
35
RA 7916
Page 170 of 270
TAXATION LAW
Exceptions to the Exemptions (Subject to VAT)
a.! Livestock and poultry DOES NOT INCLUDE fighting
cocks, race horses, zoo animals and pets
b.! DOES NOT INCLUDE vehicles, vessels, aircrafts,
machineries, and other goods for use in
manufacturing in commercial quantities
c.! DOES NOT INCLUDE those under Petroleum
Exploration Concessionaires under Petroleum Act
of 1949
d.! For sales by agricultural coops to non-members, if
seller is the member = VAT
For sales by non-agri, non-electric and non-credit,
importation of machineries and equipment = VAT
e.! DOES NOT INCLUDE parking lot
f.! If any portion of such goods are used for purposes
other than those stated = VAT
0% VAT
Actual Export Sales
Deemed Export Sales
a.! Internal or constructive export sales
1.! Raw/Packaging materials to non-resident buyer
2.! Raw/Packaging materials to export-oriented
32
3.! Phil. Port FOB value of export products
33
4.! Net selling price of export products
34
5.! sales to bonded manufacturing warehouses
35
6.! sales to export processing zones
7.! sales to enterprises duly accredited by Subic Bay
Metropolitan Authority
8.! sales to registered export traders
9.! sales to diplomatic missions etc.
10.! sale by VAT-supplier to manufacturer/producer
whose products are 100% exported
c.! Sale of goods/supplies/equipment/fuel to persons
engaged in int’l shipping/air transport
Foreign currency denominated goods
a.! To a NRC/NRA of goods
b.! To a NRC/NRA of goods locally manufactured for
household and personal use
Except: automobiles and non-essential goods
U.P. LAW BOC TAXATION II TAXATION LAW

a.! Made by VAT registered supplier from customs territory

to any registered enterprise inside ecozone
b.! Intra-ecozone enterprise sale of service, if PEZA
registered seller is subject to NIRC taxes

Taxable Activity/Property TR Tax Base Tax Payable

Actual SBE of Goods or
Gross Selling Price
Properties
Goods/ Personal
= amt. paid to the seller
Properties
12%
Real Properties = consideration/FMV, higher
IF sale is on instalment
Actual collection of consideration
plan AND ZV/FMV > = x zonal value or FMV (execution)
Agreed Consideration
SP (excluding VAT)
VAT Payable
Deemed Sale Transactions
paid by
Not ICB/T, but originally
seller/transferor
intended for sale/use
ICB/T FMV (at the time of transaction)
Transfer to SH in share of E: if FMV is unreasonably lower (by more than 30% of AMV)
profit or Cr in payment of 12% = AMV or determined by CIR
debt
Consignment after 60d
Retirement/Cessation of
Acquisition Cost or current market price, lower
business
VAT Payable
Sale of Services 12% Gross receipts derived paid by
performer
Importation of Goods Total Value used by BOC VAT paid by
=tariff & custom duties + custom duties + excise tax + importer PRIOR
In general
charges to the release of
12%
When custom duties are goods in
based on quantity or = landed cost + excise tax Customs
volume custody

a.! Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input tax credit
beginning on the first day of the month following registration.
b.! The cancellation for registration will be effective from the first day of the following month the cancellation was
approved.
c.! What is the treatment for Withholding of VAT on Government Money Payments?
•! The government or any of its political subdivisions, instrumentalities or agencies, including government-
owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of
goods and/or services taxed at twelve percent (12%) VAT pursuant to Sections 106 and 108 of the Tax Code,
deduct and withhold a Final VAT due at the rate of five percent (5%) of the gross payment.
•! The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller. The
remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or services
to government or any of its political subdivisions, instrumentalities or agencies including GOCCs in lieu of
the actual input VAT directly attributable or ratably apportioned to such sales. Should actual input VAT
attributable to sales to government exceeds seven percent (7%) of gross payments, the excess may form
part of the sellers' expense or cost. On the other hand, if actual input VAT attributable to sale to government
is less than seven percent (7%) of gross payment, the difference must be closed to expense or cost.
•! The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well
as private corporation, individuals, estates and trusts, whether large or non-large taxpayers, shall withhold
twelve percent (12%) VAT with respect to the following payments:
1.! Lease or use of properties or property rights owned by non-residents; and
2.! Other services rendered in the Philippines by non-residents.

Page 171 of 270

 U.P. LAW BOC Before start of business or TAXATION II VAT-registered TAXATION LAW
within 10d before the
beginning of taxable quarter
Person
VAT-Exempt Person VAT AND NON-VAT REGISTRATION (w/ TIN)
(cannot be cancelled w/in
3years; franchise of Compliance activities after registration:
radios/tv broadcasting, Optional Registration Registration Fee (500php) to
irrevocable) 1. Registration of books of accounts (3) of the
authorized bank agent, Certificate of business/occupation/calling including practice
RDOfficer, Rev Collection Registration of profession, before using the same.
Before start of business Officer, authorized
Register to 2. Registration of sales invoices and official
and every year city/municipal treasurer
thereafter (on/before RDO for every receipts (If there are transactions not subject to
Jan 31) separate and VAT, registration of non-VAT invoices or non-
EXEMPT from 500php
distinct VAT official receipts)
1. if aggregate gross
establishment APPROVE 3. Annual Registration: Pay registration fee for
Person sales/receipts ≤ 100,000;
every place of business that generates sales
Liable for 2. cooperative;
after updating the registration records.
VAT 3. individuals earning pure
4. Filing of the Monthly VAT Declaration and
compensation income;
Quarterly VAT Return to be submitted to
4. overseas workers
Did not register: RTO/LTDO
• Still liable for VAT DENY
• No input credit
CANCELLATION/UPDATE OF VAT REGISTRATION
(registration of a taxpayer of a franchise grantee of radio and/or tv
broadcasting whose gross annual receipts≤ 10,000,000 =
irrevocable)

Before start of business or Certificate of Non-VAT Cancellation/Update Minor change in

within 10d before the
necessitating cancellation original registration
beginning of taxable quarter

APPROVE w/in 15d

w/in 25d from
Registration Fee (500php) to cancellation
from
authorized bank agent, change
Register to
RDOfficer, Rev Collection Filing of Short Period Return Notice of Change
RDO for every (f change of address)
Officer, authorized (for the remaining period
separate and
city/municipal treasurer that he was VAT-reg)
distinct
DENY
establishment
EXEMPT from 500php Instances when a taxpayer may
if aggregate gross CANCEL his registration:
sales/receipts ≤ 100,000; 1. When TP’s gross sales/receipts for the following 12 months ≤ 1,919,500
cooperative; individuals 2. When TP has ceased to carry on his T/B and does not expect to recommence within 12m
earning pure compensation 3. In case of a single proprietorship, a change of ownership
income; overseas workers 4. Dissolution of a partnership or corporation
5. Merger/consolidation wrt dissolved corporations
6. Person who registered prior to planned business commencement but failed to actually start
business

UPDATE his registration:

RE applications for VAT zero-rating: Taxpayers shall file their application directly with the
Audit Information, Tax Exemption and Incentives Division (AITEID) under the Assessment
Service, or with the LTAID I and II, BIR National Office, as the case may be.
Page 172 of 270
1. When TP’s business has become exempt
2. When there is a change of the nature of business (from vatable to exempt)
3. When TP a tax-exempt individual who applied for optional registration and cancelled his
registration after 3yrs.
4. When TP is a VAT-registered person whose gross sales/receipts for 3 consecutive years ≤ 1,919,50
 U.P. LAW BOC TAXATION II TAXATION LAW

VAT REFUND OR VAT CREDIT CERTIFICATE

VAT- registered
cancelling their
registration (regardless of
w/in 2 years after close the source of input tax)
of the taxable quarter
when sales are made
Input Tax wrt Zero-rated and Application for w/in 2 years after
Effectively zero-rated Sales refund or TCC to close of the
Direct Tax CIR + taxable quarter
Credit supporting docs when sales are
VAT-registered made
Taxpayer Presumptive Input Tax
w/in 120 days
Transitional Input Tax w/in 120 days
Carry-over from
If VAT-exempt Actual Input Tax not related from submission
to zero-rated sales Tax Credit submission
changes his
status to VAT-
registered = GRANTED
transitional
input tax VAT-exempt Transactions DENIED INACTION

w/in 30 days w/in 30 days

Non-VAT Apply against from receipt from expiration
Taxpayer OUTPUT VAT of denial of 120-days

Appeal to CTA ISSUANCE

Related INPUT VAT shall

be treated as a cost of
NO INPUT TAX
sale or operating
expense

DENIED GRANTED

Related INPUT VAT Related OUTPUT

shall be treated as VAT shall be treated
cost of purchases as an operating Tax Credit Tax Refund
expense Certificate

Page 173 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

Illustration of the VAT System

VAT System (All VAT)

Raw Material (VAT) Manufacturer (VAT) Trader (VAT) End-User
SP (100+12) 100 112 SP (300 + 36) 300 336 SP (450 +54) 450 504
Cost 50 Cost (100 + 12) 100 112 Cost (300+36) 300 336
Profit 50 Profit 200 Profit 150
Purchase 112 Purchases 336 Purchases 504
Input VAT 12 12% VAT 36 12% VAT 54
OT 12% 12 OT 12% 36 OT 12% 54
IT 0 IT 12 IT 36
VAT Payable 12 Vat Payable 24 VAT Payable 18
VAT to BIR 12 VAT to BIR 24 VAT to BIR 18 Total VAT 54
st
VAT System (VAT Exempt 1 chain)
Raw Material (VAT
Manufacturer Trader End-User
Exempt)
SP (100+ 0) 100 SP (300 + 36) 300 336 SP (450 +54) 450 504
Cost 50 Cost (100) 100 Cost (300+36) 300 336
Profit 50 Profit 200 Profit 150
Purchase 100 Purchases 336 Purchases 504
Input VAT 0 12% VAT 36 12% VAT 54
OT 12% 0 OT 12% 36 OT 12% 54
IT 0 IT 0 IT 36
VAT Payable 0 Vat Payable 36 VAT Payable 18
VAT to BIR 0 VAT to BIR 36 VAT to BIR 18 Total VAT 54

VAT System (VAT Exempt mid-chain)

Raw Material Manufacturer (VAT Exempt) Trader End-User
SP (100+12) 100 112 SP (300) 300 SP (450 +54) 450 504
Cost 50 Cost (100 + 12) 100 112 Cost (300) 300
Profit 50 Profit 188 Profit 150
Purchase 112 Purchases 300 Purchases 504
No Input VAT 0 No VAT 0 12% VAT 54
OT 12% 12 OT 12% 0 OT 12% 54
IT 0 IT 0 IT 0
VAT Payable 12 Vat Payable 0 VAT Payable 54
VAT to BIR 12 VAT to BIR 0 VAT to BIR 54 Total VAT 66

VAT System (VAT zero-rate mid-chain)

Manufacturer (VAT Zero-
Raw Material Trader End-User
rate)
SP (100+12) 100 112 SP (300+ 0) 300 SP (450 +54) 450 504
Cost 50 Cost (100 + 12) 100 112 Cost (300) 300
Profit 50 Profit 188 Profit 150
Purchase 112 Purchases 300 Purchases 504
No Input VAT 12 No VAT 0 12% VAT 54
OT 12% 12 OT 12% 0 OT 12% 54
IT 0 IT 12 IT 0
VAT Payable 12 Vat Payable ( 12) VAT Payable 54
VAT to BIR 12 VAT to BIR (12) VAT to BIR 54 Total VAT 54
CARRIERS BY LAND / AIR / SEA
Area Object Kind Business Tax Income Tax
Person Domestic 3% Percentage Tax Regular Tax
By Land
Cargo/Goods Domestic 12% VAT Regular Tax

Page 174 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

Domestic flight -
Domestic Regular Tax
12% VAT
Person / Cargo / International flight –
By Air Regular tax
Goods 0% VAT
Gross Philippine
International 3% Percentage Tax
Billing
Domestic flight -
Domestic Regular Tax
12% VAT
Person / Cargo International flight –
By Sea Regular tax
/Goods 0% VAT
Gross Philippine
International 3% Percentage Tax
Billing

Page 175 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

! Percentage! Taxes
CONCEPT
A percentage tax is a national tax measured by a
certain percentage of the gross selling price or gross
value in money of goods sold, bartered or imported;
or of the gross receipts or earnings derived by any
person engaged in the sale of services. It is not
subject to withholding. [CIR v. Solidbank Corp., G.R.
No. 148191 (2003)]

Percentage tax is a business tax imposed on persons,

entities, or transactions specified under Sections 116
to 127 of the NIRC.

NIRC Persons/Entities/Transactions
Sec. 116 Persons exempt from VAT
Domestic Carriers;
Sec. 117
Keepers of Garages
Sec. 118 International Carriers
Sec. 119 Franchises
Overseas Dispatch, Message or
Sec. 120 Conversation Originating in the
Philippines
Banks and Non-bank Financial
Sec. 121
Intermediaries
Sec. 122 Finance Companies
Sec. 123 Life Insurance Premiums
Sec. 124 Agents of Foreign Insurance Companies
Sec. 125 Proprietors of amusement places
Sec. 126 Winnings from horse races and jai alai
Sale of Shares of Stock Listed and
Traded through the Local Stock
Sec. 127
Exchange or through Initial Public
Offering.

NATURE
By its nature, a gross receipts tax applies to the entire
receipts without any deduction, exemption or
exclusion, unless the law clearly provides otherwise.
[China Banking Corp. v. CA, G.R. No. 146749 (2003)]

PURPOSE
It was devised to maintain simplicity in tax collection
and to assure a steady source of state revenue even
during periods of economic slowdown. Such a policy
frowns upon erosion of the tax base. Deductions,
exemptions, or exclusions complicate the tax system
and lessen the tax collection. (de Leon)

Page 176 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

VI.! EXCISE TAX AND In the refund of indirect taxes, the proper party to
question or seek a refund of the tax is the statutory
DOCUMENTARY taxpayer, the person on whom the tax is imposed by
law and who paid the same even when he shifts the
STAMP TAX burden thereof to another. The tax liability remains
with the manufacturer/ producer/importer that is
primarily, directly, and legally liable for the payment
! Excise! Taxes of excise taxes. (Ibid.)

CONCEPT PURPOSE
Excise taxes are taxes imposed on certain specified The selective application and imposition of excise
goods manufactured or produced in the Philippines taxes may be justified on any of the following
for domestic sale or consumption or for any other grounds:
disposition and to things imported. (Sec. 129, par. 1, 1.! To curtail consumption of certain commodities,
NIRC) excessive or indiscriminate use of which is
considered harmful to the individual or
Kinds of excise taxes (Sec. 129, par. 2, NIRC) community. Taxes of this kind are sumptuary in
1.! Specific tax – tax due is computed based on the: nature and are exemplified by the taxes on
•! Weight alcoholic beverages and tobacco products.
•! volume capacity 2.! To protect a domestic industry the products of
•! any other physical unit of measurement. which face competition from similar imported
2.! Ad valorem tax – tax due is computed based on articles;
the: 3.! To distribute the tax burden in proportion to
•! selling price benefit derived from a particular government
•! other specified value of goods. service. Examples are the excise taxes on
gasoline, lubricating oils and denatured alcohol
The NIRC enumerates the specific goods that are for motive power; and
subject to Excise Tax: 4.! To raise revenue. The excise taxes have on many
NIRC Goods occasions been justified on the pretext of any of
the three mentioned above to minimize the
Sec. 141 Distilled Spirits
opposition to the tax. In reality, however, the
Sec. 142 Wines
main purpose is to raise revenue.
Sec. 143 Fermented Liquor
(de Leon)
Sec. 144 Tobacco Products
Sec. 145 Cigars and Cigarettes
Sec. 148 Manufactured Oils and Other Fuels
Sec. 149 Automobiles
Sec. 150 Non-essential Goods
Sec. 151 Mineral Products

NATURE
Excise taxes are imposed directly on certain specified
goods, manufactured or produced locally or imported.
They are, therefore, taxes on property.

Excise taxes, whether under the specific or the ad

valorem tax system, is basically an indirect tax
imposed on consumption of certain types or classes
of goods, whether locally manufactured or imported.
While the tax is directly levied upon the
manufacturer/importer upon removal of the taxable
goods from its place of production or from the
customs custody, the tax, in reality, is actually passed
on to the end consumer as part of the transfer value
or selling price of the goods, sold, bartered or
exchanged. [Silkair (Singapore) Pte. Ltd. v. CIR, G.R.
No. 173594 (2012)]

Page 177 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

! Documentary! Taxes Sec. 198

Assignment and Renewals of Certain
Instruments
CONCEPT NATURE
Documentary stamp tax is a tax on documents, DST is levied on the exercise by persons of certain
instruments, loan agreements and papers evidencing privileges conferred by law for the creation, revision,
the acceptance, assignment, sale or transfer of an or termination of specific legal relationships through
obligation, right, or property thereto. (Sec. 173, NIRC) the execution of specific instruments. Hence, in
imposing the DST, not only the document but also
The NIRC enumerates the specific documents that the nature and character of the transaction is
are subject to DST: considered. [Phil. Banking Corp. v. CIR, G.R. No.
170574 (2009)]
NIRC Documents
Debentures and Certificates of Being an excise tax, it is paid only once. Since DST is
Sec. 174
Indebtedness not a tax on income, an exemption from income tax
Sec. 175 Original Issue of Shares of Stocks does not include DST. (BIR Ruling No. DA-106-08,
Sales of Due-bills, Certificates of August 4, 2008)
Sec. 176
Obligation, or Shares of Stock
Bonds, Debentures, Certificates of The tax base is the document itself, not the
Sec. 177 Stock or Indebtedness Issued in transaction or the property described in the
Foreign Countries document. Thus, the validity or invalidity of the
Certificates of Profits or Interest in transaction, or the extent of the right to the property
Sec. 178
Property or Accumulations is not affected by payment or non-payment of the
Bank Checks, Drafts, Certificates of DST. (Vitug & Acosta)
Sec. 179 Deposit not Bearing Interest, and
Other Instruments PURPOSE
Bonds, Loan Agreements, The purpose of the law imposing stamp taxes on
Promissory Notes, Bills of Exchange, documents, instruments, and papers is to raise
Sec. 180 revenue and not to invalidate contracts or inflict
Drafts, Instruments and Securities
Issued by the Government penalties, and courts should give it a liberal
Acceptance of Bills of Exchange and construction. (33 C.J.S. 315-316)
Sec. 181
Others
Foreign Bills of Exchange and Letters
Sec. 182
of Credit
Sec. 183 Life Insurance Policies
Sec. 184 Policies of Insurance Upon Property
Fidelity Bonds and Other Insurance
Sec. 185
Policies
Policies of Annuities and Pre-Need
Sec. 186
Plans
Sec. 187 Indemnity Bonds
Sec. 188 Certificates
Sec. 189 Warehouse Receipts
Jai-alai, Horse Race Tickets, Lotto or
Sec. 190
Other Authorized Numbers Games
Sec. 191 Bills of Lading or Receipts
Sec. 192 Proxies
Sec. 193 Powers of Attorney
Leases and Other Hiring
Sec. 194
Agreements.
Mortgages, Pledges, and Deeds of
Sec. 195
Trusts
Deeds of Sale and Conveyances of
Sec. 196
Property
Charter Parties and Similar
Sec. 197
Instruments

Page 178 of 270

U.P. LAW BOC
VII.! TAX REMEDIES
UNDER THE NIRC
! General! Concepts
1.! ADMINISTRATIVE (BIR)
a.! Before payment
i.! Filing a petition or reconsideration or
reinvestigation; and
ii.! Entering into a compromise
b.! After payment
i.! Filing a claim for refund; and
ii.! Filing a claim for tax credit
2.! JUDICIAL (CTA/RTC)
a.! Civil action
i.! Appeal to the CTA
ii.! Action to contest forfeiture of chattel;
and
iii.! Action for damages
b.! Criminal action
i.! Filing a criminal complaint against
erring BIR officials and employees
Periods:
•! Assessment (3 or 10 years)
o! Return was filed
1.! Not false or fraudulent – 3 years from
date of filing of the return OR date
legally due or actual date of filing after it
wad due, whichever is LATER
2.! False or fraudulent – 10 years from date
the fraud or falsity was discovered
o! No return filed – 10 years from the discovery
of omission
•! Collection (3 or 5 years)
o! Collections with assessments – 5 years from
date of finality of assessment (FAN if
unprotested or the Final Decision on
Disputed Assessment [FDDA] if protested)
o! Collections without assessments –must be
made within the period of making an
assessment.
1.! With a REGULAR return filed, i.e., one
which is not false or fraudulent – 3 years
from date of filing of the return OR date
or actual date of filing after it was due,
whichever is LATER
2.! Return filed was false or fraudulent – 10
years from date of discovery of fraud or
falsity
No return filed – 10 years from date of discovery of
omission
•! Criminal offense
Page 179 of 270
TAXATION II TAXATION LAW
o! 5 years from date of commission, and if not
known then, from discovery and the
institution of judicial proceedings for its
investigation and punishment.
1.! Assessment
a.! Definition and Requisites of
a Valid Assessment
Assess means to impose a tax; to charge with a tax;
to declare a tax to be payable; to apportion a tax to
be paid or contributed, to fix a rate; to fix or settle a
sum to be paid by way of tax; to set, fix or charge a
certain sum to each taxpayer; to settle determine or
fix the amount of tax to be paid (84 C.J.S 74-750)
An assessment is the notice to the effect that the
amount therein stated is due from a taxpayer as a tax
with a demand for payment of the same within a
stated period of time. [CIR v. CTA, 27 SCRA 1159]
Forms of assessment
1.! Self-assessment – Assessments made by
taxpayers who then file returns.
2.! Deficiency assessment – Assessments made by
the BIR after the conduct of an investigation or
audit when it finds that the tax return filed by the
taxpayer contains an under-declaration of
income or when the taxpayer does not at all file a
tax return.
3.! Jeopardy assessment (Section D, infra)
Requisites for valid assessment
1.! The taxpayer shall be informed in writing of the
law and the facts on which the assessment is
made (Sec. 228, NIRC)
2.! An assessment contains not only a computation
of tax liabilities, but also a demand for payment
within a prescribed period [CIR v. PASCOR, G.R.
No. 128315 (1999)]
3.! An assessment must be served on and received
by the taxpayer [CIR v. PASCOR, supra.]
Note: The presumption of the correctness of
assessment CANNOT be made to rest on another
presumption, e.g., presumption of regularity of
performance of official functions.
Constructive methods of income determination
1.! Rely upon circumstantial evidence of
determining the correct income or transaction of
a taxpayer (Indirect Method)
2.! Expenditure Method: It proceeds on the theory
that where the amount of money which a
taxpayer spends during a given year exceeds his
reported income, and the source of such money
U.P. LAW BOC TAXATION II TAXATION LAW

is otherwise unexplained, it may be inferred that No. 193321 (2016); First Lepanto Taisho Insurance
such expenditures represent unreported income. Corporation v. CIR, G.R. No. 197117 (2013)]
3.! Percentage Method: This method is a
computation whereby determinations are made Deficiency Delinquency
by the use of percentages or ratios considered Basic tax +
typical of the business under investigation. By Base Basic tax deficiency interest
reference to similar business or situations, and surcharge
percentage computations are secured to From the due
determine sales, gross profit or even net profit. From the date date appearing in
4.! Unit and Value Method: The determination of prescribed for its the notice and
gross receipts may be computed by applying Reckoning
payment until the demand of the
price and profit figures to the known date
full payment CIR until the
ascertainable quality of business done by thereof amount is fully
taxpayer paid
Rate 20% p.a.
Inventory method for income determination (Net
Worth Method) Tax Delinquency v. Tax Deficiency
Holland v. US: In a typical net worth prosecution, the Tax Delinquency Tax Deficiency
Government, having concluded that the taxpayer's It is when:
records are inadequate as a basis for determining The amount of tax
income tax liability, attempts to establish an imposed by law is
"opening net worth" or total net value of the It is when:
greater than the amount
taxpayer's assets at the beginning of a given year. It Self-assessed taxpayer
shown in the tax return
then proves increases in the taxpayer's net worth for filed his tax return but
each succeeding year during the period under did not pay or only
If no amount is shown in
examination, and calculates the difference between partially paid the tax
the return, or if there is
the adjusted net values of the taxpayer's assets at the no return, amount by
beginning and end of each of the years involved. The Deficiency Tax assessed
which the tax as
taxpayer's non-deductible expenditures, including by the BIR became final
determined by the CIR
living expenses, are added to these increases, and if and executory
exceeds the amount
the resulting figure for any year is substantially previously assessed as a
greater than the taxable income reported by the deficiency
taxpayer for that year, the Government claims the CAN be collected CANNOT be
excess represents unreported taxable income. IMMEDIATELY through immediately collected.
1.! Administrative CAN be collected only
Formula Actions (warrant of AFTER the process of
Increase in Net worth distraint or levy) protest
Add: Non-deductible Item 2.! Judicial Actions
Less: Non-taxable income or receipts subjected to Thus, a civil action for
final tax transfer taxes Thus, civil action for collection to ordinary
Taxable Net Income collection to ordinary courts pending protest
Less: Personal and additional exemptions courts is the proper may be subject to
NET INCOME SUBJECT TO TAX remedy. Motion to Dismiss
SUBJECT to SUBJECT to
b.! Tax Delinquency as administrative penalties administrative penalties
Distinguished from Tax of: of:
1.! 25% surcharge 1.! interest
Deficiency 2.! interest 2.! compromise
3.! compromise penalty penalty
Deficiency is defined as the amount still due and [Mamalateo]
collectible from a taxpayer upon audit or
investigation; whereas delinquency is defined as the
failure of the taxpayer to pay the tax due on the date
c.! Jeopardy Assessment
fixed by law or indicated in the assessment notice or
letter of demand. Deficiency interest is imposed for Under BIR Regulations, a jeopardy assessment is a
the shortage of taxes paid, while delinquency interest tax assessment which was assessed without the
is imposed for the delay in payment of taxes. benefit of complete or partial audit by an authorized
[Takenaka Corporation Philippine Branch v. CIR, G.R. revenue officer, who has reason to believe that the

Page 180 of 270

U.P. LAW BOC TAXATION II
assessment and collection of a deficiency tax will be
jeopardized by delay because of the taxpayer’s failure
to comply with the audit and investigation
requirements to present his books of accounts and/or
pertinent records, or to substantiate all or any of the
deductions, exemptions, or credits claimed in his
return. (As defined in Sec. 3(1)(a), RR 30-2002 for the
purposes of entering into a compromise)
d.! Prescriptive Period for
Assessment (Sec. 203, NIRC)
General Rule: 3 years
•! If the taxpayer filed a return: internal revenue
taxes shall be assessed within 3 years after the
last day prescribed by law for the filing of the
return.
•! If a return is filed beyond the period prescribed
by law: the 3-year period shall be counted from
the day the return was filed.
Exceptions
1.! False return;
2.! Fraudulent return with intent to evade tax; and
3.! Failure to file a return. (Sec. 222, NIRC)
Waiver
The taxpayer and the CIR may agree in writing,
before the expiration of the time prescribed in Sec.
203, to extend the period of assessment (Sec. 222(b),
NIRC)
1.! The waiver of prescription must be executed
properly, otherwise, invalid and results to
prescription of the right to assess/collect.
[Philippine Journalists Inc. vs. CIR, G.R. No.
162852 (2004)]
2.! Requirements for a valid waiver under RMO 20-
90 and RMO 14-2016:
a.! In writing (may be but need not be
notarized);
b.! Indicate the date of execution by the
taxpayer, which must be before the
expiration of the period to assess or collect
taxes, or before the lapse if the period
previously agreed upon in a prior agreement;
c.! Indicate the definite agreed date;
d.! Indicate the date of acceptance, which must
be before the expiration of the period to
assess or to collect taxes, or before the lapse
of the period agreed upon in a prior
agreement; and
e.! Taxpayer must be furnished with a copy of
the waiver.
Suspension of running of statute of limitations
1.! Period during which the CIR is prohibited from
making the assessment or beginning distraint or
Page 181 of 270
TAXATION LAW
levy or a proceeding in court, and for sixty (60)
days thereafter;
2.! When the taxpayer requests for a reinvestigation
which is granted by the CIR;
3.! When the taxpayer cannot be located in the
address given by him in the return filed upon
which a tax is being assessed or collected, BUT if
the taxpayer informs the CIR of any change in
address, the running of the statute of limitations
shall not be suspended;
4.! When the warrant of distraint or levy is duly
served upon the taxpayer, his authorized
representative, or a member of his household
with sufficient discretion, and no property is
located;
5.! When the taxpayer is out of the Philippines.
e.! Civil Penalties, Additions to
the Tax (Sec. 248, NIRC)
DELINQUENCY INTEREST AND DEFICIENCY
INTEREST
In General
20% per annum on the unpaid amount of tax,
interest at the rate of twenty percent (20%) per
annum from the date prescribed for payment until
the amount is fully paid. (Sec. 249(A), NIRC)
Deficiency Interest
20% per annum on any deficiency in the tax due from
the date prescribed for its payment until the full
payment thereof. (Sec. 249(B), NIRC)
Delinquency interest
20% per annum on the unpaid amount in case of
failure to pay:
1.! The amount of the tax due on any return required
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 letter
of demand and assessment notice (Sec. 249(C),
NIRC)
Interest on extended payment
20% per annum on the tax or deficiency tax or any
part thereof unpaid from the date of notice and
demand until it is paid if any person required to pay
the tax is:
1.! Qualified and elects to pay the tax on installment
but fails to pay the tax or any installment or any
part of such amount or installment or before the
date prescribed for its payment; or
U.P. LAW BOC
2.! Where the CIR has authorized an extension of
time within which to pay a tax or a deficiency tax
or any part thereof (249(D), NIRC)
SURCHARGE
Surcharge – penalty imposed in addition to the tax
required to be paid (Sec. 248(A), NIRC)
Rates of Surcharge (25% or 50%)
25% of the amount due in the following cases:
1.! Failure to file any return and pay the tax due on
the date prescribed; or
2.! Filing a return with an internal revenue officer
other than those with whom the return is
required to be filed unless the CIR authorizes
otherwise; or
3.! Failure to pay the deficiency tax within the time
prescribed for its payment in the notice of
assessment; or
4.! Failure to pay the full or part of the amount of tax
due on or before the date prescribed for its
payment (Sec. 246 (A), NIRC)
50% of the tax or of the deficiency tax in the
following cases:
1.! Willful neglect to file the return within the period
prescribed; or
2.! A false or fraudulent return is willfully made (Sec.
248(B), NIRC)
Prima facie evidence of a false or fraudulent return:
Substantial underdeclaration of taxable sales,
receipts or income, or a substantial overstatement of
deductions. Failure to report sales, receipts or income
in an amount exceeding thirty percent (30%) of that
declared per return, and a claim of deductions in an
amount exceeding (30%) of actual deductions, shall
render the taxpayer liable for substantial
underdeclaration or for overstatement. (Sec. 248(B),
NIRC)
COMPROMISE PENALTY
Compromise penalty – an amount of money paid by
a taxpayer to compromise a tax violation that he has
committed, which may be the subject of criminal
prosecution. The basis of the amount paid is the
gross sales or receipts during the year or the tax due.
Compromise – an amount of money paid by the
taxpayer to settle his civil liability for tax assessed by
the government. The basis of the amount paid is the
basic tax assessed. (Mamalateo, 2008)
f.! Assessment Process and
Reglementary Periods
Page 182 of 270
TAXATION II TAXATION LAW
Assessment process [Sec. 228, NIRC; RR 12-99; RR
18-13; RR 7-18]
1.! 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.
Cases which need not be covered by a valid LA: Cases
involving civil/criminal tax fraud which fall under the
jurisdiction of the tax fraud division of the
Enforcement Services, and Policy cases under audit
by the special teams in national offices.
Tax audit – In a tax audit, revenue officers examine
the books of account and other accounting records of
taxpayers to determine the correct tax liability.
Absence of an LOA violates right to due process.
[Medicard Philippines, Inc. vs CIR, G.R. No. 222743,
(2017)]
There must be a grant of authority before any
revenue officer can conduct an examination or
assessment. Equally important is that the revenue
officer so authorized must not go beyond the
authority given. In the absence of such an authority,
the assessment or examination is a nullity. [CIR vs.
Sony Philippines, Inc., G.R. No. 178697 (2010)]
2.! NOTICE OF INFORMAL CONFERENCE
N.B. RR 7-2018 reinstated the notice of informal
conference.
The Revenue Officer who audited the taxpayer's
records shall state in his report whether or not the
taxpayer agrees with his findings that the taxpayer is
liable for deficiency taxes. lf the taxpayer is not
amenable, based on the said Officer's submitted
report of investigation, the taxpayer shall be
informed, in writing, of the discrepancies in the
taxpayer's payment of his internal revenue taxes for
the purpose of "lnformal Conference," in order to
afford the taxpayer with an opportunity to present his
side of the case.
The Informal Conference shall in no case extend
beyond thirty (30) days from receipt of the notice for
informal conference. lf it is found that the taxpayer is
still liable for deficiency tax or taxes after presenting
his side, and the taxpayer is not amenable, the, case
shall be endorsed within seven (7) days from the
conclusion of the Informal Conference for the
issuance of a deficiency tax assessment.
U.P. LAW BOC TAXATION II
3.! ISSUANCE OF PRELIMINARY ASSESSMENT
NOTICE (PAN)
General rule – The Assessment Division issues a PAN
if it determines that there exists sufficient basis to
assess the taxpayer for any deficiency tax. It shall
show in detail the facts and the law on which the
proposed assessment is based.
Exceptions to issuance of preliminary assessment
notice (PAN)
The notice for informal conference and the PAN shall
not be required in any of the following cases, in which
case, issuance of the Formal Assessment Notice
(FAN) shall be sufficient:
a.! 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.! A discrepancy has been determined between the
tax withheld and the amount actually remitted
by the withholding agent; or
c.! 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.! The excise tax due on excisable articles has not
been paid; or
e.! 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 a non-exempt person.
Reply to preliminary assessment notice (PAN)
Taxpayer is given 15 days from date of receipt of PAN
to respond
•! If he/she fails to respond: taxpayer is considered
in default; a formal letter of demand and
assessment notice shall be issued to the taxpayer
•! N.B. – In Oakwood Management Services, Inc. v.
CIR (2013), the CTA held that the issuance of the
FAN before the lapse of the 15-day period to
reply to PAN does not violate due process. A
protest against the PAN, unlike the protest
against the FAN, is not indispensable. A PAN
may or may not be protested by the taxpayer,
and the non-filing of such protest does not
render the PAN final and unappealable.
Therefore, the issuance of the FAN before the
lapse of the 15-day period for the taxpayer to file
its protest to the PAN does not inflict prejudice
on the taxpayer, for as long as the BIR properly
served a FAN and the taxpayer was able to
Page 183 of 270
TAXATION LAW
intelligently contest the FAN by filing a protest
letter within the period provided by law.
If he/she responds: a FAN/FLD shall be issued within
15 days from filing/submission of the taxpayer’s
response, calling for payment of the taxpayer’s
deficiency tax liability, inclusive of the applicable
penalties.
4.! ISSUANCE OF FORMAL LETTER OF DEMAND
AND FINAL ASSESSMENT NOTICE (FAN/FLD)
A Final Assessment Notice (FAN) is a declaration of
deficiency taxes issued to a taxpayer who:
•! fails to respond to a pre-assessment notice
within the prescribed period of time, or
•! whose reply to the PAN was found to be without
merit.
•! Sec 228: The taxpayer shall be informed in
writing of the law and the facts on which the
assessment is made; otherwise the assessment
shall be void
An assessment contains not only a computation of
tax liabilities, but also a demand for payment within a
prescribed period.
5.! DISPUTED ASSESSMENT
The taxpayer or his duly authorized representative
may protest administratively against the formal letter
of demand and assessment notice within thirty days
(30) from date of receipt. The taxpayer protesting an
assessment may file a written request for
reconsideration or reinvestigation .
•! RECONSIDERATION – refers to a plea of re-
evaluation of the assessment on the basis of
existing records without need of additional
evidence. It may involve both question of fact or
of law or both.
•! REINVESTIGATION – refers to a plea of re-
evaluation of an assessment on the basis of
newly-discovered evidence that a taxpayer
intends to present in the reinvestigation. It may
also involve a question of fact or law or both.
Failure to file a protest against FLD/FAN within 30
days, the assessment shall become final, executory
and demandable.
If there are several issues in the FLD/FAN and the
taxpayer disputes or protests only some of them, the
assessment relating to the undisputed issue(s) shall
become final, executory and demandable.
Moreover, if the taxpayer disputes or protests issues
in the FLD/FAN but he fails to state the facts, the
applicable law, rules and regulations, or
U.P. LAW BOC TAXATION II TAXATION LAW

jurisprudence in support of his protest, the issues
shall be considered undisputed and the related
assessment shall likewise become final, executory
and demandable.
A final decision on disputed assessment (FDDA)
that is declared void does not necessarily result in a
void assessment
A “decision” differs from an “assessment” and failure
of the FDDA to state the facts and law on which it is
based renders the decision void – but not necessarily
the assessment. (CIR vs. Liquigaz Philippines Corp.,
GR No. 215534, April 18, 2016)
2.!Collection
a.! Requisites
Generally, the government can only file a proceeding
in court to collect once the assessment has become
final and unappealable. (Sec. 203, NIRC)
2.! When the taxpayer requests for a reinvestigation
which is granted by the CIR;
3.! When the taxpayer cannot be located in the
address given by him in the return filed upon
which a tax is being assessed or collected, BUT if
the taxpayer informs the CIR of any change in
address, the running of the statute of limitations
shall not be suspended;
4.! When the warrant of distraint or levy is duly
served upon the taxpayer, his authorized
representative, or a member of his household
with sufficient discretion, and no property is
located;
5.! When the taxpayer is out of the Philippines.
(Sec. 223, NIRC)

b.! Prescriptive Periods;

Suspension of Running of
Statute of Limitations
Collections with assessments
FIVE YEARS after the assessment becomes final,
executory, and demandable.

Collections without assessments

•! In case of false or fraudulent return with intent to
evade tax or of failure to file a return, collection
without assessment (or assessment) may be
made within 10 years from discovery of falsity,
fraud or omission. (Sec. 222(a), NIRC)
o! An assessment may also be made which
carries its own 5-year prescriptive period to
collect.
•! Collections without assessment may be made
within the period for making an assessment (3
years from the required date of filing or actual
filing, whichever is later) (See Sec. 203, NIRC)

Waiver of prescriptive period

If tax was assessed within the different period agreed
upon by the CIR and the taxpayer, it may be collected
by distraint or levy or by a proceeding in court within
the period agreed upon in writing before the
expiration of the 5-yr period.(Sec. 222d, NIRC)

Suspension of running of statute of limitations

1.! Period during which the CIR is prohibited from
making the assessment or beginning distraint or
levy or a proceeding in court, and for sixty (60)
days thereafter;

Page 184 of 270

U.P. LAW BOC TAXATION II
! Taxpayer’s! Remedies
1.! Protesting the Assessment
a.! Protested Assessment
After issuance of FAN, taxpayer may protest the
assessment either by a request for reconsideration or
reinvestigation.
b.! Period to File Protest
30 days after receipt of FAN/FLD.
Request for RECONSIDERATION
Effect on prescriptive period to COLLECT – A request
for reconsideration does not toll the running of the
prescriptive period for the collection of an assessed
tax. [CIR vs. Philippine Global Communication Inc.,
G.R. No. 167146 (2006)]
Request for REINVESTIGATION
Effect on prescriptive period to COLLECT – A Request
for Reinvestigation will only toll the prescriptive
period to COLLECT if the request for reinvestigation is
granted by the BIR.
c.! Form, Content, and Validity
of Protest
The protest shall state: (Failure to state shall render
protest null and void)
•! Nature of protest, whether reconsideration or
reinvestigation, specifying new or additional
evidence if request for reinvestigation
•! Date of the assessment notice
•! Applicable law, rules and regulations, or
jurisprudence on which his protest is based.
d.! Submission of Supporting
Documents
If request for REINVESTIGATION is GRANTED –
Submission of documents within 60 days from filing
of protest
•! Within sixty (60) days from filing of the protest,
all relevant supporting documents must be
submitted, otherwise the assessment shall
become final.
•! “Relevant supporting documents” – documents
necessary to support the legal and factual bases
in disputing a tax assessment as determined by
the taxpayer
Page 185 of 270
TAXATION LAW
•! “Assessment shall become final” – taxpayer is
barred from disputing the correctness of the
issue assessment by introduction of newly
discovered or additional evidence, and the FDDA
shall consequently be denied.
•! Only applies to request for reinvestigation
e.! Effect of Failure to Protest
FAN/FLD becomes final and demandable.
f.! Rendition of Decision by CIR
Period to act upon or decide protest filed
180 DAYS from –
1.! Submission of documents if request for
REINVESTIGATION; or
2.! Filing of protests if request for
RECONSIDERATION
N.B. – An administrative appeal to the CIR may only
be availed of upon the denial of the protest to the
FAN by the CIR representative. Under RR 18-2013,
there is no administrative appeal to the CIR for
inaction by the CIR representative. The remedy is to
await the decision or file a petition for review to the
CTA 30 days after the lapse of 180-day waiting period.
Denial of protest – Issuance of a Final Decision on a
disputed assessment (FDDA): The decision of the CIR
or his duly authorized representatives shall state the
facts, the applicable law, rules and regulations or
jurisprudence on which such decision is based, and
that the same is his final decision.
CIR’s actions equivalent to denial of protest:
•! Filing of collection suit against taxpayer (CIR v.
Union Shipping)
•! Issuing a warrant of distraint and levy (CIR v.
Algue)
•! Where there is a request for reconsideration, final
demand letter from BIR (CIR v. Isabela Cultural
Corp.)
•! Notice of delinquency (CIR v. Ayala Securities)
•! Inaction by CIR - If the protest is not acted upon
within one hundred eighty (180) days from
submission of documents, the inaction by the CIR
is considered as a denial of protest.
•! Filing of criminal action against taxpayer
•! Issuing a warrant of distraint and levy
REMEDIES OF TAXPAYER TO IN CASE THE
COMMISSIONER DENIED THE PROTEST OR FAILS
TO ACT ON THE PROTEST
1.! In case of denial of protest
U.P. LAW BOC TAXATION II
If the protest is denied, in whole or in part, by the
CIR’s duly authorized representative, the
taxpayer may either:
a.! Appeal to the CTA within 30 days from the
date of receipt of the decision
b.! Elevate his protest through request for
reconsideration to the CIR (the only case
where an administrative appeal is possible)
If the CIR denies the protest filed by the taxpayer,
the latter may appeal to the CTA within 30 days
from receipt of the decision denying the protest.
A motion for reconsideration of the CIR’s denial
of the protests shall not toll the 30 day period to
appeal to the CTA.
2.! In case of inaction by CIR within 180 days from
submission of documents
If the protest is not acted upon by the CIR’s duly
authorized representative within 180 days from
filing of the protest or from submission of
required documents, the taxpayer may either:
a.! Appeal to the CTA within 30 days after the
expiration of the 180 days,
b.! Await the final decision of the CIR’s duly
authorized representative.
If the CIR did not act upon the petition within 180
days from the time the documents were
submitted, the taxpayer may either:
a.! Appeal to the CTA within thirty days from
the lapse of the 180-day period OR
b.! Wait until the CIR decides before he elevates
the case to the CTA.
These options are mutually exclusive, and resort
to one bars the application of the other. [Rizal
Commercial Banking Corporation vs. CIR, G.R. No.
168498 (2007)]
N.B. – if the protest is a request for
RECONSIDERATION, count the 180 days from
the filing of the protest. The submission of
documents is only for a request for
reinvestigation.
Effect of failure to appeal
Assessment becomes final and demandable.
2.!Compromise and
Abatement of Taxes
Compromise – to reduce the amount of tax payable
Cases which may be compromised:
(Sec. 2, R.R. 30-2002)
a.! Delinquent accounts
Page 186 of 270
TAXATION LAW
b.! Cases under administrative protest after issuance
of the Final Assessment Notice to the taxpayer
which are still pending in the Regional Offices,
Revenue District Offices, Legal Service, Large
Taxpayer Service (LTS), Collection Service,
Enforcement Service and other offices in the
National Office
c.! Civil tax cases being disputed before the courts
d.! Collection cases filed in courts
e.! Criminal violations, other than those already filed
in court or those involving criminal tax fraud
Cases which cannot be compromised:
(Sec. 2, R.R. 30-2002)
a.! Withholding tax cases, unless the applicant-
taxpayer invokes provisions of law that cast
doubt on the taxpayer's obligation to withhold
b.! Criminal tax fraud cases confirmed as such by
the CIR or his duly authorized representative
c.! Criminal violations already filed in court
d.! Delinquent accounts with duly approved
schedule of installment payments
e.! Cases where final reports of reinvestigation ore
reconsideration have been issued resulting to
reduction in the original assessment and the
taxpayer is agreeable to such decision by signing
the required agreement form for the purpose. On
the other hand, other protested cases shall be
handled by the Regional Evaluation Board (REB)
or the National Evaluation Board (NEB) on a case
to case basis
f.! Cases which become final and executory after
final judgment of a court, where compromise is
requested on the ground of doubtful validity of
the assessment; and
g.! Estate tax cases where compromise is requested
on the ground of financial incapacity of the
taxpayer
Authority of the CIR to compromise and abate taxes
Grounds for a compromise
The CIR may compromise the payment of any internal
revenue tax in the following cases:
a.! A REASONABLE DOUBT as to the validity of the
claim against the taxpayer exists; or
b.! The financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax. (FINANCIAL INCAPACITY)
Limits of the CIR’s power to compromise:
a.! For cases of financial incapacity: a minimum
compromise rate equivalent to ten percent (10%)
of the basic assessed tax
b.! For other cases: a minimum compromise rate
equivalent to forty percent (40%) of the basic
assessed tax
U.P. LAW BOC TAXATION II
Note: When the basic tax involved exceeds One
Million Pesos (P1,000,000), or where the settlement
offered is less than the prescribed minimum rates,
the compromise must be approved by the National
Evaluation Board (composed of the CIR and 4 Deputy
Commissioners)
The compromise offer shall be paid by the taxpayer
upon filing of the application for compromise
settlement. No application for compromise
settlement shall be processed without the full
settlement of the offered amount. In case of
disapproval of the application for compromise
settlement, the amount paid upon filing of the
aforesaid application shall be deducted from the
total outstanding tax liabilities, (RR 9-2013)
Abatement – to cancel the entire amount of tax
payable.
When the CIR may abate or cancel a tax liability:
a.! The tax or any portion thereof appears to be
UNJUSTLY or EXCESSIVELY ASSESSED; or
b.! The ADMINISTRATION and COLLECTION COSTS
do not justify the collection of the amount due.
(e.g., when the costs of collection are greater
than the amount of tax due)
3.!Recovery of Tax
Erroneously or Illegally
Collected
Nature of a claim for refund
It partakes of the nature of an exemption and is
strictly construed against the claimant. The burden of
proof is on the taxpayer claiming the refund that he is
entitled to the same. [CIR v. Tokyo Shipping, G.R. No.
L-68252 (1995)]
Nature of erroneously-paid tax/illegally assessed
collected
Taxes are erroneously paid when a taxpayer pays
under a mistake of fact, such as, he is not aware of an
existing exemption in his favor at the time that
payment is made. Taxes are illegally collected when
payments are made under duress.
a.! Tax Refund as Distinguished
from Tax Credit
REFUND takes place when there is actual
reimbursement while TAX CREDIT takes place upon
the issuance of a tax certificate or tax credit memo,
which can be applied against any sum that may be
due and collected from the taxpayer.
Page 187 of 270
TAXATION LAW
b.! Grounds, Requisites, and
Period for Filing a Claim for
Refund or Issuance of a Tax
Credit Certificate
1.! There is a tax collected erroneously or illegally,
or a penalty collected without authority, or a sum
excessively or wrongfully collected (see Section
229, Tax Code)
2.! There must be a written claim for refund filed by
the taxpayer to the CIR [see Vda. De Aguinaldo v.
CIR, G.R. No. L-19927 (1965)]
Exceptions
a.! When on the face of the return upon which
payment was made, such payment appears
clearly to have been erroneously paid, the
CIR may refund or credit the tax even
without a written claim (Section 229, Tax
Code)
b.! A return filed showing an overpayment shall
be considered as a written claim for credit or
refund. (Sec. 204(C), Tax Code)
3.! The claim must be a categorical claim for
reimbursement [see Bermejo v. CIR, G.R. No. L-
3029 (1950)]
4.! The claim for refund must be filed within 2 years
from the date of the payment of the tax
regardless of any supervening cause (Section
229, Tax Code)
5.! Taxpayer must show proof of the tax (Sec. 229)
Requirements for refund as laid down by cases
1.! Necessity of written claim for refund
2.! Claim containing a categorical demand for
reimbursement
3.! Filing of administrative claim for refund and the
suit/proceeding before the CTA within 2 years
from date of payment regardless of any
supervening cause
The claim for refund must be filed within 2 years
from the date of payment of the tax regardless of
any supervening cause (Sec. 229)
Judicial remedy for refund – File with suit with the
CTA
1.! Within 30 days from receipt of denial by the CIR;
and
2.! Before the expiration of the 2-year period
Simultaneous filing allowed
If the 2 year period is about to lapse, the taxpayer
may already appeal to the CTA even if the CIR has not
yet made any decision on the claim for refund. In
U.P. LAW BOC TAXATION II
Gibbs v. CIR [G.R. No. L-17406 (1965)], the Supreme
Court noted that if the CIR takes time in deciding the
claim and the period of two years is about to end, the
suit or proceeding must be started in the CTA before
the end of the 2 year period without awaiting the
decision of the CIR.
N.B. – Compare with the rule on refunds of input VAT.
The awaiting of the decision of CIR or the lapse of the
120-day period is mandatory. [Mandatory 120+30
Day Period: The taxpayer affected may file an appeal
in one of two ways: (1) file the judicial claim within 30
days after the Commissioner denies the claim within
the 120-day period, or (2) file the judicial claim within
30 days from the expiration of the 120-day period if
the Commissioner does not act within such period.
(RMC 54-2014)]
Legal basis of tax refunds – solutio indebitii and the
rules on quasi-contracts (prevention of unjust
enrichment)
Prescriptive period for recovery of tax erroneously
or illegally collected
Note: Under Sec. 229, there is no exception to the 2-
year prescriptive period.
Two-year period when counted:
From the date that the tax was paid.
How date of payment determined:
If the income tax is withheld at source – payment is at
the end of the taxable year.
If the income is paid on a quarterly basis – payment is
from the time of filing the final adjustment return.
CIR vs. TMX Sales [G.R. No. 83736 (1992)]: When a tax
is paid in installments, the prescriptive period should
be counted from the date of final payment or the last
installment. This rule proceeds from the theory that
there is no payment until the entire tax liability is
completely paid. Installments should be treated as
advances or portions of the annual tax due.
c.! Statutory Basis and Proof for
Tax Refund or Tax Credit
(Sec. 204[c] and Sec. 229)
Scope of claims for refund
The CIR may:
•! Credit or refund taxes erroneously or illegally
received or penalties imposed without authority;
•! Refund the value of internal revenue stamps
when they are returned in good condition by the
purchaser; and
•! In the CIR’s discretion, redeem or change
unused stamps that have been rendered unfit
Page 188 of 270
TAXATION LAW
for use and refund their value upon proof of
destruction
Necessity of proof for claim or refund
No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with the
CIR a claim for credit or refund within two (2) years
after the payment of the tax or penalty. (Sec. 204,
NIRC)
A return filed showing an overpayment shall be
considered as a written claim for credit or refund.(Sec.
204, NIRC)
d.! Proper Party to File Claim for
Refund or Tax Credit
Taxpayer/withholding agents of non-resident
foreign corporation – the withholding agent is
directly and independently liable for the correct
amount of tax that should be withheld and for
deficiency assessments, surcharges and penalties.
General Rule: The taxpayer must file a written claim
for refund stating a categorical demand for
reimbursement before the CIR within two years from
the date of payment. (Sec. 229, NIRC)
When it comes to recovery of unutilized input VAT,
Section 112 [two (2) years after the close of the
taxable quarter when the sales were made], and not
Section 229 of the 1997 Tax Code, is the governing
law. Second, prior to 8 June 2007, the applicable rule
is neither Atlas nor Mirant, but Section 112(A). The
Atlas doctrine, which held that claims for refund or
credit of input VAT must comply with the two-year
prescriptive period under Section 229, should be
effective only from its promulgation on 8 June 2007
until its abandonment on 12 September 2008 in
Mirant. [CIR v. San Roque Power Corp, G.R. No
187485 (2013)]
Exceptions to requirement of a written claim:
When on the face of the return upon which payment
was made, such payment appears clearly to have
been erroneously paid (e.g., mathematical errors),
the CIR may refund or credit the tax even without a
written claim therefore. (Sec. 229, NIRC)
U.P. LAW BOC TAXATION II
A return filed showing an overpayment shall be
considered as a written claim for credit or refund.
(Sec. 204(C), NIRC)
Note: Once the option to carry over and apply the
excess income tax payments to succeeding
quarters/year is taken, that option is irrevocable,
pursuant to the irrevocability rule found in Section 76
of the Tax Code.
Consequently, a taxpayer is barred from securing a
refund of, or tax credit certificate for, the excess
amount that it has initially opted to carry-over.
OTHER CONSIDERATION AFFECTING TAX
REFUNDS
Remedy of the taxpayer upon denial or inaction on
the claim for refund:
1.! CIR denies claim - appeal to the CTA within thirty
(30) days from the receipt of the CIR’s decision
and within two years from the date of payment.
2.! CIR does not act on the claim and the 2-year
period is about to lapse - file a claim before the
CTA before the 2-year period lapses. Otherwise,
he may no longer file a claim before the CTA in
case the CIR renders an adverse decision beyond
the 2-year period. (Revised Rules of the CTA, as
amended)
Period for claiming refund once granted:
Within five years from the date such warrant or check
was mailed or delivered, otherwise it shall be
forfeited in favor of the government and the amount
thereof shall revert to the general fund. (Sec. 230,
NIRC)
Period for using the Tax Credit Certificate (TCC):
Tax credit certificates (TCCs) can be applied against
all internal revenue taxes, excluding withholding tax.
TCCs which remain unutilized after five years from
the date of issue shall be considered as invalid,
unless revalidated. If not revalidated, the amount
covered by the TCC shall revert to the general fund.
(Sec. 230, NIRC)
All tax credit certificates issued by the BIR shall not
be allowed to be transferred or assigned to any
[other] person. (RR 14-11)
Page 189 of 270
TAXATION LAW
! Government’s! Remedies
1.! Administrative Remedies
a.! Tax Lien
1.! When a taxpayer neglects or refuses to pay his
internal revenue tax liability after demand, the
amount so demanded shall be a lien in favor of
the government from the time the assessment
was made by the CIR until paid with interest,
penalties, and costs that may accrue in addition
thereto upon ALL PROPERTY AND RIGHTS TO
PROPERTY BELONGING to the taxpayer.
2.! HOWEVER, the lien shall not be valid against any
mortgagee, purchaser or judgment creditor until
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. (Sec. 219, NIRC)
Seizure under forfeiture vs. Seizure to enforce a tax
lien
In the former all the proceeds derived from the sale of
the thing forfeited are turned over to the Collector of
Internal Revenue; in the latter, the residue of such
proceeds over and above what is required to pay the
tax sought to be realized, including expenses, is
returned to the owner of the property. [BPI v. Trinidad,
G.R. No. L-16014 (1921)]
b.! Distraint and Levy
DISTRAINT OF PERSONAL PROPERTY
Distraint – remedy enforced on the goods, chattels,
or effects, and other personal property of whatever
character including stocks and other securities, debts,
credits, bank accounts, and interest in and rights to
personal property (Sec. 205(a), NIRC)
Kinds of Distraint:
1.! Constructive Distraint
2.! Actual Distraint
Constructive Distraint – may be placed by the CIR or
any taxpayer to safeguard the interest of the
Government (Sec. 206, NIRC). Delinquency of the
taxpayer is not necessary.
Grounds for Constructive Distraint:
When in the opinion of the CIR,
1.! the taxpayer is retiring from any business subject
to tax; or
2.! the taxpayer is intending to leave the Philippines;
or
U.P. LAW BOC
3.! the taxpayer is intending to remove his property
from the Philippines or to hide or conceal his
property; or
4.! the taxpayer is planning to perform any act
tending to obstruct the proceedings for
collecting the tax due or which may be due from
him (Sec. 206, NIRC)
How constructive distraint is effected:
1.! Signing of receipt by the taxpayer
By requiring the taxpayer or any person having
possession or control of such property to sign a
receipt covering the property distrained and
obligate himself to preserve the same intact and
unaltered and not to dispose of the same in any
manner whatever, without the express authority
of the CIR
2.! If the taxpayer refuses to sign the receipt:
signing of receipt by revenue officer in the
presence of two witnesses
In case the taxpayer or the person having the
possession and control of the property refuses or
fails to sign the receipt, the revenue officer
effecting the constructive distraint shall proceed
to prepare a list of such property and, in the
presence of two (2) witnesses, leave a copy
thereof in the premises where the property
distrained is located (Sec. 206, NIRC)
Note: In constructive distraint, the property is not
actually confiscated or seized by the revenue
officer.
Actual distraint - placed on a person who owes any
delinquent tax or delinquent revenue (see Sec. 207,
NIRC); involves actual seizure of the property
Garnishment – taking of personal properties, usually
cash or sums of money, owned by a delinquent
taxpayer which is in the possession of a third party
Distraint of intangible properties (Sec. 208, NIRC)
1.! Stocks and other securities: by serving a copy of
the warrants of distraint on the taxpayer, AND
upon the president, manager, treasurer or other
responsible officer of the corporation, company
or association which issued the stocks or
securities.
2.! Debts and credits: by leaving with the person
owing the debts or having in his possession or
under his control such credits, or with his agent,
a copy of the warrant of distraint. The person
owing the debts shall then pay the CIR instead of
his creditor (taxpayer) on the strength of such
warrant.
3.! Bank accounts: by serving a warrant of
garnishment upon the taxpayer AND upon the
president, manager, treasurer or other
responsible officer of the bank. The bank shall
Page 190 of 270
TAXATION II TAXATION LAW
then turn over to the CIR so much of the bank
accounts as may be sufficient to satisfy the claim
of the Government. (NOTE: distraint of bank
accounts is called GARNISHMENT)
Summary remedy of distraint of personal property
1.! Purchase by the government at sale upon
distraint
2.! Report of sale to the Bureau of Internal Revenue
(BIR)
3.! Constructive distraint to protect the interest of
the government
Procedure for Actual Distraint
1.! Commencement of Distraint Proceedings
Who issues the warrant of distraint:
a.! CIR or his duly authorized representative –
where the amount involved is more than P1M
b.! Revenue District Officer – where the amount
involved is P1M or less (Sec. 207(A), NIRC)
2.! Service of Warrant of Distraint
How actual distraint is effected:
The proper officer shall seize and distraint any
goods, chattels, or effects, and the personal
property, including stocks and other securities,
debts, credits, bank accounts and interests in
and rights to personal property of the taxpayer in
sufficient quantity to satisfy the tax, expenses of
distraint and the cost of the subsequent sale.
(Sec. 207(A), NIRC)
3.! Report on the Distraint
A report shall be submitted by the distraining
officer to the Revenue District Officer, and to the
Revenue Regional Director.
4.! Power of the CIR or proper officer to lift the
order of distraint
The taxpayer may request that the warrant be
lifted. The CIR may, in his discretion, allow the
lifting of the order of distraint. He may ask for a
bond as a condition for the cancellation of the
warrant. (Sec. 207(A), NIRC)
5.! Notice of Sale of Distrained Properties
•! The Revenue District Officer or his duly
authorized representative (not the officer
who served the warrant), shall cause a
notification of the public sale to be posted in
not less than two (2) public places in the
municipality or city (one of which is the
Office of the Mayor) where the distraint was
made.
•! The notice shall specify the time and place of
the sale. The time of sale shall not be less
than twenty (20) days after notice to the
owner and the publication or posting of such
notice. (Sec. 209, NIRC)
6.! Sale at Public Auction
a.! At the time of the public sale, the revenue
officer shall sell the goods, chattels, or
U.P. LAW BOC TAXATION II
effects, or other personal property, including
stocks and other securities so distrained at a
PUBLIC AUCTION, to the HIGHEST BIDDER
for CASH or with the approval of the CIR,
through a DULY LICENSED COMMODITY or
STOCK EXCHANGES.
b.! Any residue over and above what is required
to pay the entire claim, including expenses
of sale and distraint, shall be RETURNED to
the owner of the property sold. Expenses
shall be limited to actual expenses of
SEIZURE and PRESERVATION of the
property pending the sale, no charge shall
be imposed for the services of the local
internal revenue officer or his deputy. (Sec.
209, NIRC)
c.! If the proceeds from the sale of the
distrained properties are not sufficient to
satisfy the tax delinquency, the CIR or his
duly authorized representative shall within
thirty (30) days after execution of the
distraint, proceed with the levy on the
taxpayer’s real property. (Sec. 207(B), NIRC)
7.! Release of the Properties from Distraint
If at any time prior to the consummation of the
sale all proper charges are paid to the officer
conducting the sale, the goods or effects
distrained shall be restored to the owner. (Sec.
210, NIRC)
8.! Purchase by the government at sale upon
distraint
If the amount offered by the highest bidder is not
equal to the amount of the tax or is very much
less than the actual market value of the articles
offered for sale, the CIR or his deputy may
purchase the same in behalf of the National
Government for the amount of taxes, penalties
and costs due. The property so purchased may be
resold by the CIR or his deputy. (Sec. 212, NIRC)
9.! Report of sale to BIR
Within two (2) days after the sale, the officer
making the same shall make a report of his
proceedings in writing to the CIR and shall
himself preserve a copy of such report as an
official record. (Sec. 211, NIRC)
Summary remedy of levy on real property
1.! Release of the Properties from Distraint
If at any time prior to the consummation of the
sale all proper charges are paid to the officer
conducting the sale, the goods or effects
distrained shall be restored to the owner. (Sec.
210, NIRC)
2.! Purchase by the government at sale upon
distraint
If the amount offered by the highest bidder is not
equal to the amount of the tax or is very much
less than the actual market value of the articles
Page 191 of 270
TAXATION LAW
offered for sale, the CIR or his deputy may
purchase the same in behalf of the National
Government for the amount of taxes, penalties
and costs due. The property so purchased may be
resold by the CIR or his deputy. (Sec. 212, NIRC)
3.! Report of sale to BIR
Within two (2) days after the sale, the officer
making the same shall make a report of his
proceedings in writing to the CIR and shall
himself preserve a copy of such report as an
official record. (Sec. 211, NIRC)
4.! Forfeiture in Favor of the Government
If there is no bidder for the real property OR if the
highest bid is not sufficient to pay the taxes,
penalties and costs, the IR Officer conducting the
sale shall declare the property FORFEITED to the
GOVERNMENT in satisfaction of the claim. (Sec.
215, NIRC)
5.! Redemption of Property Sold
•! At any time before the day fixed for the sale,
the taxpayer may discontinue all proceeding
by paying the taxes, penalties and interest.
(Sec. 213, NIRC)
•! Within one (1) year from the date of sale, the
taxpayer or anyone for him, may pay to the
Revenue District Officer the total amount of
the following: public taxes + penalties +
interest from the date of delinquency to the
date of sale + interest on said purchase price
at the rate of fifteen percent (15%) per
annum from the date of sale to the date of
redemption. (Sec. 214, NIRC)
Note: If the property was forfeited in favor of the
government, the redemption price shall include
only the taxes, penalties and interest plus costs
of sale (no interest on purchase price since the
Government did not “purchase” the property
anyway, it was forfeited)
The taxpayer-owner shall not be deprived of
possession of the said property and shall be
entitled to rents and other income until the
expiration of the period for redemption (Sec. 214,
NIRC)
6.! Final Deed of Purchaser
After the period of redemption, a final deed of sale is
issued in favor of the purchaser.
Further distraint or levy
The remedy by distraint of personal property and levy
on realty may be repeated if necessary until the full
amount due, including all expenses, is collected. (Sec.
217, NIRC)
c.! Forfeiture of Real Property
U.P. LAW BOC TAXATION II
Forfeiture implies a divestiture of property without
compensation in consequence of a default or offense.
The effect of forfeiture is to transfer the title of the
specific thing from the owner to the government. (de
Leon)
Instances when forfeiture is appropriate
1.! All chattels, machinery, and removable fixtures
of any sort used in the unlicensed production of
articles (Sec. 268, NIRC)
2.! Dies and other equipment used for the printing
or making of any internal revenue stamp, label or
tag which is in imitation of or purports to be a
lawful stamp, label or tag. (Sec. 268, NIRC)
3.! Liquor or tobacco shipped under a false name or
brand (Sec. 262, NIRC)
Remedy of enforcement of forfeitures
1.! Forfeiture of chattels and removable fixtures:
enforced by the seizure, sale or destruction of the
specific forfeited property.
2.! Forfeiture of real property: enforced by a
judgment of condemnation and sale in a legal
action or proceeding civil or criminal as the case
may require (Sec. 224, NIRC)
Resale of real estate taken for taxes (RR No. 22-
2002)
1.! All acquired/forfeited properties transferred in
the name of the Republic of the Philippines,
having passed the one-year redemption period,
shall be converted into cash from the date of
acquisition or forfeiture.
2.! The sale of acquired/forfeited real properties
shall be by sealed bids in a public auction to be
witnessed by a representative of the COA.
3.! The Notice of Sale of the acquired real properties
shall be published once a week for two (2)
consecutive weeks in a newspaper of general
circulation in the Philippines which must be
completed at least 20 days prior to the date of
such public auction.
4.! Unless the CIR provides otherwise, the Minimum
Bid Price/Floor Price shall be the latest fair
market value as determined by the CIR or the fair
market value shown in the latest tax declaration
issued by the provincial, city or municipal
assessor, whichever is higher, pursuant to Sec.
6(E) of the Tax Code.
5.! Anyone could bid except foreign nationals,
corporate or otherwise, and those qualified under
existing laws, rules and regulations, including
employees of the Bureau of Internal Revenue.
6.! Bidders shall be required to post a bond in cash
or manager’s check in an amount representing
10% of the minimum bid price at least one day
before the scheduled public auction.
Page 192 of 270
TAXATION LAW
7.! Unless the CIR allows extension of time to pay, in
meritorious cases, the winning bidder shall pay
the full amount of his bid cash or manager’s
check within two days after receipt of notice of
award.
8.! All taxes and expenses relative to the issuance of
title shall be borne by the winning bidder.
9.! The winning bidder shall be responsible at his
own expense for the ejectment of squatters
and/or occupants, if any, of the auctioned
property.
10.! Negotiated or private sale shall be resorted to as
a consequence of failed public bidding for two
consecutive times.
11.! Negotiated or private sale shall in all cases be
approved by the Secretary of Finance.
12.! Public auction sale shall be approved by the CIR
or his authorized representative.
13.! The Government reserves the right to reject or
cancel any or all bids.
When property to be sold or destroyed
1.! Forfeited chattels and removable fixtures: sold
in the same manner and under the same
conditions as the public notice and the time and
manner of sale as are prescribed for sales of
personal property distrained for the non-
payment of taxes
2.! Distilled spirits, liquors, cigars, cigarettes,
other manufactured products of tobacco and
all apparatus used in or about the illicit
production of such articles: destroyed by the
order of the CIR when the sale or use would be
injurious to public health or prejudicial to the
enforcement of the law
3.! All other articles subject to excise tax
manufactured or removed in violation of the
Code, dies for the printing or making of
internal revenue stamps and labels: sold or
destroyed in the discretion of the CIR
4.! Forfeited property shall not be destroyed until at
least 20 days after seizure. (Sec. 225, NIRC)
Disposition of funds recovered in legal proceedings
or obtained from forfeiture
All judgments and monies recovered and received for
taxes, costs, forfeitures, fines and penalties shall be
paid to the CIR or his authorized deputies as the
taxes themselves are required to be paid, and except
as specially provided, shall be accounted for and
dealt within the same way. (Sec. 226, NIRC)
d.! Suspension of Business
Operation
In addition to other administrative and penal
sanctions provided for in the Tax Code and
U.P. LAW BOC TAXATION II TAXATION LAW

implementing regulations, the CIR or his duly

authorized representative may order suspension or
closure of a business establishment for a period of
not less than five (5) days for any of the following
violations:
1.! Failure to issue receipts and invoices.
2.! Failure to file VAT return as required under the
provisions of Sec. 114 of the Tax Code.
3.! Understatement of taxable sales or receipts by
30% or more of his correct taxable sales or
receipt for the taxable quarter.
4.! Failure of any person to register as required
under the provisions of Sec. 236 of the Tax Code.
e.! Non-Availability of
Injunction to Restrain
Collection of Tax
No court shall have the authority to grant an
injunction to restrain the collection of any national
internal revenue tax, fee or charge imposed by this
Code. (Sec. 218, NIRC)
Assessment not necessary before filing a criminal
charge for tax evasion
An assessment is not necessary before a criminal
charge can be filed. The criminal charge need only be
proved by a prima facie showing of a wilful attempt to
file taxes, such as failure to file a required tax return.
[CIR v. Pascor, supra.]
Suit to recover tax based on false or fraudulent
returns
A proceeding in court for the collection of the tax
assessed may be filed without assessment at any
time within ten (10) years after the discovery of the
falsity, fraud or omission. Provided, that in a fraud
assessment which has become final and executor, the
fact of fraud shall be judicially taken cognizance of in
the civil or criminal action for the collection thereof.
(Sec. 222, NIRC)
False Return v. Fraudulent Return
A false returns is due to mistakes, carelessness or
ignorance and a fraudulent return is filed with intent
to evade taxes.

2.!Judicial Remedies – Civil or The fraud contemplated by law is actual and not
constructive, and must amount to intentional
Criminal Action wrongdoing with the sole object of avoiding the tax.
[Aznar v. CTA, G.R. No. L-20569 (1974)]
Civil Action
Two ways by which civil liability is enforced: Payment of tax not defense
a.! By filing a civil case for the collection of sum of Payment of the tax due after a case has been filed
money with the proper regular court; and shall not constitute a valid defense in any prosecution
b.! By filing an answer to the petition for review filed for violation of the provisions under the Code. (Sec.
by the taxpayer with the Court of Tax Appeals. 253(A), NIRC)
(Mamalateo)
Liability of person who aids or abets:
Criminal Action Any person who willfully aids or abets in the
Any person convicted of a crime under the Code shall: commission of a crime penalized under the Code or
a.! Be liable for the payment of the tax, and who causes the commission of any such offense by
b.! Be subject to the penalties imposed under the another shall be liable in the same manner as the
Code. (Sec. 253(A), NIRC) principal. (Sec. 253(B), NIRC)
Form and Mode of Proceeding:
Offender Penalty
Civil and criminal action and proceedings instituted
he shall be deported
in behalf of the Government under the authority of Not a citizen of the
immediately after serving
this Code or other law enforced by the BIR: Philippines
the sentence
a.! Shall be BROUGHT IN THE NAME OF THE
the maximum penalty
GOVERNMENT of the Philippines; and
prescribed for the offense
b.! Shall be CONDUCTED BY LEGAL OFFICERS OF
shall be imposed on him
THE BIR
shall be dismissed from
c.! Shall be filed in court with the approval of the A public officer or
CIR. (Sec. 220, NIRC) public office, and
employee
perpetually disqualified
from holding any public
Criminal action as a collection remedy
office, to vote, and to
The judgment in the criminal case shall impose the
participate in any election
penalty; and order payment of the taxes subject of
the criminal case as finally decided by the CIR. (Sec. CPA his license shall be
205, NIRC) automatically revoked or

Page 193 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

cancelled once he is
convicted
imposed on the partner,
president, general
Corporations, manager, branch manager,
associations, treasurer, officer-in-charge
partnerships etc. and employees responsible
for the violation (Sec. 253,
NIRC)

Minimum amount of fine:

The fines imposed for any violation of the Code shall
not be lower than the fines imposed herein or twice
the amount of taxes, interests and surcharges due
from the taxpayer, whichever is higher. (Sec. 253,
NIRC)

Prescriptive period for criminal action:

All violations of any provision of the Code shall
prescribe after five (5) years. (Sec. 281, NIRC)

Page 194 of 270

U.P. LAW BOC TAXATION II
VIII.!LOCAL
GOVERNMENT CODE
OF 1991, AS
AMENDED
! Local! Government!
Taxation
1.! Fundamental Principles
(UEPIP)
a.! Taxation shall be Uniform in each local
government unit;
b.! Taxes, fees, charges and other impositions shall:
(EPUC)
1.! be Equitable and based as far as practicable
on the taxpayer's ability to pay;
2.! be levied and collected only for Public
purposes;
3.! not be Unjust, excessive, oppressive, or
confiscatory;
4.! not be Contrary to law, public policy,
national economic policy, or in the restraint
of trade;
c.! The collection of local taxes, fees, charges and
other impositions shall not be let to any Private
person;
d.! The revenue collected shall inure solely to the
benefit of, and be subject to the disposition by,
the local government unit levying the tax, fee,
charge or other Imposition, unless otherwise
specifically provided herein; and,
e.! Each local government unit shall, as far as
Practicable, evolve a progressive system of
taxation. (SEC. 130, LGC)
2.!Nature and Source of
Taxing Power
a.! Grant of Local Taxing Power
under the Local Government
Code
Each local government unit shall have the power to
create its own sources of revenues and subject to
such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue
Page 195 of 270
TAXATION LAW
exclusively to the local governments. [Sec. 5, Art. X,
1987 Constitution]
Each local government unit shall exercise its power to
create its own sources of revenue and to levy taxes,
fees, and charges subject to the provisions herein,
consistent with the basic policy of local autonomy.
Such taxes, fees, and charges shall accrue exclusively
to the local government units. (Sec. 129, LGC)
b.! Authority to Prescribe
Penalties for Tax Violations
Vested in the sanggunian
The sanggunian of a local government unit is
authorized to prescribe fines or other penalties for
violation of tax ordinances but in no case shall such
fines be less than One thousand pesos (P1,000.00)
nor more than Five thousand pesos (P5,000.00), nor
shall imprisonment be less than one (1) month nor
more than six (6) months. Such fine or other penalty,
or both, shall be imposed at the discretion of the
court. The sangguniang barangay may prescribe a
fine of not less than One hundred pesos (P100.00)
nor more than One thousand pesos (P1,000.00). (Sec.
516, LGC)
c.! Authority to Grant Local Tax
Exemptions
LGUs may, through ordinances duly approved, grant
tax exemptions, incentives or reliefs under such terms
and conditions as they may deem necessary. (Sec. 192,
LGC)
d.! Withdrawal of exemptions
Local tax exemptions, in general
General rule: Unless otherwise provided, tax
exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or judicial,
including government-owned or controlled
corporations are withdrawn upon the effectivity of
the LGC. (Sec. 193, LGC)
Exceptions: Tax exemptions not withdrawn
1.! Local water districts
2.! Cooperatives duly registered under R.A. No.
6938,
3.! Non-stock and non-profit hospitals and
education institutions
Note: The LGC took effect on January 1, 1992.
[Sec. 193 is] an express and general repeal of all
statutes granting exemptions from local taxes,
U.P. LAW BOC
withdrew the sweeping tax privileges previously
enjoyed by the National Power Corporation under its
Charter. [NPC v. Cabanatuan, G.R. No. 149110 (2003)]
Real property tax exemptions
General Rule: 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 the LGC.
Exceptions:
1.! 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;
2.! Charitable institutions, churches, parsonages or
convents appurtenant thereto, mosques, non-
profit or religious cemeteries and all lands,
buildings, and improvements actually, directly,
and exclusively used for religious, charitable or
educational purposes;
3.! 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 water;
4.! All real property owned by duly registered
cooperatives as provided for under R.A. No.
6938; and
5.! Machinery and equipment used for pollution
control and environmental protection. (Sec. 234,
LGC)
Note: Section 234 applies specifically to real property
tax exemptions, while Section 193 applies to
exemptions from all other local taxes.
e.! Authority to Adjust Local Tax
Rates
LGUs shall have the authority to adjust the tax rates
as prescribed not oftener than once every five (5)
years, but in no case shall the adjustment exceed ten
percent (10%) of the rates fixed by the Code. (Sec. 191,
LGC)
f.! Residual Taxing Power of
Local Governments
LGUs may exercise the power to levy taxes, fees, or
charges on ANY base or subject not otherwise
Page 196 of 270
TAXATION II TAXATION LAW
specifically enumerated in the LGC or taxed under
NIRC or other applicable laws:
Requisites:
1.! Not unjust, excessive, oppressive, confiscatory,
or contrary to declared national policy;
2.! Pursuant to an ordinance enacted with public
hearing conducted for the purpose (Sec. 186,
LGC); and
3.! Subject to the limitations provided under
Section 133 of the LGC.
g.! Authority to Issue Local Tax
Ordinances
The power to impose a tax, fee, 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. (Sec.
132, LGC)
3.!Local Taxing Authority
a.! Power to Create Revenues
Exercised thru Local
Government Units [LGUs]
Each LGU shall exercise its power to create its power
to create its own sources of revenue and to levy taxes,
fees and charges subject to the provisions herein,
consistent with the basic policy of local autonomy.
(Sec. 129, LGC)
The power to impose a tax, fee, or charge or to
generate revenue under this Code shall be exercised
by the Sanggunian concerned through an
appropriate ordinance. (Sec. 132, LGC)
Ordinances issued in the exercise of such power, or
any particular item/s therein, may be vetoed by local
chief executives of the LGUs, except the Punong
Barangay, on the ground that it is ultra vires or
prejudicial to public welfare. His reasons shall be
stated in writing. (Sec. 55 (a) and (b), LGC)
b.! Procedure for Approval and
Effectivity of Tax Ordinances
A public hearing must be conducted prior to the
enactment of a tax ordinance. (Sec. 187, LGC)
Within ten (10) days after the approval of the
ordinance, certified true copies of all tax ordinances
or revenue measures shall be published in full for
U.P. LAW BOC TAXATION II TAXATION LAW

three (3) consecutive days in a newspaper of local

circulation.

In provinces, cities and municipalities where there are

no newspapers of local circulation, it must be posted
in at least two (2) conspicuous and publicly
accessible places. (Sec. 188, LGC)

Copies shall be furnished the respective local

treasurers for public dissemination (Sec. 189, LGC)

N.B. Requisites for substantive validity of an

ordinance:
1.! It must not contravene the Constitution or any
statute;
2.! It must not be unfair or oppressive;
3.! It must not be partial or discriminatory;
4.! It must not prohibit but may regulate trade;
5.! It must be general and consistent with public
policy; and
6.! It must not be unreasonable [Magtajas v. Pryce
Properties, G.R. No. 111097 (1994)]

4.!Scope of Taxing Power

LGU Scope of Taxing Power
May levy only:
a.! Transfer of Real Property
Ownership (Sec. 135, LGC)
b.! Business of Printing and
Publication (Sec. 136, LGC)
Provinces c.! Franchise Tax (Sec. 137, LGC)
(Sec. 134, d.! Tax on Sand, Gravel and Other
LGC) Quarry Resources (Sec. 138,
LGC)
e.! Professional Tax (Sec. 139)
f.! Amusement Tax (Sec. 140)
g.! Annual Fixed Tax for every
delivery truck or van (Sec. 141)
May levy taxes, fees and charges not
Municipalities otherwise levied by provinces (Sec.
142, LGC)
May levy taxes, fees and charges
Cities which the province or municipality
may impose (Sec. 151, LGC)
May levy only:
a.! Taxes on stores or retailers
b.! Service fees or charges
Barangays
c.! Barangay clearance
d.! Other fees and charges (Sec.
152, LGC)

But all LGUs may also impose reasonable service fees,

rates for operation of public utilities, and toll fees and
charges. (See letter e below) (Sec. 153-155, LGC)

Page 197 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

5.!Specific Taxing Power of LGUs

! !
Tax on Transfer of Real Property
(135) (151)
!
Tax on Business of Printing and Publication !
(136)
!
Franchise tax !
(137)
!
Tax on sand, gravel and other quarry resources !
(138)
!
Professional tax !
(139)
!
Amusement tax !
(140)
Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or !
!
Producers, Wholesalers of, Dealers, or Retailers in, Certain Products (141)
Tax on Business ! (143) !
Fees and charges on regulation/licensing of business and occupation ! (147) !
Fees for Sealing and Licensing of Weights and Measures ! (148) !
Fishery Rentals, Fees and Charges ! (149) !
Community Tax ! (156) !
!
Tax on Gross Sales or Receipts of Small-Scale Stores/Retailers
(152a)
!
Service Fees on the use of Barangay-owned properties
(152b)
!
Barangay Clearance
(152c)
Other Fees and Charges (on commercial breeding of fighting cocks,
!
cockfights, cockpits; places of recreation which charge admission fees;
(152d)
outside ads)
Service Fees and Charges (153) ! ! ! !
Public Utility Charges (154) ! ! ! !
Toll Fees or Charges (155) ! ! ! !
! (w/in
Real Property Tax ! Metro !
Manila)
May exceed the maximum rates allowed for the province or municipality ≥ 50%, except rates of professional and
amusement taxes (Sec. 151, LGC)

a.! Taxing Powers of Provinces

Tax Imposed Rate/Amount Base Exemptions Others
Evidence of payment of
tax is to be required by
Register of Deeds as a
Sale, transfer, or requisite to
Total acquisition
TAX ON TRANSFER OF REAL other disposition of registration; and by the
price or fair
PROPERTY Imposed on the real property provincial assessor as a
market value if
sale, donation, barter, or any Not more than pursuant to R.A. condition for
monetary value is
other mode of transfer of 50% of 1% 6657 cancellation of old tax
not substantial,
ownership or title to real (Comprehensive declaration.
whichever is
property (Sec 135 LGC) Agrarian Reform
higher
Law) Notaries public shall
furnish the provincial
treasurer with a copy of
the subject deed within

Page 198 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

30 days from
notarization.

Tax must be paid 60

days from the date of
execution of deed or
from the date of
decedent's death.
TAX ON BUSINESS OF
PRINTING AND
PUBLICATION (Sec 136, LGC)
Imposed on the business Receipts from
of persons engaged in printing and/or
printing, and/or Gross annual publishing of books
publication of books, Not exceeding receipts for the and other reading
cards, posters, leaflets, 50% of 1% preceding materials prescribed
handbills, certificates, calendar year by the DECS as
receipts, pamphlets, and school texts or
others of similar nature references
In the succeeding
calendar year,
regardless of when
business started
Not exceeding Capital
Newly started business operating, tax shall be
1/20 of 1% investment
based on gross receipts
for preceding calendar
year, or any fraction
thereof.
FRANCHISE TAX (Sec 137,
LGC)
Notwithstanding any
exemption granted by any law
or any other special law, tax
may be imposed on business
enjoying a franchise
Gross annual
Note: The case of San Pablo v.
receipts for the
Reyes [G.R. No. 127708 (1999)]
preceding
states that the explicit
Not exceeding calendar year
language of Section 137 of
50% of 1 based on the
LGC, which authorizes the
incoming receipt,
province to impose franchise
or realized, within
tax "notwithstanding any
its territorial
exemption granted by any law
jurisdiction
or other special law", is all-
encompassing and clear, even
though the phrase “in lieu of
all taxes” is contained in the
MERALCO franchise upon the
withdrawal of tax exemptions
in the LGC.
In the succeeding
calendar year,
Not more than Capital regardless of when
Newly-started business
1/20 of 1% investment business started
operating, tax shall be
based on gross receipts

Page 199 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

for preceding calendar

year, or any fraction
thereof.
Permit to extract sand,
gravel and other quarry
resources to be issued
exclusively by the
provincial governor
TAX ON SAND, GRAVEL AND pursuant to an
OTHER QUARRY Ordinance by the
RESOURCES. Sangguniang
Levied on ordinary stones, Fair market value Panlalawigan
gravel, earth and other quarry in the locality per
resources as defined in the Not more than cubic meter of Distribution of
NIRC, extracted from public 10% resources proceeds:
lands or from the beds of seas, referred to in
•! Province - 30%
lakes, rivers, streams, creeks, Column 1
•! Component
and other public waters within
City/Municipality
its territorial jurisdiction (Sec
where resources
138, LGC)
were extracted -
30%
•! Barangay where
resources were
extracted - 40%
To be paid to the
province where the
profession is practiced,
or where a principal
office is maintained.

A person who pays for

professional tax may
practice his profession
anywhere in the
country without being
subjected to similar
PROFESSIONAL TAX.
Such amount as taxes.
Provinces may levy annual
the Sangguniang Such reasonable Professionals
professional tax on each
Panlalawigan classification by exclusively Employers shall require
person engaged in the exercise
may determine, the Sangguniang employed by the payment of
of a profession requiring
in no case to Panlalawigan government professional tax as a
government examination (Sec
exceed P300.00 condition for
139, LGC)
employment and
annually thereafter.

Payable annually, on or
before Jan 31.

Any person first

beginning to practice a
profession after
January must pay the
full tax before
engaging therein.
AMUSEMENT TAX.. Collected Not more than Gross receipts Holding of operas, In case of theaters or
from proprietors, lessees, or 10% (amended from admission concerts, dramas, cinemas, tax shall first

Page 200 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

operators of theaters, by RA 9640, fees recitals, painting, be deducted and

cinemas, concert halls, 2009) and art exhibitions, withheld by their
circuses, boxing stadia, and flower shows, proprietors, lessees and
other places of amusement musical programs, operators
(Sec 140, LGC) literary and
oratorical Proceeds to be shared
Note: The case of Alta Vista presentations equally by the province
Golf and Country Club v. City of and municipality where
Cebu [G.R. No. 180235 (2016)] Exception to amusement places are
states that golf courses are not exemption: Pop, located.
subject to amusement tax rock, or similar
because “people do not enter concerts
a golf course to see or view a
show or performance.”
TAX ON DELIVERY
TRUCK/VAN.. Imposed on
vehicles used for the delivery
Manufacturers,
of distilled spirits, fermented
producers, wholesalers,
liquors, soft drinks, cigars and
Amount not Every truck, van, dealers and retailers
cigarettes, and other products
exceeding P500 vehicle referred to in column 1
as may be determined by the
shall be exempt from
sanggunian, to sales outlets,
tax on peddlers
or consumers in the province,
whether directly or indirectly
(Sec 141, LGC)

b.! Taxing Powers of Cities

The City may levy taxes, fees, charges which the province or municipality may impose.

Those levied and collected by highly urbanized and independent component cities shall accrue to them and
distributed in accordance with the provisions of LGC.

Rates on levy made by the city may exceed the maximum rates allowed for the province or municipality by not more
than 50%
Exception: Rates of professional and amusement taxes. (Sec. 151, LGC)

c.! Taxing Powers of Municipalities

TAX ON VARIOUS TYPES OF BUSINESSES [SEC. 143, LGC]
Rate/Amount and Base
Manufacturers, assemblers,
repackers, processors, brewers,
distillers, rectifiers, and
compounders of liquors, distilled
spirits, and wines or
manufacturers of any article of
commerce of whatever kind or
nature
Other Information
“Manufacturer” includes every person
who:
1.! by physical or chemical process,
alters the exterior texture or form
or inner substance of any raw
material or product in such
In accordance with the schedule in
manner as to have been put in its
Section 143 [a], LGC, at a rate not
original condition, or
exceeding 37 ½% of 1% of gross sales or
2.! by any such process alters the
receipts for the preceding calendar year
quality of such raw material or
product to reduce it to
marketable shape or prepare it
for any of the use of industry, or
3.! by any such process combines
such material or product with

Page 201 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

others of the same or of different

kinds that the finished products
can be put to a special use or
uses to which such material or
products in their original
condition could not have been
put, and
4.! alters such raw material or
manufactured or partially
manufactured products, or
combines the same to produce
such finished products for the
purpose of their sale or
distribution to others and not for
his own use or consumption
(Sec. 131, LGC)
Schedule in Article 143 [b], LGC, at a rate
Wholesalers, distributors, or
not exceeding 50% of 1% of gross sales
dealers in any article of commerce
or receipts for the preceding calendar
of whatever kind or nature
year
Exporters and on manufacturers,
millers, producers, wholesalers,
distributor, dealers or retailers of
essential commodities
enumerated below: [RWC-
CLAPS]
1.! Rice and corn
2.! Wheat and or cassava flour,
meat, dairy products, locally
manufactured, processed or
preserved food, sugar, salt,
and other agricultural,
marine, and fresh water
Not exceeding 1/2 of rates prescribed in
products, whether in original
the schedule in Sec 143 [a, b, d], LGC
state or not
(Manufacturers. Wholesalers, Retailers)
3.! Cooking oil and cooking gas
4.! Cement
5.! Laundry soap, detergents,
and medicine
6.! Agricultural implements.
equipment and post-harvest
facilities, fertilizers,
pesticides, insecticides,
herbicides and other farm
inputs;
7.! Poultry feeds and other
animal feeds;
8.! School supplies
Barangays have the exclusive power
Gross sales or receipts for the preceding
to tax gross receipts amounting to:
calendar year of:
Retailers 50k or less: in cities
400k or less: 2% per annum
30k or less: in municipalities [Sec. 143
more than 400k: 1% per annum
[d], Sec. 152, LGC]
In accordance with the schedule in Sec.
Contractors and other 143 [e], LGC, at a rate not exceeding 50%
independent contractors of 1% of gross receipts for the preceding
calendar year

Page 202 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

Not exceeding fifty percent 50% of 1% on

Banks and other financial
institutions
= income from financial leasing, dividends,
Peddlers engaged in the sale of
any merchandise or article of
commerce
the gross receipts of the preceding
calendar year from interest, commissions
and discounts from lending activities,
rentals on property and profit from
exchange or sale of property, insurance
premium.
Not exceeding P50.00 per peddler
annually.
Catch-all provision.

Any business which the If on any business subject to excise,

sanggunian concerned may deem value-added or percentage tax, rate
proper to tax of tax shall not exceed 2% of gross
sales or receipts of the preceding
calendar year
The Sanggunian concerned may prescribe a schedule of graduated rates but in no case to exceed the rates
prescribed herein

CEILING ON BUSINESS TAX IMPOSABLE ON
MUNICIPALITIES WITHIN METRO MANILA
Such municipalities may levy taxes at rates which
shall not exceed by fifty percent (50%) the maximum
rates prescribed in sec 143. [Sec. 144, LGC]
TAX ON RETIREMENT ON BUSINESS
Upon termination of a business subject to tax under
Sec.143 and 144, a sworn statement of its gross sales
or receipts for the current year shall be submitted. If
the tax paid is less than the tax due, the difference
shall be paid before the business is considered
officially retired. [Sec. 145, LGC]
assessments or dues from the unit owners, these
amounts are not intended for the incurrence of profit
by the corporation, but to shoulder the multitude of
necessary expenses for maintenance of the
condominium. [Yamane vs. BA Lepanto Condominium
Corp., G.R. No. 154993 (1995)]
Business tax must be based on gross receipts, it
being different from gross revenue. The right to
receive income, and not the actual receipt determines
when to include the amount in gross income.
[Ericsson Telecoms vs. City of Pasig, G.R. No. 176667
(2006)]

RULES ON PAYMENT OF BUSINESS TAX
1.! Taxes in Sec. 143 shall be paid for every separate
or distinct establishment or place where business
subject to tax is conducted.
2.! One line of business is not exempted by being
conducted with some other businesses for which
such tax has been paid.
3.! The tax on a business must be paid by the person
conducting it.
4.! If a person operates 2 or more businesses
mentioned in Sec 143 which are taxed;
computation shall be based on:
a.! combined total gross sales/receipts IF
subject to the same tax rate
b.! separate reports on gross sales/receipts if
subject to different tax rates
Condominium corporations are not business entities,
and are thus not subject to local business tax. Even
though the corporation is empowered to levy
FEES AND CHARGES FOR REGULATION &
LICENSING
General rule: As a condition to the conduct of business
or profession, the municipality may impose
reasonable fees and charges not yet imposed by the
province, commensurate with the cost of regulation,
inspection and licensing. [Sec.147, LGC]
Exception: Professional tax in Sec. 139
Specific rules:
1.! Municipality has power to impose reasonable
rates for sealing and licensing of weights and
measures [Sec. 148, LGC]
2.! The Municipality has exclusive authority to grant
fishery privileges in municipal waters. The
sangguniang bayan may:
a.! Grant fishery privileges to erect fish corrals,
oysters, mussels or other aquatic beds or

Page 203 of 270

U.P. LAW BOC TAXATION II
bangus fry areas, within a definite zone of
the municipal waters, as
b.! Grant marginal fishermen the privilege to
gather, take or catch bangus fry, prawn fry or
kawag-kawag or fry of other species and fish
from the municipal waters by nets, traps or
other fishing gears free of rental, fee, charge
or imposition.
c.! Issue licenses for the operation of fishing
vessels of three [3] tons or less
d.! Penalize the use of explosives, noxious or
poisonous substances, electricity, muro-ami,
and other deleterious methods of fishing and
prescribe a criminal penalty therefor [Sec.
149, LGC]
SITUS OF TAX COLLECTED
According to Sec. 150 of the LGC, situs shall be
determined by the following rules:
RULE 1: In case of persons maintaining/operating a
branch or sales outlet making the sale or transaction,
the tax shall be recorded in said branch or sales
outlet and paid to the municipality/city where the
branch or sales outlet is located.
RULE 2: Where there is NO branch or sales outlet in
the city/municipality where the sale is made, sale
shall be recorded in the principal office and the tax
shall be paid to such city/municipality.
RULE 3: In the case of manufacturers, contractors,
producers, and exporters having factories, project
offices, plants, and plantations, proceeds shall be
allocated as follows:
a.! 30% of sales recorded in the principal office shall
be made taxable by the city/municipality where
the principal office is located
b.! 70% shall be taxable by the city/municipality
where the factory, project office, plant, or
plantation is located
Illustration of Rules 1 to 3
A company has a principal office in Mandaluyong,
while its sales office and factory are in Sta. Rosa:
a.! Sales made in Mandaluyong will be recorded
Mandaluyong;
b.! Sales made in Sta. Rosa by the Sta. Rosa sales
office will be recorded in Sta. Rosa;
c.! Sales made in Los Baños, Calamba or Cabuyao
[i.e., delivered to customers located in those
places and not made by the Sta. Rosa sales
office], will be recorded in Mandaluyong;
d.! Aside from sales made in Sta. Rosa, 70% of sales
recorded in Mandaluyong shall be taxable by Sta.
Rosa since a factory is located there.
Page 204 of 270
TAXATION LAW
RULE 4: In case the plantation is located in a place
other than the place where the factory is located, the
70% in Rule 3 will be divided as follows:
•! 60% to the city/municipality where the factory is
located
•! 40% to the city/municipality where the
plantation is located
RULE 5: In case of 2 or more factories, plantations,
etc. in different localities, the 70% shall be prorated
among the localities where the factories, plantations,
etc. are located in proportion to their respective
volume of production.
Illustration:
A company has a principal office in Valenzuela and
has its factory in Bulacan. It also has branches selling
merchandise in Muntinlupa, Bacolod, Cebu.
a.! Sales made in Valenzuela will be recorded in
Valenzuela;
b.! Sales made in Muntinlupa, Bacolod and Cebu
shall be taxable by the said cities;
c.! Sales in all other places which do not have a
sales branch shall be distributed as follows: 30%
to Valenzuela and 70% to Bulacan.
Note: 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.
Excise Tax: Tax is imposed on the performance of an
act or occupation, enjoyment of a privilege. The
power to levy such tax depends on the place in which
the act is performed or the occupation is engaged in;
not upon the location of the office. [Allied Thread Co.,
Inc. v. City Mayor of Manila, G.R. No. L-40296 (1984)]
Sales Tax: It is the place of the consummation of the
sale, associated with the delivery of the things which
are the subject matter of the contract that
determines the situs of the contract for purposes of
taxation, and not merely the place of the perfection of
the contract. [Shell Co., Inc. v. Municipality of Sipocot,
Camarines Sur, G.R. No. L-12680 (1959)]
Branch or Sales Office — a fixed place in a locality
which conducts operations of the business as an
extension of the principal office. Offices used only as
display areas of the products 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
U.P. LAW BOC TAXATION II TAXATION LAW

considered as a sales office. [Art. 243(a)(2) of the LGC
IRR]
d.! Taxing Powers of Barangays
The following shall exclusively accrue to the
barangays:
1.! Taxes on Stores or Retailers with Fixed Business
Establishments.
a.! Rate: not greater than one percent (1%)
b.! Base:
i.! Cities: gross sales or receipts of the
preceding calendar year of
P50,000.00 or less
ii.! Municipalities: gross sales or receipts
of P30,000.00 or less
2.! Service Fees or Charges. For services rendered in
connection with the regulations or the use of
barangay-owned properties or facilities such as
palay, copra, or tobacco dryers.
3.! Barangay Clearance. A city or municipality
cannot issue a permit for business without a
clearance from the barangay concerned. The
sangguniang barangay may impose a reasonable
fee on the clearance.
4.! Other Charges Allowed.
a.! charges on commercial breeding of fighting
cocks, cockfights and cockpits;
b.! charges on places of recreation which charge
admission fees; and
c.! charges on billboards, signboards, neon
signs, and outdoor advertisements. [Sec. 152,
LGC]
e.! Common Revenue Raising
Powers
1.! Service fees and charges
LGUs may impose and collect such reasonable
fees and charges for services rendered. [Sec. 153,
LGC]
2.! Public utility charges
LGUs may fix the rates for the operation of public
utilities owned, operated and maintained by
them within their jurisdiction. [Sec. 154, LGC]
3.! Toll fees or charges
a.! The sanggunian may prescribe the terms and
conditions and fix the rates for the
imposition of 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.
b.! The sanggunian may also discontinue the
collection of the tolls when public safety and
welfare requires.
c.! No toll fees or charges shall be collected
from:
i.! Officers and enlisted men of the AFP
and members of the PNP on mission
ii.! Post office personnel delivering mail
iii.! Physically-handicapped
iv.! Disabled citizens who are sixty-five
(65) years or older. [Sec. 155, LGC]

f.! Community Tax

Who may levy [Sec.
Cities or municipalities
156, LGC]
1.! Individuals who are:
a.! Inhabitants of the Philippines
b.! 18 years of age or over
c.! Either:
i.! Regularly employed on a wage or salary basis for at least 30 consecutive
Persons Liable working days during any calendar year
[Sec. 157 &158, ii.! Engaged in business or occupation
LGC] iii.! Owns real property with an aggregate assessed value of P1,000 or more
iv.! Is required by law to file an income tax return
2.! Juridical Persons
a.! Every corporation no matter how created or organized,
b.! Whether domestic or resident foreign,
c.! Engaged in or doing business in the Philippines
1.! Individuals
Rates [Sec. 157 a.! Annual community tax of P5.00 PLUS annual additional tax of P1.00 per
&158, LGC] P1,000.00 of income regardless whether from business, exercise of profession
or property

Page 205 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

b.! Never to exceed P5000

c.! Husband and wife shall pay a basic tax of P5.00 each PLUS additional tax based
on total property owned by them and the total gross receipts or earnings derived
therefrom
2.! Juridical Persons
a.! Annual community tax of P500.00 PLUS annual additional tax of not more than
P10,000.00 according to the ff. schedule:
i.! P2.00 for every P5,000 worth of real property in the Philippines owned
during the preceding year based
ii.! P2.00 for every P5,000.00 of gross receipts derived from business in the
Philippines during the preceding year.
b.! Dividends received by a corporation from another corporation shall be deemed
part of the gross receipts or earnings for purposes of computing additional tax.
Persons Exempt 1.! Diplomatic and consular representatives
[Sec. 159, LGC] 2.! Transient visitors who stay in the Philippines for not more than 3 months
Place of Payment
Where individual resides, or where the principal office of the juridical entity is located.
[Sec. 160, LGC]
Accrues on the 1st day of January of each year to be paid not later than the last day of
February of each year.

If a person reaches 18 years of age or otherwise loses the benefit of exemption on or

before June 30, he shall be liable on the day he reaches such age or upon the day the
exemption ends; if on or before the March 31, he shall have 20 days to pay without being
Time of Payment delinquent. Persons who come to reside in the Philippines, or reach 18 years old, or
[Sec 161, LGC] ceases to belong to an exempt class on or after July 1, shall not be subject to community
tax for that year.

Corporations established and organized on or before June 30 shall be liable to

community tax for that year; those on or before March 31 shall have 20 days to pay
without becoming delinquent; if on or after July 1, shall not be subject to community tax
for that year.
If unpaid within the prescribed period, an interest of 24% shall be added per annum from
Penalty
the due date until payment. [Sec. 161, LGC]

Presentation of Community Tax Certificate is

necessary when an individual subject to community
tax:
1.! Acknowledges any document before a notary
public
2.! takes the oath of office upon election or
appointment to any position in the government
service
3.! receives any license, certificate, or permit from
any public authority
4.! pays any tax or fee
5.! receives any money from any public fund
6.! transacts other official business
7.! receives any salary or wage from any person or
commission
Presentation of certificate is not needed in the
registration of a voter. [Sec. 163, LGC]
The city or municipal treasurer shall deputize the
barangay treasurers to collect, provided the latter be
bonded.
If: actually and directly collected by the city or
municipal treasurer, community tax accrues entirely
to the general fund. If: collected through the
barangay treasurers, apportioned equally. [Sec. 164,
LGC]
6.!Common Limitations on the
Taxing Powers of LGUs
Unless otherwise provided, the following cannot be
levied by the local governments: [IDEC-GAPEP-GRR-
ECN]:
a.! Income tax, except when levied on banks and
other financial institutions;
b.! Documentary stamp tax;
c.! Estate tax, inheritance, gifts, legacies and other
acquisitions mortis causa, except as otherwise
provided;

Page 206 of 270

U.P. LAW BOC TAXATION II
d.! Customs duties, registration fees of vessel 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 LGU concerned;
e.! Taxes, fees or charges on 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, or other taxes, fees, or otherwise
Sec.133(e) prohibits the imposition, in the guise
of wharfage, of fees, as well as all other taxes or
charges in any form whatsoever, on goods or
merchandise. It is therefore irrelevant if the fees
imposed are actually for police surveillance on
the goods, because any other form of imposition
on goods passing through the territorial
jurisdiction of the municipality is clearly
prohibited. [See Palma Development Corp. v.
Municipality of Managas, G.R. No. 152492
(2003)]
f.! Taxes, fees or charges on Agricultural and
aquatic products when sold by marginal farmers
or fishermen;
g.! Taxes on business enterprises certified to by the
Board of Investments as Pioneer or non-pioneer
for a period of 6 and 4 years, respectively from
the date of registration;
h.! Excise taxes on articles enumerated under the
NIRC, as amended, and taxes, fees or charges on
petroleum products;
i.! Percentage or VAT on sales, barters or
exchanges or similar transactions on goods or
services except as otherwise provided herein;
j.! 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;
k.! Taxes on premiums paid by way or Reinsurance
or retrocession;
l.! 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
tricycles;
m.! Taxes, fees, or other charges on Philippine
products actually Exported, except as otherwise
provided;
n.! Taxes, fees, or charges, on Countryside and
Barangay Business Enterprises and cooperatives
duly registered under the Cooperative Code of
the Philippines; and
o.! Taxes, fees or charges of any kind on the
National Government, its agencies and
Page 207 of 270
TAXATION LAW
instrumentalities, and local government units.
[Sec. 133, LGC]
Doctrine of Preemption. “Preemption in the matter
of taxation simply refers to an instance where the
national government elects to tax a particular area,
impliedly withholding from the local government the
delegated power to tax the same field. This doctrine
primarily rests upon the intention of Congress.
Conversely, should Congress allow municipal
corporations to cover fields of taxation it already
occupies, then the doctrine of preemption will not
apply.” [Victorias Milling v. Municipality of Victoria,
G.R. No. L-21183 (1968)]
7.!Collection of Business Tax
a.! Tax Period and Manner of
Payment
Based on calendar year, unless otherwise provided.
May be paid annually or in quarterly instalments. [Sec.
165, LGC]
b.! Accrual of Tax
General rule: Accrues on the first day of January of
each year
Except: New taxes, fees or charges, or changes in the
rates thereof which shall accrue on the first day of the
quarter next following the effectivity of the ordinance
imposing such new levies or rates. [Sec. 166, LGC]
c.! Time of Payment
Within the 20 days of January or of each subsequent
quarter. [i.e., Jan 20, Apr 20, July 20, and Oct 20]. It
may be extended by the sanggunian for justifiable
reasons, without surcharges or penalties. Extension
cannot exceed 6 months. [Sec. 167, LGC]
d.! Penalties on Unpaid Taxes,
Fees or Charges
1.! Surcharge not exceeding 25% on taxes, fees or
charges NOT paid on time; and
2.! Interest not exceeding 2% per month of the
unpaid taxes, fees or charges including
surcharges, until the amount is fully paid
3.! In no case shall the total interest exceed 36
months. [Sec. 168, LGC]
U.P. LAW BOC TAXATION II
e.! Authority of Treasurer in
Collection and Inspection of
Books
All local taxes, fees and charges shall be collected by
the local treasurer or their duly authorized deputies
[Sec. 170, LGC]
The local treasurer may, by himself or through his
deputies duly authorized in writing, examine the
books, accounts, and other pertinent records of any
person subject to local taxes, fees and charges in
order to ascertain, assess and collect the correct
amount of the tax, fee or charge.
Examination must be done during business hours,
only once for every tax period and shall be certified to
by the examining official. [Sec. 171, LGC]
8.!Taxpayer’s Remedies
a.! Periods of Assessment and
Collection of Local Taxes,
Fees or Charges
Assessment: Within 5 years from the date they
become due
In case of Fraud or Intent to Evade Tax: Within 10
years from discovery of fraud or intent to evade
payment. [Sec. 194, LGC]
Collection: 5 years from the date of assessment by
administrative or judicial action. No such action shall
be instituted after the expiration of said period.
Instances When Running of Prescription Periods is
Suspended
1.! When the treasurer is legally prevented from
making the assessment or collection
2.! When taxpayer requests for reinvestigation and
executes a waiver in writing before lapse of the
period for assessment or collection.
3.! When the taxpayer is out of the country or
otherwise cannot be located [Sec. 194 (d), LGC]
b.! Protest of Assessment
Within 60 days from the receipt of the notice of
assessment issued by the local treasurer or his duly
authorized representative, the taxpayer may file a
written protest with the local treasurer contesting
the assessment; otherwise it shall become final and
Page 208 of 270
TAXATION LAW
executory. The local treasurer shall decide within 60
days from the time of filing.
If the protest is found to be wholly or partly
meritorious, a notice cancelling wholly or partially the
assessment will be issued. If the protest was denied
or when the 60-day period already lapsed, the
taxpayer shall have 30 days from the receipt of denial
or the end of the 60-day period to appeal with the
court of competent jurisdiction; otherwise, the
assessment becomes conclusive and unappealable.
[Sec. 195, LGC]
c.! Claim for Refund of Tax
Credit for Erroneously or
Illegally Collected Tax, Fee
or Charge
Requires a written claim for refund or credit to be
filed with local treasurer before protest is entertained,
which must be brought within 2 years from payment
of tax or from the date the taxpayer became entitled
to refund or credit. After the expiration of the 2-year
period, no case or proceeding shall be entertained in
any court. An appeal can be filed before the court of
competent jurisdiction 30 days from receipt of denial
of claim. [Sec. 196, LGC]
9.!Civil Remedies by the LGU
for Collection of Revenues
a.! Local Government’s Lien for
Delinquent Taxes, Fees or
Charges
Non-payment of a tax, fee or charge creates a lien
superior to all liens or encumbrances in favor of any
other person, enforceable by administrative or
judicial action.
The lien may only be extinguished upon full payment
of the delinquent local taxes, fees, and charges
including related surcharges and interests. [Sec. 173,
LGC]
b.! Civil Remedies, in General
1.! Administrative action
Distraint of personal property
Personal properties subject to distraint: goods,
chattels or effects and other personal property of
U.P. LAW BOC TAXATION II
whatever character, including stocks and other
securities, debts, credits, bank accounts, and interest
in and rights to personal property
Procedure: [Sec. 175, LGC]
a.! Seizure of personal property
b.! Accounting of distrained goods
c.! Publication of time and place of sale and the
articles distrained
d.! Release of distrained property upon payment
prior to sale
e.! Procedure of sale
f.! Disposition of proceeds
Levy of real property: Levy upon real property and
interest in or rights to real property
Procedure [Sec. 176, LGC]
a.! Preparation of a duly authenticated certificate by
the LGU Treasurer effecting the levy on the real
property
b.! Service of written notice of levy to the assessor,
Register of Deeds, and delinquent taxpayer
(agent if absent from the Philippines, or
occupant of the property in question if none)
c.! Report on any levy
d.! Annotation of the levy on the tax declaration and
the certificate of title
e.! Advertisement and Sale [Sec. 178, LGC]
Further distraint or levy
The remedies by distraint or levy may be repeated if
necessary until the full amount due, including all
expenses, is collected [Sec. 184, LGC]
Note: Either of these remedies or all may be pursued
concurrently or simultaneously at the discretion of
the local government unit concerned [Sec. 174, LGC].
In case the levy on real property is not issued before
or simultaneously with the warrant of distraint on
personal property, and the personal property of the
taxpayer is not sufficient to satisfy his delinquency,
the provincial, city or municipal treasurer, as the case
may be, shall within thirty (30) days after execution of
the distraint, proceed with the levy on the taxpayer's
real property. [Sec. 176, LGC]
Exemption of personal property from distraint or
levy (ToB-CUPLA)
a.! Tools and implements necessarily used by the
taxpayer in his trade or employment
b.! One horse, cow, carabao, or other Beast of
burden, such as the delinquent taxpayer may
select and necessarily used by him in his ordinary
occupation
c.! his necessary Clothing, and that of all his family
Page 209 of 270
TAXATION LAW
d.! household furniture and Utensils necessary for
housekeeping and used for that purpose by the
delinquent taxpayer, such as he may select, of a
value not exceeding P10,000
e.! Provisions, including crops, actually provided for
individual or family use sufficient for 4 months
f.! the professional Libraries of doctors, engineers,
one fishing boat and net, not exceeding the total
value of P10,000 by the lawful use of which a
fisherman earns his livelihood
g.! any material or Article forming part of a house or
improvement of any real property
Appeal before the Secretary of Justice (Procedure)
•! Appeal to the Secretary of Justice within 30 days
from effectivity
•! The Secretary of Justice has 60 days to decide
but an appeal does not suspend the effectivity of
the ordinance
•! Within 30 days from the Secretary of Justice’s
decision or after 60 days inaction, an appeal may
be filed with the RTC. (See Sec. 187, LGC)
Penalty on local treasurer for failure to issue and
execute warrant of distraint or levy
Automatically dismissed from the service after due
notice and hearing [Sec. 177, LGC]
2.! Judicial Action
The local government may institute an ordinary civil
action with regular courts of proper jurisdiction for
the collection of delinquent taxes, fees, charges or
other revenues.
The civil action shall be filed by the local treasurer.
[Sec. 183, LGC]
LGC does not contain a provision prohibiting courts
from enjoining the collection of local taxes. Such
lapse may have allowed preliminary injunction under
Rule 58, ROC where local taxes are involved. [Valley
Trading Co. vs. CFI of Isabela, G.R. No. L-
49529(1989); Angeles City v. Angeles City Electric
Corporation, G.R. No. 166134 (2010)]
U.P. LAW BOC TAXATION II
! Real! Property! Taxation
1.! Fundamental Principles
a.! Current fair market value is the basis for
assessment
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. [Sec. 201, LGC]
b.! Actual use shall be the basis of classification for
assessment
1.! 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.
2.! Actual Use- refers to the purpose for which
the property is principally or predominantly
utilized by the person in possession thereof
[Sec. 199 (b), LGC]
3.! MCIAA v. Marcos [G.R. No. 120082 (1996)]:
“Usage” means direct, immediate and actual
application of the property
c.! Private persons cannot be left to the appraisal,
assessment, levy and collection of real property
tax.
d.! Uniform classification within each local
government unit shall be observed.
e.! equitable appraisal and assessment is required.
[Sec. 197, LGC]
2.!Nature of Real Property
Tax
a.! It is a direct tax on the ownership or use of real
property.
b.! It is an ad valorem tax. Value is the tax base.
c.! It is proportionate because the tax is calculated
on the basis of a certain percentage of the value
assessed.
d.! It creates a single, indivisible obligation.
e.! It attaches on the property [i.e., a lien] and is
enforceable against it.
f.! With respect to LGUs, it is levied thru a delegated
power
3.!Imposition of Real Property
Tax
Page 210 of 270
TAXATION LAW
a.! Power to Levy Real Property
Tax
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. [Sec. 232, LGC]
The following may levy real property tax:
a.! Province
b.! City
c.! A municipality within the Metro Manila area
Coverage; for a Province, or a City or Municipality
within Metro Manila
1.! Land
2.! Building
3.! Machinery
4.! Other improvements not specifically exempted
[Sec. 232, LGC]
The rate shall be as follows:
Province: not exceeding one percent (1%) of the
assessed value of real property; and
City or municipality within Metro Manila: not
exceeding two percent (2%) of the assessed value of
real property. [Sec. 233, LGC]
Special Levy on Idle Lands
A province, or city or municipality within Metro
Manila may levy an annual tax on idle lands at the
rate not exceeding five percent [5%] of the assessed
value of the property in addition to the basic tax
Lands covered
1.! Agricultural Lands
More than one hectare in area suitable for
cultivation, dairying, inland fishery, and other
agricultural uses, one-half of which remain
uncultivated or unimproved
2.! Other than Agricultural
More than one thousand square meters in area
one half of which remain unutilized or
unimproved [Sec. 236 and 237, LGC]
Exempt Idle Lands
Lands exempt by reason of
•! Force majeure,
•! Civil disturbance,
•! Natural calamity or
•! Any cause or circumstance which physically or
legally prevents improving, utilizing or
cultivating the same. [Sec. 238, LGC]
U.P. LAW BOC TAXATION II TAXATION LAW

Special Levy for Public Works 3.! Within 30 days from date of declaration
A tax ordinance shall describe with reasonable 4.! Failure to file, will be listed as in Assessment
accuracy the nature, extent and location of the public Rolls as taxable
works to be undertaken, the estimated cost, the
metes and bounds by monuments and lines and the GOCCs
number of annual installments which should not be GOCCs are not covered by the exemption since the
less than 5 nor more than 10 years. exemption only refers to instrumentalities without
personalities distinct from the government.
The sanggunian may fix different rates for different [Philippine Ports Authority vs. City of Iloilo, G.R. No.
parts or sections thereof, depending on whether such 109791 (2003)]
land is more or less benefited by the proposed work.
[Sec. 241, LGC] Provision
SC Ruling
involved
Special Education Fund (SEF) Sec 133 (o), LGC.
A province, or city or municipality within Metro LGUs not allowed
Manila may levy and collect an annual tax of one to levy… [o]
percent (1%) on the assessed value of real property taxes/fees/
which shall be in addition to the basic real property charges of any
tax. Airport Authority is
Mactan kind on the
a GOCC, not
Airport national gov’t, its
exempt from RPT.
b.! Exempt from Real Property Authority agencies,
Legislature in
vs. instrumentalities
Tax amending the law
Marcos, and LGUs.
specifically deleted
G.R. No.
1.! Owned by the Republic of the Philippines or any GOCCs from the
1120082 Sec 234 (a), LGC.
of its political subdivisions except when enumeration in Sec
(1996) Properties exempt
beneficial use is granted for a consideration or to 234 (a).
from RPT: real
a taxable person. properties owned
2.! Charitable institutions, churches, parsonages, or by the Republic or
convents appurtenant thereto, mosques, non- any of its political
profit or religious cemeteries, and all lands, subdivisions.
buildings, and improvements actually, directly MIAA falls under
and exclusively used for religious, charitable, or Manila
the term
educational purposes. Airport
“instrumentality”
3.! Machinery and equipment actually, directly and Authority Sec 133 (o), LGC
outside the scope
exclusively used by local Water utilities and vs. CA,
of LGS’s local
GOCCs engaged in the supply and distribution of G.R. No. Sec 234 (a), LGC
taxing powers
water and/or generation and transmission of 155650
under Sec 133[o].
electric power. (2006)
4.! Real property owned by duly registered Mactan The Mactan Airport
cooperatives as provided for under Republic Act Airport is a government
No. 6938 [Cooperative Code of the Philippines]. Authority instrumentality;
5.! Machinery and equipment used for pollution vs. City of only portions of the
control and Environmental protection. [Sec. 234, Lapu- land leased to
LGC] Lapu, taxable persons
G.R. No. like private parties
Provincial Assessor of Marinduque v. CA [G.R. No. 181756 are subject to real
170532 (2009)]: A claim for exemption under Sec. (2015) estate tax.
234 (e) should be supported by evidence that the
property sought to be exempt is actually, directly and Charitable Institutions
exclusively used for pollution control and A charitable institution does not lose its character
environmental protection. and its exemption simply because it derives income
from paying patients so long as the money received is
Proof of Exemption devoted to the charitable object it was intended to
1.! Documentary evidence such as affidavits, by- achieve, and no money inures to the benefit of
laws, contract, articles of incorporation persons managing the institution. [Lung Center of the
2.! Given to local assessor Philippines vs. Quezon City, G.R. No. 144104 (2004)]

Page 211 of 270

U.P. LAW BOC
Property leased to private entities is not exempt from
RPT, as it is not actually, directly and exclusively used
for charitable purposes. Portions of the land occupied
by the hospital and portions used for its patients,
whether paying or non-paying, are exempt from real
property taxes.
4.!Appraisal and Assessment
of Real Property Tax
a.! Rule on Appraisal of Real
Property Tax at Fair Market
Value
All real property shall be appraised at the current and
fair market value prevailing at the locality where the
property is situated. [Sec. 201, LGC]
FMV is the price at which property may be sold by a
seller who is not compelled to sell and bought by a
buyer who is not compelled to buy. [Sec. 199(l), LGC]
b.! Declaration of Real Property
Declaration by the Owner or Administrator
Prepare a sworn statement declaring the true value
of the property which shall be the current and fair
market value of the property.
It must contain a sufficient description of the property
to enable the assessor or his deputy to identify the
same for assessment purposes
The declaration must be filed with the assessor once
every three (3) years during the period from January 1
to June 30. [Sec. 202, LGC]
Declaration by Any Person Acquiring Real Property
or Making Improvements
The sworn statement declaring the true value of the
property must be filed to the provincial, city or
municipal assessor within sixty [60] days after the
acquisition or upon completion or occupancy of the
improvement, whichever comes earlier. [Sec. 203,
LGC]
Declaration by the Provincial or City or Municipal
Assessor
When the person required to file the sworn
declaration refuses or fails to make such declaration,
the provincial, city or municipal assessor shall declare
the property in the name of the defaulting owner.
Page 212 of 270
TAXATION II TAXATION LAW
Notice of Transfer of Real Property
Any person who shall transfer real property
ownership to another shall notify the provincial, city
or municipal assessor within sixty [60] days from the
date of such transfer.
The notification shall include:
1.! Mode of transfer,
2.! Description of the property alienated, and
3.! Name and address of the transferee [Sec. 208,
LGC]
c.! Listing of Real Property in
the Assessment Rolls
The local assessor must maintain an assessment roll
wherein all real property, whether taxable or exempt,
located within the territorial jurisdiction of the LGU, is
listed.
Real property in general—
Shall be listed, valued and assessed in the name of
the owner or administrator, or anyone having legal
interest in the property.
For undivided real property—
May be in the name of the estate or of the heirs and
devisees, or in the name of one or more co-owners
Real property of a corporation, partnership or
association—
Same manner as an individual
Real property owned by the Republic of the
Philippines, its instrumentalities, political subdivision,
the beneficial use has been granted to a taxable
person—
In the name of the possessor, grantee or of the public
entity if such property has been acquired or held for
resale or lease. [Sec. 205, LGC]
d.! Preparation of Schedules of
FMV
Authority of assessor to take evidence
The assessor of the province, city or municipality or
his deputy may summon the owners or persons
having legal interest therein and witnesses,
administer oaths, and take deposition concerning the
property, its ownership, amount nature, and value.
[Sec. 213, LGC]
Amendment of schedule of fair market value
U.P. LAW BOC TAXATION II TAXATION LAW

Before any general revision of property assessment is 4.! Statues, reliefs, paintings or other objects for use
made, there shall be prepared a schedule of FMV by or ornamentation, placed in buildings or on lands
the provincial, city or municipal assessors; which by the owner of the immovable in such a manner
shall be published in a newspaper of general that it reveals the intention to attach them
circulation or in the absence thereof, shall be posted permanently to the tenements;
in the provincial capital, city or municipal hall and in 5.! Machinery, receptacles, instruments or
two other conspicuous public places therein. [Sec. 212, implements intended by the owner of the
LGC] tenement for an industry or works which may be
carried on in a building or on a piece of land, and
which tend directly to meet the needs of the said
e.! Classes of Real Property industry or works;
6.! Animal houses, pigeon-houses, beehives, fish
1.! Residential – Is land principally devoted to ponds or breeding places of similar nature, in
habitation case their owner has placed them or preserves
2.! Agricultural – Is land devoted principally to the them with the intention to have them
planting of trees, raising of crops, livestock and permanently attached to the land, and forming a
poultry, dairying, salt making, inland fishing and permanent part of it; the animals in these places
similar aquaculture activities and other are included;
agricultural activities and is not classified as 7.! Fertilizer actually used on a piece of land;
mineral, timber, residential, commercial or 8.! Mines, quarries, and slag dumps, while the
industrial land matter thereof forms part of the bed, and waters
3.! Commercial – Is land devoted principally for the either running or stagnant;
object of profit and is not classified as 9.! Docks and structures which, though floating, are
agricultural, industrial, mineral, timber or intended by their nature and object to remain at
residential land a fixed place on a river, lake, or coast;
4.! Industrial – Is land devoted principally to 10.! Contracts for public works, and servitudes and
industrial activity as capital investment and is not other real rights over immovable property. (334a)
classified as agricultural, commercial, timber,
mineral or residential land Machinery
5.! Mineral – Are lands in which minerals exist in
The FMV is the acquisition
sufficient quantity or grade to justify the
cost
necessary expenditures to extract and utilize
I
such minerals
f the machinery is imported,
6.! Timberland
the acquisition cost includes
7.! Special – all lands, buildings and other
freight, insurance, bank and
improvements actually, directly and exclusively Brand New
other charges, brokerage,
used for hospitals, cultural, or scientific purposes,
arrastre and handling, duties
and those owned and used by local water
and taxes, plus cost of inland
districts, and GOCCs rendering essential public
transportation, handling, and
services in the supply and distribution of water
installation charges at the
and/or generation and transmission of electric
present site. [Sec. 224, LGC]
power [Sec. 216, LGC]
FMV is determined by
dividing the remaining
N.B. The Local Government Code contains no
economic life of the
definition of the term “real property”. Therefore,
All other machinery by its estimated
reference should be made to the enumeration of real
Cases economic life and multiplied
property under Art. 415 of the Civil Code, as follows:
by the replacement/
1.! Land, buildings, roads and constructions of all
reproduction cost. [Sec. 224,
kinds adhered to the soil;
LGC]
2.! Trees, plants, and growing fruits, while they are
Rate—not exceeding five
attached to the land or form an integral part of
percent (5%) of its original
an immovable;
3.! Everything attached to an immovable in a fixed cost or replacement cost, for
Depreciation each year of use
manner, in such a way that it cannot be
Allowance
separated therefrom without breaking the
The remaining value shall be
material or deterioration of the object;
fixed at not less than twenty
percent (20%) of such

Page 213 of 270

U.P. LAW BOC TAXATION II
original, replacement or
reproduction cost for so long
as the machinery is useful
and in operation. [Sec. 225,
LGC]
f.! Actual Use of Property as
Basis of Assessment
Real property shall be classified, valued and assessed
on the basis of actual use regardless of where located,
whoever owns it, and whoever uses it. (Sec. 217, LGC)
Unpaid realty taxes attach to the property and are
chargeable against the person who had actual or
beneficial use and possession of it regardless of
whether or not he is the owner. To impose the RPT on
the subsequent owner which was neither the owner
nor the beneficial user of the property during the
designated periods would not only be contrary to law
but also unjust. [Estate of Lim v. City of Manila, G.R.
No. 90639 (1990)]
g.! Assessment of Real Property
Assessment levels
Assessment level – is the percentage applied to the
fair market value to determine the taxable value of
the property [Sec. 199(g), LGC]
Assessment levels shall be fixed by ordinances of the
sanggunian at rates not exceeding those prescribed
in Sec. 218
Assessed Value/ Taxable Value = Fair Market Value
x Assessment Level [Sec. 199(h), LGC]
General revisions of assessments and property
classification
The local assessor shall undertake a general revision
of real property assessments every 3 years. [Sec. 219,
LGC]
Date of effectivity of assessment or reassessment
General rule: All assessments or reassessments made
after the first day of January of any year shall take
effect on the first day of January of any year
Exceptions: Reassessments due to
1.! partial or total destruction
2.! major change in actual use;
3.! great and sudden inflation or deflation of real
property values;
4.! gross illegality of the assessment when made; or
Page 214 of 270
TAXATION LAW
5.! any other abnormal cause shall be made within
ninety (90) days from the date of any cause and
shall take effect at the beginning of the quarter
next following the reassessment. [Sec. 221, LGC]
Assessment of property subject to back taxes
Property declared for the first time: 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 [Sec. 222, LGC]
Notification of new or revised assessment
When real property is assessed for the first time or
when an existing assessment is increased or
decreased, the local assessor shall within thirty [30]
days give written notice of the new or revised
assessment to the person in whose name the
property is being declared.
Notice may be given personally or by registered mail
or through the assistance of the punong barangay to
the last known address of the person to be served.
[Sec. 223, LGC]
5.!Collection of Real Property
Tax
a.! Date of Accrual of Real
Property Tax and Special
Levies
Real property tax for any year shall accrue on the first
day of January. [Sec. 246, LGC]
b.! Collection of Tax
Collecting authority: The local treasurer
He may deputize the barangay treasurer to collect all
taxes upon filing of a bond. [Sec. 247, LGC]
Duty of assessor to furnish local treasurer with
assessment rolls
The provincial, city or municipal assessor shall
prepare and submit to the local treasurer, on or
before the 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. [Sec.
248, LGC]
Notice of time for collection of tax
On or before the 31st of January or on any date
prescribed, the local treasurer shall post the notice of
the dates when the tax may be paid without interest
U.P. LAW BOC TAXATION II
at a conspicuous and publicly accessible place at the
city or municipal hall.
The notice shall also be published in a newspaper of
general circulation in the locality once a week for two
consecutive weeks. [Sec. 249, LGC]
c.! Period Within Which to
Collect Real Property Tax
Within five years from the date they become due.
Within ten years from discovery of fraud, in case there
is fraud or intent to evade.
It shall be suspended when:
1.! The local treasurer is legally prevented to collect
tax.
2.! The owner or property requests for
reinvestigation and writes a waiver before
expiration of period to collect.
3.! The owner of property is out of the country or
cannot be located. [Sec. 270, LGC]
d.! Special Rules on Payment
Payment of real property tax in installments
Payment of real property tax and the additional tax
for the Special Education Fund, without interest, may
be made in four [4] equal instalments:
•! 1st : March 31
st
th
•! 2nd : June 30
th
•! 3rd : September 30
•! 4th : December 31st
This shall not apply to special levies which shall be
governed by ordinance of the sanggunian concerned.
Payments of real property taxes shall first be applied
to prior years delinquencies, interests and penalties,
if any, and only after the delinquencies are settled
may tax payments be credited for the current period.
[Sec. 250, LGC]
Interests on unpaid real property tax
In case of failure to pay the basic real property tax or
any other tax when due shall subject the taxpayer to
the payment of interest at the rate of two percent per
month on the unpaid amount or a fraction thereof
until the delinquent tax shall have been fully paid.
But the total interest on the unpaid tax shall not
exceed thirty-six months. [Sec. 255, LGC]
Condonation of real property tax
Page 215 of 270
TAXATION LAW
By SANGGUNIAN: in case of general failure of crops
or substantial decrease in the price of agricultural or
agri-based products or calamity in any LGU [Sec. 276,
LGC]
By the PRESIDENT of the Philippines: when public
interest so requires [Sec. 277, LGC]
e.! Remedies of LGUs for
Collection of Real Property
Tax
1.! Issuance of notice of delinquency for real
property tax payment
2.! Local Government’s Lien— The basic real
property tax shall constitute a lien on the
property subject to tax, superior to all liens,
charges or encumbrances in favor of any person,
irrespective of the owner or possessor thereof,
enforceable by administrative or judicial action
and may only be extinguished upon payment of
the tax and the related interests and expenses.
[Sec. 257, LGC]
3.! Levy
Upon the failure to pay the tax when due, the
local treasurer shall issue a warrant levying the
real property subject to tax. The warrant shall
include a duly authenticated certificate showing
the name of the owner or person having legal
interest therein, description of the property,
amount of the tax due and interest thereon.
Warrant must be mailed or served to owner or
person having legal interest in the propert
Written notice of levy must be mailed or served
to the assessor and the Register of Deeds where
the property is located
The Register of Deeds must annotate the levy on
the tax declaration and certificate of title [Sec.
258, LGC]
Failure to issue or execute the warrant of levy
within one year from the time the tax becomes
delinquent or within thirty days from the date of
the issuance thereof shall be dismissed from
service [Sec. 259, LGC]
4.! 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
U.P. LAW BOC
accrue to the general fund of the local
government unit concerned. [Sec. 264, LGC]
5.! Further levy until full payment of amount due
Levy may be repeated if necessary until the full
due, including all expenses, is collected. [Sec.
265, LGC]
6.!Refund or Credit of Real
Property Tax
PAYMENT UNDER PROTEST
This is resorted to when the taxpayer questions the
excessiveness of the amount of tax imposed on him.
Procedure
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."
b.! The protest in writing must be filed within thirty
(30) days from payment of the tax with the local
treasurer.
c.! The treasurer shall decide the protest within sixty
(60) days from receipt.
d.! In the event that the protest is denied or upon
the lapse of the 60-day period, the taxpayer may
avail of the procedure in questioning an
assessment:
1.! Appeal to the LBAA within 60 days;
2.! Then appeal to the CBAA within 30 days;
3.! Appeal to the CTA En Banc within 30 days.
[Sec. 252, LGC]
Repayment of excessive collections
When an assessment of real property tax 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 local treasurer shall decide the claim within sixty
(60) days from receipt thereof.
In case the claim for tax refund or credit is denied, the
taxpayer may follow the procedure in questioning an
assessment (Appeal to LBAA, and then CBAA, and
then CTA En Banc). [Sec. 253, LGC]
7.!Taxpayer’s Remedies
Page 216 of 270
TAXATION II TAXATION LAW
a.! Contesting an Assessment of
Value of Real Property
APPEAL TO THE LOCAL BOARD OF ASSESSMENT
APPEALS (LBAA)
1.! Appeal must be filed within 60 days from the
date of receipt of the written notice of
assessment
2.! By filing a petition under oath in the form
prescribed for the purpose
3.! Copies of tax declarations and other affidavits or
documents must be submitted [Sec. 226, LGC]
The LBAA shall decide the appeal within 120 days
from the date of receipt of such appeal.
The LBAA shall have the power to summon witnesses,
administer oaths, conduct ocular inspection, take
depositions, and issue subpoena duces tecum and/or
subpoena
The LBAA must furnish the appellant a copy of the
decision of the board. [Sec. 229, LGC]
Fels Energy v. Province of Batangas [G.R. No. 168557
(2007)]: Under Section 226 of R.A. No 7160, the last
action of the local assessor on a particular
assessment shall be the notice of assessment; it is
this last action which gives the owner of the property
the right to appeal to the LBAA. The procedure
likewise does not permit the property owner the
remedy of filing a motion for reconsideration before
the local assessor.
Victorias Milling v. CTA [G.R. No. L-24213 (1968)]: The
failure to appeal within the statutory period renders
the assessment final and unappealable.
A taxpayer who is not satisfied with the assessment
of his property should appeal to the Local Board of
Assessment Appeals within 60 days from receipt of
the written notice of assessment. The filing of a
petition for injunction in the Regional Trial Court
upon the issuance of a warrant of levy is not in
accordance with the remedies provided in the LGC.
[Republic vs. City of Kidapawan, G.R. No. 166651
(2005)]
APPEAL TO THE CENTRAL BOARD OF
ASSESSMENT APPEALS (CBAA)
Appeal must be filed within 30 days from the receipt
of the decision of LBAA [Sec. 229, LGC]
U.P. LAW BOC TAXATION II TAXATION LAW

EFFECT OF PAYMENT OF TAX
Appeal on assessments of real property shall not
suspend the collection of the corresponding realty
taxes on the property involved as assessed by the
provincial or city assessor without prejudice to the
subsequent readjustment depending upon the final
outcome of the appeal. [Sec. 231, LGC]
b.! Payment of Real Property
tax under protest
1.! File protest with local treasurer
Protest must be filed with the local treasurer. No
protest shall be entertained unless the tax is first
paid. The protest must be in writing and filed
within 30 days from payment of the tax to the
local treasurer.
Meralco v. Nelia Barlis [G.R. No. 114231 (2001)]:
The trial court has no jurisdiction to issue a writ
of prohibition which seeks to set aside the
warrant of garnishment over petitioner’s bank
deposit in satisfaction of real property taxes
without paying first under protest the tax
assessed and without exhausting available
administrative remedies.
The local treasurer shall decide the protest
within 60 days from receipt.
2.! Appeal to the Local Board of Assessment
Appeals
3.! Appeal to the Central Board of Assessment
Appeals
4.! Appeal to the CTA En Banc
Appeal must be filed through a petition for
review within 30 days from the receipt of the
decision of CBAA [Sec. 11, R.A. 1125 as amended]
5.! Appeal to the SC
Appeal must be filed within 15 days from receipt of
decision of the CTA [Rule 45, Rules of Court]
resort to judicial action without paying under protest
the assessed tax and filing an appeal with the Local
and Central Boards of Assessment Appeals. [City of
Lapu-Lapu v. PEZA, G.R. Nos. 184203 and 187583
(2014)]
c.! Judicial
Question on the legality of a tax ordinance
Any question on the constitutionality or legality of a
tax ordinance may be raised on appeal within 30 days
from effectivity to the Secretary of Justice who shall
render a decision within 60 days from the date of
receipt of the appeal.
The appeal shall not have the effect of suspending
the effectivity of the tax ordinance and the accrual
and payment of the tax.
Within 30 days after receipt of the decision or the
lapse of the sixty-day period without the Secretary of
Justice acting upon the appeal, the aggrieved party
may file appropriate proceedings with a court of
competent jurisdiction. [Sec. 187, LGC]
Assailing the validity of a tax sale
No court shall entertain any action assailing the
validity of any sale at public auction until the
taxpayer shall have deposited with the court the
amount for which the real property was sold,
together with interest of two percent per month from
the date of sale to the time of the institution of the
action. [Sec. 267, LGC]

Erroneous Assessment vs. Illegal Assessment

An erroneous assessment presupposes that the
taxpayer is subject to the tax but is disputing the
correctness of the amount assessed. With an
erroneous assessment, the taxpayer claims that the
local assessor erred in determining any of the items
for computing the real property tax, i.e., the value of
the real property or the portion thereof subject to the
tax and the proper assessment levels. In case of an
erroneous assessment, the taxpayer must exhaust
the administrative remedies provided under the LGC.

On the other hand, an assessment is illegal if it was

made without the authority under the law. In case of
an illegal assessment, the taxpayer may directly

Page 217 of 270

U.P. LAW BOC
Flowchart.V:..Procedure.for.Assessment.of.Land.Value.for.Real.Property.Tax.
Purposes=Local.Gov’t.Code
For.purposes.of.this.flowchart.owner.means.owner.or.administrator.of.real.property.or.any.person.having.legal.interest.thereto
Owner.declares.real.
property.once.every.3.
START
years.(sec..202).w/n.
Jan.1.to.June.30
Submit.documents.
supporting.exemption.w/
in.30.days.from.
Required.
declaration.(sec..206)
Documents.
submitted.w/in.
30.days?
Property.
Yes proven.as.tax.
No exempt?
Property.shall.be.
listed.as.taxable.in.
No
the.assessment.
roll.(sec..206)
Within.30.days.from.
assessment,.assessor.
sends.notice.to.owner.
(sec..223)
Owner.may.protest.
assessment.within.60.
days.from.receipt.of.notice.
to.the.Local.Board.of.
Assessment.Appeals.
(LBAA).(Sec..226)
Appeal.to.the.
END Supreme.Court.w/
in.15.days
Page 218 of 270
TAXATION II TAXATION LAW
Assessor.prepares.
Assessor.declares.
assessment.rolls.
real.property.if.owner/
wherein.real.property.
administrator.fails.to.
shall.be.listed,.valued.
do.so.(sec..204)
and.assessed.(sec..205)
Owner.may.claim.
Is.real.property.
for.tax.exemption. Yes
tax.exempt?
(sec..206)
Property.shall.be.
dropped.from.
Yes
assessment.roll.
(sec..206)
END
No
If.LBAA.rejects.protest,.owner.
LBAA.must.decide.
may.appeal.to.the.Central.
within.120.days.
Board.of.Assessment.Appeals.
from.receipt.of.
(CBAA).w/in.30.days.from.
appeal.(sec..229)
receipt.of.notice.(Sec..229)
If.CBAA.rejects.protest,.
owner.may.appeal.to.
the.CTA.en.banc.within.
30.days.from.receipt.of.
decision
U.P. LAW BOC TAXATION II TAXATION LAW

Flowchart.VI:..Taxpayer’s.Remedies.Involving.Collection.of.Real.Property.
TaxALoc.Gov’t.Code
For.purposes.of.this.flowchart.owner.means.owner.or.administrator.of.real.property.or.any.person.having.legal.interest.thereto

LTA.Local.Treasurer
LGU.A.Local.Government.Unit
LBAAA.Local.Board.of.Assessment.Appeals
CBAAA.Central.Board.of.Assessment.Appeals
START CTAA.Court.of.Tax.Appeals

LT. posts. notice. of. deadline. for.

Owner. pays. the. tax...
Assessor. submits. payment.at.a.conspicuous.place.at. LT.collects.the.tax.
Written. protest. must. be.
assessment. roll. to. the. LGU. hall. OR. publish. the. same. starting.Jan.1.of.
filed. with. the. local.
local. treasurer. in. a. newspaper. of. general. the.calendar.year..
treasurer. w/in. 30. days.
(sec..248) circulation.in.the.LGU.1x.a.week.for. (Sec..257)
from.payment...(sec..252)
2.consecutive.weeks.(sec..249)

Amount.of.tax.
LT.must.decide.w/
protested.shall.be.
LT.grants. LT.decides.w/in. in.60.days.from.
refunded.or. Yes Yes
protest? 60.days? receipt.of.protest.
applied.as.tax.
(sec..252)
credit.(Sec..252)

No

Refund. or. tax. credit. must. Taxpayer.may.appeal.within.within.60.

No days.from.receipt.of.notice.(or.expiration.
be. claimed. with. the. local.
treasurer. w/in. 2. years. from. of.60.days).to.the..LBAA.(Sec..226)
the.date.taxpayer.is.entitled.
to.such.(sec..253) LBAA.must.decide.
within.120.days.
from.receipt.of.
appeal.(sec..229)
LT.acts.on.claim.
LT.grants.
for.refund/tax. Taxpayer.happy..
Yes refund/tax. Yes END
credit.w/in.60.
credit?
days?

No
Taxpayer.may.appeal.
w/in.60.days.from.
No receipt.of.notice.(or.
expiration.of.60.days).
to.LBAA.(Sec..226)
END
If.LBAA.rejects.protest/
refund,.owner.may.
appeal.to.the.CBAA.w/
in.30.days.from.receipt.
of.notice.(Sec..229)
If. CBAA. rejects. protest/
Appeal.to.the. refund,.owner.may.appeal.to.
Supreme.Court.w/ the. CTA. en. banc. within. 30.
in.15.days days.from.receipt.of.decision.
(Rule.43,.ROC)

Page 219 of 270

U.P. LAW BOC
Flowchart'VII:''Procedure'for'Levy'for'Purposes'of'Satisfying'Real'
Property'TaxesILocal'Gov’t'Code
START
Tax' constitutes' a' lien' on' the'
property' ' superior' to' all' liens'
&' may' only' be' extinguished'
upon' payment' of' the' tax' and'
charges.'(sec.'257)
Before'the'date'of''sale,'
the'owner'may'stay'the'
proceedings'by'paying'the'
delinquent'tax,'interest'&'
the'expenses'of'sale.
Sale'is'held:'
1.''at'the'main'entrance'
of'the'LGU'building,'OR'
2.''on'the'property'to'be'
sold,'OR'at
3.''any'other'place'
specified'in'the'notice
Is'there'a'
bidder?
Yes
Bidder' pays' &' 30' days'
after' the' sale,' the' LT''
shall' report' the' sale' to'
the'sanggunian
LT' shall' deliver' to'
purchaser' certificate'
of'sale
Proceeds' of' sale' in'
excess' of' delinquent'
tax,' interest' &'
expenses' of' sale'
remitted'to'the'owner'
(sec.'260)
TAXATION II TAXATION LAW
For'purposes'of'this'flowchart'owner'means'owner'or'administrator'of'real'property'or'any'
person'having'legal'interest'thereto
Warrant'of'Levy'issued'
by'the'Local'Treasurer' Warrant'is'mailed'
Time'for'payment'
(LT),'which'has'the'force' to'or'served'upon'
of'real'property'
of'legal'execution'in'the' the'delinquent'
taxes'expires
LGU'concerned.'(sec.' owner'(sec.'258)
258)
30'days'from'service'of'warrant,'local'
treasurer' shall' advertise' sale' of' the'
property'by:'
1.''posting'notice'at'main'entrance'of' written'notice'of'the'levy'&'
LGU' hall/bldg' and' in' a' conspicuous' the'warrant'is'mailed/served'
place'in'the'barangay'where'prope'is' upon'the'assessor'and'the'
located'AND' Registrar'of'Deeds'of'the'
2.' by' publication' once' a' week' for' 2' LGU'(sec.'258)
weeks' (sec.' 260)' (Note:' In' cases' of'
levy'for'unpaid'local'taxes'publication'
is'once'a'week'for'3'weeks)
LT'shall'purchase'the'property'in'behalf'of'
the'LGU'(sec.'263)'(Note:'in'cases'of'levy'
No for'unpaid'local'taxes,''LT'may'purchase'if'
there' is' no' bidder' or' if' the' highest' bid' is'
insufficientIsec.'181)'
w/in' 1' year' from' sale,' owner' may'
Registrar' of' Deeds' shall' transfer' the'
redeem'upon'payment'of'the'
title'of'the'forfeited'property'to'the'LGU'
1.'delinquent'tax,'
w/o'need'of'a'court'order'(sec.'263)
2.'interest'due,'
3.' ' expenses' of' sale' (from' date' of'
delinquency'to'date'of'sale)'and'
4.''add’l'interest'of'2%'per'month'on' W/n' 1' year' from' forfeiture,' the'
the'purchase'price'from'date'of'sale' owner,'may'redeem'the'property'by'
to'date'of'redemption.'(sec.'261) paying'to'the'local'treasurer'the'full'
Delinquent' owner' retains' amount' of' the' tax' and' the' related'
possession' and' right' to' the' fruits' interest' and' the' costs' of' sale'
(sec.'261) otherwise' the' ownership' shall' be'
vested'on'the'local'government'unit'
concerned.'(sec.'263)
LT' returns' to' the'
Sanggunian' concerned'
purchaser/bidder' the'
may,' by' ordinance' sell'
price' paid' +' interest'
and' dispose' of' the' real'
of' 2%' per' month'
property' acquired' under'
(sec.'261)
the' preceding' section' at'
public'auction.'(sec.'264)
If' property' is' not'
redeemed,' the' local' Levy'may'be'repeated'
treasurer' shall' until'the'full'amount'due,'
execute' a' deed' of' including'all'expenses,'is'
conveyance' to' the' collected.'(sec.'265)
purchaser'(sec.'262)
END
Page 220 of 270
U.P. LAW BOC
IX.! TARIFF AND
CUSTOMS CODE OF
THE PHILIPPINES
[as amended by R.A. No. 10863 or the Customs
Modernization and Tariff Act (CMTA) which took
effect on June 16, 2016]
Note: The CMTA has both saving and repealing
clauses. Laws, rules and regulations previously issued
pertaining to the importation of goods that are
consistent with the CMTA will remain valid unless the
same be repealed or amended. While those which are
inconsistent are expressly repealed, amended or
modified accordingly. [Sec. 1802 and 1803, CMTA]
! Tariff! and! Duties
1.! Definition
Tariff can mean:
a.! The list or schedule of articles with their
corresponding duties imposed on the same; or
b.! The duties imposed on the articles which are
payable to the government.
Taxes or list of articles liable to duties – a list or
schedule of articles on which a duty is imposed upon
the importation into the country, with the rates at
which they are severally taxed. And derivatively, the
system of imposing duties or taxes on the
importation of foreign merchandise.
Customs duties – taxes on the importation or
exportation of commodities, the tariff or tax assessed
upon the merchandise imported from or exported to
a foreign country. [Garcia v. Exec. Sec., G.R. No.
101273 (1992)]
Note: Customs and tariffs are used interchangeably.
They both refer to the taxes imposed on imported or
exported wares, articles, or merchandise.
Export tariff – duty levied, assessed and collected on
the gross FOB value at the time of shipment based on
the prevailing exchange rate on traditional export
products, such as certain wood products, mineral
products, plant and vegetable products [Sec. 514,
TCC]
Note: Export duties imposed upon all export products
under Sec. 514, TCCP had been abolished, except the
Page 221 of 270
TAXATION II TAXATION LAW
export duty upon logs [Sec. 1, EO 26 issued on 1 July
1986].
Import tariff – Except as otherwise provided for in
this Act or in other laws, all goods, when imported
into the Philippines, shall be subject to duty upon
importation, including goods previously exported
from the Philippines. [Sec. 104, CMTA]
2.!Purpose for Imposition
a.! Generation of governmental revenues
b.! Regulation of economic activity such as
protecting local industries -- where such local
industries actually exist and are producing
comparable goods
3.!Kinds or Classification of
Duties
a.! Ordinary/Regular Duties
Ordinary or regular duties refer to those that, as a
matter of course, are imposed on dutiable articles as
a revenue-generating measure
AD VALOREM; METHODS OF VALUATION
The tax rates are based on the value of the imported
article.
Methods for determining dutiable value
1.! Transaction value – an ad valorem rate of duty
equivalent to the price actually paid or payable
for the goods when sold for export to the
Philippines, as adjusted; [Sec. 701, CMTA]
2.! Transaction value of identical goods – the
transaction value of identical goods sold for
export to the Philippines and exported at or
about the same time as the goods being valued;
“identical goods” refer to goods which are the
same in all respects, including physical
characteristics, quality and reputation,
discounting minor differences in appearances;
[Sec. 702, CMTA]
3.! Transaction value of similar goods – the
transaction value of similar goods sold for export
to the Philippines and exported at or about the
same time as the goods being valued; “similar
goods” refer to goods which, although not alike
in all respects, have like characteristics and
similar component materials which enable them
to perform the same functions and to be
commercially interchangeable; factors to be
considered in determining whether goods are
similar may include quality of the goods, its
U.P. LAW BOC TAXATION II
reputation and the existence of a trademark [Sec.
703, CMTA]
4.! Deductive value – an amount based on the unit
price at which the imported goods or identical or
similar imported goods are sold in the
Philippines, in the same condition as when
imported, in the greatest aggregate quantity, at
or about the time of importation of the goods
being valued, to persons not related to the
persons from whom they buy such goods, subject
to certain deductions [Sec. 704, CMTA]
5.! Computed value – the aggregate value of the
cost or value of materials and fabrication or other
processing employed in producing the imported
goods; amount for profit and general expenses;
freight, insurance fees and other transportation
expenses for the importation of the goods,
among others; and [Sec. 705, CMTA]
6.! Fallback value – an amount determined by
using other reasonable means and on the basis
of data available in the Philippines. [Sec. 706,
CMTA]
Note:
General rule: Imported goods shall be valued using
the transaction value. [Sec. 700, CMTA]
Exception: Where the dutiable value cannot be
determined under the transaction value system, the
succeeding methods are sequentially applied.
However, the order of methods 4 and 5 may be
reversed at the request of the importer, subject to the
approval of the Commissioner. [Sec. 700, CMTA; CAO
4-2004]
Ground to refuse the request: if the
Commissioner deems that the BOC will
experience real difficulties in determining the
dutiable value using Method 5
Dutiable Value (DV) must not include:
1.! Charges for construction, erection, assembly
maintenance or technical assistance undertaken
after importation;
2.! Cost of transport after importation;
3.! Duties and taxes of the Philippines; and
4.! Other permissible deduction under the WTO
Valuation Agreement [CAO 4-2004]
ALL of the following conditions must be satisfied so
that the dutiable value shall be the Transaction
Value (TV):
1.! No restrictions as to the disposition or use of
goods by the buyer except restrictions which:
a.! are imposed by law or by Philippine
authorities
b.! limit the geographical area where goods
may be resold
Page 222 of 270
TAXATION LAW
c.! do not substantially affect the value of the
goods
2.! The sale or price is not subject to some condition
or consideration for which value cannot be
determined
3.! Buyer and seller are not related or if they are,
that the transaction value is acceptable for
customs purposes [Sec. 701, CMTA]
Persons are deemed related if:
1.! They are officers or directors of one another’s
business;
2.! They are legally recognized partners in business;
3.! There exists an employer-employee relationship
between them;
4.! Any person directly or indirectly owns, controls or
holds 5% or more of the outstanding voting stock
or shares of both seller and buyer;
5.! One of them directly or indirectly controls the
other;
6.! Both of them are directly or indirectly controlled
by a 3rd person;
7.! Together they directly or indirectly control a 3rd
person; or
8.! They are members of the same family, including
those related by affinity or consanguinity up to
the 4th civil degree. [Sec. 701, CMTA]
If related, use of TV is acceptable if the importer
demonstrates that such value closely approximates
one of the following:
1.! TV in sales to unrelated buyers of identical or
similar goods
2.! Deductive value of identical or similar goods
determined according to method #4
3.! Computed value of identical or similar goods
determined according to method #5 [Sec. 701,
CMTA]
Transaction value of identical goods
The DV shall be the transaction value of identical
goods sold for export to the Phil and exported at or
about the same time as the goods being valued.
Identical goods must be same commercial level and
substantially same quantity as the goods being
valued.
Identical goods
1.! Same in all respects (physical characteristics,
quality and reputation)
2.! Produced in the same country as the goods being
valued
3.! Produced by producer of the goods being valued
Excludes: imported goods for which engineering,
development, artwork, design work, plans and
sketches are undertaken in the country of
U.P. LAW BOC TAXATION II
importation and provided by the buyer to the
producer free of charge or at a reduced rate [CAO
4-2004]
When no identical goods produced by the same
person: Identical goods produced by different
producer in the same country
If NO identical goods at same commercial level and
same quantity,
1.! TV of identical goods at a different commercial
level and different quantity may be utilized
2.! TV shall be adjusted upward or downward to
account for the difference [CAO 4-2004]
Similar Goods
1.! like characteristics and like component materials
2.! capable of performing same functions
3.! commercially interchangeable
4.! produced in same country
5.! produced by same producer
Excludes: imported goods for which engineering,
development, artwork, design work, plans and
sketches is undertaken in the Phil and provided
by the buyer to the producer free of charge or at
a reduced rate
When no similar goods produced by the same
person: similar goods produced by different producer
in the same country
If NO similar goods at same commercial level and
same quantity,
1.! TV of similar goods at a different commercial
level and different quantity may be utilized
2.! TV shall be adjusted upward or downward to
account for the difference [CAO 4-2004]
Deductive value
DV is determined on the basis of sales in the Phil of
goods being valued of identical or similar imported
goods less certain expenses resulting from
importation and sale of goods.
Deductive Value is determined by making a
deduction from the established price per unit for the
aggregate of the ff. elements:
1.! Commissions or
2.! additions made in connection with profit and
general expenses and
3.! transport, insurance and associated costs
4.! customs duties and other national taxes
PRICE
Less: COMMISSIONS/ADDITIONS
Less: COSTS
Less: DUTIES and TAXES
DEDUCTIVE VALUE
Page 223 of 270
TAXATION LAW
The sales must meet the following conditions:
1.! sold in the Philippines in the same condition as
imported
2.! sale has taken place at or about the same time of
importation of goods being valued
If no sale took place at or about the time of
importation, use sales at the earliest date after
importation (of the imported goods or similar or
identical goods) but before expiration of 90 days
If no sale meets the above conditions, dutiable value
shall be based on the unit price at which the
imported goods, after further processing, are sold in
the greatest aggregate quantity to unrelated persons
in the Philippines [Sec. 704, CMTA]
“At or about the same time”
45 days prior to and 45 days following the
importation [CAO 4-2004]
DV is calculated by:
Determining aggregate of relevant costs, charges
and expenses or value of
1.! materials and
2.! production or processing costs
Additional Costs*
Cost of containers, packing, assists, engineering,
artwork, plans and sketches undertaken in the
Philippines and charged to producer profits and
general expenses cost of transport, insurance and
charges to the port or place of importation
*Note: these additional costs are added only if not
included in the determination of the aggregate of
relevant costs, charges and expenses or value of
materials and production.
Fallback value
If DV cannot be determined using any of the above
methods, use other reasonable means consistent
with principles and general provisions of the General
Agreements on Tariffs and Trade [GATT]
SPECIFIC
Rates are based on units of weight number or
measurement [Sec. 202, TCC]
Kinds of weight:
1.! Gross Weight – weight of same, together with
the weight of all containers, packages, holders
and packings, of any kind, in which said articles
are contained, held or packed at the time of
importation
U.P. LAW BOC
2.! Legal Weight – weight at the time of their sale to
the public in usual retail quantities
3.! Net Weight – only the actual weight at the time
of importation excluding the weight of the
immediate and all other containers
b.! Special Duties
These are additional import duties imposed on
specific kinds of imported articles. [See Table of
Special Duties below]
Dumping duties
CMTA, Sec. 711. Dumping Duty. – The
provisions of Republic Act No. 8752, otherwise
known as the "Anti-Dumping Act of 1999", are
hereby adopted.
Countervailing duties
CMTA, Sec. 713. Countervailing Duty. – The
provisions of Republic Act No. 8751, otherwise
known as "An Act Strengthening the
Mechanisms for the Imposition of
Countervailing Duties on Imported Subsidized
Products, Commodities or Articles of
Commerce in Order to Protect Domestic
Industries from Unfair Trade Competition,
Amending for the Purpose Section 302, Part 2,
Title II, Book I of Presidential Decree No. 1464",
otherwise known as the "Tariff and Customs
Code of the Philippines, as Amended", are
hereby adopted.
Marking duties
CMTA, Sec. 710. Marking of Imported Goods
and Containers. –
(A) Marking of Goods, – Except as hereinafter
provided, all goods of foreign origin imported
into the Philippines or their containers, as
provided in subsection (B) hereof shall be
conspicuously marked in any official language
of the Philippines as legibly, indelibly and
permanently as the nature of the goods or
container will permit and in such manner as to
indicate to an ultimate purchaser in the
Philippines the name of the country of origin of
the goods. Pursuant thereto, the Commissioner
shall, with the approval of the Secretary of
Finance:
(1) Determine the character of words and
phrases or abbreviation thereof which shall be
acceptable as indicating the country of origin
and prescribe any reasonable method of
marking, whether by printing, stenciling,
stamping, branding, labeling or by any other
Page 224 of 270
TAXATION II TAXATION LAW
reasonable method, and in a conspicuous place
on the goods or container where the marking'
shall appear;
(2) Require the addition of other words or
symbols which may be appropriate to prevent
deception or mistake as to the origin of the
goods or as to the origin of any other goods
with which such imported goods is usually
combined subsequent to importation but
before delivery to an ultimate purchaser; and
(3) Authorize the exception of any goods from
the requirements of marking if:
(i) Such goods are incapable of being marked;
(ii) Such goods cannot be marked prior to
shipment to the Philippines without injury;
(iii) Such goods cannot be marked prior to
shipment to the Philippines, except at an
expense economically prohibitive of their
importation;
(iv) The marking of a container of such goods
will reasonably indicate the origin of such
goods;
(v) Such goods are crude substances;
(vi) Such goods are imported for use by the
importer and not intended for sale in their
imported or any other form;
(vii) Such goods are to be processed in the
Philippines by the importer or for the importer's
account other than for the purpose of
concealing the origin of such goods and in such
manner that any mark contemplated by this
section would necessarily be obliterated,
destroyed, or permanently concealed;
(viii) An ultimate purchaser, by reason of the
character of such goods or by reason of the
circumstances of their importation, must
necessarily know the country of origin of such
goods even though they are not marked to
indicate their origin;
(ix) Such goods were produced more than
twenty (20) years prior to their importation into
the Philippines; or
(x) Such goods cannot be marked after
importation except at an expense which is
economically prohibitive, and the failure to
mark the goods before importation was not due
to any purpose of the importer, producer, seller
or shipper to avoid compliance with this
section.
(B) Marking of Containers. – Whenever goods
are exempt under paragraph (3) of subsection
(A) of this section from the requirements of
marking, the immediate container, if any, of
such goods, or such other container or
containers of such goods, shall be marked in
U.P. LAW BOC
such manner as to indicate to an ultimate
purchaser in the Philippines the name of the
country of origin of such goods in any official
language of the Philippines, subject to all
provisions of this section, including the same
exceptions as are applicable to goods under
paragraph (3) of subsection (A).
(C) Fine for Failure to Mark. – If, at the time of
importation any good or its container, as
provided in subsection (B) hereof, is not marked
in accordance with the requirements of this
section, there shall be levied, collected, and
paid upon such good a marking duty of five
percent (5%) of dutiable value, which shall be
deemed to have accrued at the time of
importation,
(D) Release Withheld Until Marked. – No
imported goods held in customs custody for
inspection, examination, or assessment shall
be released until such goods or their containers
shall have been marked in accordance with the
requirements of this section and until the
amount of duty estimated to be payable under
subsection (C) of this section shall have been
deposited.
(E) The failure or refusal of the owner or
importer to mark the goods as herein required
within a period of thirty (30) days after due
notice shall constitute as an act of
abandonment of said goods and their
disposition shall be governed by the provisions
of this Act relative to abandonment of imported
goods.
Retaliatory/discriminatory duties
CMTA, Sec. 714. Discrimination by Foreign
Countries. – Without prejudice to the Philippine
commitment in any ratified international
agreements or treaty, the following recourse
shall be applicable in case of discrimination by
foreign countries:
(a) When the President finds that the public
interest will be served thereby, the President
shall, by proclamation, specify and declare new
or additional duties in an amount not
exceeding one hundred percent (100%) ad
valorem upon goods wholly or in part the
growth or product of, or imported in a vessel of
any foreign country whenever the President
shall find as a fact that such country:
(1) Imposes, directly or indirectly, upon the
Page 225 of 270
TAXATION II TAXATION LAW
disposition or transportation in transit or
through reexportation from such country of any
goods wholly or in part the growth or product
of the Philippines, any unreasonable charge,
exaction, regulation or limitation which is not
equally enforced upon the like goods of every
foreign country; or
(2) Discriminates in fact against the commerce
of the Philippines, directly or indirectly, by law
or administrative regulation or practice, by or in
respect to any customs, tonnage, or port duty,
fee, charge, exaction, classification, regulation,
condition, restriction or prohibition, in such
manner as to place the commerce of the
Philippines at a disadvantage compared with
the commerce of any foreign country.
(b) If at any time the President shall find it to be
a fact that any foreign country has not only
discriminated against the commerce of the
Philippines, as aforesaid, but has, after the
issuance of a proclamation as authorized in
subsection (a) of this section, maintained or
increased its said discrimination against the
commerce of the Philippines, the President is
hereby authorized, if deemed consistent with
the interests of the Philippines and of public
interest, to issue a further proclamation
directing that such product of said country or
such goods imported in their vessels be
excluded from importation into the Philippines.
(c) Any proclamation issued by the President
under this section shall, if the President deems
it consistent with the interest of the Philippines,
extend to the whole of any foreign country or
may be confined to any subdivision or
subdivisions thereof: Provided, That the
President may, whenever the public interest
requires, suspend, revoke, supplement or
amend any such proclamation.
(d) All goods imported contrary to the
provisions of this section shall be forfeited to
the government of the Philippines and shall be
liable to be seized, prosecuted and condemned
in like manner and under the same regulations,
restrictions, and provisions as may from time to
time be established for the recovery, collection,
distribution, and remission or forfeiture to the
government by the tariff and customs laws.
Whenever the provision of this section shall be
applicable to importations into the Philippines
of goods wholly or in part the growth or
product of any foreign country, it shall be
applicable thereto, whether such goods are
imported directly or indirectly.
U.P. LAW BOC
(e) It shall be the duty of the Commission to
ascertain and at all times be informed whether
any of the discriminations against the
commerce of the Philippines enumerated in
subsections (a) and (b) of this section are
practiced by any country; and if and when such
discriminatory acts are disclosed, it shall be the
duty of the Commission to bring the matter to
the attention of the President, and to
recommend measures to address such
discriminatory acts.
(f) The Secretary of Finance shall make such
rules and regulations as are necessary for the
execution of a proclamation that the President
may issue in accordance with the provisions of
this section.
Safeguard measure
CMTA, Sec. 712. Safeguard Duty. – The
provisions of Republic Act No. 8800, otherwise
known as the "Safeguard Measures Act", are
hereby adopted.
4.!Flexible Tariff Clause
Constitutional Basis
Sec. 28[2], Art. VI, 1987 Constitution. The Congress
may, by law, authorize the President to fix with
specified limits, and subject to such limitations and
restrictions, as it may impose, tariff rates, import
and export quotas, tonnage and wharfage duties,
and other duties or imposts within the framework of
the national development program of the
Government.
Definition
The Flexible Clause refers to the power of the
President upon recommendation of the National
Economic and Development Authority (NEDA) to:
a.! Increase, reduce or remove existing protective
tariff rates of import duty, but in no case shall be
higher than 100% ad valorem;
b.! Establish import quota or to ban importation of
any commodity as may be necessary; and
c.! Impose additional duty on all imports not
exceeding 10% ad valorem, whenever necessary.
[Sec. 102(u), CMTA]
Specific Rule
CMTA, Sec. 1608. Flexible Clause. – (a) In the
interest of the general welfare and national
security, and, subject to the limitations
prescribed under this Act, the President, upon
Page 226 of 270
TAXATION II TAXATION LAW
the recommendation of the NEDA, is hereby
empowered to:
(1) Increase, reduce, or remove existing rates of
import duty including any necessary change in
classification. The existing rates may be
increased or decreased to any level, in one or
several stages, but in no case shall the
increased rate of import duty be higher than a
maximum of one hundred percent (100%) ad
valorem; (2) Establish import quotas or ban
imports of any commodity, as may be
necessary; and
(3) Impose an additional duty on all imports not
exceeding ten percent (10%) ad valorem
whenever necessary: Provided, That upon
periodic investigations by the Commission and
recommendation of the NEDA, the President
may cause a gradual reduction of rates of
import duty granted in Section 1611 of this Act,
including those subsequently granted pursuant
to this section.
(b) Before any recommendation is submitted to
the President by the NEDA pursuant to the
provisions of this section, except in the
imposition of an additional duty not exceeding
ten percent (10%) ad valorem, the Commission
shall conduct an investigation and shall hold
public hearings wherein interested parties shall
be afforded reasonable opportunity to be
present, to produce evidence and to be heard.
The Commission shall also hear the views and
recommendations of any government office,
agency, or instrumentality. The Commission
shall submit its findings and recommendations
to the NEDA within thirty (30) days after the
termination of the public hearings.
(c) The power of the President to increase or
decrease rates of import duty within the limits
fixed in subsection (a) hereof shall include the
authority to modify the form of duty. In
modifying the form of duty, the corresponding
ad valorem or specific equivalents of the duly
with respect to imports from the principal
competing foreign country for the most recent
representative period shall be used as basis.
(d) Any order issued by the President pursuant
to the provisions of this section shall take effect
thirty (30) days after promulgation, except in
the imposition of additional duty not exceeding
ten percent (10%) ad valorem which shall take
effect at the discretion of the President.
U.P. LAW BOC TAXATION II TAXATION LAW

(e) The power delegated to the President as

provided for in this section shall be exercised
! Requirements! of!
only when Congress is not in session. Importation
(f) The power herein delegated may be
withdrawn or terminated by Congress through 1.! Beginning and Ending of
a joint resolution.
Importation
The NEDA shall promulgate rules and
regulations necessary to carry out the Importation begins when the carrying vessel or
provisions of this section. aircraft enters the Philippine territory with the
intention to unload therein. [Sec. 1202, TCC; Sec. 103,
CMTA]

Importation is deemed terminated

a.! The duties, taxes and other charges due upon the
goods have been paid or secured to be paid at
the port of entry unless the goods are free from
duties, taxes and other charges and legal permit
for withdrawal has been granted; or
b.! In case the goods are deemed free of duties,
taxes and other charges, the goods have legally
left the jurisdiction of the Bureau. [Sec. 1202,
TCC; Sec. 103, CMTA]

Note: The payment of the duties, taxes, fees and

other charges must be in full. [Papa v. Mago (1968)]

Deemed “entered”
Imported goods shall be deemed “entered” in the
Philippines for consumption when the goods
declaration is electronically lodged, together with
any required supporting documents, with the
pertinent customs office. [Sec. 115, CMTA]

Under Sec. 206, TCC, imported articles shall be

deemed "entered" in the Philippines for consumption
when the specified entry form is properly filed and
accepted, together with any related documents
required by the TCC and/or regulations to be filed
with such form at the time of entry, at the port or
station by the customs official designated to receive
such entry papers and any duties, taxes, fees and/or
other lawful charges required to be paid at the time
of making such entry have been paid or secured to be
paid with the customs official designated to receive
such monies, provided that the article has previously
arrived within the limits of the port of entry.

2.!Obligations of Importer
a.! Cargo Manifest
[Sec. 1005, TCC; the same under CMTA, Sec. 1204]

Page 227 of 270

U.P. LAW BOC TAXATION II
Every vessel from a foreign port must have on board
a complete manifest of all her cargo.
All cargoes intended to be landed at a port in the
Philippines must be described in separate manifests
for each port of call.
The manifest shall include:
1.! Port of departure
2.! Port of delivery
3.! Marks, numbers, quantity and description of the
packages
4.! Names of the consignees
Requirement to provide advance copy
A true and complete copy of the cargo manifest shall
be electronically sent in advance by the shipping
company, NVOCC (Non-Vessel Operating Common
Carrier), freight forwarder, cargo consolidator, or
their agents within the cut-off period as may be
determined by the Bureau before the arrival of the
carrying vessel at the port of entry. [Sec. 1204, CMTA]
General rule: It cannot be changed or altered after
entry of vessel.
Exception:
Amendment, under oath, by the master, consignee or
agent, which shall be attached to the original
manifest
CANNOT amend the manifest after the invoice
and/or entry covering the importation have been
received and recorded in the office of the appraiser
EXCEPT: (a) Obvious clerical error or any other
discrepancy is committed in the preparation; (b)
Without fraudulent intent; (c) Discovery would not
have been made until after examination of the
importation is completed.
The cargo manifest and each copy thereof shall be
accompanied by a translation in English if originally
written in another language. [Sec. 1205, CMTA; Sec.
1006, TCC previously states “into the official language
of the Philippines”]
Manifests for the Commission on Audit and District
Collector
1.! the Bureau of Customs shall provide electronic
copies to the COA Chairperson;
2.! the master shall present to the District Collector
the original properly endorsed by the boarding
officer [Sec. 1206, CMTA]
Page 228 of 270
TAXATION LAW
[Under Sec. 1007, TCC, it is the master who delivers
and mails the cargo manifest to the Auditor General
and Collector]
b.! Import Entry
Now called “Goods Declaration” under the CMTA
Goods Declaration
a statement made in the manner prescribed by the
Bureau and other appropriate agencies, by which the
persons concerned indicate the procedure to be
observed in the application for the entry or admission
of imported goods and the particulars of which the
customs administration shall require [Sec. 102(y)]
Declarant
may be a consignee or a person who has the right
to dispose of the goods.
The declarant shall lodge a goods declaration with
the Bureau and may be:
1.! The importer, being the holder of the bill of
lading; or
2.! The exporter, being the owner of the goods to
be shipped out; or
3.! A customs broker acting under the authority of
the importer or from a holder of the bill; or
4.! A person duly empowered to act as agent or
attorney-in-fact for each holder.
In case the consignee or the person who has the right
to dispose of the goods is a juridical person, it may
authorize a responsible officer of the company to sign
the goods declaration as declarant on its behalf. [Sec.
106 and 407, CMTA] [Sec. 1301, TCC – #2 pertains to
“any other holder of the bill of lading in due course”]
Importations Subject to Goods Declaration
Unless otherwise provided for in this Act, all imported
goods shall be subject to the lodgement of a goods
declaration. A goods declaration may be for
consumption, for customs bonded warehousing, for
admission, for conditional importation, or for
customs transit. [Sec. 401, CMTA]
Kinds of Goods Declaration
1.! For Consumption
2.! For Customs Bonded Warehousing
3.! For admission
4.! For conditional importation
5.! For customs transit
Sec. 1302, TCC – All imported articles, except
importation admitted free of duty, shall be subject to
a formal or informal entry.
U.P. LAW BOC
Kinds of Import Entry [Sec. 1302, TCC]
1.! Formal Entry – A formal entry may be:
a.! For immediate consumption, or
b.! Under irrevocable domestic letter of credit,
bank guarantee or bond for:
i.! Placing the article in customs
bonded warehouse;
ii.! constructive warehousing and
immediate transportation to other
ports of the Philippines upon proper
examination and appraisal; or
iii.! Constructive warehousing and
immediate exportation.
2.! Informal Entry
Statements in Goods Declaration
1.! The invoice and goods declaration contain an
accurate and faithful account of the prices paid
or payable for the goods, and other adjustments
to the price actually paid or payable, and that
nothing has been omitted therefrom or
concealed whereby the government of the
Republic of the Philippines might be defrauded
of any part of the duties and taxes lawfully due
on the goods;
2.! To the best of the declarant's information and
belief, all the invoices and bills of lading or
airway bills relating to the goods are the only
ones in existence relating to the importation in
question, and that these documents are in the
same state as when they were received by the
declarant, and the declaration thereon are in all
respects genuine and true. [Sec. 412, CMTA]
[Under Sec. 1304, TCC, the following is included: “That
the entry delivered to the Collector contains a full
account of the value or price articles, including subject
of the entry.”]
Content of Goods Declaration
1.! shall contain the names of the consignee,
importing vessel or aircraft, port of departure,
port of destination and date of arrival, the
number and marks of packages, or the quantity,
if in bulk, the nature and correct commodity
description of the goods contained therein, its
value as set forth in a proper invoice, and such
other information as may be required by rules
and regulations. [Sec. 411, CMTA]
2.! signed by the declarant [Sec. 107, CMTA]
Form
As far as practicable, the format of the goods
declaration shall conform with international
standards. The Bureau shall require the electronic
lodgement of the goods declaration. [Sec. 407,
CMTA]
Page 229 of 270
TAXATION II TAXATION LAW
[Sec. 1306, TCC requires a number of copies in such
form as prescribed by regulations and excludes
consignee and port of destination from the content of
the import entry]
Articles to be cleared on informal entry
1.! Goods of a commercial nature with Free on
Board (FOB) or Free Carrier At (FCA) value of
less than P50,000.00, subject to adjustment
every three years; and
2.! Personal and household effects or goods, not
in commercial quantity, imported in a
passenger's baggage or mail.
The Commissioner may adjust the value of goods of
commercial nature that shall be cleared through an
informal entry process. [Sec. 402, CMTA; Sec. 1302,
TCC – value of #1 is P2,000 or less]
Articles to be cleared on formal entry
All goods declaration for consumption shall be
cleared through a formal entry process. [Sec. 402,
CMTA]
Note: All importations entered through a formal entry
process shall be covered by a letter of credit or any
verifiable commercial document evidencing payment
or in cases where there is no sale for export, by any
commercial document indicating the commercial
value of the goods. [Sec. 402, CMTA; RA 9135 (2001)]
c.! Declaration of Correct
Weight or Value
Unless otherwise provided for in this Act, all imported
goods shall be subject to the lodgement of a goods
declaration.
PROVISIONAL GOODS DECLARATION (PGD)
UNDER CMTA, SEC. 403: Where the declarant does
not have all the information or supporting documents
required to complete the goods declaration, the
lodging of a provisional goods declaration may be
allowed: Provided, That it substantially contains the
necessary information required by the Bureau and the
declarant undertakes to complete the information or
submit the supporting documents within 45 days
from the filing of the PGD, extendible for another 45
days for valid reasons.
If the Bureau accepts a PGD, the duty treatment of
the goods shall not be different from that of goods
with complete declaration.
U.P. LAW BOC TAXATION II
Goods under a PGD may be released upon posting of
any required security equivalent to the amount
ascertained to be the applicable duties and taxes.
[See also Sec. 1400, CMTA on misdeclaration]
Information to be furnished [Sec. 1313, TCC]
Classification
When article is not specifically classified in the Code,
the interested party, importer or foreign exporter may
submit a sample with full description of component
materials in a written request.
Value
Upon written application, Collector shall furnish
importer within 30 days the latest information as to
the value of the articles to be imported.
Importer must present all pertinent papers and
documents, act in good faith and unable to obtain
information due to unusual conditions
Information given is not an appraisal nor is it binding
upon the Collector’s right of appraisal.
The declaration, ascertainment or verification of the
correct weight of the cargo at the port of loading is
the duty or obligation of the master, pilot, owner,
officer or employee of the vessel. If he omits or
disregards this duty and a punishable discrepancy
between the declared weight and actual weight of
the cargo exists, the inevitable conclusion is that he is
negligent or careless. Similarly, if in the exercise or
performance of this duty, he is negligent or careless
resulting in the commission of excessive discrepancy
in the weight of the ship's cargo penalized under the
law, carelessness or incompetency is, nonetheless,
imputable to him.
d.! Liability for Payment of
Duties
General rule: the liability for duties, taxes, fees and
other charges attached to importation constitutes a
personal debt due from the importer in favor of the
government; it constitutes a lien upon the imported
goods which may be enforced while such goods are
under customs’ custody. [CMTA, Sec. 405; same under
Sec. 1204, TCC]
How to discharge: Discharged only by payment in
full of all duties, taxes, fees and other charges legally
accruing
Exception: Relieved by laws or regulations
Page 230 of 270
TAXATION LAW
e.! Liquidation of Duties
When made: Upon approval by the Collector of the
returns of the appraiser and reports of the weights,
gauge or quantity [Sec. 1601, TCC]
How: the liquidation shall be made on the face of the
entry showing the particulars thereof, initiated by the
liquidating clerk, approved by the chief liquidator,
and recorded in the record of liquidations. [Sec. 1601,
TCC]
Additional Process: A daily record of all entries
liquidated shall be posted in the public corridor of the
customhouse, stating the name of the vessel or
aircraft, the port from which she arrived, the date of
her arrival, the name of the importer, and the serial
number and date of the entry. A daily record must
also be kept by the Collector of all additional duties,
taxes and other charges found upon liquidation, and
notice shall promptly be sent to the interested parties.
[Sec. 1601, TCC]
TENTATIVE AND FINAL LIQUIDATION
Tentative Liquidation [Sec. 1602, TCC]
When liquidation shall be deemed to be tentative: If
to determine the exact amount due under the law in
whole or in part some future action is required [only
as to item/s affected]
Effect: shall to that extent be subject to future and
final readjustment and settlement; entry in such case
shall be stamped "Tentative liquidation"
Final Liquidation [Sec. 1603, TCC as amended by RA
9135]
When liquidation is final and conclusive upon all
the parties: when articles have been entered and
passed free of duty or final adjustment of duties
made, after the expiration of 3 years from the date of
the final payment of duties.
Exceptions:
1.! Fraud
2.! Protest
3.! Compliance audit pursuant to the provisions of
the Code
Note: Exceptions do not apply in case of tentative
liquidation
Fractions in the Liquidation — a fraction of a peso
less than fifty centavos shall be disregarded, and a
fraction of a peso amounting to fifty centavos or more
shall be considered as one peso. In case of
overpayment or underpayment of duties, taxes,
surcharges, wharfage and/or other charges paid on
U.P. LAW BOC TAXATION II TAXATION LAW

entries, where the amount involved is less than five special economic zones and free ports, are
pesos, no refund or collection shall be made. [Sec. required to keep subject-records of all its
1604, TCC] activities, including in whole or in part, records
on imported goods withdrawn from said zones
Notes: into the customs territory for a period of three (3)
READJUSTMENT OF APPRAISAL, years from the date of filing of the goods
CLASSIFICATION OR RETURN [SEC. 1407, TCC] declaration. [Sec. 1003, CMTA]
Prescriptive Period for Appraisal, Classification or
Return Audit examination
General rule: Appraisal, classification or return as Any authorized officer of the Bureau shall be given by
finally passed upon and approved or modified by the the importer and customs broker full and free access
Collector shall not be altered or modified in any to the premises where the records are kept, to
manner. conduct audit examination, inspection, verification,
and investigation of those records relevant to such
Exceptions: investigation or inquiry. [Sec. 1002, CMTA]
1.! Within one year after payment of the duties,
upon statement of error in conformity with [Sec. 3514, TCC also required all importers and brokers,
seventeen hundred and seven hereof, approved to keep records for 3 years for inspection by customs
by the Collector officers authorized by BOC]
2.! Within fifteen days after such payment upon
request for reappraisal and/or reclassification
addressed to the Commissioner by the Collector,
if the appraisal and/or classification is deemed to
be low
3.! Upon request for reappraisal and/or
reclassification, in the form of a timely protest
addressed to the Collector by the interested
party if the latter should be dissatisfied with the
appraisal or return
4.! Upon demand by the Commissioner of Customs
after the completion of compliance audit
pursuant to the provisions of this Code." [R.A.
9135 (2001)]

f.! Keeping of Records

1.! All importers are required to keep at their
principal place of business, in the manner
prescribed by regulations to be issued by the
Commissioner and for a period of 3 years from
the date of final payment of duties and taxes or
customs clearance, as the case may be, all
records pertaining to the ordinary course of
business and to any activity or information
contained in the records required by this title in
connection with any such activity.
2.! All parties engaged in customs clearance and
processing are required to keep at their principal
place of business, in the manner prescribed by
regulations to be issued by the Commissioner
and for a period of 3 years from the date of filing
of the goods declaration, copies of the
abovementioned records covering the
transactions handled.
3.! Locators or persons authorized to bring
imported goods into free zones, such as the

Page 231 of 270

U.P. LAW BOC TAXATION II
! Accrual! and! Payment! of!
Tax! and! Duties
1.! General Rule: All Imported
Articles are Subject to Duty
a.! Free Importation and
Exportation
Unless otherwise provided by law or regulation, all
goods may be freely imported into and exported from
the Philippines without need for import and export
permits, clearances or licenses. [Sec. 116, CMTA]
b.! Regulated Importation and
Exportation
These goods shall be imported or exported only after
securing the necessary goods declaration or export
declaration, clearances, licenses, and any other
requirements, prior to importation or exportation. In
case of importation, submission of requirements after
arrival of the goods but prior to release from customs
custody shall be allowed but only in cases provided
for by governing laws or regulations. [Sec. 116, CMTA]
c.! Prohibited importations
1.! 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 upon any person in
the Philippines;
2.! 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;
3.! Written or printed goods, negatives or
cinematographic films, photographs, engravings,
lithographs, objects, paintings, drawings or other
representation of an obscene or immoral
character;
4.! 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;
Page 232 of 270
TAXATION LAW
5.! Any adulterated or misbranded food or goods for
human consumption or any adulterated or
misbranded drug in violation of relevant laws
and regulations;
6.! Infringing goods as defined under the
Intellectual Property Code and related laws; and
7.! All other goods or parts thereof which
importation and exportation are explicitly
prohibited by law or rules and regulations issued
by the competent authority. [Sec. 118, CMTA]
d.! Restricted Importation and
Exportation
Except when authorized by law or regulation, the
importation and exportation of the following
restricted goods are prohibited:
1.! Dynamite, gunpowder, ammunitions and other
explosives, firearms and weapons of war, or
parts thereof;
2.! Roulette wheels, gambling outfits, loaded dice,
marked cards, machines, apparatus or
mechanical devices used in gambling or the
distribution of money, cigars, cigarettes or
other goods when such distribution is
dependent on chance, including jackpot and
pinball machines or similar contrivances, or
parts thereof;
3.! Lottery and sweepstakes tickets, except
advertisements thereof and lists of drawings
therein;
4.! Marijuana, opium, poppies, coca leaves, heroin
or other narcotics or synthetic drugs which are
or may hereafter be declared habit forming by
the President of the Philippines, or any
compound, manufactured salt, derivative, or
preparation thereof, except when imported by
the government of the Philippines or any
person duly authorized by the Dangerous
Drugs Board, for medicinal purposes;
5.! Opium pipes or parts thereof, of whatever
material; and
6.! Any other goods whose importation and
exportation are restricted.
e.! De Minimis Importations
(Small Value Importations)
No duties and taxes shall be collected on goods with
an FOB or FCA value of ₱10,000.00 or below.
The Secretary of Finance shall adjust the de minimis
value every 3 years. The value shall be adjusted to its
present value using the CPI, as published by the PSA.
[Sec. 423, CMTA]
U.P. LAW BOC TAXATION II
CAO 2-2016
•! De Minimis importations shall be lodged and
processed under a simplified system and with the
use of information and communications
technology (“ICT”) enabled system to allow
advance clearance, and ensure proper customs
monitoring and control;
•! De Minimis importations shall, as far as
practicable, be subject to a nonintrusive
examination (e.g. x-ray or any other equivalent
device) on a random basis based.
•! The customs examiner may physically inspect the
imported goods.
Exclusions from Immediate Release as De Minimis
importations:
1.! Importations declared as “without commercial
value” or “of no commercial value” or with
specific amount but qualified by the phrase “for
customs purposes” or analogous phrases. The
party concerned must declare the specific value
of the goods, supported by available invoice,
receipt or equivalent document.
2.! Tobacco and liquor products carried by
passengers in excess of the allowable limits but
within the De Minimis value.
3.! Goods subject to requirements or conditions
imposed by the concerned regulatory agency,
unless for personal use and within the limits
allowed by regulations.
4.! Prohibited and restricted importations.
5.! Importations to be entered conditionally-free, for
warehousing, for transit, and / or admission to a
free zone [CAO 2-2016]
f.! Conditionally-Free and
Duty-Exempt Importations
[Sec. 800, CMTA]
The following 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
Page 233 of 270
TAXATION LAW
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:
1.! Aquatic products such as fishes, crustaceans,
mollusks, marine animals, seaweeds, fish oil, roe,
caught or gathered by fishing vessels of
Philippine registry; Provided, That they are
imported in such vessels or in crafts attached
thereto; Provided, However, That they have not
been landed in any foreign territory or, if so
landed, that they have been landed solely for
transshipment without having been advanced in
condition;
2.! Equipment for use in the salvage of vessels or
aircrafts, not available locally, upon identification
and the giving of a security in an amount equal to
100% of the ascertained duties, taxes and other
charges thereon, conditioned for the exportation
thereof or payment of corresponding duties,
taxes and other charges within six (6) months
from the date of acceptance of the goods
declaration; Provided, That the Bureau may
extend the time for exportation or payment of
duties, taxes and other charges for a term not
exceeding six (6) months from the expiration of
the original period;
3.! Cost of repairs, excluding the value of the goods
used, made in foreign countries upon vessels or
aircraft documented, registered or licensed in the
Philippines, upon proof satisfactory to the
Bureau: (1) that adequate facilities for such
repairs are not afforded in the Philippines; or (2)
that such vessels or aircrafts, while in the regular
course of their voyage or flight, were compelled
by stress of weather or other casualty to put into
a foreign port to make such repairs in order to
secure the safety, seaworthiness, or
airworthiness of the vessels or aircrafts to enable
them to reach their port of destination;
4.! Goods brought into the Philippines for repair,
processing or reconditioning to be reexported
upon completion of the repair, processing or
reconditioning: Provided, That the Bureau shall
require security equal to 100% of the duties,
taxes and other charges thereon, conditioned for
the exportation thereof or payment of the
corresponding duties, taxes and other charges
within six (6) months from the date of
acceptance of the goods declaration;
5.! Medals, badges, cups, and other small goods
bestowed as trophies or prizes, or those received
or accepted as honorary distinction;
6.! Returning residents
U.P. LAW BOC TAXATION II
Personal and household effects belonging to
returning residents including household
appliances, jewelry, precious stones, and other
goods of luxury which were formally declared
and listed before departure and identified under
oath before the District Collector when exported
from the Philippines by such returning residents
upon their departure therefrom or during their
stay abroad; personal and household effects
including wearing apparel, goods of personal
adornment, toilet goods, instruments related to
one's profession and analogous personal or
household effects, excluding luxury items,
vehicles, watercrafts, aircrafts and animals
purchased in foreign countries by residents of the
Philippines which were necessary, appropriate,
and normally used for their comfort and
convenience during their stay abroad,
accompanying them on their return, or arriving
within a reasonable time which, barring
unforeseen and fortuitous events, in no case shall
exceed 60 days after the owner's return.
For purposes of this section, the phrase
“returning residents” shall refer to nationals who
have stayed in a foreign country for a period of at
least six (6) months.
Conditions for exemption from tax and duties
Returning residents shall have tax and duty
exemption on personal and household effects:
Provided, That:
a.! It shall not be in commercial quantities;
b.! It is not intended for barter, sale or for hire;
and
c.! Limited to the FCA or FOB value of:
i.! ₱350,000.00 for those who have
stayed in a foreign country for at least
10 years and have not availed of this
privilege within 10 years prior to
returning resident's arrival;
ii.! ₱250,000.00 for those who have
stayed in a foreign country for a period
of at least five (5) but not more than
10 years and have not availed of this
privilege within five (5) years prior to
returning resident's arrival; or
iii.! ₱150,000.00 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.
Page 234 of 270
TAXATION LAW
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.
In addition to the privileges granted under the
immediately preceding paragraph, returning
Overseas Filipino Workers (OFWs) shall have the
privilege to bring in, tax and duty-free, home
appliances and other durables, limited to one of
every kind once in a given calendar year
accompanying them on their return, or arriving
within a reasonable time which, barring
unforeseen and fortuitous events, in no case shall
60 days after every returning OFW's return upon
presentation of their original passport at the port
of entry: Provided, That any amount in excess of
FCA value of ₱150,000.00 for personal and
household effects or of the number of duty-free
appliances as provided for under this section,
shall be subject to the corresponding taxes and
duties; 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;
7.! Balikbayan box
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 ₱150,000.00; 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;
For purposes of this Act, OFWs refer to holders of
valid passports duly issued by the Department of
Foreign Affairs (DFA) and certified by the
Department of Labor and Employment (DOLE) or
the Philippine Overseas Employment
Administration (POEA) for overseas employment
purposes. They cover all Filipinos, working in a
U.P. LAW BOC
foreign country under employment contracts,
regardless of their professions, skills or
employment status in a foreign country; and
Calendar Year refers to the period from January 1
to December 31.
8.! Wearing apparel, goods of personal adornment,
toilet goods, portable tools and instruments,
theatrical costumes and similar effects
accompanying travelers, or tourists, or arriving
within a reasonable time before or after their
arrival in the Philippines, which are necessary
and appropriate for the wear and use of such
persons according to the nature of the journey,
their comfort and convenience; Provided, That
this exemption shall not apply to goods intended
for other persons or for barter, sale or hire:
Provided, However, That the Bureau may require
either a written commitment or a security in an
amount equal to 100% of the ascertained duties,
taxes and other charges thereon, conditioned for
the exportation thereof or payment of the
corresponding duties, taxes and other charges
within three (3) months from the date of
acceptance of the goods declaration: Provided,
Further, That the Bureau may extend the time for
exportation or payment of duties, taxes and other
charges for a term not exceeding three (3)
months from the expiration of the original period.
Personal and household effects and vehicles
belonging to foreign consultants and experts
hired by, or rendering service to, the government,
and their staff or personnel and families
accompanying them or arriving within a
reasonable time before or after their arrival in the
Philippines, in quantities and of the kind
necessary and suitable to the profession, rank or
position of the person importing said items, for
their own use and not for barter, sale or hire:
Provided, That the Bureau may require either a
written commitment or a security in an amount
equal to 100% of the ascertained duties, taxes
and other charges thereon, upon the goods
classified under this subsection; conditioned for
the exportation thereof or payment of the
corresponding duties, taxes and other charges
within three (3) months after the expiration of
their term or contract; Provided, However, That
the Bureau may extend the time for exportation
or payment of duties, taxes and other charges for
a term not exceeding three (3) months from the
expiration of the original period;
9.! Professional instruments and implements, tools
of trade, occupation or employment, wearing
apparel, domestic animals, and personal and
household effects belonging to persons coming
to settle in the Philippines or Filipinos or their
Page 235 of 270
TAXATION II TAXATION LAW
families and descendants who are now residents
or citizens of other countries, such parties
hereinafter referred to as overseas Filipinos, in
quantities and of the class suitable to the
profession, rank or position of the persons
importing said items, for their own use and not
for barter or sale, accompanying such persons, or
arriving within a reasonable time: Provided, That
the Bureau may, upon the production of
satisfactory evidence that such persons are
actually coming to settle in the Philippines and
that the goods are brought from their former
place of abode, exempt such goods from the
payment of duties and taxes; Provided, Further,
That vehicles, vessels, aircrafts, machineries and
other similar goods for use in manufacture, shall
not fall within this classification and shall
therefore be subject to duties, taxes and other
charges;
10.! Goods used exclusively for public entertainment,
and for display in public expositions, or for
exhibition or competition for prizes, and devices
for projecting pictures and parts and
appurtenances thereof, upon identification,
examination, and appraisal and the giving of a
security in an amount equal to 100% of the
ascertained duties, taxes and other charges
thereon, conditioned for exportation thereof or
payment of the corresponding duties, taxes and
other charges within three (3) months from the
date of acceptance of the goods declaration:
Provided, That the Bureau may extend the time
for exportation or payment of duties, taxes and
other charges for a term not exceeding three (3)
months from the expiration of the original
period; and technical and scientific films when
imported by technical, cultural and scientific
institutions, and not to be exhibited for profit:
Provided, Further, That if any of the films is
exhibited for profit, the proceeds therefrom, shall
be subject to confiscation, in addition to the
penalty provided under this Act;
11.! Goods brought by foreign film producers directly
and exclusively used for making or recording
motion picture films on location in the
Philippines, upon their identification,
examination and appraisal and the giving of a
security in an amount equal to 100% of the
ascertained duties, taxes and other charges
thereon, conditioned for exportation thereof or
payment of the corresponding duties, taxes and
other charges within three (3) months from the
date of acceptance of the goods declaration,
unless extended by the District Collector for
another three (3) months; photographic and
cinematographic films, underdeveloped, exposed
outside the Philippines by resident Filipino
U.P. LAW BOC TAXATION II
citizens or by producing companies of Philippine
registry where the principal actors and artists
employed for the production are Filipinos, upon
affidavit by the importer and identification that
such exposed films are the same films previously
exported from the Philippines. As used in this
paragraph, the terms “actors” and “artists”
include the persons operating the photographic
camera or other photographic and sound
recording apparatus by which the film is made;
12.! Importations for the official use of foreign
embassies, legations and other agencies of
foreign governments: Provided, That those
foreign countries accord like privileges to
corresponding agencies of the Philippines. Goods
imported for the personal or family use of
members and attaches of foreign embassies,
legations, consular officers and other
representatives of foreign governments; Provided,
However, That such privilege shall be accorded
under special agreements between the
Philippines and the countries which they
represent: Provided, Further, That the privilege
may be granted only upon specific instructions of
the Secretary of Finance pursuant to an official
request of the DFA on behalf of members or
attaches of foreign embassies, legations,
consular officers and other representatives of
foreign governments;
13.! Imported goods donated to or, for the account of
the Philippine government or any duly registered
relief organization, not operated for profit, for
free distribution among the needy, upon
certification by the DSWD or the Department of
Education (DepED), or the Department of Health
(DOH), as the case may be;
14.! Containers, holders and other similar receptacles
of any material including kraft paper bags for
locally manufactured cement for export,
including corrugated boxes for bananas,
mangoes, pineapples and other fresh fruits for
export, except other containers made of paper,
paperboard and textile fabrics, which are of such
character as to be readily identifiable and/or
reusable for shipment or transportation of goods
shall be delivered to the importer thereof upon
identification, examination and appraisal and the
giving of a security in an amount equal to 100%
of the ascertained duties, taxes and other
charges thereon, within six (6) months from the
date of acceptance of the goods declaration;
15.! Supplies which are necessary for the reasonable
requirements of the vessel or aircraft in its
voyage or flight outside the Philippines,
including goods transferred from a bonded
warehouse in any Customs District to any vessel
or aircraft engaged in foreign trade, for use or
Page 236 of 270
TAXATION LAW
consumption of the passengers or its crew on
board such vessel or aircraft as sea or air stores;
or goods purchased abroad for sale on board a
vessel or aircraft as saloon stores or air store
supplies; Provided, That any surplus or excess of
such vessel or aircraft supplies arriving from
foreign ports or airports shall be dutiable;
16.! Goods and salvage from vessels recovered after a
period of two (2) years from the date of filing the
marine protest or the time when the vessel was
wrecked or abandoned, or parts of a foreign
vessel or its equipment, wrecked or abandoned
in Philippine waters or elsewhere: Provided, That
goods and salvage recovered within the said
period of two (2) years shall be dutiable;
17.! Coffins or urns containing human remains, bones
or ashes, used personal and household effects
(not merchandise) of the deceased person,
except vehicles, the FCA value of which does not
exceed ₱150,000.00, upon identification as
such: Provided, That every three (3) years after
the effectivity of this Act, the value herein stated
shall be adjusted to its present value using the
CPI as published by the PSA;
18.! Samples of the kind, in such quantity and of such
dimension or construction as to render them
unsaleable or of no commercial value; models
not adapted for practical use; and samples of
medicines, properly marked “sample-sale
punishable by law”, for the purpose of
introducing new goods in the Philippine market
and imported only once in a quantity sufficient
for such purpose by a person duly registered and
identified to be engaged in that trade: Provided,
That importations under this subsection shall be
previously authorized by the Secretary of
Finance: Provided, However, That importation of
sample medicines shall have been previously
authorized by the Secretary of Health, and that
such samples are new medicines not available in
the Philippines: Provided, Further, That samples
not previously authorized or properly marked in
accordance with this section shall be levied the
corresponding tariff duty.
Commercial samples, except those that are not
readily and easily identifiable as in the case of
precious and semi-precious stones, cut or uncut,
and jewelry set with precious or semi-precious
stones, the value of any single importation of
which does not exceed FCA value of ₱50,000.00
upon the giving of a security in an amount equal
to the ascertained duties, taxes and other
charges thereon, conditioned for the exportation
of said samples within three (3) months from the
date of the acceptance of the goods declaration
or in default thereof, the payment of the
U.P. LAW BOC
corresponding duties, taxes and other charges:
Provided, That if the FCA value of any single
consignment of such commercial samples
exceeds ₱50,000.00, the importer thereof may
select any portion of the same not exceeding the
FCA value of ₱50,000,00 for entry under the
provision of this subsection, and the excess of the
consignment may be entered in bond, or for
consumption, as the importer may elect:
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.
19.! Animals, except race horses, and plants for
scientific, experimental propagation or breeding,
andfor other botanical, zoological and national
defense purposes: Provided, That no live trees,
shoots, plants, moss and bulbs, tubers and seeds
for propagation purposes may be imported under
this section, except by order of the government
or other duly authorized institutions; Provided,
However, That the free entry of animals for
breeding purposes shall be restricted to animals
of recognized breed, duly registered in the record
or registry established for that breed, and
certified as such by the Bureau of Animal
Industry (BAI): Provided, Further, That the
certification of such record, and pedigree of such
animal duly authenticated by the proper
custodian of such record or registry, shall be
submitted to the District Collector, together with
the affidavit of the owner or importer that such
animal is the animal described in said certificate
of record and pedigree: Provided, Finally, That
the animals and plants are certified by the NEDA
as necessary for economic development;
20.! Economic, technical, vocational, scientific,
philosophical, historical and cultural books or
publications, and religious books like Bibles,
missals, prayer books, the Koran, Ahadith and
other religious books of similar nature and
extracts therefrom, hymnal and hymns for
religious uses; Provided, That those which may
have already been imported but are yet to be
released by the Bureau at the effectivity of this
Act may still enjoy the privilege herein provided
upon certification by the DepED that such
imported books and/or publications are for
economic, technical, vocational, scientific,
philosophical, historical or cultural purposes or
that the same are educational, scientific or
cultural materials covered by the International
Agreement on Importation of Educational
Scientific and Cultural Materials (XAESCM)
signed by the President of the Philippines on
August 2, 1952, or other agreements binding
Page 237 of 270
TAXATION II TAXATION LAW
upon the Philippines. Educational, scientific and
cultural materials covered by international
agreements or commitments binding upon the
Philippine government so certified by the DepED;
21.! Philippine goods previously exported from the
Philippines and returned without having been
advanced in value, or improved in condition by
any process of manufacturing or other means,
and upon which no drawback or bounty has been
allowed, including instruments and implements,
tools of trade, machinery and equipment, used
abroad by Filipino citizens in the pursuit of their
business, occupation or profession; and foreign
goods previously imported when returned after
having been exported and loaned for use
temporarily abroad solely for exhibition, testing
and experimentation, for scientific or educational
purposes; and foreign containers previously
imported which have been used in packing
exported Philippine goods and returned empty if
imported by or for the account of the person or
institution who exported them from the
Philippines and not for sale, barter or hire subject
to identification: Provided, That Philippine goods
falling under this subsection upon which
drawback or bounty have been allowed shall,
upon reimportation thereof, be subject to a duty
under this subsection equal to the amount of
such drawback or bounty;
22.! Aircraft, equipment and machinery, spare parts,
commissary and catering supplies, aviation gas,
fuel and oil, whether crude or refined except
when directly or indirectly used for domestic
operations, and such other goods or supplies
imported by and for the use of scheduled airlines
operating under congressional franchise:
Provided, That such goods or supplies are not
locally available in reasonable quantity, quality
and price and are necessary or incidental to the
proper operation of the scheduled airline
importing the same;
23.! Machineries, equipment, tools for production,
plans to convert mineral ores into saleable form,
spare parts, supplies, materials, accessories,
explosives, chemicals, and transportation and
communications facilities imported by and for
the use of new mines and old mines which
resume operations, when certified to as such by
the Secretary of the Department of Environment
and Natural Resources (DENR), upon the
recommendation of the Director of Mines and
Geosciences Bureau, for a period ending five (5)
years from the first date of actual commercial
production of saleable mineral products:
Provided, That such goods are not locally
available in reasonable quantity, quality and
price and are necessary or incidental in the
U.P. LAW BOC TAXATION II
proper operation of the mine; and aircrafts
imported by agro-industrial companies to be
used by them in their agriculture and industrial
operations or activities, spare parts and
accessories thereof, when certified to as such by
the Secretary of the Department of Agriculture
(DA) or the Secretary of the Department of Trade
and Industry (DTI), as the case may be;
24.! Spare parts of vessels or aircraft of foreign
registry engaged in foreign trade when brought
into the Philippines exclusively as replacements
or for the emergency repair thereof, upon proof
satisfactory to the District Collector that such
spare parts shaft he utilized to secure the safety,
seaworthiness or airworthiness of the vessel or
aircraft, to enable it to continue its voyage or
flight;
25.! Goods exported from the Philippines for repair,
processing or reconditioning without having
been substantially advanced in value, and
subsequently reimported in its original form and
in the same state: Provided, That in case the
reimported goods advanced in value, whether or
not in their original state, the value added shall
be subject to the applicable duty rate of the tariff
heading of the reimported goods; and
26.! Trailer chassis when imported by shipping
companies for their exclusive use in handling
containerized cargo, upon posting a security in
an amount equal to 100% of the ascertained
duties, taxes and other charges due thereon, to
cover aperiod of one (1) year from the date of
acceptance of the entry, which period, for
meritorious reasons, may be extended by the
Commissioner from year to year, subject to the
following conditions:
a.! That they shall be properly identified and
registered with the Land Transportation
Office (LTO);
b.! That they shall be subject to customs
supervision fee to be fixed by the District
Collector and subject to the approval of the
Commissioner;
c.! That they shall be deposited in the customs
territory when not in use; and
d.! That upon the expiration of the period
prescribed above, duties and taxes shall be
paid unless otherwise reexported.
2.!Goods Declaration
Goods Declaration – A statement made in the
manner prescribed by the Bureau and other
appropriate agencies, by which the persons
concerned indicate the procedure to be observed in
the application for the entry or admission of imported
Page 238 of 270
TAXATION LAW
goods and the particulars of which the customs
administration shall require. [Sec. 102(y), CMTA]
Importations subject to Goods Declaration
Unless otherwise provided for, all imported goods
shall be subject to the lodgement of a goods
declaration. A goods declaration may be for
consumption, for customs bonded warehousing, for
admission, for conditional importation, or for
customs transit. [Sec. 401, CMTA]
a.! Formal Entry distinguished
from Informal Entry
All goods declaration for consumption shall be
cleared through a formal entry process except for the
following goods which shall be cleared through an
informal entry process:
1.! Goods of a commercial nature with Free on
Board (FOB) or Free Carrier At (FCA) value of less
than fifty thousand pesos (₱50,000.00). Every
three (3) years after the effectivity of this Act, the
Secretary of Finance shall adjust this amount as
provided herein to its present value, using the
Consumer Price Index (CPI) as published by the
PSA; and
2.! Personal and household effects or goods, not in
commercial quantity, imported in a passenger’s
baggage or mail.
The Commissioner may adjust the value of goods of
commercial nature that shall be cleared through an
informal entry process without prejudice to the
periodic adjustment period in subparagraph (a) of
this section.
All importations entered through, a formal entry
process shall be covered by a letter of credit or any
verifiable commercial document evidencing payment
or in cases where there is no sale for export, by any
commercial document indicating the commercial
value of the goods. [Sec. 402, CMTA]
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.
U.P. LAW BOC
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 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 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 may be adjusted by the
Commissioner. [Sec. 407, CMTA]
c.! Assessment and Payment of
Duties and Taxes, Interest
and Surcharge
Tentative Assessment of Provisional Goods
Declaration
Assessment of a provisional goods declaration shall
be deemed tentative and such assessment shall be
completed upon final readjustment and submission
by the declarant of the additional information or
documentation required to complete the declaration
within the period provided in Section 403 of this Act.
[Sec. 426, CMTA]
Readjustment of Appraisal, Classification or Return
Such appraisal, classification or return, as finally
passed upon and approved or modified by the District
Collector, shall not be altered or modified in any
manner, except:
1.! Within one (1) year after payment of the duties,
upon statement of error in conformity with
Section 912 of this Act, as approved by the
District Collector;
2.! Within 15 days after such payment, upon request
for reappraisal or reclassification addressed to
the Commissioner by the District Collector, if the
appraisal or classification is deemed to be low;
3.! Upon request for reappraisal and/or
reclassification, in the form of a timely protest
addressed to the District Collector by the
interested party if the latter should be
dissatisfied with the appraisal or return; or
4.! Upon demand by the Commissioner after the
completion of compliance audit in accordance
with the provisions of this Act. [Sec. 427, CMTA]
Assessment of Duty on Less Than Entered Value
Duty shall not be assessed in any case upon an
amount less than the entered value, unless by
Page 239 of 270
TAXATION II TAXATION LAW
direction of the Commissioner 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 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. [Sec. 428, CMTA]
Final Assessment
Assessment shall be deemed final 15 days after
receipt of the notice of assessment by the importer or
consignee. [Sec. 429, CMTA]
Period of Limitation
In the absence of fraud and when the goods have
been finally assessed and released, the assessment
shall be conclusive upon all parties three (3) years
from the date of final payment of duties and taxes, or
upon completion of the post clearance audit. [Sec.
430, CMTA]
Release of Goods after Payment of Duties and
Taxes
Goods declared shall be released when duties and
taxes and other lawful charges have been paid or
secured and all the pertinent laws, rules and
regulations have been complied with. [Sec. 431,
CMTA]
Fine or Surcharge on Goods
Goods subject to any fine or surcharge shall be
released only after the payment of the fine or
surcharge. [Sec. 436, CMTA]
d.! Provisional Goods
Declaration
Where the declarant does not have all the
information or supporting documents required to
complete the goods declaration, the lodging of a
provisional goods declaration may be allowed:
Provided, That it substantially contains the necessary
information required by the Bureau and the declarant
undertakes to complete the information or submit
the supporting documents within 45 days from the
filing of the provisional goods declaration, which
period may be extended by the Bureau for another 45
days for valid reasons.
If the Bureau accepts a provisional goods declaration,
the duty treatment of the goods shall not be different
from that of goods with complete declaration.
U.P. LAW BOC TAXATION II
Goods under a provisional goods declaration may be
released upon posting of any required security
equivalent to the amount ascertained to be the
applicable duties and taxes. [Sec. 404, CMTA]
e.! Relief Consignment
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, clearance of
relief consignment shall be a matter of priority and
subject to a simplified customs procedure. The
Bureau shall provide for:
1.! Lodging of a simplified goods declaration or of a
provisional or incomplete goods declaration
subject to completion of the declaration within a
specified period;
2.! Lodging, registering and checking of the goods
declaration and supporting documents prior to
the arrival of the goods, and their release upon
arrival;
3.! Clearance beyond the designated hours of
business or away from customs offices and
waiver of any corresponding charges; and
4.! Examination and/or sampling of goods only
in exceptional circumstances.
The DOF and the DSWD shall jointly issue the rules
and regulations for the implementation of this
provision. [Sec. 120, CMTA]
Duty and 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. [Sec. 121, CMTA]
f.! Misdeclaration,
Misclassification and
Undervaluation in Goods
Declaration
[Sec. 1400, CMTA]
DEFINITION AND DISTINCTION
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
Page 240 of 270
TAXATION LAW
be paid between what is legally determined upon
assessment and what is declared, shall be subject to
a surcharge equivalent to 250% of the duty and tax
due. No surcharge shall be imposed when the
discrepancy in duty is less than 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:
1.! the declared value fails to disclose in frill the
price actually paid or payable or any dutiable
adjustment to the price actually paid or payable;
or
2.! 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 250%
of the duty and tax due. No surcharge shall be
imposed when the discrepancy in duty is less
than 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.
Prima facie evidence of fraud
A discrepancy in duty and tax to be paid between
what is legally determined and what is declared
amounting to more than 30% shall constitute a
prima facie evidence of fraud.
IMPOSITION OF SURCHARGE
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
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 penalties provided under
Section 1401 of this Act against the importer and
other person or persons who willfully participated in
the fraudulent act.
U.P. LAW BOC TAXATION II TAXATION LAW

n.! Discrepancy with the master's or pilot's-in-

! Unlawful! Importation! or!
Exportation
Smuggling refers to the fraudulent act of importing
any goods into the Philippines, or the act of assisting
in receiving, concealing, buying, selling, disposing or
transporting such goods, with full knowledge that the
same has been fraudulently imported, or the
fraudulent exportation of goods. Goods referred to
under this definition shall be known as smuggled
goods. [Sec. 101(nn), CMTA]
1.! Technical Smuggling and
Outright Smuggling
Technical Smuggling
The act of importing goods into the country by means
of fraudulent, falsified or erroneous declaration of the
goods to its nature, land, quality, quantity or weight,
for the purpose of reducing or avoiding payment of
prescribed taxes, duties and other charges [Sec.
101(pp), CMTA]
command deport
o.! Failure to report fraud
p.! False statement of vessel's or aircraft's
destination
q.! Affixing seals
r.! Breaking of seal placed by customs officers
s.! Breaking of lock or fastening placed by customs
officers
t.! Removal, breakage, and alteration of marks
u.! Unauthorized withdrawal of imported goods
from bonded warehouse
v.! Removing or repacking goods in warehouse
w.! Removing goods from customs custody
x.! Failure to pay duties, taxes and other charges
y.! Breach of security
z.! Failure to keep importation records and full
access to customs officers
aa.! Concealment or destruction of evidence of fraud

Outright Smuggling
The act of importing goods into the country without
complete customs prescribed importation documents,
or without being cleared by customs or other
regulatory government agencies, for the purpose of
evading payment of prescribed taxes, duties and
other government charges. [Sec. 101(ff), CMTA]

2.!Other Fraudulent Practices

[Secs. 1402-1428, CMTA]
a.! Failure or refusal of party to give evidence or
submit documents for assessment
b.! Other fraudulent practices against customs
revenue
c.! Failure to declare baggage
d.! Vessel, seacraft, or aircraft departing before
undergoing customs formalities
e.! Obstruction to boarding officer
f.! Unlawful boarding or leaving of vessel or aircraft
g.! Unloading of cargo before arrival at port of entry
h.! Unloading of cargo at improper time or place
after arrival
i.! Failure to exhibit or deposit documents
j.! Bringing of unmanifested arms, explosives or war
equipment
k.! Failure to supply advance and requisite
manifests
l.! Disappearance of manifested goods
m.! Discrepancy between actual and declared weight
of manifested goods

Page 241 of 270

U.P. LAW BOC TAXATION II
! Remedies
1.! Government
a.! Administrative/Extrajudicial
SEARCH, SEIZURE, FORFEITURE, ARREST
Persons exercising police authority
The following persons are authorized to effect search,
seizure, and arrest:
1.! Officials of the Bureau, District Collectors,
Deputy District Collectors, police officers, agents,
inspectors and guards of the Bureau;
2.! Upon authorization of the Commissioner, officers
and members of the Armed Forces of the
Philippines (AFP) and national law enforcement
agencies; and
3.! Officials of the BIR on all cases falling within the
regular performance of their duties, when
payment of internal revenue taxes is involved.
[Sec. 214, CMTA]
Place where authority may be exercised
Within customs premises, and within the limits of the
authority granted by the Commissioner, Port and
airport authorities in all ports of entry shall provide
authorized customs officers with unhampered access
to all premises within their administrative jurisdiction.
[Sec. 215, CMTA]
CAO 01-2017 (Clearance Procedures for all Travelers
and Crew and their Baggage) Sec 4.11: District
Collector shall coordinate with the Port or Airport
authorities as to the premises that should be under
customs control and jurisdiction and only the District
Collector shall be authorized to grant access to said
premises.
Customs premises – The Bureau shall, for customs
purposes, have exclusive control, direction and
management of customs offices, facilities,
warehouses, ports, airports, wharves, infrastructure
and other premises in the Customs Districts, in all
cases without prejudice to the general police powers
of the local government units (LGUs), the Philippine
Coast Guard and of law enforcement agencies in the
exercise of their respective functions. [Sec. 303,
CMTA]
Exercise of power of seizure
Any person exercising police authority, as defined in
the CMTA, has the power and duty to seize any vessel,
aircraft, cargo, goods, animal or any other movable
property when the same is subject to forfeiture or
Page 242 of 270
TAXATION LAW
when they are subject of a fine imposed under the
CMTA. [Sec. 216, CMTA; Sec 4.12.1 of CAO 01-2017]
Other Authorized Searches
1.! Authority to enter properties [Sec. 219]
2.! Authority to search dwelling house [Sec. 220]
3.! Authority to search vessels or aircrafts and
persons or goods conveyed therein [Sec. 221]
4.! Authority to search vehicles, other carriers,
persons and animals [Sec. 222]
5.! Authority to search persons arriving from foreign
countries [Sec. 223]
CAO 1-2017, Sec 4.5: Baggage of arriving Travelers
and Crew shall be subject to non-intrusive inspection.
When necessary, scanned baggage may be subject to
physical inspection.
Property subject to seizure and forfeiture [Sec. 1113,
CMTA]
1.! Any vehicle, vessel or aircraft, including cargo,
which shall be used unlawfully in the importation
or exportation of goods or in conveying or
transporting smuggled goods in commercial
quantities into or from any Philippine port or
place. The mere carrying or holding on board of
smuggled goods in commercial quantities shall
subject such vehicle, vessel, aircraft, or any other
craft to forfeiture: Provided, That the vehicle,
vessel, aircraft or any other craft is not used as a
common carrier which has been chartered or
leased for purposes of conveying or transporting
persons or cargo;
2.! Any vessel engaging in the coastwise trade which
shaft have on board goods of foreign growth,
produce, or manufacture in excess of the amount
necessary for sea stores, without such goods
having been properly entered or legally
imported;
3.! Any vessel or aircraft into which shall be
transferred cargo unloaded contrary to law prior
to the arrival of the importing vessel or aircraft at
the port of destination;
4.! Any part of the cargo, stores, or supplies of a
vessel or aircraft arriving from a foreign port
which is unloaded before arrival at the vessel’s or
aircraft’s port of destination and without
authority from the customs officer; but such
cargo, ship, or aircraft stores and supplies shall
not be forfeited if such unloading was due to
accident, stress of weather, or other necessity
and is subsequently approved by the District
Collector;
5.! Goods which are fraudulently concealed in or
removed contrary to law from any public or
private warehouse, container yard, or container
freight station under customs supervision;
U.P. LAW BOC TAXATION II
6.! Goods, the importation or exportation of which
are effected or attempted contrary to law, or any
goods of prohibited importation or exportation,
and all other goods which, in the opinion of the
District Collector, have been used, are or were
entered to be used as instruments in the
importation or the exportation of the former;
7.! Unmanifested goods found on any vessel or
aircraft if manifest therefor is required;
8.! Sea stores or aircraft stores adjudged by the
District Collector to be excessive, when the duties
and taxes assessed by the District Collector
thereon are not paid or secured forthwith upon
assessment of the same;
9.! Any package of imported goods which is found
upon examination to contain goods not specified
in the invoice or goods declaration including all
other packages purportedly containing imported
goods similar to those declared in the invoice or
goods declaration to be the contents of the
misdeclared package;
Misdeclared Shipment
Shipments declared as consolidated Balikbayan
Boxes but are found to be otherwise shall be
considered as misdeclared and subjected to
seizure and forfeiture proceedings [Sec. 8, CMO
33-2016 (Guidelines on the Implementation of
CAO 05-2016 on Consolidated Shipment of Duty
and Tax-Free “Balikbayan Boxes”)]
10.! Boxes, cases, trunks, envelopes, and other
containers of whatever character used as
receptacle or as device to conceal goods which
are subject to forfeiture under this Act or which
are so designed as to conceal the character of
such goods;
11.! Any conveyance actually used for the transport of
goods subject to forfeiture under tbis Act, with its
equipage or trappings, and any vehicle similarly
used, together with its equipment and
appurtenances. The mere conveyance of
smuggled goods by such transport vehicle shall
be sufficient cause for the outright seizure and
confiscation of such transport vehicle but the
forfeiture shall not be effected if it is established
that the owner of the means of conveyance used
as aforesaid, is engaged as common carrier and
not chartered or leased, or that the agent in
charge thereof at the time, has no knowledge of
the unlawful act; and
12.! Goods sought to be imported or exported:
a.! Without going through a customs office,
whether the act was consummated,
frustrated, or attempted;
b.! Found in the baggage of a person arriving
from abroad and undeclared by such person;
Page 243 of 270
TAXATION LAW
c.! Through a false declaration or affidavit
executed by the owner, importer, exporter, or
consignee concerning the importation of
such goods;
d.! On the strength of a false invoice or other
document executed by the owner, importer,
exporter, or consignee concerning the
importation or exportation of such goods; or
e.! Through any other practice or device
contrary to law by means of which such
goods entered through a customs office to
the prejudice of the government.
Conditions Affecting Forfeiture of Goods
The forfeiture shall be effected only –
1.! when and while the goods are in the custody or
within the jurisdiction of customs officers, or
2.! in the possession or custody of or subject to the
control of the importer, exporter, original owner,
consignee, agent of another person effecting the
importation, entry or exportation in question, or
3.! in the possession or custody of or subject to the
control of persons who shall receive, conceal, buy,
sell, or transport the same, or aid in any of such
acts, with knowledge that the goods were
imported, or were the subject of an attempt at
importation or exportation contrary to law. [Sec.
1115, CMTA]
Seizure or Release of Goods
The District Collector shall issue an order of release
or a warrant of seizure within five (5) days, or two (2)
days in case of perishable goods, upon the
recommendation of the alerting officer or any other
customs officer.
The District Collector shall immediately make a
report of such seizure or release to the Commissioner.
[Sec. 1116, CMTA]
Warrant of Seizure or Order of Release
The District Collector shall have the authority to issue
a warrant of seizure of the goods upon determination
of the existence of probable cause and in case of
nonexistence thereof, the issuance of order of release.
In case the District Collector issued an order of
release, the District Collector shall immediately
transmit all the records to the Commissioner who
shall automatically review within forty-eight (48)
hours, or within twenty-four (24) hours in case of
perishable goods. When no decision is made by the
Commissioner within the prescribed period, the
imported goods shall be deemed released.
The lifting of the alert order shall he issued by the
District Collector only upon the affirmation of the
U.P. LAW BOC
decision of the District Collector by the Commissioner,
or after the lapse of the period of review by the
Commissioner, whichever is earlier. [Sec. 1117, CMTA]
Release of Balikbayan Boxes
Balikbayan boxes or portions thereof which are
compliant with the existing rules and regulations are
entitled to immediate release. When consolidated
Balikbayan Boxes or portions thereof are subject to
alert or any enforcement intervention, the boxes or
portions thereof which are compliant shall be
segregated and processed separately. [Sec. 4.7, CAO
05-2016]
Sale of Perishable Goods During Forfeiture
Proceedings
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. [Sec. 1118,
CMTA]
Service of Warrant of Seizure
The District Collector shall cause the service of
warrant of seizure to the owner or importer of the
goods or the authorized representative thereof. The
owner or importer shall be given, an opportunity to
be heard during the forfeiture proceedings.
For the purpose of serving the warrant, the importer,
consignee, or person holding the bill of lading or
airway bill shall be deemed the “owner” of the goods.
For the same purpose, “authorized representative”
shall include any agent of the owner and if the owner
or the agent is unknown, any person having
possession of the goods at the time of the seizure.
Service of warrant to an unknown owner shall be
effected by posting the warrant for fifteen (15) days in
a public place at the concerned district, and by
electronic or printed publication. [Sec. 1119, CMTA]
Proceedings in Case of Property Belonging to
Unknown Parties
If, within fifteen (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 favor of the government to be disposed
of in accordance with the CMTA. [Sec. 1121, CMTA]
Burden of Proof in Forfeiture Proceedings
In all proceedings for the forfeiture of any vehicle,
vessel, aircraft, or goods under this Act, the burden of
proof shall be borne by the claimant. [Sec. 1123,
CMTA]
Page 244 of 270
TAXATION II TAXATION LAW
Settlement of Pending Seizure Case by Payment of
Fine or Redemption of Forfeited Goods
Subject to the approval of the Commissioner, the
District Collector may allow the settlement by
payment of fine or the redemption of forfeited goods,
during the course of the forfeiture proceeding.
However, the Commissioner may accept the
settlement by redemption of any forfeiture case on
appeal. No settlement by payment of fine shall be
allowed when there is fraud or when the discrepancy
in duties and taxes to be paid between what is
determined and what is declared amounts to more
than thirty percent (30%).
In case of settlement by payment of fine, the owner,
importer, exporter, or consignee or agent shall offer
to pay a fine equivalent to thirty percent (30%) of the
landed cost of the seized goods. In case of settlement
by redemption, the owner, importer, exporter, or
consignee or agent shall offer to pay the redeemed
value equivalent to one hundred percent (100%) of
the landed cost.
Upon payment of the fine or payment of the
redeemed value, the goods shall be released and all
liabilities which may attach to the goods shall be
discharged without prejudice to the filing of
administrative or criminal case.
When settlement not allowed
1.! Fraud
2.! Importation is prohibited by law
3.! Release of the goods is contrary to law
[Sec. 1124, CMTA]
Decision in Forfeiture Cases
In forfeiture cases, the District Collector shall issue an
order for hearing within fifteen (15) days, or five (5)
days in case of perishable goods, from issuance of the
warrant. The District Collector shall render a decision
within thirty (30) days upon termination of the
hearing, or within ten (10) days in case of perishable
goods. The decision shall include a declaration of
forfeiture, the imposition of a fine or such other action
as may be proper. [Sec. 1125, CMTA]
Automatic Review in Forfeiture Cases
The Commissioner shall automatically review any
decision by the District Collector adverse to the
government. [Sec. 1127, CMTA]
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
U.P. LAW BOC
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. [Sec. 1131, CMTA]
b.! Judicial
Requisites for filing of criminal/civil case
1.! Brought in the name of the government of the
Phil;
2.! Prosecuted and handled by the Bureau with the
assistance of the Department of Justice (DOJ);
and
3.! With approval from the Commissioner. [Sec. 1135,
CMTA]
Rules on appeal including jurisdiction
Unless otherwise provided, the party aggrieved by the
ruling or decisions of the Commissioner may appeal
to the CTA, in the manner and within the period
prescribed by law and regulations. Decisions of the
Secretary of Finance when required by this Act, may
likewise be appealed to the CTA.
Unless an appeal is made to the CTA in the manner
and within the period prescribed by law and
regulations, the ruling or decision of the
Commissioner or the Secretary of Finance shall be
final and executory. [Sec. 1136, CMTA]
2.!Taxpayer
a.! Protest
When, a ruling or decision of the District Collector or
customs officer involving goods with valuation, rules
of origin, and other customs issues is made, except
the fixing of fines in seizure cases, the party adversely
affected may appeal by way of protest against such
ruling or decision by presenting to the Commissioner
a written protest setting forth the objection to the
ruling or decision in question and the reasons
therefore. [Sec. 1106, CMTA]
When made
At the time when payment of the amount claimed to
be due the government is made, or within fifteen (15)
days thereafter. [Sec. 1106, CMTA]
Form
1.! Must be in writing
2.! Specify the particular decision or ruling of the
District Collector for which protest is being made
Page 245 of 270
TAXATION II TAXATION LAW
3.! Indicate the particular grounds relied upon for
relief [Sec. 1108, CMTA]
Scope
Limited to 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. [Sec.
1108, CMTA]
Samples to be Furnished by Protesting Parties
If the nature of the goods permit, importers filing
protests involving questions offset must, upon
demand, present to the Commissioner samples of the
goods which are the subject matter of the protest.
The samples of the goods shall be verified by the
customs officer who made the classification against
which the protests are filed. [Sec. 1109, CMTA]
Effect of Failure to Protest
The action of the District Collector shall be final and
conclusive. [Sec. 1107, CMTA]
Decision in Protest
When a protest is filed in proper form, the
Commissioner shall render a decision within thirty
(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
reassessed, if necessary. [Sec. 1110, CMTA]
Automatic Review
The Commissioner shall automatically review any
decision by the District Collector adverse to the
government. [Sec. 1127, CMTA]
b.! Abandonment
When article deemed abandoned
Imported goods are deemed abandoned under any of
the following circumstances:
1.! When the owner, importer, or consignee of the
imported goods expressly signifies in writing to
the District Collector the intention to abandon
the same; or
2.! When the owner, importer, consignee, or
interested party after due notice, falls to file the
goods declaration within the prescribed period in
Section 407 of this Act; Provided, That the term
goods declaration shall include provisional or
incomplete goods declaration deemed valid by
the Bureau as provided in Section 403 of this Act.
For this purpose, it is the duty of the District
Collector to post a list of all packages discharged
and their consignees, whether electronically or
physically in the District Office, or send a notice
U.P. LAW BOC TAXATION II
to the consignee within five (5) days from the
date of discharge; or
3.! Having filed such goods declaration, the owner,
importer, consignee or interested party after due
notice, fails to pay the assessed duties, taxes and
other charges thereon, or, if the regulated goods
failed to comply with Section 117 of this Act,
within fifteen (15) days from the date of final
assessment: Provided, That if such regulated
goods are subject of an alert order and the
assessed duties, taxes and other charges thereof
are not paid within fifteen (15) days from
notification by the Bureau of the resolution of the
alert order, the same shall also be deemed
abandoned; or
4.! Having paid the assessed duties, taxes and other
charges, the owner, importer or consignee or
interested party after due notice, fails to claim
the goods within thirty (30) days from payment.
For this purpose, the arrastre or warehouse
operator shall report the unclaimed goods to the
District Collector for disposition pursuant to the
provisions of this Act; or
5.! When the owner or importer fails to claim goods
in customs bonded warehouses within the
prescribed period. [Sec. 1129, CMTA]
Treatment and Disposition of Abandoned Goods
Expressly abandoned goods, when the owner,
importer, or consignee of the imported goods
expressly signifies in writing to the District Collector
the intention to abandon the same, shall ipso facto
be deemed the property of the government.
If the Bureau has not disposed of the abandoned
goods, the owner or importer of goods impliedly
abandoned may, at any time within thirty (30) days
after the lapse of the prescribed period to file the
declaration, reclaim the goods provided that all legal
requirements have been complied with and the
corresponding duties, taxes and other charges,
without prejudice to charges and fees due to the port
or terminal operator, as well as expenses incurred
have been paid before the release of the goods from
customs custody.
When the Bureau sells goods which have been
impliedly abandoned, although no offense has been
discovered, the proceeds of the sale, after deduction
of any duty and tax and all other charges and
expenses incurred as provided in Section 1143, shall
be turned over to those persons entitled to receive
them or, when this is 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 as provided in Section 1151. [Sec.
1130, CMTA]
Page 246 of 270
TAXATION LAW
If the abandoned articles are transferred to a customs
bonded warehouse, the operator shall be liable for
the payment of duties and taxes in the case of loss of
the stored abandoned imported articles [R.V. Marzan
v. CA, GR No. 128064 (2004)]
c.! Abatement and Refund
The reduction or diminution, in whole or in part, of
duties and taxes where payment has not been made.
[Sec. 102, CMTA]
When available
When goods have not yet been released for
consumption or have been placed under another
customs procedure, provided that no other offense or
violation has been committed, the declarant shall
neither be required to pay the duties and taxes nor be
entitled to refund thereof in any of the following
cases:
1.! When, at the request of the declarant, the goods
are abandoned, or as determined by the Bureau,
the goods are destroyed or rendered
commercially valueless while under customs
control. Any cost herein incurred shall be borne
by the declarant;
2.! When goods are destroyed or irrecoverably lost
by accident or force majeure, the remaining
waste or scrap after destruction, if taken into
consumption, shall be subject to the duties and
taxes that would be applicable on such waste or
scrap if imported in same state; and
3.! When there are shortages due to the nature of
the goods. [Sec. 904, CMTA]
Other cases of abatement or refund
1.! Abatement for damage incurred during Voyage
[Sec. 905, CMTA]
2.! Missing packages [Sec. 906]
3.! Deficiency in contents of packages [Sec. 907]
4.! Goods lost or destroyed after arrival [Sec. 908]
5.! Defective goods [Sec. 909]
6.! Dead or injured animals [Sec. 910]
Refund in case of excess payments due to
1.! manifest clerical error made in invoice or entry
2.! error in return of weight, measure and gauge
(certified, under penalties of falsification or
perjury, by examining official)
3.! error in the distribution of charges on invoices
[which does not involve any question of law and
certified, under penalties of falsification or
perjury, by examining official] [Sec. 912, CMTA]
Conditions for refund of excess payments
U.P. LAW BOC TAXATION II TAXATION LAW

1.! errors discovered before payment or discovered

within 1 year after the final liquidation
2.! written request and notice from importer or
statement of error certified by the Collector

How claimed
1.! Claim made in writing
2.! Collector shall verify with the records in his office
3.! Certify claim to Commissioner with his
recommendation and necessary papers
4.! Commissioner shall then cause the claim to be
paid if found correct

If the result of the refund would result to a

corresponding refund of the internal revenue taxes on
the same importation, Collector shall certify to
Commissioner who shall cause the said excess to be
paid, refunded or credited in favor of the importer.
[Sec. 913, CMTA]

Page 247 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

Flowchart,IX:,,Remedies,from,Seizure,and,Forfeiture,CasesATariffs,and,
Customs,Code

START

Collector,seizes,goods,
Importer,may,secure,
Collector,determines, and,reports,it,to,the,
release,of,goods,by, Collector,conducts,
probable,cause, Commissioner,and,to,
(illegal,importation) filing,of,cash,bond, hearing
COA.,,Owner,is,notified,
(Sec.,2301)
of,seizure

Collector’s, Amount,
decision,favorable, Automatic,review*,by,Customs,
Yes involved,less, Yes
to,taxpayer/ Commisioner,(Sec.,2313)
than,5M?
adverse,to,gov’t?

Is,
Does,
No Commissioner’s,
commissioner,
Yes decision,favorable,
decide,w/in,30,
Taxpayer,appeals, to,taxpayer/
days?
to,Customs, adverse,to,gov’t?
Commissioner,15,
days,from,receipt, No
of,notice
Inaction,construed,as,affirmation,
of,Collector’s,decision
Does,
Commissioner,
Yes No,,amount,is,at,least
decide,w/n,30,
Is, 5M
days?
Commissioner’s, Yes
Automatic,Review*,by,
decision,
the,Secretary,of,
favorable,to, Yes
Finance,(SOF),(Sec.,
taxpayer/
2313,,CMO,3A2002)
adverse,to,
gov’t?

Is,SOF’s,
decision, Does,SOF,
No favorable,to, Yes decide,within,
No No taxpayer/adverse, 30,days?
to,gov’t?

No
Yes
,Inaction,construed,as,
affirmation,of,
Decision,becomes,
commissioner’s,decision, No
END final,&,
(or,of,collector’s,decision, Appeal,
unappealable
in,case,of,inaction,by, to,CTA
commissioner)
Appeal,to,the,
Inaction,construed,
Court,of,Tax,
as,affirmation,of,
Appeals,within,30,
Collector’s,
days,,from,notice,
decision
of,decision

Appeal,to,CTA,en,
MR,within,15,days,
banc,15,days,from, Appeal,to,the,
from,receipt,of, END
receipt,of,decision, Supreme,Court
decision
denying,MR

*Automatic, review, is, intended, to, protect, the, interest, of, the, Government., , W/o, auto, review,, the, Commissioner, and, SoF, would, not, know,
about,the,decision,laid,down,by,the,Collector,favoring,the,taxpayer.,Automatic,review,is,necessary,because,nobody,is,expected,to,appeal,
the,decision,of,the,Collector,which,is,favorable,to,the,taxpayer,&,adverse,to,the,Government.,,(Yaokasin,v.,Commissioner,180,SCTA,591

Page 248 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

TABLE OF SPECIAL DUTIES: When Imposed

Where a product or commodity is imported in the Philippines at an export price less than
Anti-Dumping
the normal value in the ordinary course of trade for the like product or article destines for
[Sec. 301, TCCP; RA
consumption in the exporting country or materially regarding establishment of a
8752; Sec. 711, CMTA]
domestic industry producing the like product [Sec. 3, RA 8752]
Whenever any product, commodity or article of commerce is granted directly or indirectly
by the government in the country of origin or exportation, any kind or form of specific
Countervailing
subsidy upon the production, manufacture or exportation of such product, commodity or
[Sec. 302, TCCP; RA
article, and the importation of such subsidized product, has caused or threatens to cause
8751; Sec. 713, CMTA]
material injury to a domestic industry or has materially retarded the growth or prevents
the establishment of a domestic industry [Sec. 1, RA 8751]
If, at the time of importation, any good or its container is not marked in any official
Marking
language of the Philippines as legibly, indelibly and permanently as the nature of the
[Sec. 303, TCCP; Sec.
goods or container will permit, and in such manner as to indicate to an ultimate
710, CMTA]
purchaser in the Philippines the name of the country of origin of the goods
Whenever the President finds that the public interest will be served thereby, additional
customs duty shall be imposed upon articles wholly or in part the growth or product of,
or imported in a vessel of, any foreign country whenever he shall find as a fact that such
country —
Discriminatory
1.! Imposes, directly or indirectly, upon any Phil product unreasonable charge,
[Sec. 304, TCCP; Sec.
exaction, regulation or limitation which is not equally enforced upon the like articles
714, CMTA]
of other foreign countries; or
2.! Discriminates in fact against the commerce of the Philippines, as to place the
commerce of the Philippines at a disadvantage compared with the commerce of any
foreign country.
[Sec 5] General Safeguard Measure: Whenever there is a positive final determination of
the Commission that a product is being imported into the country in increased
quantities, whether absolute or relative to the domestic production, as to be a
substantial cause of serious injury or threat thereof to the domestic industry; however, in
the case of non-agricultural products, the Secretary of Agriculture shall first establish
Safeguard
that the application of such safeguard measures will be in the public interest
[RA 8800; Sec. 712,
[Sec 21] Special Safeguard Measure for Agricultural Products: Imposed upon agricultural
CMTA]
products, consistent with Phil international treaty obligations, if its:
1.! Cumulative import volume in a given year exceeds its trigger volume subject to the
conditions under Sec. 23, RA 8800, or but not currently; and
2.! Actual CIF import price is less than its trigger price subject to conditions under Sec.
24, RA 8800

Page 249 of 270

U.P. LAW BOC TAXATION II TAXATION LAW

TABLE OF SPECIAL DUTIES: Imposing Authority and Amount

Anti-Dumping Countervailing
[Sec. 301, TCC [Sec. 302 as Marking Discriminatory Safeguard
as amended by amended by RA [Sec. 710, CMTA] [Sec. 714, CMTA] [RA 8800]
RA 8752] 8751]
For non-
agricultural
Secretary of Trade and Industry - products:
non-agricultural products Secretary of
Secretary of Agriculture - President Trade and
Commissioner of Secretary of
agricultural products [through a Industry
Customs Agriculture
Tariff Commission - decides proclamation] For agricultural
whether or not to impose anti- products:
dumping/countervailing duty Secretary of
Agriculture

For 1]:

appropriately set
to a level not
exceeding one-
third of the
applicable out-
quota customs
duty on the
agricultural
product under
tariff increase, consideration in
either ad the year when it
valorem or is imposed
specific, or both,
5% of dutiable to be paid For 2], compute
Anti-Dumping
value, deemed to Not exceeding through a cash as follows:
Duty = Normal Equivalent to the
have accrued at 100% ad valorem bond set at a 0 - if price
Value - Export subsidy
the time of upon the articles level sufficient difference is at
Price
importation to redress or most 10% of the
prevent injury to trigger price
the domestic 30% of the
industry [Sec. 8, amount by which
RA 8800] the price
difference
exceeds 10% of
the trigger price
50% - if it
exceeds 40% but
less than 60%
70% - if it
exceeds 60 but
at most 75%
90% - if it
exceeds 75%

Page 250 of 270

U.P. LAW BOC TAXATION II
X.! JUDICIAL REMEDIES
[R.A. No. 1125, as amended by R.A. No. 3457 and
further amended by R.A. No. 9282 and R.A. No. 9503,
and A.M. No. 05-11-07-CTA or the Revised Rules of
the Court of Tax Appeals (RRCTA)]
! Jurisdiction! of! the! Court! of!
Tax! Appeals
1.! Exclusive Appellate
Jurisdiction over Civil Tax
Cases
a.! Civil Cases within the
Jurisdiction of the Court En
Banc
[Sec. 2(a-e), Rule 4, RRCTA]
The Court en banc shall exercise exclusive appellate
jurisdiction to review by appeal the following:
1.! Decisions or resolutions on motions for
reconsideration or new trial of the Court in
Divisions in the exercise of its exclusive appellate
jurisdiction over:
a.! Cases arising from administrative agencies –
Bureau of Internal Revenue, Bureau of
Customs, Department of Finance,
Department of Trade and Industry,
Department of Agriculture;
b.! Local tax cases decided by the Regional Trial
Courts in the exercise of their original
jurisdiction; and
c.! Tax collection cases decided by the Regional
Trial Courts in the exercise of their original
jurisdiction involving final and executory
assessments for taxes, fees, charges and
penalties, where the principal amount of
taxes and penalties claimed is less than one
million pesos.
2.! Decisions, resolutions or orders of the Regional
Trial Courts in local tax cases and in tax
collection cases decided or resolved by them in
the exercise of their appellate jurisdiction;
3.! Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in
Division in the exercise of its exclusive original
jurisdiction over tax collection cases; and
4.! Decisions of the Central Board of Assessment
Appeals (CBAA) in the exercise of its appellate
Page 251 of 270
TAXATION LAW
jurisdiction over cases involving the assessment
and taxation of real property originally decided
by the provincial or city board of assessment
appeals.
b.! Civil Cases within the
Jurisdiction of the Court in
Divisions
[Sec. 3(a), Rule 4, RRCTA]
The Court in Divisions shall exercise exclusive original
or appellate jurisdiction to review by appeal the
following:
1.! Decisions of the Commissioner of Internal
Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other
matters arising under the National Internal
Revenue Code or other laws administered by the
Bureau of Internal Revenue;
2.! Inaction by the Commissioner of Internal
Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other
matters arising under the National Internal
Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National
Internal Revenue Code or other applicable law
provides a specific period for action: Provided,
that in case of disputed assessments, the
inaction of the Commissioner of Internal Revenue
within the one hundred eighty day-period under
Section 228 of the National Internal revenue
Code shall be deemed a denial for purposes of
allowing the taxpayer to appeal his case to the
Court and does not necessarily constitute a
formal decision of the Commissioner of Internal
Revenue on the tax case; Provided, further, that
should the taxpayer opt to await the final
decision of the Commissioner of Internal
Revenue on the disputed assessments beyond
the one hundred eighty day-period
abovementioned, the taxpayer may appeal such
final decision to the Court under Section 3(a),
Rule 8 of these Rules; and Provided, still further,
that in the case of claims for refund of taxes
erroneously or illegally collected, the taxpayer
must file a petition for review with the Court prior
to the expiration of the two-year period under
Section 229 of the National Internal Revenue
Code;
3.! Decisions, resolutions or orders of the Regional
Trial Courts in local tax cases decided or resolved
by them in the exercise of their original
jurisdiction;
U.P. LAW BOC TAXATION II
4.! Decisions of the Commissioner of Customs in
cases involving liability for customs duties, fees
or other money charges, seizure, detention or
release of property affected, fines, forfeitures of
other penalties in relation thereto, or other
matters arising under the Customs Law or other
laws administered by the Bureau of Customs;
5.! Decisions of the Secretary of Finance on customs
cases elevated to him automatically for review
from decisions of the Commissioner of Customs
adverse to the Government under Section 2315 of
the Tariff and Customs Code; and
6.! Decisions of the Secretary of Trade and Industry,
in the case of nonagricultural product,
commodity or article, and the Secretary of
Agriculture, in the case of agricultural product,
commodity or article, involving dumping and
countervailing duties under Section 301 and 302,
respectively, of the Tariff and Customs Code, and
safeguard measures under Republic Act No.
8800, where either party may appeal the
decision to impose or not to impose said duties.
2.!Criminal Cases
a.! Exclusive Original
Jurisdiction in Criminal
Cases
The Court in Divisions shall exercise exclusive original
jurisdiction over all criminal offenses arising from
violations of the National internal Revenue Code or
Tariff and Customs Code and other laws
administered by the Bureau of Internal Revenue or
the Bureau of Customs, where the principal amount
of taxes and fees, exclusive of charges and penalties,
claimed is one million pesos or more. [Sec. 3(b)(1),
Rule 4, RRCTA]
b.! Exclusive Appellate
Jurisdiction in Criminal
Cases
The Court in Divisions shall exercise exclusive
appellate jurisdiction over appeals from the
judgments, resolutions or orders of the Regional Trial
Courts in their original jurisdiction in criminal
offenses arising from violations of the National
Internal Revenue Code or Tariff and Customs Code
and other laws administered by the Bureau of
Internal Revenue or Bureau of Customs, where the
principal amount of taxes and fees, exclusive of
charges and penalties, claimed is less than one
Page 252 of 270
TAXATION LAW
million pesos or where there is no specified amount
claimed. [Sec. 3(b)(2), Rule 4, RRCTA]
Criminal cases within the jurisdiction of the Court
En Banc[Sec. 2(f-h), Rule 4, RRCTA]
The Court en banc shall exercise exclusive appellate
jurisdiction to review by appeal the following:
1.! 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 cases involving criminal offenses
arising from violations of the National Internal
Revenue Code or the Tariff and Customs Code
and other laws administered by the Bureau of
Internal Revenue or Bureau of Customs;
2.! Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in
Division in the exercise of its exclusive appellate
jurisdiction over criminal offenses mentioned in
the preceding subparagraph; and
3.! Decisions, resolutions or orders of the Regional
trial Courts in the exercise of their appellate
jurisdiction over criminal offenses mentioned in
subparagraph (f).
Does the CTA have jurisdiction over a special civil
action for certiorari assailing an interlocutory order
issued by the RTC in a local tax case? YES.
While there is no express grant of such power, with
respect to the CTA, Section 1, Article VIII of the 1987
Constitution provides, nonetheless, that judicial
power shall be vested in one Supreme Court and in
such lower courts as may be established by law and
that judicial power includes the duty of the courts of
justice to settle actual controversies involving rights
which are legally demandable and enforceable, and
to determine whether or not there has been a grave
abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or
instrumentality of the Government.
On the strength of the above constitutional provisions,
it can be fairly interpreted that the power of the CTA
includes that of determining whether or not there has
been grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of the RTC in issuing
an interlocutory order in cases falling within the
exclusive appellate jurisdiction of the tax court. It,
thus, follows that the CTA, by constitutional mandate,
is vested with jurisdiction to issue writs of certiorari in
these cases. [City of Manila v. Grecia-Cuerdo, (2014)]
U.P. LAW BOC TAXATION II
! Judicial! Procedures
1.! Judicial Action for
Collection of Taxes
a.! Internal Revenue Taxes
The remedies for the collection of internal revenue
taxes, fees or charges, and any increment thereto
resulting from delinquency can be through the
institution of a civil or criminal action. [Sec. 205,
NIRC]
Note: See Taxpayer’s Remedies – Collection above.
When this remedy is resorted to:
The tax assessment becomes final and executory
because of the failure to appeal.
Even pending decision of the administrative protest
[CIR v. Union Shipping, 1990]
b.! Local Taxes
The LGU concerned may enforce the collection of
delinquent taxes, fees, charges or other revenues by
civil action in any court of competent jurisdiction. The
civil action shall be filed by the local treasurer. [Sec.
183, LGC]
MTC/RTC depending on jurisdictional threshold
amount.
Prescriptive period
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
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.
Local taxes, fees, or charges may be collected within
5 years from the date of assessment by
administrative or judicial action
No judicial or administrative action for collection can
be instituted after lapse of the period for assessment
except when there is fraud or intent to evade tax. [Sec.
194 LGC]
Page 253 of 270
TAXATION LAW
The running of the periods of prescription shall be
suspended for the time during which:
1.! The treasurer is legally prevented from making
the assessment of collection;
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. [Sec. 194, LGC]
2.!Civil Cases
a.! Who May Appeal, Mode of
Appeal, Effect of Appeal
Appeal to CTA Division
1.! A party aggrieved or adversely affected by the
decision or ruling or inaction of
a.! CIR;
b.! Commissioner of Customs;
c.! Secretary of Finance;
d.! Secretary of Trade and Industry;
e.! Secretary of Agriculture; or
f.! RTC exercising original jurisdiction
2.! May appeal within 30 days from the receipt of
the copy of the decision or ruling, or the
expiration of the period fixed by law for the
Commissioner to decide, to the Court of Tax
Appeals Division.
Mode of Appeal: Rule 42
Aggrieved party may file a motion for reconsideration
or new trial within 15 days from receipt of the copy of
the decision.
Appeal to CTA en Banc
A party adversely affected by a decision or resolution
of a Division of the Court on a motion for
reconsideration or new trial may appeal within 15
days from receipt of the copy of the decision.
Mode of Appeal: Rule 43
A party adversely affected by a decision or ruling of
the Central Board of Assessment Appeals and the
Regional Trial Court in the exercise of their appellate
jurisdiction may appeal within 30 days from the
receipt of the copy of the decision.
SUSPENSION OF COLLECTION OF TAX
General rule: No appeal taken to the Court shall
suspend the payment, levy, distraint, or sale of any
property of the taxpayer for the satisfaction of his tax
liability as provided under existing laws.
U.P. LAW BOC TAXATION II
Exception: Where the collection of the amount of the
taxpayer’s liability, sought by means of a demand for
payment, by levy, distraint or sale of any property of
the taxpayer, or by whatever means, as provided
under existing laws, may jeopardize the interest of
the Government or the taxpayer, an interested party
may file a motion for the suspension of the collection
of the tax liability [Sec. 11, RA 1125, as amended]
Injunction not available to restrain collection
No court shall have authority to grant an injunction to
restrain the collection of any national internal
revenue tax, fee or charge imposed by the Code. [Sec.
217, NIRC]
Exception: Sec. 11, RA 1125, supra.
Note: The LGC does not have a provision prohibiting
injunction in the collection of tax.
The requirement for depositing an amount or posting
a surety bond as a condition for the suspension of the
collection of taxes may be dispensed with.
The CTA has ample authority to dispense with the
deposit of the amount claimed or the filing of the
required bond, whenever the method employed by
the BIR in the collection of tax jeopardizes the
interest of the taxpayer for being patently in violation
of law. [Sps. Pacquiao v. CTA First Division, G.R. No.
213394 (2016)]
TAKING OF EVIDENCE
The Court may receive evidence in the following
cases:
1.! In all cases falling within the original jurisdiction
of the Court in Division pursuant to Section 3,
Rule 4 of these Rules; and
2.! In appeals in both civil and criminal cases where
the Court grants a new trial pursuant to Section 2,
Rule 53 and Section 12, Rule 124 of the Rules of
Court. [Sec. 2, Rule 12, A.M. No. 05-11-07]
Taking of evidence by:
Justice—
The Court may, motu proprio or upon proper motion,
direct that a case, or any issue therein, be assigned to
one of its members for the taking of evidence, when
the determination of a question of fact arises at any
stage of the proceedings, or when the taking of an
account is necessary, or when the determination of
an issue of fact requires the examination of a long
account. The hearing before such justice shall
proceed in all respects as though the same had been
made before the Court.
Upon the completion of such hearing, the justice
concerned shall promptly submit to the Court a
Page 254 of 270
TAXATION LAW
written report thereon, stating therein his findings
and conclusions. Thereafter, the Court shall render its
decision on the case, adopting, modifying, or
rejecting the report in whole or in part, or, the Court
may, in its discretion, recommit it to the justice with
instructions, or receive further evidence. [Sec. 12, RA
No. 1125, as amended; also Sec. 3, Rule 12, A.M. No.
05-11-07]
Court Official –
In default or ex parte hearings, or in any case where
the parties agree in writing, the Court may delegate
the reception of evidence to the Clerk of Court, the
Division Clerks of Court, their assistants who are
members of the Philippine bar, or any Court attorney.
The reception of documentary evidence by a Court
official shall be for the sole purpose of marking,
comparison with the original, and identification by
witnesses of such documentary evidence. The Court
official shall have no power to rule on objections to
any question or to the admission of exhibits, which
objections shall be resolved by the Court upon
submission of his report and the transcripts within
ten days from termination of the hearing. [Sec. 4, Rule
12, A.M. No. 05-11-07]
MOTION FOR RECONSIDERATION OR NEW TRIAL
[Rule 15, A.M. No. 05-11-07]
Who: Any aggrieved party may seek a reconsideration
or new trial of any decision, resolution or order of the
Court.
May be opposed by: The adverse party may file an
opposition to the motion for reconsideration or new
trial within ten days after his receipt of a copy of the
motion for reconsideration or new trial of a decision,
resolution or order of the Court.
When: He shall file a motion for reconsideration or
new trial within fifteen days from the date he received
notice of the decision, resolution or order of the Court
in question.
The Court shall resolve the motion for
reconsideration or new trial within three months from
the time it is deemed submitted for resolution.
How: The motion shall be in writing stating its
grounds, a written notice of which shall be served by
the movant on the adverse party.
A motion for new trial shall be proved in the manner
provided for proof of motions. A motion for the cause
mentioned in subparagraph [a] of the preceding
section shall be supported by affidavits of merits
which may be rebutted by counter-affidavits. A
motion for the cause mentioned in subparagraph (b)
U.P. LAW BOC TAXATION II
of the preceding section shall be supported by
affidavits of the witnesses by whom such evidence is
expected to be given, or by duly authenticated
documents which are proposed to be introduced in
evidence.
A motion for reconsideration or new trial that does
not comply with the foregoing provisions shall be
deemed pro forma, which shall not toll the
reglementary period for appeal.
Effect: The filing of a motion for reconsideration or
new trial shall suspend the running of the period
within which an appeal may be perfected.
Grounds: A motion for new trial may be based on one
or more of the following causes materially affecting
the substantial rights of the movant:
1.! Fraud, accident, mistake or excusable negligence
which ordinary prudence could not have guarded
against and by reason of which such aggrieved
party has probably been impaired in his rights; or
2.! Newly discovered evidence, which he could not,
with reasonable diligence, have discovered and
produced at the trial and, which, if presented,
would probably alter the result.
A motion for new trial shall include all grounds then
available and those not included shall be deemed
waived.
Restrictions: No party shall be allowed to file a
second motion for reconsideration of a decision, final
resolution or order; or for new trial.
b.! Appeal to the CTA En Banc
No civil proceeding involving matter arising under the
National Internal Revenue Code, the Tariff and
Customs Code or the Local Government Code shall
be maintained, except as herein provided, until and
unless an appeal has been previously filed with the
CTA and disposed of in accordance with the
provisions of this Act.
A party adversely affected by a resolution of a
Division of the CTA on a motion for reconsideration or
new trial, may file a petition for review with the CTA
en banc. [Sec. 18, RA No. 1125 as amended]
The CTA En Banc cannot annul a final and
executory judgment of a division of the court
The laws creating the CTA and expanding its
jurisdiction, and the CTA’s own rules of procedure do
not provide for a scenario where the CTA sitting en
banc is asked to annul a decision of one of its
Page 255 of 270
TAXATION LAW
divisions. Similarly, the SC or the CA divisions are not
considered separate and distinct courts but are
divisions of one and the same court. There is no
hierarchy of courts within the SC and the CA.
Annulment by a collegial court, sitting En Banc is
tantamount to allowing a court to annul its own
judgment and acknowledging that a hierarchy exists
within such court. A proper remedy would have been
an original action for Certiorari under Rule 65. [CIR v.
Kepco Ilijan Corp., G.R. No. 199422 (2016)]
c.! Petition for Review on
Certiorari to the Supreme
Court
[Rule 16, A.M. No. 05-11-07]
A party adversely affected by a decision or ruling of
the Court en banc may appeal by filing with the
Supreme Court a verified petition for review on
certiorari within fifteen days from receipt of a copy of
the decision or resolution, as provided in Rule 45 of
the Rules of Court. If such party has filed a motion for
reconsideration or for new trial, the period herein
fixed shall run from the party’s receipt of a copy of the
resolution denying the motion for reconsideration or
for new trial.
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
Supreme Court.
3.!Criminal Cases
a.! Institution and Prosecution
of Criminal Actions
Institution of criminal action
Instituted by the filing an information in the name of
the People of the Philippines
Those involving violations of the NIRC and other
laws enforced by the BIR: Must be approved by the
CIR
Those involving violations of the tariff and Customs
Code and other laws enforced by the Bureau of
Customs: Must be approved by the Commissioner of
Customs
Institution shall interrupt the running of the period of
prescription
U.P. LAW BOC TAXATION II TAXATION LAW

Prosecution of criminal action official capacity in all cases brought to the Court in
Conducted and prosecuted under the direction and the exercise of its appellate jurisdiction. He may
control of the public prosecutor deputize the legal officers of the Bureau of Internal
Revenue in cases brought under the National Internal
Those involving violations of the NIRC and other Revenue Code or other laws enforced by the Bureau
laws enforced by the BIR or violations of the tariff of Internal Revenue, or the legal officers of the
and Customs Code and other laws enforced by the Bureau of Customs in cases brought under the Tariff
Bureau of Customs - The prosecution may be and Customs Code of the Philippines or other laws
conducted by their respective duly deputized legal enforced by the Bureau of Customs, to appear in
officers. behalf of the officials of said agencies sued in their
official capacity: Provided, however, such duly
INSTITUTION OF CIVIL ACTION IN CRIMINAL deputized legal officers shall remain at all times
ACTION under the direct control and supervision of the
In cases within the jurisdiction of the Court, the Solicitor General.
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
c.! Petition for Review on
proceeding. The filing of the criminal action shall Certiorari to the Supreme
necessarily carry with it the filing of the civil action. Court
No right to reserve the filing of such civil action
separately from the criminal action shall be allowed A party adversely affected by a decision or ruling of
or recognized. the CTA en banc may file with the Supreme Court a
verified petition for review on certiorari pursuant to
b.! Appeal and Period to Appeal Rule 45 of the 1997 Rules of Civil Procedure. [Sec. 19,
R.A. No. 1125 as amended]
in Criminal Cases
Period to Mode of
Deciding Body
Appeal Appeal
Regional Trial
Appeal
Court in the
pursuant to
exercise of its 15 days from
Sec. 3[a] and 6,
original receipt of
Rule 122 of the
jurisdiction decision
Rules of Court
[to CTA
Division]
15 days from Petition for
receipt of review as
decision provided in
CTA Division Rule 43 of the
[to CTA En May be Rules of Court
Banc] extended for
good cause for The Court En
not more than Banc shall act
15 days on the appeal.
Regional Trial
Petition for
Courts in the
15 days from review as
exercise of their
receipt of provided in
appellate
decision Rule 43 of the
jurisdiction
Rules of Court
[To CTA
division]

Solicitor General as counsel for the People and

government officials sued in their official capacity
The Solicitor General shall represent the People of
the Philippines and government officials sued in their

Page 256 of 270

U.P. LAW BOC TRAIN LAW TAXATION LAW

TRAIN LAW
Taxation Law

Page 257 of 270

U.P. LAW BOC TRAIN LAW TAXATION LAW

On December 19, 2017, the President signed into law package 1 of the Tax Reform for Acceleration and Inclusion
(“TRAIN”) bill or Republic Act (“R.A.”) No. 10963. The law contains amendments to several provisions of the National
Internal Revenue Code of 1997 (“NIRC” or “Tax Code”) on individual income taxation, passive income for both
individuals and corporations, estate tax, donor’s tax, value-added tax (“VAT”), excise tax, and documentary stamp
tax (“DST”), among others. Below is a comparison of the old NIRC provisions and the changes introduced by TRAIN.
(PWC Tax Alert No. 34-2018)

Tax Particulars NIRC TRAIN Law (RA 10963)

On powers and authority granted to the Commissioner of Internal Revenue
Added: Cooperatives
Development Authority
required to submit a tax
incentive report to the
BIR and Dep’t of
Finance. The report
Power to obtain Sec. 5 (B) Commissioner’s power to obtain information from any shall include
information, and to person other than the person whose internal revenue tax liability is information on the
summon, examine, subject to audit or investigation or from any office or officer of the income tax, VAT and
and take testimony national and local governments, government agencies and other tax incentive
of persons instrumentalities. availed of. The report
shall be included in the
database created under
the Tax Incentives
Management and
Transparency Act
(TIMTA) (RA 10708).
Added: Exercise of this
authority
Examination of Sec. 6 (A) The Commissioner or his duly authorized representative
notwithstanding any
returns and may authorize the examination of any taxpayer and the
law requiring the prior
determination of assessment of the correct amount of tax after a return has been
authorization of any
tax due filed.
government agency or
instrumentality.
Added: Now requires
mandatory
consultation from both
public and private
appraisers, and with
prior notice to affected
parties. There is an
automatic adjustment
of the zonal valuation
once every three years
Authority to
Sec. 6 (E) The Commissioner is authorized to determine the fair through issuance of
prescribe real
market value of real properties. regulations by the
property values
Secretary of Finance. No
adjustment in zonal
valuation shall be valid
unless published or
posted. The basis of
valuation, as well as
records of consultation,
shall be public records
available for inquiry of
any taxpayer.
Adjustments in personal income taxation
Individual income Sec. 24 (A) (2) Personal income tax (A) Reduced personal

Page 258 of 270

U.P. LAW BOC TRAIN LAW TAXATION LAW

tax income tax rates

rates
Not over 10k 5% Effective 1 Jan 2018
500 + 10% of the excess over Not over
Over 10k but not over 30k 0%
10k 250k
2.5k + 15% of the excess over Over 250k 20% of the
Over 30k but not over 70k
30k but not excess over
8.5k + 20% of the excess over over 400k 250k
Over 70k but not over 140k
70k Over 400k 30k + 25%
22.5k + 25% of the excess over but not of the excess
Over 140k but not over 250k over 800k over 400k
140k
50k + 30% of the excess over Over 800k 130k + 30%
Over 250k but not over 500k but not of the excess
250k
125k + 32% of the excess over over 2M over 800k
Over 500k Over 2M 490k + 32%
500k
but not of the excess
over 8M over 2M
2.41M + 35%
Over 8M of the excess
over 8M

Effective 1 Jan 2019

Not over
0%
250k
Over 250k 15% of the
but not excess over
over 400k 250k
Over
22.5k + 20%
400k but
of the excess
not over
over 400k
800k
Over
102.5k + 25%
800k but
of the excess
not over
over 800k
2M
402.5k +
Over 2M
30% of the
but not
excess over
over 8M
2M
2,202.5k +
35% of the
Over 8M
excess over
8M

(B) New: Purely self-

employed and
professionals
If gross sales/receipts
and other non-
operating income do not
exceed the 3M VAT
threshold, taxpayer may
opt to be taxed at: (i) 8%
of gross sales/receipts
and other non-
operating income in

Page 259 of 270

U.P. LAW BOC TRAIN LAW TAXATION LAW

excess of 250k in lieu of

graduated rates and
percentage tax; or (ii)
graduated rates in (A)
above.

(C) New: Mixed income

earners:
On their compensation
income – at graduated
rates
On their income from
the conduct of trade or
business or the practice
of profession – same as
(B) above
Now taxed: PCSO and
lotto winnings
Passive income exceeding 10k subject to
Sec. 24 (B) (1) PCSO and lotto winnings are exempt from the 20%
from interest, the 20% final tax.
final tax.
royalties, prizes
and other winnings Increased Tax: Interest
Interest income from a depository bank under the EFCDS is
of individual citizen income from a
subject to a final tax of 7.5%.
and resident alien depository bank under
the EFCDS, final tax
now at 15%.
Capital gains from
sale of shares of
stock not traded in
Sec. 24 (C) Capital gains tax on sale of shares not traded in the Increased Tax: now flat
the local stock
stock exchange: first 100k at 5%, and excess at 10% rate of 15%.
exchange of
individual citizen
and resident alien
New: Sunset clause
Preferential tax
treatment shall not
apply for employees of
ROHQ, RHQ, OBU, and
Petroleum service
contractors and
subcontractors which
registered with the
Securities and Exchange
Alien individuals Sec. 25 (C), (D) and (E) A rate of 15% final withholding tax on the
Commission beginning 1
and qualified gross compensation income of alien individuals and qualified
January 2018.
Filipinos employed Filipinos employed by the following employers: RHQ, ROHQ,
by specific OBUs, and Petroleum service contractors and subcontractors.
[ITEM VETOED]
employers
Grandfather clause:
Present and future
qualified employees of
existing ROHQ, RHQ,
OBU, and Petroleum
service contractors and
subcontractors as of 31
Dec 2017 shall enjoy
preferential tax
treatment.

Page 260 of 270

U.P. LAW BOC TRAIN LAW TAXATION LAW

Adjustments in corporate income tax provisions

Government-
owned or
controlled Sec. 27 (C) GSIS, SSS, PhilHealth, the local water districts and the Removed Tax
corporations, PCSO are exempt from corporate income tax. exemption of PCSO
agencies or
instrumentalities
Passive income on
interest from
Increased Tax: Interest
deposits and yield
income from a
or any other Sec. 27 (D) (1) Interest income from a depository bank under the
depository bank under
monetary benefit EFCDS subject to final tax of 7.5%.
the EFCDS, final tax
from deposit
now at 15%.
substitutes, trust
funds and royalties
Capital gains from
sale of shares of
stock not traded in
Sec. 27 (D) (2) Capital gains tax on sale of shares not traded in the Increased Tax: now flat
the local stock
stock exchange: first 100k at 5%, and excess at 10% rate of 15%.
exchange of
domestic
corporations
Adjustments on provisions for exclusions and deductions
Increased exemption:
Amount of exempt 13th
Sec. 32 (B) (7) (e) 13th month pay and other benefits amounting to month pay and other
On exemption of
82k is excluded from the computation of gross income. benefits is increased to
13th month pay and
90k.
other benefits
The President shall adjust the amount of said exemption to its
exemption
present value using the Consumer Price Index (CPI) Removed CPI
adjustments on said
amount.
Increased tax: Effective
Sec. 33 (A) Fringe benefits given to non-rank and file employees 1 Jan 2018, final tax rate
Fringe benefit tax are subject to 32% final tax rate. The grossed-up monetary value now 35%; grossed-up
is determined by dividing the actual monetary value by 68%. monetary value
determined using 65%.
New: OSD may be
availed of by a general
Sec. 34 (L) In lieu of the itemized allowable deductions, an
Optional standard professional partnership
individual subject to tax, other than a non-resident alien, may
deduction (“OSD”) only once, either the
elect an OSD of 40% of gross sales or gross receipts.
partnership or the
partners.
Deduction of
Sec. 34 (M) Allowed deduction of 24k per year or 200 per month
premium payments
worth of premium payments on health and/or hospitalization
on health and/or Repealed
insurance of an individual provided that the family has a gross
hospitalization
income not exceeding 250k for the taxable year.
insurance
Secs. 35 and 79 (D) Exemptions on the following:
On personal and
50k worth of basic personal exemption; 25k worth of additional
additional Repealed
exemption per qualified dependent not exceeding four; Personal
exemptions
exemption allowable to non-resident alien individual
Exemption allowed Sec. 62 Exemption of 20k allowed from the income of the estate or
Repealed
to estate and trust trust.
Income tax Sec. 79 (F) Husband deemed head of the family and proper
Repealed
collected at source claimant of the additional exemption. Taxes to be withheld from

Page 261 of 270

U.P. LAW BOC TRAIN LAW TAXATION LAW

– husband and wife the wages of the wife must be in accordance with the table for
zero exemption of the withholding tax table.
Filing of tax returns
An individual whose
taxable income (not
from business or
profession) does not
exceed 250k shall not
be required to file an
ITR. Those engaged in
business or profession
required to file ITR
regardless of gross
income.

New, Form of an ITR:

The ITR shall consist of
a maximum of four
pages in paper or
electronic form
Sec. 51 (A) (2) (a) An individual whose gross income does not containing only the
Individual exceed his total personal and additional exemptions for following information:
dependents are not required to file an income tax return (“ITR”). (i) Personal profile and
information; (ii) Total
gross sales, receipts or
income from
compensation of
services rendered,
conduct of trade or
business or the exercise
of a profession, except
income subject to final
tax as provided under
the Tax Code; (iii)
Allowable deductions
under the Tax Code; (iv)
Taxable income as
defined in the Tax Code;
and (v) Income tax due
and payable.
Entirely new provision:
Sec. 51-A An individual
receiving purely
compensation income
from one employer
wherein the tax of which
has been correctly
withheld shall not be
Substituted Filing [instituted via Revenue Regulation] required to file an
annual ITR.
The certificate of
withholding, filed by the
employer and stamped
“received” by the BIR,
shall be tantamount to
the substituted filing of
income tax return of the

Page 262 of 270

U.P. LAW BOC TRAIN LAW TAXATION LAW

employees.
New provision
prescribing the form of
an ITR same as with
Sec. 52 (A) The return shall be filed by the president, vice- individuals (supra)
Corporate president or other principal officer, and shall be sworn to by such
officer and by the treasurer or assistant treasurer. The foregoing provisions
shall not affect the
implementation of
TIMTA.
Payment and Sec. 56 (A) (2) When a tax due is in excess of 2k, the taxpayer Changed date: Second
assessment of other than a corporation may elect to pay the tax due in two equal instalment to be paid on
income tax for instalments; the first instalment paid at the time the return is filed or before 15 Oct
individuals and and the second instalment on or before 15 July following the close following the close of
corporations of the calendar year. the calendar year.
Reduced withholding
Sec. 57 (B) Secretary of Finance may require withholding of tax on rate: Beginning 1 Jan
Withholding of items of income payable to natural or juridical persons, residing in 2019, rate of
creditable tax at the Philippines by payor-corporations/persons at the rate of 1% to withholding shall not be
source 32% thereof, which shall be credited against the income tax less than 1% but not
liability of the taxpayer. more than 15% of the
income payment.
Changed date,
simplified: The return
for both final and
creditable withholding
Sec. 58 Return for final withholding tax filed and paid made within taxes shall be filed and
25 days from the close of each calendar quarter. the payment made not
later than the last day of
Return for creditable withholding taxes filed and paid not later the month following the
On return and than the last day of the month following the close of the quarter close of the quarter
payment of taxes during which the withholding taxes was made. during which the
withheld at source withholding was made.
The Commissioner, with the approval of the Secretary of Finance,
may require the withholding agents to pay or deposit the taxes Removed: The provision
deducted or withheld at more frequent intervals when necessary allowing the
to protect the interest of the government. Commissioner of
Internal Revenue to
adjust the withholding
of tax at more frequent
intervals is removed.
Changed date: Filing of
Sec. 74 (A) Every individual subject to income tax and is receiving
Declaration of declaration of estimated
self-employment income shall make and file a declaration of his
income tax for income shall be on or
estimated income for the current taxable year on or before 15 April
individuals before 15 May of the
of the same taxable year.
same taxable year.
Changed date:
Return and Payment of the fourth
Sec. 74 (B) The amount of estimated income shall be paid in 4
payment of instalment shall be paid
instalments with the fourth instalment to be paid on or before 15
estimated income on or before 15 May of
April of the following calendar year.
tax the following calendar
year.

Page 263 of 270

U.P. LAW BOC TRAIN LAW TAXATION LAW

Tax Particulars NIRC TRAIN Law (RA 10963)

Estate Tax Table
Over But not The tax Plus Of the
Over shall be Excess Over
Sec. 84. 0 200,000 Exempt
Estate tax rate is fixed
Rate of Estate 200,000 500,000 0 5% 200,000
at 6%
Tax 500,000 2,000,000 15,000 8% 500,000
2,000,000 5,000,000 135,000 11% 2,000,000
5,000,000 10,000,000 465,000 15% 5,000,000
10,000,000 And Over 1,215,000 20% 10,000,000
•! Removed the
deductions of
Citizens or residents are allowed the following deductions, among funeral expenses,
others: judicial expenses,
and medical
Sec. 86(A) •! Expenses, losses, indebtedness, and taxes (among others, funeral
expenses.
Deductions for expenses not to exceed PHP200,000 and judicial expenses)
•! Increased
Citizens or •! Family home not to exceed PHP1m
allowance for
Residents •! Standard deduction of PHP1m
deduction of family
•! Medical expenses not to exceed PHP500,000. home to PHP10m.
•! Increased the
standard deduction
to PHP5m
•! Removed
allowance for
deduction of
expenses, losses,
indebtedness, and
taxes.
•! Provides for a
A nonresident alien is allowed the following deductions, among others: standard deduction
Sec. 86(B)
•! Expenses, losses, indebtedness, and taxes (among others, funeral of PHP500,000.
Deductions for •! Provides that a
expenses not to exceed PHP200,000 and judicial expenses)
Nonresident proportion of the
•! Property previously taxed
not a citizen claims against the
•! Transfers for public use
estate, claims
against insolvent
persons, and
unpaid mortgages
may be claimed as
a deduction from
the estate.

Sec. 86(D) An Individual who is a nonresident not citizen of the Philippines shall
Deductions for not be allowed to claim any deduction unless the value of the
Repealed
Nonresident nonresident’s gross estate situated outside the Philippines is included
not a citizen in the return filed.
Sec. 89
Written notice of death required for gross estates exceeding
Filing a Notice Repealed
PHP20,000
of Death
Sec. 90(A)(1) All transfers subject to
All transfers subject to estate tax or those, though exempt from tax,
When required estate tax or regardless
have gross values exceeding PHP200,000, or regardless of the gross
to file an of the gross value of the
value of the estate where the said estate consists of registered
estate tax estate where the said
or registrable property shall file an estate tax return.
return estate consists of

Page 264 of 270

U.P. LAW BOC TRAIN LAW TAXATION LAW

registered or
registrable property
shall file an estate tax
return.
Estate tax returns
Sec. 90(A)(3)
showing a gross value
When CPA Estate tax returns showing a gross value exceeding
exceeding PHP5m
Certificate PHP2M must be certified by a CPA.
must be certified by a
required
CPA
Sec. 90(B) The estate tax return
Deadline of The estate tax return must be filed within six months from the must be filed within
Estate Tax decedent’s death. one year from the
Return decedent’s death.
An estate with
insufficient cash is
Sec. 91
allowed to pay the
Additional
estate tax due by
Provision
installment within two
allowing
years from the statutory
Payment by
date for its payment
Installment
without civil penalty
and interest.
Sec. 97 A bank shall not allow withdrawal from a decedent’s bank
Sec. 97 Banks, which has
account without the Commissioner certifying that taxes imposed
Banks can now knowledge of the death
thereon have already been paid.
allow of the person, shall
withdrawal allow withdrawals from
The administrator of the estate or any one of the heirs may, when
from a decedent’s deposit
authorized by the Commissioner, withdraw an amount not exceeding
decedent’s account subject to a 6%
PHP20, 000 even without the certification from the Commissioner that
deposit final withholding tax.
the estate taxes have been paid.
Donor’s tax rates are as follows:

a.! Not stranger – based on total net gift

Over But not The tax Plus Of the
Over shall be Excess Over Donor’s tax rate fixed at
0 100,000 Exempt 6% based on total gifts
100,000 200,000 0 2% 100,000 in excess of
Sec. 84.
PHP250,000 (exempt
Rate of 200,000 500,000 2,000 4% 200,000
gift) made during the
Donor’s Tax 500,000 1,000,000 14,000 6% 500,000
calendar year whether
1,000,000 3,000,000 44,000 8% 1,000,000
the donee is a stranger
3,000,000 5,000,000 204,000 10% 3,000,000 or not.
5,000,000 10,000,000 404,000 12% 5,000,000
10,000,000 1,004,000 15% 10,000,000

b.! Stranger – 30% based on net gifts

A sale, exchange, or
other transfer made in
Sec. 100.
the ordinary course of
Additional
business (i.e., bona fide
Provision on
transaction, at arm’s
transfer for The amount by which the fair market value exceeded the value of the
length, and free from
less than consideration in a transfer of property shall be deemed a gift.
donative intent) shall
adequate and
be considered as made
full
for an adequate and
consideration
full consideration.

Page 265 of 270

U.P. LAW BOC TRAIN LAW TAXATION LAW

Sec. 101
Exemption of Sec. 101 (A) PHP10,000 amount of dowries or gifts made on account of
Repealed
Dowries marriage are exempt from donor’s tax.
Repealed
•! [ITEM VETOED]
Expressly added as
“export sales” the
sale and delivery of
goods to registered
enterprises within
a separate customs
territory as
provided under
special laws and
The following sales by VAT-registered persons shall be subject to zero within Tourism
percent (0%) rate: Enterprise Zones
a.! Export sales which include the following: declared by TIEZA.
1.! sale and actual shipment of goods from the Philippines to a
•! Items 2, 3, and 5
foreign country;
shall be subject to
2.! sale of raw materials or packaging materials to a nonresident
12% VAT upon the
buyer for delivery to a resident local export-oriented enterprise;
successful
3.! sale of raw materials or packaging materials to export-oriented
establishment and
enterprise whose export sales exceed seventy percent (70%) of
implementation of
Sec. 106 (A) (2) total annual production;
an enhanced VAT
Limiting the 4.! sale of gold to the Bangko Sentral ng Pilipinas (BSP);
refund system.
zero-rated sale 5.! those considered export sales under Executive Order No. 226,
of goods otherwise known as the Omnibus Investment Code of 1987, and •! For Item 4, Sale of
gold to BSP is
transactions other special laws; and
reclassified from
6.! sale of goods, supplies, equipment and fuel to persons
export sales to
engaged in international shipping or international air transport
exempt
operations.
transactions.
b.! Foreign currency denominated sales; and •! Item 6 will qualify
as export sales
c.! Sales to persons or entities exempted under special laws or provided that the
international agreements goods, supplies,
equipment and
fuel shall be used
for international
shipping and air
transport
operations.
•! Foreign currency
denominated sales
are removed from
zero-rated sale of
goods.
Inclusion of sale of
electricity by
generation companies,
transmission by any
Sec 108(A)
entity, and distribution
Additional Sec. 108 (A) Provision defines sale or exchange of services.
companies,
Provision
including electric
cooperatives in the
definition of sale or
exchange of services.

Page 266 of 270

U.P. LAW BOC TRAIN LAW TAXATION LAW

•! Item 1 will qualify

as zero-rated sale
of services if these
services are
exclusively for
international
shipping and air
transport
operations.
•! For Item 2, Zero-
rating for transport
of passenger and
cargo from the
Philippines to
Sec. 108 (B) Zero-rated sales of services include: foreign country
1.! Services rendered to persons engaged in international shipping or shall apply for
international air transport operations; domestic air or sea
2.! Transport of passengers and cargo by air or sea vessels from the vessels only.
Sec 108(B) Philippines to a foreign country; •! Items 3 and 4 shall
Limiting the 3.! Services performed by subcontractors and/or contractors in be subjected to
zero-rated sale processing, converting, of manufacturing goods for an enterprise 12% VAT upon
of services whose export sales exceed 70% of total annual production; and successful
transactions 4.! Processing, manufacturing or repacking goods for other persons establishment and
doing business outside the Philippines which goods are implementation of
subsequently exported, where the services are paid for in an enhanced VAT
acceptable foreign currency and accounted for in accordance with refund system.
the rules and regulations of BSP •! [ITEM VETOED]
Expressly added as
zero-rated
transactions the
sale of services to
registered
enterprises within
a separate customs
territory as
provided under
special laws and
within Tourism
Enterprise Zones
as declared by
TIEZA.

VAT exemptions include, among others, the following transactions: •! Item 1 was
1.! Importation of professional instruments, etc. belonging to persons expanded to
coming to settle in the Philippines, for their personal use, include those
accompanying such persons or arriving within 90 days before or belonging to
after their arrival; overseas Filipinos,
Sec 109(1)
2.! Sale of real property utilized for low- cost housing, sale of and their families
Expansion of
residential lot valued at PHP1,919,500 and sale of house and lot and descendants
VAT Exempt
and other residential dwellings valued at PHP3,199,200; who are now
Transactions
3.! Lease of residential unit with monthly rental of PHP12,800 residents or
4.! Importation of fuel, goods, and supplies by persons engaged in citizens of other
international shipping of air transport operations; and countries.
5.! Other sale of lease of goods or properties or the performance of •! For item 2,
services, the amount of which does not exceed PHP1.919,500. beginning 1

Page 267 of 270

U.P. LAW BOC TRAIN LAW TAXATION LAW

January 2021, the

VAT exemption
shall only apply to
sale of real
properties not
primarily held for
sale to customers
or held for lease in
the ordinary course
of trade or
business, sale of
real property
utilized for
socialized housing
and sale of house
and lot and other
residential
dwellings with
threshold reduced
to PHP2m.
•! For item 3, the
lease threshold
would be increased
to PHP15,000 and
it will no longer be
adjusted to its
present value.
•! For item 4,
exemption of the
importation of fuel,
goods and supplies
shall only apply if
such are used for
international
shipping or air
transport
operations.
•! For item 5, the VAT
threshold is
increased to
PHP3m.
•! Added the
exemption of sale
or lease of goods
and services to
senior citizens and
persons with
disabilities.
•! Added the
exemption for
transfers of
property pursuant
to Section 40 (C)(2)
of the Tax Code.
•! Added the
exemption for

Page 268 of 270

U.P. LAW BOC TRAIN LAW TAXATION LAW

association dues,
membership fees,
and other
assessments and
charges collected
by homeowners
associations and
condominium
corporations.
•! Sale of gold to BSP
is now classified
under VAT exempt
transactions.
•! Beginning 1
January 2019, sale
of drugs and
medicines
prescribed for
diabetes, high
cholesterol and
hypertension
would be included
as VAT exempt
transactions.
The amortization of the
input VAT shall only be
allowed until 31
Sec. 110 (A)
The input tax on goods purchased or imported for use in trade or December 2021 after
(2)(b)
business for which deduction for depreciation is allowed shall be spread which taxpayers with
No more
evenly over the month of acquisition and the 59 succeeding months if unutilized input VAT on
amortization
the aggregate acquisition cost for such capital goods
of input VAT
goods, excluding the VAT component thereof, exceeds PHP1M. purchased or imported
on purchases
shall be allowed to
exceeding 1m
apply the same as
scheduled until fully
utilized.
The Commissioner
shall grant a refund for
creditable input taxes
within 90 days from the
date of submission of
The Commissioner shall grant a refund or issue the tax credit certificate the official receipts or
for creditable input taxes within 120 days from the date of submission of invoices and other
complete documents. documents in support
Sec. 112(c)
of the application filed.
Period within
In case of full or partial denial of the claim for tax refund or tax credit, or
which the VAT
the failure on the part of the Commissioner to act on the application Should the
claim should
within the period prescribed above, the taxpayer affected may, within Commissioner find that
be decided by
30 days from the receipt of the decision denying claim or after the the grant of refund is
the BIR
expiration of the 120 day period, appeal the decision or the unacted not proper, the
claim with the Court of Tax Appeals (CTA). Commissioner must
state in writing the
legal and factual basis
for the denial. In case of
full or partial denial of
claim for tax refund,
the taxpayer may

Page 269 of 270

U.P. LAW BOC TRAIN LAW TAXATION LAW

within 30 days from

receipt of the decision
denying the claim
appeal the decision
with the CTA.

Penalty for failure on

the part of any official,
agent, or employee of
the BIR to act on the
application within the
90-day period shall be
imposed.
Effective 1 January
Sec. 114(a) Every person liable to pay the VAT shall file a quarterly return of his 2023, the filing and
Filing of gross amount of his gross sales/receipts within 25 days following the payment of VAT shall
Quarterly VAT close of each taxable quarter. Moreover, VAT-registered persons shall be done within 25 days
Returns pay VAT on a monthly basis. following the close of
each taxable quarter.
Effective 1 January
2021, the VAT
withholding system
shall shift from final to
The Government or any of its political subdivisions, instrumentalities or
a creditable system.
agencies shall, before making payment of purchase of goods and
services, deduct and withhold a final VAT at the rate of 5% of the gross
Sec. 114(c) Payments for purchase
payment thereof.
of goods and services
arising from Official
Payment for lease or use of properties or property rights to nonresident
Development
owners shall be subject to 12% withholding tax at the time of payment.
Assistance funded
projects shall not be
subject to the final
withholding VAT.
Sec. 129
Excise tax now Excise taxes apply to goods manufactured or produced in the Excise taxes also apply
covers both Philippines for domestic sales or consumption or for any other to services performed in
goods and disposition and to things imported. the Philippines
services

Page 270 of 270